28/08/13 The strategy consultants in search of a strategy - FT.

com

August 28, 2013 7:10 pm

The strategy consultants in

search of a strategy
By John Gapper

Consultancy is in a funk as midsized partnerships realise they

have to do something to survive

©Ingram Pinn

D id you hear the one about the strategy consultancy that could not work out a strategy
for itself? It might make chief executives being billed $500 an hour for the wisdom of
McKinsey & Co or Boston Consulting Group chuckle, but it is not a joke for the industry.

Consultancy is in a funk as midsized partnerships with venerable names, such as Booz & Co
and Roland Berger, realise they have to do something but cannot decide on what. Just
carrying on is not an option – they face the spectre of Monitor, the consultancy that went
bankrupt last year, and was bought by Deloitte for only $120m.

There is not a palatable choice. Merging with another firm, as Booz considered with AT
Kearney, would invite a clash of cultures. They are not generating enough cash to join the big
league with McKinsey, BCG and Bain & Co. And some partners cannot face being absorbed
by a big accountancy or technology firm such as Deloitte or Accenture.

The partners of Roland Berger, the German strategy firm that has never quite gone global,
have put back a decision, having almost agreed to be acquired by Deloitte in 2010 and then

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had second thoughts. At that time, the partners and its founder invested in expansion
instead.

So the strategists are in a strategy hole. As Oscar Wilde remarked of Charles Dickens’ The
Old Curiosity Shop: “One must have a heart of stone to read the death of Little Nell without
laughing.”

It is not only consultants that face these difficulties – other kinds of professional partnerships
are in a bind. In a lower-growth world, they are pressed to pay big bonuses to retain their
revenue-earning partners while opening new offices to serve global companies.

If they take on debt to bridge the gap, they can enter a downward spiral. In the legal
profession, this happened to Dewey & LeBoeuf, the New York law firm that collapsed last
year after borrowing $200m to finance its growth.

Consulting, which was used to double-digit growth before the 2008 financial crisis, now faces
its own reckoning. “The dirty little secret of consultancy is there are no profits. They all get
paid out to partners,” says one such partner.

The firms being squeezed are the midsized consultants that lack scale but have higher costs
than specialist boutiques. On one estimate, a global consultancy firm needs annual revenues
of at least $2bn both to pay its partners and to invest enough and, according to Kennedy
Consulting Research and Advisory, only McKinsey, BCG and Bain met that hurdle in 2011.

The money goes to pay partners between $1.2m and $1.5m a year and invest up to a further
$500,000 per partner on developing staff and adding services. Booz and AT Kearney had
revenues of $930m in 2011 and Roland Berger $1.2bn, so none is big enough.

The big three have another advantage – each has passed through the dangerous phase when
the founding partners leave and their successors buy them out. Bain nearly collapsed in the
early 1990s after Bill Bain’s transition landed it with excess debt. It only survived when Mitt
Romney became chief executive and the debt was restructured.

Roland Berger’s partners have paid down old debt by giving up bonuses, while Booz has the
opposite problem. It has a clean balance sheet since a 2008 deal under which Carlyle Group
bought Booz Allen Hamilton, the technology consultant that formerly employed Edward
Snowden, the former National Security Agency consultant. But the split left it too small to
thrive.

If anything, the big three have gained from this turmoil. Their revenues are growing in
double digits after a post-crisis dip in 2009, and they can recruit from weaker firms.
McKinsey, which has 1,400 partners and revenues of $5bn, is of a different scale to the mid-
tier.

That is vital in developing the business. Only a minority of what strategy consultants now do
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28/08/13 The strategy consultants in search of a strategy - FT.com

is blue-sky thinking for CEOs. Two decades ago, 70 per cent of McKinsey’s revenues were
from strategy and corporate finance but most now flow from hands-on work on risk,
operations and marketing.

They are far smaller than the accounting firms that want to expand their consulting arms
again, having previously focused on audit work, and big technology and outsourcing
consultants. These often employ hundreds of thousands of people on vast outsourcing
projects.

But they are beyond reach of mid-tier firms, which are struggling to come to terms with this
reality. It is not easy, since meetings of strategy partners to decide on strategy tend to
degenerate into strident debates that go nowhere and end in a vote to postpone the decision.

The easiest option would be to sell to a technology or accounting giant that covets a premium
strategy firm to gain an entrée to CEOs and decision makers. “It is alluring to the point of
intoxicating for them to acquire such a business,” says Tom Rodenhauser, Kennedy’s
managing director for research.

That probably sounds good to partners who are close to retiring and would like a payout. But
younger partners tend to be less keen on being swallowed up by a big machine, and
employed as glorified sales people. The last effort to combine a strategy consultant with a
technology firm – EDS and AT Kearney – was a failure.

The longer the mid-tier firms delay, however, the more vulnerable they become to partners
leaving and confidence evaporating. Here’s some free strategic advice for them: make up
your minds.

john.gapper@ft.com

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