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Paying for advice? Go get a therapist. RIP management consultants

3. Insight

Ultimately, however, expertise is not what the consultancies imagine they are selling anyway, as Bain’s early motto makes clear:

“We don’t sell advice by the hour; we sell profits at a discount.”

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Inherent in Bain’s idea of “profits at a discount” is the promise that consulting is more than just someone coming up with a plan for your company.

At one point, it had more or less sufficed for a consultant to “come up with a strategy.” In the 1960s, however, consulting became a function that was actually supposed to get results.

BCG led the way. With its famous “$1M framework” — otherwise known as the growth-share matrix — BCG didn’t just change how people thought about their businesses; its insights altered how people built businesses too.

At the time, the predominant pressure in American business culture was to diversify. High tax rates on corporate gains meant that the best way to spend profits was to make acquisitions. At the same time, powerful antitrust laws (like the 1950 Antimerger Act) made it difficult for companies to acquire other companies in their own industries.

Buying companies exclusively in other industries, however, had the effect of turning formerly focused corporations into overextended conglomerates — many of which would begin to fail over the next decade.

How consulting used to work
Helping companies focus was the aim of BCG’s growth-share matrix — called the “$1M framework” because its application alone could merit BCG $1M in client fees.

The point of the growth-share matrix was to help a company understand which of its (often many) businesses should be nurtured, which should be ended, and which needed further study.

The matrix was one larger box, separated it into four smaller boxes, measured along two axes: relative market share (x) and market growth (y). Each line of business was plotted within this matrix with a bubble proportional to the size of that business.

Consultants would plot out all of a company’s businesses, revealing which dominated markets, which were growing quickly, and so on.

The real power of the matrix emerged when companies also plotted competitors. By plotting 3-4 different competing conglomerates, the errors that individual companies were making in the lines of business they chose to nurture became much more apparent.

American Standard was a lighthouse case study for this process for BCG.

Like many other big corporations of the time, American Standard was involved in dozens of different businesses, and it was impossible for any executive to maintain a complete understanding of each one. Virtually all of its available investment capital, however, was going into just one specific line of business: small air conditioners.

Plotting American Standard on the growth-share matrix revealed that while its small air conditioner business was in a market that was growing quickly, its share of that market was a magnitude smaller than that of air conditioning giant Carrier.

American Standard’s small air conditioner business was, in other words, what BCG came to call a “question mark business” — a business with high growth but low market share. Question mark businesses were possibly worth investing in further, but they weren’t sure bets.

Even worse investments were low-growth businesses. With high market share, they were tempting to maintain, but would often suck profits indiscriminately without much return. BCG deemed these “cow” businesses.

Meanwhile, those with low market share were simple underperformers, or “dogs,” and should be cut immediately.

The only sure bet in the growth-share matrix was a business with high growth and high market share: the “star.”Using the growth-share matrix, American Standard realized that its pet project was completely unsustainable and had to be sold. Fortunately for the company, because small air conditioners was a high-growth industry, it was easy to find a buyer willing to pay a premium.

In the end, BCG gave American Standard not just a good strategy, but the right tactical advice — and taking that advice resulted in a huge long-term victory for the company.

The growth-share matrix became BCG’s “$1M framework” because it packaged the consultancy’s clearest and most original strategic thinking into a neat and digestible visual.

The framework was simple, but it also presented a whole new way for companies to think about their businesses and where they invested their time and money. It was a genuinely innovative insight into allocating capital, dressed up as a 2×2.

How the disruption works
When the “tools of the trade” are publicized — when holes are poked into the black box — clients are empowered to ask more questions, expect more rigorous performance benchmarks, and have more of a say in negotiating what they feel is a fair deal. By demystifying the management consulting process, books, classes, and blog posts bring more transparency to the marketplace of ideas.

Over the years, we’ve seen companies move from hiring consultants to building out entire strategy functions inside their businesses — teams, staffed by ex-consultants and others, that can perform the role of a management consultant internally.

They can do this because of consulting turnover. According to Kennedy Research, turnover at prestigious consulting firms averages around 18-20% a year.

McKinsey, the big consulting firm that has pressed the hardest for growth, has more than 30,000 alumni. These alumni graduate with great strategy credentials, and they have to do something with them. Clayton Christensen writes,

“We know that many companies have hired small armies of former consultants for internal strategy groups and management functions, which contributes to the companies’ increasing sophistication about consulting services… Typically these people are, not surprisingly, demanding taskmasters who reduce the scope (and cost) of work they outsource to consultancies and adopt a more activist role in selecting and managing the resources assigned to their projects.”

 


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