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McKinsey Solutions and McKinsey Analytics

McKinsey Solutions and McKinsey Analytics are two of the fastest growing areas of McKinsey. They are broadly grouped under McKinsey Digital. I recently had lunch with a group of ex-McKinsey senior partners. They were not pleased with the rapid growth of the non-traditional areas of McKinsey like McKinsey Solutions and McKinsey Analytics.

According to them, these non-traditional areas now make up more than 50% of McKinsey in terms of headcount and are growing faster than the traditional consulting headcount and revenue.

Those partners were upset because they believed McKinsey should not sell solutions. And yet we have McKinsey Solutions.

This article is not about the different types of work and recruiting within McKinsey Solutions, McKinsey Digital McKinsey Analytics etc. The McKinsey website provides all that information and because this part of McKinsey is changing so much, it is worth checking the site often. The work is far too varied to cover in one article.

We have also found it generally easier for our clients to join this part of McKinsey.

This article looks at what McKinsey Solutions, and McKinsey Digital in general, means for McKinsey. And it answers the question everyone is indirectly asking:

Is McKinsey Solutions hurting the prestige of McKinsey?

McKinsey Solutions Parallels to Banking

There was a time when investment banking primarily meant advisory fees for mergers, acquisitions and the like. There was a time when the school you attended, your family name and your pedigree determined your access to CEOs and your ability to advise them on their financing needs. Investment banking has operated this way forever. It still does to a large degree.

Advisory investment banking is like the traditional generalist side of McKinsey.

When a strategy takes 2 months to develop, 8 months to implement and possibly 2 years to truly assess, it is hard to know if the strategy is any good when it is presented to a CEO. The CEO cannot judge the quality of the strategy with 100% certainty, but he can judge the person presenting the strategy.

The pedigree of the management consultant becomes the determining factor. His employer, school, grades, experience, family, dressing, behavior and the like.

Yet, unlike management consulting, the last time a client wanted FIRMSconsulting to get them into Investment Banking, as a backup to McKinsey, was years ago.

Today, clients want to get into PE, VC, Trading, Quantitative Desks and the like. That is if they choose finance. Tech is much bigger of a draw.

If Sex and City was remade today Carrie would be living in San Francisco and Big would be a trader at DE Shaw or a VC partner.

When traders first arrived on Wall Street they were routinely ignored, vilified and treated like second-class citizens. They were considered the illegitimate children of finance. Even though Goldman Sachs had a trader as a CEO before most investment banks, traders themselves took a long time to be seen as equals across the entire banking sector.

Traders were people who could get things done and their pedigree did not matter. Their schools did not matter. Their trades mattered.

When the results of a trade can be verified in minutes or a day, pedigree does not matter. Results are your pedigree.

Then traders started looking for an edge. And a hedge.

Goldman Sachs’ J. Aron trading arm brought in Armen Avanessians who set up their stats group. The fixed income side brought in Emanuel Derman who built one of the most famous 2-factor models in the world.

These two men were part of a vanguard that changed banking. They automated trades, found patterns and, crucially, moved the quantitative work from advising to executing trades. Before long, Goldman Sachs was powered by trading profits and trading was the new investment banking.

Every bank, hedge fund etc., has tried to replicate that success.

Why wouldn’t any financial group not want to use algorithms to find patterns the human eye could not detect and execute trades the human mind could not find and at a speed faster than any human?

And, of course, traders have bad months and years with changing legislation and markets. But that they are a force that changed banking is hard to dispute.

McKinsey Solutions & Advisory

Right now, all the acquisitions and recruits McKinsey is making tend to operate around the periphery of advisory work. They produce tools to help clients analyze data. They scan market sentiment to check brand relevance. It is a long list. Limited only by their creativity.

And yet there is demand for this work. That is why they keep growing.

The jump McKinsey Solutions, McKinsey Analytics and McKinsey Digital have to make is to figure out how to rethink McKinsey’s core advisory work versus being an add-on to advisory.

Someone in McKinsey needs to be asking how can McKinsey rethink the way they advise clients in their core management consulting work by blending in data and analytics.

This is not about automating the current approach but redesigning the current approach.

Why are hypotheses and deductive logic the only way to conduct analyses?

Management consulting has not changed much for McKinsey. There are still management consultants developing hypotheses, storyboards and conducting analyses to prove their deductive logic.

Consultants have moved to power point, excel, database models and big data tests to prove and disprove hypotheses but the underlying approach is still the same. A consultant from the 1980s would recognize all the steps used today even if the tools have changed.

This is similar to traders in banking.

Traders used to sell bonds based on their gut knowledge and past experience.

Some moved to slide rules and eventually started using calculators.

Derman came along and developed a set of equations to predict prices.

Eventually, the bank began automating trades.

The core trading function had been changed.

McKinsey Solutions, McKinsey Analytics and McKinsey Digital will eventually figure out a way to change the advisory process.

Right now, there is incredible resistance to this change. Many McKinsey partners in the generalist side will quit as the change happens. I know some who did this. That is normal.

Many partners quit when banks began bringing in quants and automating functions. People always quit when change occurs. They resist it.

McKinsey Solutions will have to do it. If they do not, someone else will. BCG, Deloitte, Accenture have all gone down this path and, to be fair, some of them are farther along the journey.

McKinsey Solutions: Profits & Prestige

Every time change begins it is human nature to say a few things:

I don’t see how it can happen.

It will never happen.

Clients value personal human interaction.

Computers cannot replace judgement.

This is too complex to be automated.

In fact, those partners believe to succeed they need to be better at speaking to clients and understanding their needs. They will double down on improving the way they engage clients.

Taking better care of a horse and breeding better horses did not stop the automobiles.

This is a structural shift and it is happening and McKinsey is not the leader in this space. Yet, they are doing the right things by investing to figure out how to make it work and since no one has figured it out, they have as much chance of setting the standard as anyone else.

The mistake is to assume that McKinsey Solutions, McKinsey Analytics and McKinsey Digital will always be an arm of McKinsey. If they figure out how to bring data to the consulting side and even digitize the actual consulting process, the whole of McKinsey becomes digital.

That is not to say that there will be no strategy consulting. It just means it will be done in a different way. Just like spreadsheets did not make consultants obsolete, it did change the way consulting is done.

McKinsey Solutions will not be asked to play such a central role in consulting. McKinsey Solutions will become part of McKinsey’s DNA.

As McKinsey Solutions grows in size and brings in more profits, all partners will make decisions that cater to their needs since the partner profit distributions are heavily dependent on the success of McKinsey Solutions.

No one bites the hand that consistently feeds them. At the end of the day that will be the only thing that will matter.

McKinsey may turn away profits on one study, but no one is going to turn away a structural change in profits.

As McKinsey Solutions keeps growing, eventually a partner from McKinsey Solutions will be nominated to run the Firm. People have always thought of something wealthy and profitable as being prestigious. This will be no different.

McKinsey Solutions will be prestigious because in the future there will be no McKinsey Solutions nor McKinsey Digital.

It will just be McKinsey advising in a new way powered by the principals of Digital, Solutions and Analysis. It will all be blended.

McKinsey Solutions & Your Career

If you are considering McKinsey on the generalist side, McKinsey Digital and/or McKinsey Solutions, in the long term it will not matter. McKinsey is already a majority-minority firm. The generalists are a minority in terms of headcount and if the hiring trends continue they will be a smaller and smaller minority in headcount. Like anything in life the implications will take time to show through.

The generalists will argue this is not true. They have the relationships. They have the power. They run the executive committees.

What matters are the trends. And the trends show a shift in power. And the shift is not the generalists being displaced but a change in the way the generalist work is done.

McKinsey is not becoming less prestigious by going this route. This is what they need to do to survive.

Yes, it is true we do not have any idea how to yet blend digital, solutions and the like to rethink management consulting, but that does not mean someone will not figure it out.

It is hard to imagine so much can be digitized and automated but strategy consulting is the one thing that is immune to change.

So, join McKinsey Solutions, McKinsey Analytics or McKinsey Digital. In a few years it will most likely be McKinsey. And if you do a great job you will be one of the partners who reinvented management consulting.

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