Game of Thrones — Future of The Big Consulting firms

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The current state of the “Strategy and Operations” consulting market can be defined by one theme: the quest for scale. Scale has become the overarching objective across the various consulting players in the market. How did we get here?

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Clients have changed: Consulting clients have become extremely savvy. In early days in consulting, there was a lot of value in “Outside In”-led strategy projects that essentially leveraged the Consulting firm’s talent arbitrage. Nowadays, every client of even a rudimentary maturity tends to have an internal strategy function run by ex-Consultants and ivy league graduates.

  • Therefore, only firms that have a cutting edge offer+IP, supported by a global scale to support global clients, tend to have any kind of sustainable competitive edge in the market.
  • In general, a larger scale seems to be helping consulting firms remain more relevant and more valuable for global clients (Larger scale seems to mean marginally better talent, significantly better investments, better IP, better service to Fortune 500, etc — and hence makes a big incremental difference in the long run).
  • In addition, scale also seems to help firms tide over tough times much better e.g. the 2008 Crises.

There is a natural age advantage playing out in the MBB (#McKinsey, #Bain, #BCG) Group.

  • Age advantage is the advantage a firm gains simply by having been around for longer than its competition (somewhat like the experience curve, but much more broader implications than that)
  • Age advantage is particularly true in traditional Strategy consulting — you grow only at the pace that you grow partners within the firm. Within the MBB, largely due to its age advantage, Mckinsey (its about ~25–35 years older than the Boston firms) has ended up with a materially larger scale.
  • If you have been around for ~25–35 years more like Mckinsey, then you have that significant headstart because its very difficult for Bain or BCG to organically grow these partners from within their ranks to compensate for the lost years.
  • Thanks to Mckinsey’s age-advantage driven scale, they have been able to better invest in practically everything — and continue to be much more cutting edge than the other two firms. This has by now become kind of an inevitable virtuous cycle for Mckinsey — the larger you are, the more you grow, and the better you become.
  • Given its scale disadvantage, BCG is now in a huge rush to build scale. There are some markets across the world where BCG has an open door policy to recruit laterally pretty much anyone with some semblance of a good consulting experience. Bain is now a significant scale laggard in this MBB group.

The Big 4 (#KPMG, #PwC, #EY, #Deloitte) firms are now trying to circumvent their age disadvantage by going for inorganic acquisitions. Given their larger scale overall (Deloitte and PWC are ~3–4 times larger than Mckinsey), they can afford to take the risk of inorganic moves. However, the success of these inorganic moves can only be seen with time — traditionally, inorganic deals in Strategy Consulting have not been particularly successful.

  • There is a natural age advantage playing out in the Big 4 Group too: Around the early part of this millennium, the Big 4 firms (except Deloitte) had divested their Consulting businesses driven by all the scandals. Deloitte’s choice to invest in consulting in the last 15 years has offered it the opportunity to deliver substantial organic growth, as well as the opportunity to buy a range of consulting businesses (think Bearing Point, Monitor, etc).
  • The other Big 4 have kind of realized late that a thriving Consulting business is vital for them to grow given saturation in their core audit/tax markets — but these 15 years in the middle have kind of given Deloitte an age advantage in the Big 4 group not dissimilar to the one enjoyed by Mckinsey in the MBB group.

One twist: Deloitte’s age advantage is restricted to the US (though they are now trying to muscle their way to strength elsewhere) — whereas PWC enjoys a bit of an advantage outside the US 9 (and they bolstered this international advantage a bit with their sequence of failed acquisitions: Diamond, PRTM, Booz, etc) . But overall, given the disproportionate size of Deloitte in the US — it looks like they will emerge winners in this space. However, the rest of the Big 4 are going to try to short circuit their way to scale by grabbing other smaller boutiques (Eg. EY acquiring Parthenon and poaching several very senior MBB directors/senior partners across the globe).

The Big 4 firms have a better ability to support the ups and downs of a Consulting business (given their highly stable, predictable, annuity based, oligopolistic, Audit and Tax businesses). Accenture, unfortunately, cant do the same since such vagaries of the consulting business are not appreciated by their demanding public shareholders.

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The mid market Consulting firms will disappear: Booz is gone. Monitor is gone. Parthenon is gone. Roland Berger was supposed to have been gone 7 years back — but ever since they didnt take the Deloitte deal in a last minute turnabout, they have now been depleted so much (through poaching by other firms) that they are are a shadow of what they used to be.

  • AT Kearney has been in the market to get acquired on and off for a decade now — but none of us has been able to figure out how to acquire and succeed with their slightly weird portfolio of offers and capabilities. LEK, OC&C, etc are too regional to make a big difference globally.
  • Bain explored merging with BCG — but some obvious issues like culture, etc. came up. A number of the Big 4 firms have made an approach to both Bain and BCG — and haven’t been summarily turned away by either firm.

My personal suspicion is Bain may go sooner than later to a PWC or Deloitte. Deloitte now has a CEO with an M&A background — so that plays to their advantage right now. However, Deloitte is also reportedly super stingy when it comes to deals — which is why PWC may actually be more successful in bagging a Bain/BCG (Once the right price is offered to the partners, all other barriers to getting acquired will come down).

What future holds? (my personal views)

  • Mckinsey maybe the last man standing, along with the Big 4 and Accenture: In about 5 years time, it shouldn’t be too big a surprise if Mckinsey is the only pure play left in the market, though I would personally bet on BCG surviving independently for ~7–8 years. I think all of the Big 4 will remain relevant to varying degrees. Deloitte and PWC will continue to lead overall — with the #1 player being whoever manages to snatch Bain and/or even BCG.
  • Accenture will become more and more technology centric: Accenture already is seen mostly as a IT services and outsourcing firm, and not much as a consulting firm. This trend will become more and more pronounced. They will soon drop all pretense of “Accenture Strategy”, and become pretty much “Accenture IT”, “Accenture Outsourcing”, and “Accenture Pre-sales”. A number of Strategy-type Managing Directors in Accenture have been leaving them recently due to their inability to sell large technology/outsourcing deals (and selling these large deals is the only way MDs can meet the steep targets in Accenture). Also, Accenture has realized that the predictable, large scale IT/Outsourcing business is much better for a listed company, than the unpredictable consulting business.
  • Except Mckinsey, it looks like everybody is talking to everybody right now about possible inorganic moves

So. long story short, in 5 years from now, my personal guess is: either BCG would have grown to a scale comparable to Mckinsey, or they would be very close to getting acquired by a Big 4 firm.

All of these predictions need to be taken with a pinch of salt. I have realized that what Bill Gates said is broadly true. “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” While industry consolidation is definitely here to stay, whether this wave plays out in 5 years or 10 years is a bit of a guess for everyone around.

Thank You

Phani Marupaka

https://www.linkedin.com/in/phani-marupaka-02646b33/

Read on Disruptions ahead in the Consulting world’ . Please leave your comments or feedback in my inbox.

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About me: Hi, I’m Phani Marupaka — graduated from BITS Pilani Dubai in Computer Science Engineering, Data Specialist certified by Duke University, Investment Portfolio Specialist certified by Rice University, Digital Marketing Specialist — from Duke University and have around 6+ years experience in Business Development & Sales. I also write on startups, different sectors, industries & technology trends on LinkedIn.

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