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Meet the MasterMinds: Christopher McKenna on the Past and Future of Consulting

Christopher McKenna is the author of The World’s Newest Profession, which examines the growth of the management consulting industry. McKenna teaches Management Studies at Oxford University’s Saïd Business School, and he was nominated as one of Oxford’s three best teachers for the UK's National Teaching Fellowship Award both in 2005 and 2006.

McKenna is an expert on the history and evolving strategies of professional firms and their role in the international transformation of business, nonprofits, and government. We asked McKenna to tell us what he thinks consultants need to know about the industry.

McLaughlin: What are the most valuable lessons for consultants from the history of their industry?

McKenna: To understand the consulting profession as it is now, it’s crucial to realize that, like almost all professions, it evolved from government regulations. Consulting emerged because of US banking and financial securities acts in the 1930s that restricted the activities of bankers and accountants to prevent potential conflicts of interest.

The 1933 Glass-Steagall Banking Act, which separated investment banking from commercial banking, also prohibited the consulting and re-organizational work that banks did previously. At the same time, actions by the US Securities and Exchange Commission prevented professionals like lawyers, accountants, and engineers from continuing to act as consultants.

The result was the rapid growth of independent management consulting firms to fill the void. People like James McKinsey, Edwin Booz, and George Armstrong responded immediately to this emerging opportunity and institutionalized the field of management consulting.

The role of government regulations in the rise of the consulting profession is not immediately obvious because those laws were not codified for consulting in the direct way that they were for accounting and banking.

If I were in a strategy consulting firm, I’d be buying as much insurance as I could.

The lesson from history is to think more expansively about your potential competitors. Bankers, lawyers, and engineers performed the management consulting function in the past, and these businesses could enter the market again.

McLaughlin: Some people think that Frederick Winslow Taylor’s work was the foundation of management consulting. What impact did Taylor’s doctrine have on the development of the industry?
 
McKenna: Not much. None of the Taylorist firms survived into the1930s.Taylor’s idea was that there was a single best way to run things. As anybody who’s got anything to do with consulting knows, you don’t walk in and tell somebody there’s only one way to do something. You can’t sell services on that basis.

The work of management consultants is not directly connected to Frederick Taylor any more than corporate lawyers evolved from ambulance chasers.

McLaughlin: As you look toward the future, do you foresee any disruptors or enablers that will impact the growth of the industry?

McKenna: Yes. My thoughts return first to government regulations, which we’ve discussed. Once you create regulation, its subsequent dismantling can be equally disruptive. If regulation provides new business, deregulation may also either take away from that business or provide other opportunities.

So, if you believe that some new deregulatory movement is in the works—which wouldn’t surprise me—then you should consider serving industries which will be subject to the new regulatory environment.

The other potential disruptor is professional liability.

If you view the history of the industry as cycles, you see a pattern: mounting cycles of liability, followed by regulatory efforts to diminish or resolve the problem. The same kind of crisis of liability that happened in the late 1980s and culminated in the Enron scandal of 2000 may be in process again. And I think it could disrupt the industry enormously.

McLaughlin: What’s your sense of how that trend will play out for professional service firms?

McKenna: What we’re seeing right now is exactly the same process that happened in the late 1980s and early 1990s. At that time, decisions in a set of court cases resulted in more liability for corporations, which they tried to avoid in new and innovative ways, mostly by hiring consulting firms to perform management audits to offset their liability.

That liability, in turn, shifted to the professional firms, which had to find ways to offset it themselves. Well, the same thing is happening now. We’re noticing that the accounting firms are screaming about their increasing liability and saying that Sarbanes-Oxley has put them in a real bind by demanding a certain level of accountability.

Their accounting work is very profitable, but at the same time, their potential liability, should a lawsuit hit them, is enormous. The firms are pushing regulators, theorists, and others to reduce that liability.

If that happens, of course, the business environment will become less risky for firms, encouraging further expansion of their businesses. Such expansion can lead to lowering of professional standards of care and, if that happens, the result would be increased liability.  

And then I would expect to see more service failures and more litigation.

McLaughlin: Do you believe consultants will also be subject to increased litigation in the future?

McKenna: I think consultants will face more lawsuits.

Consultants claim to be experts and verify that clients are pursuing the right strategy, or have strong managerial controls, or have the right organizational structure, or have good governance. Simultaneously, they argue that this is merely advice, not actionable information, a stance that is impossible in other professions.

In other fields like law, accounting, and engineering, it’s impossible to make those claims and not be held to standards of malpractice. Consultants have managed to avoid this and it’s quite a remarkable feat.

The question is to what extent consultants will be able to continue walking this tightrope, which I see as a very dangerous one. I think it’s almost impossible for them to do it for very much longer.

If I were in a strategy consulting firm, I’d be buying as much insurance as I could. In terms of liability, I think the day is coming when consultants will be seen as equivalent to lawyers, investment bankers, engineers, and accountants. I don’t think consultants can continue to claim that they provide valuable professional advice and yet cannot be held accountable for it.

McLaughlin: The management consulting industry does not conform to professional standards like those in law, accounting, and medicine must. Why do you think this hasn’t happened?

McKenna: It’s due to some consultants’ unwillingness to move in that direction. It’s a remarkable pattern we have seen that people, particularly in the large firms, have been unwilling to take the appropriate steps that would transform consulting into a full-fledged profession.

I don’t think consultants can continue to claim that they provide valuable professional advice and yet cannot be held accountable for it.

On numerous occasions, people have proposed government regulation, examinations, minimum requirements, standards of malpractice, and so forth. And in each case, consultants have fought against this, arguing both that they want to keep the government out and that they think they can self-police.

But self-policing requires the ability to throw people out and prohibit them from practicing again. In the consulting industry, you can fire a poorly performing consultant from a particular firm, but that individual can move to another firm.

It’s very hard to patrol the boundaries of a profession unless you’re willing to take on government certification and other such trappings. Consulting industry leaders clearly decided not to do so, and that is not illogical for the large firms. The small consultancies, which account for the vast majority of consultants, are not helped by this.

A profession is not defined by what it practices and what it does right, but by how it deals with failures and malpractice. And in dealing with malpractice, the expectation is that you are willing to be judged by a jury of your peers.

Partners in consulting firms have told me they’re not prepared to submit to that. They consider their own firms to be separate and distinct, and they will not be judged by people in other firms.

McLaughlin: In your view, what is the best role for management consultants in helping clients?
 
McKenna: Consultants, of course, do many, many diverse jobs. I would propose a simplified way to understand their function. Consultants provide two benefits for clients: a combination of legitimacy, which derives from management audits, and the transfer of best practices.

These days, we tend to think that legitimacy is less valuable. We view it as somehow disreputable, which it’s not at all—in spite of recent scandals. All professions function by providing legitimacy. The consulting profession arose from the need for independent evaluation of how businesses were organized and run. That remains a valid and important function.

McLaughlin: Do you think the second benefit you mentioned that consultants bring to clients—the transfer of best practices—is more important than innovation?

McKenna: It’s very nice rhetoric to suggest that consultants are innovators who develop and bring new ideas to clients, but that’s not actually the best role for them.

It’s very expensive to ask someone to think. That’s why we have universities, which are nonprofit institutions for a reason. There’s not much profit to be made in paying somebody to sit and think. Potentially, your thinker could come up with something big but could also sit there for twenty-five years and not come up with a new idea.

So it’s risky to pay a thinker. On the other hand, if you pay consultants to bring you ideas that they already understand very well and have transferred to other organizations, then it’s a good bet those ideas will work for you.

So excelling at the transfer of best practices will continue to be the central plank of consulting for the foreseeable future.

McLaughlin: What other projects are you working on?

McKenna: I have struggled to understand went on in the Enron case, and have thought a lot about the nature of professionals and their relationship to white-collar crime. Next year I’ll be starting a project on a very broad history of white-collar crime.

I’m going to look at four countries, over 250 years. It’ll be a while in the writing so I don’t think your readers should wait around. It won’t come out for some time.

McLaughlin: Thanks for your time.

You can find out more or contact McKenna at the Oxford Web site.