Good question! Quite simply, management consultants, like McKinsey, help their clients solve problems. While true, let's unpack this statement and analyze each component a little more carefully to get more insight. Let's start by looking at an actual verbatim statement from one the preeminent management consulting firms, McKinsey, about what they do. Read it and then we'll break it down and analyze it.
"We serve clients at every level of their organization, in whatever capacity we can be most useful, whether as a trusted advisor to top management or as a hands-on coach for front line employees. For every engagement, we assemble a team with the most appropriate experience and expertise." - from McKinsey & Co homepage, What We Do section
In this process, we're already beginning to think like a consultant by breaking down a problem into smaller, more manageable components! Two questions immediately jump out:
Who are the clients?
The clients are often leading businesses (eg think Fortune 1,000 companies like Coca-Cola and Microsoft), investors (eg Private Equity firms like KKR), governments (eg US Dept. of Energy) and non-profits (eg, Bill and Melinda Gates Foundation). While each consulting firm will have a different client base (and sometimes different sector focus), the primary customers of many consulting firms come from the first category: leading businesses. We'll revisit this more below.
What are the client challenges?
Ok, so if leading businesses are the primary customers of consulting firms, you might immediately ask: why do leading businesses, who likely can likely hire the world's best talent, need to hire expensive consultants to help them with their problems? While there are edge cases, there are three core reasons that drive the bulk of the consulting business. For more detail, read on below or listen to Founder walk through the three core reasons companies hire firms like McKinsey, BCG and Bain.
The leading consulting firms have built up critical expertise in key areas. Thus, when companies face mission-critical challenges or problems that require that expertise, an efficient way to resolve the issue can be to engage with a consulting firm. For example, consider the scenario of a large consumer electronics manufacturer who has decided to merge with a similarly sized competitor. While both firms have done small acquisitions in the past, neither firm has ever attempted a merger of this scale. Thus, neither will have the muscle memory or in-house expertise to confidently execute well. Note the operative word confidently here. The firms might be capable of doing it themselves, but given the high stakes, they want to execute confidently and thus leveraging expertise from a consulting firm makes sense.
In many cases, consulting firms will be brought on to provide an objective, third party opinion on a major decision a company is making (eg, it could be a new, large multi-year investment, a potential acquisition, a strategy shift, outsourcing, etc). Why does this happen? Again, shouldn't the key stakeholders at the company who know their own business best be perfectly qualified to make that decision? Yes and no.
Yes, they'll understand the business well and likely have more of the context than any third party. But other challenges almost always arise. The business owners might have "blind spots" or certain biases. Thus, bringing in an outside voice will help them confront those and objectively deal with them. Another example is a "deadlock" scenario. For example, it's possible that the board of directors, or factions within the executive team disagree about the right route and thus a tie-breaking, objective opinion is needed. Another common possibility is that the consulting firm can bring in an objective view on industry best practices, essentially leveraging their wider purview of how other companies have tackled similar problems.
The last common case is that the company has a pressing problem. Since all their existing teams and people are tied up with ongoing projects, the company requires an injection of smart people and "brains" to bring to bear on the problem at hand. Some companies are designed to operate this way. For example, private equity firms often rely on management consulting firms to help on specific aspects of due diligence when they're looking to make an acquisition. Sure, the private equity firms could build and staff their own internal consulting firms but many will choose to hire teams on an "on-demand" basis, rather than changing the structure and talent base of their own organization.
Are all firms the same?
Great, so now that we know a little more about the type of clients who hire consulting firms and we know about the classes of problems that spur them to hire a consulting firm. But what about the consulting firms themselves? If you are, say a leading global business, that has an urgent pricing problem, which firm do you hire? Are all the firms equally capable of helping you navigate that problem? How do you think about who to approach?