Consulting Practice I Inherited

“Trust but verify.” Pres. Ronald Reagan

This series examines the ways in which best practices from BCG and McKinsey can be applied in other work environments, such as in a smaller boutique consulting firm or even a corporate role. This article is a part 2 in this series, part 1 is available here. 

Some of the details have been modified for confidentiality reasons.

What was I inheriting?

I had inherited a very disorganized consulting practice. It was very hard to create a boundary around management consulting to analyze the business. I was going to apply all my skills as a consulting partner to analyze this consulting business.

My rule was to write out what I found in the first 2 to 4 weeks. After 4 weeks, weird practices would begin to appear less weird to me. I would, therefore, routinely refer to the write-up to ensure my priorities did not change. This was a crucial action.

There was no administrative support team for the consulting practice: no finance manager, no personnel manager, no training manager and no other critical functions. Just understanding the business took me over 2 months since I had to politely convince support staff from the parent company to spend 4 hours a week helping me pull together the numbers we needed.

I spent a lot of time hanging around cubicles, buying little presents for employees and taking out many people to lunch to gain their trust. Do you have any idea how many cupcakes I needed to buy? And that was just for the executive assistants and junior staff.

Boy, did I eat a lot of pasta in those first few weeks and months. It was heavy penne with peas and Italian sausage. Certainly delicious and the only thing I could eat while speaking. I decided buying cupcakes for the senior executives and board members would not work, hence the pasta.

Not a single person could give me a definitive number of people in the consulting practice. It ranged from 150 to 350 depending on whom you asked.

Salaries where completely out of whack with some senior consultants paid as much as some directors due to their specialist skills. The company hired some of my own people from the firm and paid them not for the role they had been hired, but due to the previous title and brand they had on their resumes.

So you had these really expensive ex-McKinsey and ex-BCG consultants doing basic due diligence work, coming in at 8:30am, taking a 60 minutes break, going to yoga or gym and finally leaving at 5 to 5.30 pm. The ex-PWC consultants where slightly better – but not by much.

In effect the boutique was simply renting their brand-name resumes without actually using the asset effectively.

There was no link between value of the output they provided and their input salary costs.

For example, one consultant recently had a child and his wife decided to return to McKinsey. He was also ex-McKinsey. He had been a mere associate at McKinsey with just 1.5 years experience but he was being paid $140K along with a guaranteed bonus and share options.

Moreover, he had somehow figured out it was okay to come in at 9.30am and leave around 3pm. How in the world can you work as a team from home on consulting studies!

That had to change. Either the salary would need to go down or his output and quality would need to dramatically improve.

And on my second day one of the directors had the audacity to intimate we need to raise salaries to compete with BCG!

What about raising the quality of the work? Lets have that discussion first!

There were people on the consulting payroll who where not consultants and had never been on a consulting study. The teams within the consulting practice where split between 8 offices and rarely, if ever, communicated.

Strategy Consultants

Only the self-described elite offices in New York and Moscow worked closely together. This group called themselves the strategy consultants and considered themselves an independent part of the consulting practice. They ignored everyone else.

They were extremely arrogant, negative, condescending and loved making all the other consultants feel small.

Everyone in New York and Moscow talked of being in the league of McKinsey and BCG. Yet McKinsey and BCG, for sure, had never heard of them. I had never heard of them and I specialized in their sector.

I am certain none of my previous clients had ever heard of them either.

The majority of work done in New York and Moscow were these incredibly detailed market sizing studies such as estimating the number of aluminum containers Gazprom would buy and the studies were done for companies who supplied Gazprom.

The New York and Moscow partners loved throwing in the word “strategy” and “strategic” into the word play, but this was not strategy.

At best, it was strategic. In truth, they were doing very detailed market sizing work and since they were placing lots of numbers in their reports, they called it strategy. Moreover, who needed more strategy consultants? How was this of use to the parent company?

The economics of the strategy group was a stinker!

It reeked of bravado not matched by profits. They were billing clients $150,000 to do a 4 to 5 week study. Those were crazily cheap rates. Forgetting about the need to have a strategy consulting practice, they were not even being appreciated in the market.

This is the equivalent of a car company producing sports cars and saying it is in the league of Ferrari. Yet, forgetting that if you sell your cars for 10% of the price of the Ferrari, you are not in the same league.

And I find this to be the case in many boutique consulting firms. They love the word strategy. They use the word strategy, insist they do strategy but become all bashful and shy when you ask about their strategy to make a profit at least comparable to moderately successful consulting practices. They usually don’t have one.

In effect, the parent company was subsidizing the strategy directors’ fantasy to run a strategy consulting practice.

Moscow and New York did not communicate with the other 6 offices within the consulting practice. They did not even know the names of the other consultants and partners. They felt the offices in Latin America and Central Asia were staffed by knuckle draggers who where lower class. The consultants in Central Asia where treated particularly badly.

And the irony is that the Central Asian consultants desperately wanted acknowledgement from the Moscow and New York partners. The Central Asians where falling over themselves to get transfers to New York and Moscow.

Essentially, this created two consulting practices.

The accounting department generated productivity ratios of billings versus employee costs for every division across the entire company. The strategy teams were so pleased to show me they had a ratio of 3.7. The procurement, extraction, surveying, geological and engineering teams had lower ratios, averaging around 3.5. In effect the consultants where just 6% ((3.7-3.5)/3.5) more profitable then the engineers.

Just 6%. That is nothing. They should be around 250% more profitable given their higher cost base and the type of work they were allegedly doing.

Yet while the consultants billed more per hour, they were not heavily utilized, which lowered their overall profits. They were under performing compared to industry standards.

The strategy consultants assumed I would support them since I was a former corporate strategy partner.

Due Diligence & Operations Consultants

These guys where most concerned about my arrival. All they saw was “another” strategist arriving and they resigned themselves becoming even more marginalized.

The rest of the offices within consulting practice performed two types of work.

First, they were involved in these insanely complex technical due diligence studies. Let’s assume J.P Morgan wanted to buy a mine in Ukraine. J.P. Morgan would need a truckload of due diligences done. The technical due diligence work would be done by a combination of engineers, and geologists etc., working with the consultants to estimate the costing and breakeven costs.

This was the bread and butter of the rest of the consulting practice. Many members of the consulting team were simply rotated between these studies to help with the economic analyses. The profitability of this work was fine and the relationship with the rest of the business was very strong.

I cannot say this was the most exciting work. I knew the consultants did not like this, but we were actually pretty good at it and this ability to leverage all our deep technical skills actually gave us a pretty big advantage versus firms like BCG, Deloitte, Accenture and so on.

Yet, many consultants are caught up in the glamor of consulting and this work was far from glamorous. It was hard to recruit people for this type of work.

We had ex Bain, BCG and McKinsey consultants being overpaid to do this kind of work. We either needed to change the economics of the work or lower their salaries.

Second, a unit within the consulting practice had been developed to scoop up all the technical skills the business had and, led by the consultants, roll out a type of implementation that no one else could do. I actually thought this was very unique.

Back at the firm, our version of implementation was largely setting up program management offices and working with experienced hires to roll out the changes. This was the way BCG and McKinsey did it and it is still the way they do it. Only recently have they tried bringing in seasoned implementation experts.

However, there is a key difference. McKinsey and BCG implementation focused on management practices. The boutique consulting firm focused on operation and technical practices.

This unit within the consulting practice was doing something completely different and they had a very clever business model as well. They were not simply selling the work for the sake of revenue. They attacked the problem from two fronts.

On the first front, the consultants had worked with the internal engineers to develop these detailed benchmarks, costing models and technical metrics to optimize operations at, for example, one of the parent company’s leading aluminum smelters. In other words, they had tested the thinking and it worked.

They had, thereafter, built up a set of management steps that could be taken to optimize each metric.

Yet, increasing the productivity much further at the smelter was risky. So they needed a guinea pig for more risky ideas.

They would take all their work, done at the parent company’s smelter, to a rival and offer to show how to improve the rival’s operations.

Then they would take what they had learned from perfecting the approach at a rival and bring it back to the parent company to beef up our operations.

So they did the trials at a rival and also returned with a deep understanding of the rival’s operations, culture, management techniques, metrics and targets.

They would then feed the competitor data into our models on mines etc., to figure out the true economics of our businesses, versus the competitors, and feed this back to the board. They would simultaneously see if the management of our smelters could be improved.

In my time there, only 2 clients made us sign such restrictive contracts that we were not allowed to use the data we collected. Only 2!

So this was a good business blending the best of consulting with the best of the technical skills to help the parent company. They were not trying to create some orphan child consulting practice that made no sense and had no synergy to the parent.

On the second front, they used this skill to develop goodwill. Most large resources studies are done in pretty impoverished parts of the world. While the parent company was running a copper mine in Zambia, for instance, these guys would go to the government and offer to help optimize the local water treatment facility.

This led to relationships that often times led to more work for the parent company. They were basically a very unusual front end of the consulting practice that never tried to sell anything. They just arrived, impressed and let the work build goodwill.

That is the best kind of “sales” team: the kind that does not sell.

And they were very nice guys as well: very open to sharing and helping everyone.

That blending of deep and real engineering know-how with the general consulting implementation skills was a pretty strong combination. However, the unit was young and resource starved.

Like the board, I felt we had to invest in growing this part of the consulting practice. I almost envisioned something along the lines of a more sophisticated industry services unit, like what exists in the oil and gas sectors.

To be continued …

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Image from Jon Herbert under cc.