McKinsey & Company: The First Management Consultants

Sector

ServicesConsulting

Background

Romeen Sheth is the President of Metasys Technologies. We dive deep into the management consulting business model, the history of the firm, and their underrated marketing strategy.

Cover

Date

March 30, 2022

Episode Number

52

Entrenched, high-premium and widely-respected business with enduring advantages compounded over time. Despite cost of talent, McKinsey running at around 60-70% gross margin, 25-30% EBITDA.

Key Learnings

1. Value of brand, and diversity in client base: McKinsey engages with various sectors, including private and public. Leverages brand and a customized approach.
2. A strong company culture promotes adaptability: the cultural underpinning of McKinsey, as established by Marvin Bower, emphasized constant reinvention while preserving its foundational values. This unique blend of stability and adaptability has enabled the firm to remain an industry leader
3. Incentive alignment will significantly impact performance. The unique partnership model at McKinsey ensures that the partners are financially incentivized to collectively perform and ensure the firm's overall success.
4. The value of skilled, knowledge-based services in the modern economy: McKinsey is a high-margin operation. High revenues are driven by charging substantial fees to clients for consultant time and resources.
5. Human Capital as a Long-term Business Investment: McKinsey’s success underscores the importance of investing in people for long-term business growth.
6. Importance of Talent Density: McKinsey's success and influence over the last century have been largely driven by its ability to attract and retain top talent.

Key Takeaways and Business Model

1. Large-scale consulting firm: with a revenue of around 10 billion and over 30,000 employees across 130 cities, the firm's scale and penetration are extensive.
2. McKinsey operates on a project-based model focusing on problem-solving: The company assists its clients in addressing business challenges by providing specific insights and expertise for a predetermined duration.
3. Unique ownership and culture: McKinsey operates on an equal-weighted partnership model, not as a corporation, with about 2,000 global partners. Partners' compensations are majorly performance-tied, aligning incentives towards the overall firm performance. A part of this compensation is managed by MIO Partners, essentially serving as a hedge fund or wealth management office for McKinsey partners. There's a periodic election for a global managing partner, who can only serve three terms, ensuring a dynamic leadership structure.
4. The growth and evolution of McKinsey have been shaped by two pivotal figures, James McKinsey and Marvin Bower. James McKinsey founded the firm in the 1920s during the US business establishment's hyper-growth phase, driven by the Industrial Revolution. His vision was to provide businesses with rigorous and analytical business consulting, introducing much-needed precision and strategic management thinking. Marvin Bower, who succeeded McKinsey, emphasized professionalism and service. He aimed for McKinsey to be viewed similarly to other high-class professions, like medicine or law.
5. Consulting Industry Landscape: The consulting industry, ranging from $150 billion to $200 billion, is a mix of small and large firms. The significant players like McKinsey, Boston Consulting Group (BCG), and Bain & Company are known as the 'Big Three'. Other sizable firms, including Deloitte, PWC, KPMG, and Accenture, focus more on operational work. This industry is fragmented into management, operational, and technology consulting.
6. Project Economics and Profitability: McKinsey projects involve teams of consultants working on specific workstreams, often running complex, large-scale initiatives. The cost to the client is approximately $180,000 per week for a team of six consultants, breaking down to about $6,000 per consultant, per day. The majority of project costs are salaries, with additional expenses related to support and travel. Despite these costs, consulting remains a high-margin business, with McKinsey running at around 60-70% gross margin, resulting in about 25-30% EBITDA.
7. McKinsey's Employee-Centric Business Development Strategy: McKinsey's unique approach to marketing and sales involves significant investment in training and developing employees. The firm’s strategy is built on the expectation that alumni, who often move into leadership roles, bring business back to McKinsey.
8. Content Marketing as a Sales Tool: McKinsey uses content marketing effectively as a sales tool through publications like the "McKinsey Quarterly" and the "McKinsey Global Institute." These platforms enhance the company's brand image.
9. Emphasis on Talent: McKinsey heavily emphasizes talent attraction and development. The talent model is a mix of attracting high-quality candidates and nurturing them once inside. Annually, they receive approximately a million applications and hire less than 1% of applicants
10. Effective Training and Staffing Model: McKinsey's training and staffing models enable accelerated learning and professional development. A unique aspect is the existence of a 'Professional Development Manager (PDM)' whose role is to understand the individual's career aspirations, strengths, weaknesses, and personal circumstances to facilitate appropriate project staffing.
11. Future growth lever is asset-based consulting model McKinsey solutions (using software solutions): approach allows McKinsey to deliver value to clients at cheaper price points and brings in additional revenue streams

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