The place: a textile plant near Mumbai, India. The time: 2008. The scene? Chaos. Rubbish is piled up outside the building—and almost as much inside. There are piles of flammable junk and uncovered containers of chemicals. The yarn is scarcely neater: it is at least bundled up and protected in white plastic bags, but the inventory is scattered around the plant in unmarked piles.1
Such shambolic conditions are typical in the Indian textile industry, and that presents an opportunity. Researchers from Stanford University and the World Bank are about to conduct a novel experiment: They’re going to send in a team of management consultants to tidy up some of these companies, but not others. Then they’ll track what happens to these companies’ profits. This will be a rigorous, randomized controlled trial. It will conclusively tell us: Are management consultants worth their fees?2
That question has often been raised over the years, with a skeptical tone. If managers often have a bad reputation, what should we make of the people who tell managers how to manage? Picture a management consultant: What comes to mind? Perhaps a young, sharp-suited graduate, earnestly gesturing to a bulleted PowerPoint presentation that reads something like “holistically envisioneer client-centric deliverables.”
Okay, I got that from an online random buzzword generator.3 But you get the idea. The industry battles a stereotype of charging exorbitant fees for advice that, on close inspection, turns out to be either meaningless or common sense. Managers who bring in consultants are often accused of being blinded by jargon, implicitly admitting their own incompetence, or seeking someone else to blame for unpopular decisions.
Still, it’s big business. The year after Stanford and the World Bank started their Indian study, the British government alone spent well over $2 billion on management consultants.4 Globally, consulting firms charge their clients a total of about $125 billion.5
Where did this strange industry begin?
There’s a noble way to frame its origins: economic change creates a new challenge, and visionary men of business provide a solution. In the late nineteenth century, the U.S. economy was expanding fast, and thanks to the railway and telegraph, it was also integrating, becoming more of a national market and less of a collection of local ones. Company owners began to realize that there were huge rewards to be had for companies that could bestride this new national stage. So began an unprecedented wave of mergers and consolidations; companies swallowed each other up, creating giant household names: U.S. Steel, General Electric, Heinz, AT&T. Some employed more than 100,000 people.6 And that was the challenge: nobody had ever tried to manage such vast organizations before.
In the late 1700s, Josiah Wedgwood had shown that double-entry bookkeeping techniques could help business owners understand where they were making money and what steps they might take to make more. But using accounts to actually manage a large corporation would require a new approach.
Enter a young professor of accountancy by the name of James McKinsey. McKinsey’s breakthrough was a book published in 1922, with the not-entirely-thrilling title Budgetary Control. But for corporate America, Budgetary Control was revolutionary. Rather than using traditional historical accounts to provide a picture of how a business had been doing over the past year, McKinsey proposed drawing up accounts for an imaginary corporate future. These future accounts would set out a business’s plans and goals, broken down department by department. And later, when the actual accounts were drawn up, they could be compared with the plan, which could then be revised. McKinsey’s method helped managers take control, setting out a vision for the future rather than simply reviewing the past.7
McKinsey was a big character: tall and fond of chomping cigars, ignoring his doctor’s advice. His ideas caught on with remarkable speed: by the mid-1930s, he was hiring himself out at $500 a day—about $25,000 in today’s money. And, as his own time was limited, he took on employees; if he didn’t like a report they wrote, he’d hurl it in the trash. “I have to be diplomatic with our clients,” he told them. “But I don’t have to be diplomatic with you bastards!”8
And then, at the age of forty-eight, James McKinsey died of pneumonia. But under his lieutenant, Marvin Bower, McKinsey & Company thrived. Bower was a particular man. He insisted that each man who worked for him wear a dark suit, a starched white shirt, and, until the 1960s, a hat. McKinsey & Company, he said, was not a business but a “practice”; it didn’t take on jobs, it took on “engagements”; it was not a company, it was a “firm.” Eventually it became known simply as “The Firm.” Duff McDonald wrote a history of The Firm, arguing that its advocacy of scientific approaches to management transformed the business world.9 It acquired a reputation as perhaps the world’s most elite employer. The New Yorker once described McKinsey’s young Ivy League hires parachuting into companies around the world, “a SWAT team of business philosopher-kings.”10
But hold on: Why don’t company owners simply employ managers who’ve studied those scientific approaches themselves? There aren’t many situations where you’d hire someone to do a job and also hire expensive consultants to advise them how to do it. What accounts for why companies like McKinsey gained such a foothold in the economy?
Part of the explanation is surprising: government regulators cleared a niche for them. The Banking Act of 1933, known as Glass-Steagall, was a far-reaching piece of American financial legislation. Among many provisions, this legislation made it compulsory for investment banks to commission independent financial research into the deals they were brokering; fearing conflicts of interest, Glass-Steagall forbade law firms, accounting firms, and the banks themselves from conducting this work. In effect, the Glass-Steagall Act made it a legal requirement for banks to hire management consultants.11 For a follow-up, in 1956 the Justice Department banned the emerging computer giant IBM from providing advice about how to install or use computers. Another business opportunity for the management consultants.
Minimizing conflicts of interest was a noble aim, but it hasn’t worked out well. McKinsey’s long-serving boss in the 1990s, Rajat Gupta, managed to get himself convicted and imprisoned in 2012 for insider trading.12 McKinsey also employed Enron’s Jeff Skilling, and then was paid well for advising him, before quietly fading into the background while Enron collapsed and Skilling went to jail.13
Here’s another argument for employing management consultants: ideas on management evolve all the time, so maybe it’s worth getting outsiders in periodically for a burst of fresh thinking? Clearly that can work. But often it doesn’t. Instead, the consultants endlessly find new problems to justify their continued employment—like leeches, attaching themselves and never letting go. It’s a strategy known as “land and expand.”14 One UK government ministry recently admitted that 80 percent of its supposedly temporary consultants had been working there for more than a year—some for up to nine years.15 Needless to say, it would have been much cheaper to employ them as civil servants.
No doubt the consultancy firms will claim that their expertise is giving the taxpayer value for money. Which brings us back to India and that randomized controlled trial. The World Bank hired the global consulting firm Accenture to put some structure into these jumbled Mumbai textile factories, instituting new routines: preventative maintenance, proper records, systematic storing of spares and inventory, and the recording of quality defects. And did it work?
It did. Productivity jumped by 17 percent—easily enough to pay Accenture’s consulting fees.16 We shouldn’t conclude from this study that cynicism about management consulting is always misplaced. These factories were, after all, what a jargon-filled PowerPoint presentation might call “low-hanging fruit.” But it’s scientific proof of one thing, at least: As so often in life, when an idea is used simply and humbly, it can pay dividends.