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MBB (McKinsey, Boston Consulting Group – BCG – and Bain) have a problem with their business models.
Out of loyalty to some friends, I don’t comment much on MBB and I also think it is poor form to talk down your competitors. So I have written down much more critical views of some of their missteps / flaws and filed them away.
“When McKinsey Comes to Town” does a thorough job of cataloging some of McKinsey’s less celebrated history and there are other books such as “Deep Collusion” detailing some of Bain’s behaviour too. I’ll leave those books to tell those stories and leave my more scathing criticisms unpublished.
This post is regarding a more fundamental issue that confronts not just MBB but other service based firms – including Goldman Sachs in its past partnership form.
MBB have grown dramatically. All three started from single founder who drove growth from cautious focused starts. McKinsey really started in its modern form through Marvin Bower. He took decades shaping the firm and remained involved right until his old age. Bruce Henderson defined modern strategy as he shaped BCG. And Bill Bain built Bain from the late 1970s.
McKinsey have grown from about 2900 consultants in 1994 to over 38000 employees by 2022. BCG from 4900 in the year 2000 to 25000. Bain from 700 in 1998 to 15000.
All three firms have values, “North Stars,” etc. Yet how aligned are these firms to their founding visions? How have scandals taken place?
I believe the fundamental challenge is in their partnership model and value realisation through growth.
Partners grow their value share through their career by rising through the ranks until they share in the value of the pyramid under their management. This is lucrative but limited. Once at partner level, further growth in value is only really achieved via outperformance or share of a bigger pool (e.g. global profit share). In typical corporates, value is created in growth of equity value (future profits and growth). In partnerships (even the corporatized style of MBB), value creation on exit is limited. Much of this is by design to avoid misaligned incentives. Partners are encouraged to share in value during tenure. Marvin Bower went so far as to say that a McKinsey partner’s job was to leave the firm in a better position for the next generation of McKinsey employees.
This caused major problems for the partners of Goldman Sachs prior to listing due to the cap on potential earnings – particularly due to the loading of future value in corporate valuations and the inability to share in it for exiting partners. Largely this led to their listing. Much has been written about what was gained and lost to Goldman’s culture as a result.
Back to MBB. The partnership structure results in two problems. Some growth in value share is possible via senior partners’ share in the global profit pool and this encourages the firms to grow their size of the firms’ headcounts in order to create larger pools. But the more severe problem is that MBB are faced with an inability to promote and retain unless they either exit partners to make room for new ones – or they need to grow their pyramids to support the new partners. The latter has been the result.
MBB’s focus on strategy consulting has rapidly given way to other offerings that grow their scale. While much might be justified as growing to meet adjacent clients needs and demand for implementation, etc, most is merely due to the limits imposed through continued focus on pure strategy consulting.
Attempts have been made to find new value opportunities such as PE investment, turnarounds, results sharing, etc. Many of these have raised critical conflicts of interest and been spun out.
The growth challenge has also pushed the requirement to expand geographically. MBB have expanded rapidly into ethically challenging geographies such as China and Saudi Arabia – both of which now have large percentages of their headcount.
For now MBB have defied gravity by combining good margins and scale – typically a trade-off.
Big growth numbers embed a serious problem – they have to be sustained in order to continue to deliver value share – and provide positions for ever growing number of promotions. This creates tensions at all levels of the pyramid – but especially the middle where those consultants looking to exit after gaining experience create delivery gaps.
But more seriously and aligned to my linkage to cultural and ethical considerations, big growth numbers result in a much greater difficulty – it is much more difficult to maintain strong adherence to values and ethics. This happens as global leadership lose visibility of day-to-day behaviours, local partners become more powerful and independent – and payroll and the growth requirement drives huge risk of turning away business.
I’ll leave it there – the consequences are detailed as the failures catalogued in the other books I mentioned.
The challenge for those firms that remain focused on high-end pure strategy consulting is therefore to avoid the seeds of the same business model problem – and to attract and retain employees against the promise of potentially greater value creation at MBB.
This problem has been keenly felt by the next tier of strategy firms – with the Economist and FT regularly calling into question their sustainability.
I am idealistic enough to focus on a very modest and pure growth ambition for GA. But as I bring in other partners and promote during our rebuild, the future business model requires crystal clarity.
