The Rise of Management Consultants

"The Origins of Modern Management Consulting" by Christopher D. McKenna, in Business and Economic History (Fall 1995), Dept. of Economics, College of William and Mary, Williamsburg, Va. 23187.

Management consultants are to the corporate world what big-name athletes are to professional sports: sometimes loved, sometimes hated, but always very well compensated. In 1993, AT&T paid out more to management consultants than it spent on research and development. While it’s generally assumed that management consulting grew directly out of the "scientific management" movement fathered by Frederick W. Taylor (1856–1915), its origins were quite different, argues McKenna, a historian at Johns Hopkins University.

By the late 19th century, American big business had grown large enough to require outside advice. Most of this advice came from major banks, which enjoyed far more intimate contact with their corporate clients than today’s banks do. They owned stock, lent money, and often took an active role in management—sometimes including a seat on the board of directors. The banks began to draw in the specialized consultants: chemical engineers such as Arthur D. Little for engineering advice, accounting firms such as Arthur Anderson and Ernst & Ernst for outside audits and financial advice, and large corporate law firms.

But the Glass-Steagall Act of 1933 and the establishment of the Securities and Exchange Commission in 1934 ended all that, forcing banks to choose between commercial and investment banking and to sever their close ties with their corporate customers.

"The new institutional arrangements in banking opened up a vacuum into which firms of management consultants rushed,"McKenna writes. From about 100 independent "management engineering" firms (as they were called then) in 1930, the number grew to 400 a decade later. Firms also expanded in size. In 1926, after a dozen years in business, Edwin Booz employed only one other management engineer; a decade later, Booz-Allen & Hamilton had 11 consultants on staff.

"Since the 1930s," McKenna writes, "management consultants have reorganized the largest and most important organizations in the world." McKinsey and Company, for example, during the 1960s and ’70s, decentralized some 25 of Great Britain’s largest companies. "Whether reorganizing the Bank of England, Royal Dutch Shell, the government of Tanzania, or even the World Bank, management consultants disseminated American management techniques throughout the world."