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on strategy consulting

james o. mckinseyThe profession is less than a hundred years old and yet has established itself as an indispensable player in the world of business, and has done so across the planet. An origin story.

The product of rapid and significant changes that peaked in 1934, strategy consulting is one of the fundamental elements of the American business model. A revolution that began at the end of the 19th century.

1890: the renewal of American capitalism

Although the impetus behind strategy consulting, the Glass-Steagall Act, only dates back to 1934, the industry’s history actually began almost thirty years earlier. “In the 1890s, the American government implemented a federal antitrust law,” explains Marie-Laure Djelic (1) , the head of ESSEC’s management department and the author of a number of articles on the emergence of consulting.“This was the Sherman Act, the very foundation of most competitive regulation laws as they exist today in the United States and in Europe.”

Like dominoes falling upon one another, a chain reaction quickly took place to adapt to the new situation. To circumvent the law on cartels, businesses joined forces into joint stock corporations. The industry transformed radically: the number of very large companies increased at an exponential rate while small family ventures became the exception rather than the rule. This was the American economy’s first great merger wave.

This new corporate structure led to other upheavals: it separated ownership from decision-making, which would later become management. “The individuals who took the reins therefore needed a certain legitimacy and management became a science,” Marie-Laure Djelic develops.

The first to place his own experts at the head of companies with dispersed, shareholding ownership was banker J.P. Morgan, who played a key organizing role in the early 20th century.

But although they initiated the sector’s emergence, it was by their own actions – and their own errors – that bankers were ultimately barred from any consulting activities. “The crisis of 1929 changed everything, as it was interpreted as being the result of bankers’ irresponsible decisions,” states Marie-Laure Djelic. “Roosevelt’s government therefore undertook the regulation of the financial sector, which led to the Glass-Steagall Act in 1934.” The first part of the law separated commercial banks from investment ones, while the second part forbade investment banks from serving as consultants to their clients. A window of opportunity had opened wide, and some were quick to understand this new sector’s potential.

The first initiatives: Marvin Bower and McKinsey

Although the Glass-Steagall Act sent tremors coursing through the American economy, it did not diminish the need for consulting. Companies had reached a critical mass that did not allow them to do without outside help in regard to decision-making. James O. McKinsey was then at the head of an eponymous auditing firm. He hired the young and brilliant Marvin Bower, who would go on to change the fate of both the company and the entire sector. Unusually for the time, Marvin Bower not only possessed a law degree but also an MBA. When he joined McKinsey, at the end of the 1920s, he brought with him the operating modes of American law firms: partnerships, up-or-out… In 1934, Bower rapidly became aware of the opportunities presented by the Glass-Steagall Act and suggested reorienting the firm towards management consulting… even though that designation did not yet exist.

The record books indicate that the first consulting firm was Arthur D. Little, founded in 1886, but it was Marvin Bower who shaped the profession into what it is today.

The New York office, which he led, took this strategic turn, while the Chicago office split from the company, becoming A.T. Kearney. Drawing on his own experience, Bower chose to recruit not the experienced veterans preferred by J.P. Morgan but rather young graduates fresh out of school. But not from any school: he selected only Baker Scholars, the top 5%, initially from Harvard, then from the other major business schools that began to emerge. All of this met with great success.

A decade later, the number of consulting firms had increased by an average 50% each year: from a hundred-odd at the start of the 1930s, there were about 400 ten years later. By 1950, over a thousand firms employed approximately 12,000 consultants. By that decade’s end the number was closer to 50,000. “Consulting firms are not only a consequence of the American economy’s metamorphosis,” continues Marie-Laure Djelic. “On the contrary, I see the emergence of this industry as one of the main structural elements of the form of capitalism that took over the United States late in the 20th century.”

After shaping their profession for nearly half a century, industrialists then turned to new horizons: across the Atlantic, Western Europe was seeking an economic model. The founding of the European Community and the creation of a unified marketplace bore all the signs of being significant new opportunities, and American businesses did not hesitate for long before moving en masse into this new market, with service providers close on their heels and consulting firms leading the pack.

The American model’s first wave of exportation could begin.

(1) A graduate of Harvard, ESSEC and the Sorbonne, Marie-Laure Djelic teaches management at ESSEC and specializes in organizational theory and the comparative history of capitalism. She is the author of Exporting the American Model and of various articles on the history of consulting, notably “Message and Medium: The Role of Consulting Firms in Globalization and Its Local Interpretation”, of which she was a co-author, and “The Banyan Tree of Globalization”, a history of McKinsey.

Lisa Melia for Consultor.news

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