Strategy Consultants In Search of a Strategy

Back in 2005 a movie entitled Hustle and Flow described in vivid detail the harsh reality of life as a drug dealer and pimp.  It even won an Academy Award for the title track called, appropriately, It's Hard Out Here for a Pimp. 

No, we are not trying to make invidious comparisons between that world and the work of strategy consultants or other professional service providers. We understand that there are some who would be only too happy to do so - we are in that game, ourselves, after all - but the point is a larger one. The business of selling intangibles, such services and the occasional product like software upgrades has gotten a whole lot tougher.

The financial crisis was brought on by a lot of very smart, well educated people proffering advice for which they were paid handsomely. They plied on the insecurities of those with budgets who understood all too well, that while skill was important, there is no success without luck, and that luck sometimes runs out, especially for those who wonder how they got so lucky in the first place. So lots of people cashed in, not just big name 'strategy consultants' like McKinsey, BCG and Bain, but lawyers, corporate communications (pr) specialists, accountants, marketing positioners, leadership coaches and the like.

But most of the financial oxygen that sustained those businesses got sucked out of the atmosphere when the bubble finally deflated. And despite the spurious claims by some principals that 'no one could have predicted this,' plenty of people saw it coming but were too busy cashing in to dare alerting anyone to its lack of sustainability. So now, there is hope of a nascent recovery. But life may never be the same because budgets are still tentative and, frankly, the corporate dudes with the budget authority are looking out for Number One. And the calculus by which they operate says less for you, more for me. Your advice was nice, but I can handle this now.

The challenge is that these firms built up structures that focused on feeding the beast - usually the senior partners in whichever enterprise. In a world requiring chronic innovation, that leaves little for research and development. So these firms are suddenly faced with having to justify not just salary demands the market will no longer bear, but with questions about the utility of the service they provide. Even the graduate schools that provide their 'associates' validation and eager new recruits are facing calls to reduce the number of years required for these once-so-precious degrees. Yeah, it's a problem.

The answer, eg ' the strategy' that will provide surcease is probably apparent but unpalatable. It requires the sort of behavior more advantageously offered others rather than oneself: sacrifice, lowered expectations, reduced circumstances. Yes, it is hard out here...for everyone. JL

John Gapper reports in the Financial Times:

Consulting, which was used to double-digit growth before the 2008 financial crisis, now faces its own reckoning. “The dirty little secret of consultancy is there are no profits. They all get paid out to partners,” says one such partner

Did you hear the one about the strategy consultancy that could not work out a strategy for itself? It might make chief executives being billed $500 an hour for the wisdom of McKinsey & Co or Boston Consulting Group chuckle, but it is not a joke for the industry. Consultancy is in a funk as midsized partnerships with venerable names, such as Booz & Co and Roland Berger, realise they have to do something but cannot decide on what. Just carrying on is not an option – they face the spectre of Monitor, the consultancy that went bankrupt last year, and was bought by Deloitte for only $120m.
There is not a palatable choice. Merging with another firm, as Booz considered with AT Kearney, would invite a clash of cultures. They are not generating enough cash to join the big league with McKinsey, BCG and Bain & Co. And some partners cannot face being absorbed by a big accountancy or technology firm such as Deloitte or Accenture.

The partners of Roland Berger, the German strategy firm that has never quite gone global, have put back a decision, having almost agreed to be acquired by Deloitte in 2010 and then had second thoughts. At that time, the partners and its founder invested in expansion instead.

So the strategists are in a strategy hole. As Oscar Wilde remarked of Charles Dickens’ The Old Curiosity Shop: “One must have a heart of stone to read the death of Little Nell without laughing.”
It is not only consultants that face these difficulties – other kinds of professional partnerships are in a bind. In a lower-growth world, they are pressed to pay big bonuses to retain their revenue-earning partners while opening new offices to serve global companies.

If they take on debt to bridge the gap, they can enter a downward spiral. In the legal profession, this happened to Dewey & LeBoeuf, the New York law firm that collapsed last year after borrowing $200m to finance its growth.

The firms being squeezed are the midsized consultants that lack scale but have higher costs than specialist boutiques. On one estimate, a global consultancy firm needs annual revenues of at least $2bn both to pay its partners and to invest enough and, according to Kennedy Consulting Research and Advisory, only McKinsey, BCG and Bain met that hurdle in 2011. The money goes to pay partners between $1.2m and $1.5m a year and invest up to a further $500,000 per partner on developing staff and adding services. Booz and AT Kearney had revenues of $930m in 2011 and Roland Berger $1.2bn, so none is big enough.
The big three have another advantage – each has passed through the dangerous phase when the founding partners leave and their successors buy them out. Bain nearly collapsed in the early 1990s after Bill Bain’s transition landed it with excess debt. It only survived when Mitt Romney became chief executive and the debt was restructured.

Roland Berger’s partners have paid down old debt by giving up bonuses, while Booz has the opposite problem. It has a clean balance sheet since a 2008 deal under which Carlyle Group bought Booz Allen Hamilton, the technology consultant that formerly employed Edward Snowden, the former National Security Agency consultant. But the split left it too small to thrive.

If anything, the big three have gained from this turmoil. Their revenues are growing in double digits after a post-crisis dip in 2009, and they can recruit from weaker firms. McKinsey, which has 1,400 partners and revenues of $5bn, is of a different scale to the mid-tier.
That is vital in developing the business. Only a minority of what strategy consultants now do is blue-sky thinking for CEOs. Two decades ago, 70 per cent of McKinsey’s revenues were from strategy and corporate finance but most now flow from hands-on work on risk, operations and marketing.
They are far smaller than the accounting firms that want to expand their consulting arms again, having previously focused on audit work, and big technology and outsourcing consultants. These often employ hundreds of thousands of people on vast outsourcing projects.
But they are beyond reach of mid-tier firms, which are struggling to come to terms with this reality. It is not easy, since meetings of strategy partners to decide on strategy tend to degenerate into strident debates that go nowhere and end in a vote to postpone the decision.
The easiest option would be to sell to a technology or accounting giant that covets a premium strategy firm to gain an entrée to CEOs and decision makers. “It is alluring to the point of intoxicating for them to acquire such a business,” says Tom Rodenhauser, Kennedy’s managing director for research.

That probably sounds good to partners who are close to retiring and would like a payout. But younger partners tend to be less keen on being swallowed up by a big machine, and employed as glorified sales people. The last effort to combine a strategy consultant with a technology firm – EDS and AT Kearney – was a failure.

The longer the mid-tier firms delay, however, the more vulnerable they become to partners leaving and confidence evaporating. Here’s some free strategic advice for them: make up your minds.