The 8 defining stages of the Consulting Industry
by Hélène LAFFITTE
February 25, 2019
Consulting has always existed. We can trace advisors to decision-makers back to the Antiquity. Marco Polo, Colbert, and Hamilton are in a way the first consultants. But modern Consulting originated in Europe at the end of the 19th Century during the second industrial revolution. The Consulting Industry has always followed the trends closely both in management theory and technology. The specialization and segmentation of the Consulting Industry continue to scatter the market. Each region evolves at its own pace depending on the maturity of both buyers and sellers of Consulting Services.
“Consultant” is not just a fancy name, but a professional who can make a difference in how a company address challenges and succeeds. A simple definition of a “consultant” includes the following: a provider of expert advice to another person or an entity, who is compensated for their services.
How old is Consulting?
We are not exactly sure, but the evidence of first Consultants offering advice might be traced back many centuries ago. Consultants then, might not have been called “Consultants,” and Thought Leadership could have been words of wisdom and guidance. As this ancient quote by Homer to Achilles (in the Iliad dating back from 750BCE), suggests, a great leader can inspire his followers, and lead by example too:
“Be both a speaker of words and a doer of deeds.” – Homer.
Modern Consulting generally follows the Economic development starting in the 19th century, and it has been shaped by it in profound ways. Management consulting sprung out of the need to help businesses improve their performance.
The 8 Defining Stages in the Development of the Consulting Industry –
The history of Consulting is holistically intertwined with the growing needs of businesses, shaped by industrial developments worldwide.
Businesses needed expertise and independent perspective to help them achieve their goals, improve strategy, streamline processes, increase sales and profitability, and many more, and Consultants perfectly delivered in their role of Independent contractors.
1st. The Need for Operations Efficiency in the Early 20th Century –
Late 19th century and early 20th century, when the first need for Work Rationalization emerged, is generally viewed as the beginning of professional Consulting, as we know it today. The need for expertise in organizing people, processes, and machinery gave rise to the creation of the first management consulting firms. Among the main factors for the creation of Management Consulting are the increased need for Efficiency in Operations, and leverage of the specialization theories of Taylor and Babbage, Arthur D. Little (1886) started as general management service, and later specialized in technical and management engineering. They were the first to introduce “scientific management.”
These methods would allow companies to improve the efficiency of their operations by studying and optimizing each part of an operational task.
As U.S. managers in the early 20th century scrambled for efficiency in their factories in and needed ways to speed up their workers’ performance, these progressive methods were enthusiastically adopted.
2nd. The Emergence of Management Consultancy –
As Management Consulting developed, the boundaries of the service became clearer and more profound. Clients started seeing the need and value Management Consulting could provide.
Management consulting is a service directed at managers, to help them make decisions. It is knowledge-intensive and independent. The work is structured as a separate project and can be conducted part-time or full-time.
As pointed by Marc Baaji, New forms of production spurred growth and more significant capital needs, well beyond the typical financial means of any given business. At the same time, the need for expertise and professional business management grew significantly.
3rd. Growth, Profitability, and Challenges During the 2nd Industrial Revolution –
The second industrial revolution paved the way for growth and profitability. However, it also created many challenges that managers could not always overcome on their own, especially because investors were no longer involved in the day to day operations like most owners once were.
The separation between management and ownership of factories grew into chasms. Professional managers were neither owners nor entrepreneurs. Facing the responsibility of making major complex decisions, they looked for advice from consultants.
Even governments started to seek advice from consultants, whether it was the US Government hiring Booz Allen and Hamilton or the French Government implementing scientific management in its defense industry.
4th. Demand for Financial Advice Following the Great Depression of the 1920s –
Following the great financial crisis of 1929, The Glass-Steagall Banking Act in 1933, stopped banks from getting actively involved in re-organizations and consulting activities. This new law triggered rapid growth in demand for expert advice in banking, finance, management, strategy, and organization, all of which boosted the consulting industry. And one of the pioneers in modern Consulting industry, McKinsey & Company, founded in 1926, quickly established Itself as a provider of both Accounting and Strategy expertise. While banks and large accounting firms were moving out for regulatory reasons, the firm experimented with new business development methods and leveraged its general survey of company managers to gain corporate clients.
5th. Major Strategy Frameworks Created in the 1950s & 1960s –
Structure follows Strategy, according to Raymond Chandler, as a means to its implementation. From a consulting standpoint, it turns out that strategy consulting followed the organizational efficiency version of the service. Under Bruce Henderson’s leadership, the BCG authored multiple strategy frameworks that are still in use today. The two great examples include:
- The “Growth-share Matrix” which helps companies evaluate where and how to allocate cash among their business units, and
- The “Experience Curve” which models the evolution of costs with the number of units produced for the first time.
6th. The Emergence of IT Consulting And The Big Four –
During the 1980s and 90s, the demand for strategy and organization consulting developed rapidly. Meanwhile, the need for information technology advice and expertise grew exponentially. Both the number of consultants and their range of activity exploded, spreading out geographically into Europe, Asia, and South America.
IT Consulting and the Big Accounting Firms mark a major development in Consulting.
Computer technology and its wide adoption in the economic and business terms ushered in need for a new field of consultancy.
IT consultancy became an important new niche. However, computer manufacturers were prohibited from offering their expertise due to antitrust concerns. As a result, IT consulting developed independently, offered by outside vendors. It led to the creation of EDS (Electronics Data Systems) by Ross Perot, a former IBM employee.
The Big Four, who were The Big Six at the time, swiftly diversified beyond accounting and auditing, into consulting. Seizing an opportunity to grow their consulting market share, they populated the IT Consulting niche market, helping clients, among other things, to implement enterprise resource planning (ERP) systems all over the world. By mid-1990 they became larger than most other consultancies. Most of them ending up splitting as a consequence of the Enron Scandal.
Depending on calculation methods, IT consulting can be considered the largest and fastest growing segment of management consulting, with only operations excellence coming close.
7th. The Business of Excellence –
Business excellence as a concept sounds really exciting, and we can thank McKinsey for being the first who introduced the idea of ‘scaling up’ success through excellence in the 1980s. Leveraging the work of Peters and Waterman from the book “In Search of Excellence,” McKinsey introduced the 7-S framework. Also inspired by Nadler and Tushman’s Congruence Model and Galbraith’s Star Model – this framework served as the foundation for linking strategy, organization, and culture. It identified competencies and later, capabilities as sources of competitive advantage.
Today McKinsey & Co continues to be a Consulting industry leader. Since the mid-1990s, the company offers Operations Excellence programs and most large consultancies have embraced the same offering to the point of commoditizing it. Moreover, today’s increasingly competitive environment requires true excellence for entire processes from A to Z. Think excellence in manufacturing, excellence in R&D, excellence in marketing and sales, …. you name it.
8th. The Segmentation and Specialization Era –
For consulting firms that were previously leaders in one field of management consultancy, it is always challenging to establish a similar position in a new field. It is difficult to diversify. The more logical approach is specialization by capability and by industry sector. It has been a major factor for Management consultancy branching out into several specialties:
- Strategic management
- Information technology (IT) consulting
- Human resource consulting
- Virtual management consulting
- Operations management consulting
- Engineering management
- Management science
Beside this segmentation, Consultants also began to focus more on specific industry verticals.
And now what? –
Unless you have inherited the same perception skills as Tom Cruise in Oblivion or Jim Carey in the Truman Show you have probably noticed that everyone speaks about embracing Digital. Consultants have clearly identified this wave and strategy, the big 4 (they are back), IT consultancies and even media agencies are colliding at full speed. But that’s another story.