p0051-p0058 by Ozzmaahson


									    The Origins of Modern Management Consulting

                         Christopher McKenna•
                        The JohnsHopkins University

        In 1993, AT&T spentmore on management    consultingservicesthan on
corporate         and             and
          research development, AT&T is notalone[8, p. 60]. Wall Street
analystsexpectbillingsfor consulting          to
                                     services advanceat twice the rate of
corporate  revenues over the next decade. Yet, despitethe size, growth,and
influence consulting               historians
                      firms,business        haveremained uncharacteristically
silent aboutthe origins,development, impactof management                or
        engineering" was
"management       asit known
                           before Second
                                the    World   2
                                            War. In this
      I             the
paper, will describe professional         of
                                  origins management    consultingfirmsat the
turnof thecenturyanddiscuss why, after slow,gradualgrowththroughthe 1920s,
thesefirms took off duringthe 1930s. I argue(1) that historianshave wrongly
assumed  that management  consulting arosedirectly out of Taylorism,(2) that
engineers,accountants,                                 by
                        and lawyers, often supervised merchantbankers,
provided counselthat later became the primary repertoire of management
            and                          of          and
consultants, (3) thatthelegalseparation investment commercial        banking
                                         and       of
in 1933drovetherapidprofessionalization growth management          consulting
duringthe GreatDepression.
       Recent historiansof scientificmanagement,   includingDaniel Nelson,
StephenWaring, and JudithMerkle, have tracedthe impact of Taylorismon
contemporary             as       as
              institutions diverse businesseducation,publicadministration,
andBritish industry                         craze
                   longaftertheProgressive-era for "efficiency" ended[29,
36, 26]. The proponents scientificmanagement,FrederickTaylor, Henry Gantt,
Morris Cooke,FrankandLillian Gilbreth,andHarrington       consulted
                                                   Emerson,       with
       200           on      to          the       of
nearly businesses ways systematize activities theirworkers       through
theapplication wageincentives,             studies, industrial
                                 time-motion      and         psychology
[29, p. 11]. Naturally              of
                      then,historians Taylorism            that
                                               haveassumed theycould
describecontemporary                 of                      "production
                        practitioners "industrialengineering,"

           is    frommydissertation, History Management
 Thisarticle drawn                "The     of                 1880-

             of        Consultants
2TheAssociationManagement                   management
                                (ACME)defines                as
                                               who help executives
a serviceprovidedfor a fee by objectiveoutsiders                  improvethe
management,operations, and economic performanceof institutions. Since the
                  and                 of management
institutionalization professionalization                  occurred
                                                 consulting       withinfirms,
                           this            on
not amongsolopractitioners, paperfocuses management             firms.

BUSINESS AND ECONOMIC HISTORY, Volume twenty-four,no. 1, Fall 1995.
                             History Conference.ISSN 0849-6825.
Copyright¸1995 by the Business


engineering," "consulting             and "efficiencyengineering," early
                          engineering,"                            as
management   consultants.Similarly,management           like
                                             consultants, Thomas     Cody,
tryingto tracethe historyof managementconsultinghaveassumed  that:

        undoubtedlythe most influential factor in the growth of modern
        management consulting                         of
                              was the development the conceptof
        'scientific management' FrederickTaylor   .... The concept
        combinedthe practice of engineering  with the principlesof
        economics, it was out of this couplingthattoday'sprofession
        wasborn[11, p. 24].

But Taylorists management           consultants            had
                                                  actually verydifferent      professional
        As Hugh Aitken pointedout in ScientificManagementin Action, those
executivesand their advisorsin large scalebusiness            who were "concerned      with
          of                         and           at
problems formalorganization control theadministrative                     level,"cameout
of a different intellectualtradition  thantheshop     management    movement   fromwhich
Taylormadehisreputation pp. 17-18]. Taylorists               werelargelyconcerned      with
industrialrelationswhile early management           consultants  focusedon problemsof
bureaucraticorganization. While Harrington Emerson's firm of "efficiency
engineers" surviveas a very smallconsulting              firm throughthe 1980s,andthe
British "management       consultancies"     founded in the 1930s were undoubtedly
Taylorist,noneof the largemodern          Americanmanagement        consulting  firms have
Taylorist origins  [31, 35]. Rather,   professionally-trained               and
                                                               accountants engineers,
often with backgrounds law or banking, foundedthe early "management
engineering"                                                on
                firms to offer advice to executives the organization their         of
boardrooms, on the efficiencyof theirshopfloors.
        The growthand complexityof the largestindustrial                             in
                                                                     organizations the
UnitedStates            a          at                           for
                created market the turn-of-the-century theprofessional                firms
of engineers,                and
               accountants, lawyers         whichoffered   independent  corporate  counsel
[9, pp.464-468]. By the 1890s,                   of
                                    executives largemanufacturing          companies   who
needed  engineering            but                                     on
                      advice, did notwanta full-timeengineer staff,couldturn
to consulting  chemical              like
                         engineers ArthurD. Little or electrical         engineering  firms
           &            for
like Stone Webster technical            knowledge   [20; 19, pp. 386-391]. Similarly,in
the 1890s, corporatemanagers                                                of
                                      employedAmericansubsidiaries the British
accounting                                      to
             firms,like PriceWaterhouse, provideexternal              audits andfinancial
controls theirgrowing                      [
                            companies 9, p. 464]. By the 1900s,American-based
accountingfirms like Arthur Anderson,Haskins & Sells, Ernst & Ernst, and
Seidman Seidman        wereexpanding                   the
                                          throughout country        [23, pp. 1-3]. In law,
largeNew York corporate firmslike CravathSwaine,DavisPolk, and Sullivan
& Cromwellprovided       legaladviceto businesses                       in
                                                        headquartered New York. At
the sametime growingregionalfirmslike Jones             Day in Cleveland    andBakerand
Bottsin Houston     served                     of
                            localdivisions national                     [24,
                                                            companies p. 22]. The
threeprofessions,    engineering,                 and
                                    accounting, law, all enjoyed         strong  growthin
firm numbers sizefromthe 1890s              onward           of
                                                    because thespecialized       skillsthat
largerpartnerships    couldoffertheirexpanding        corporate  clients.
        This expanding     corporate     clienteleenabledyoungerpartnersto build
practices "management        engineering"     withinolder,largerfirmsor to foundnew
specialtyfirms. Theseyoungerprofessionals             intentionally  borrowedskills and

credentials fieldsoutside                 training theystruggled attract
                           theirprofessional     as              to
        For          the
clients. example, electrical             consulting of Stone Webster
                               engineering        firm         &
workedfor J.P. Morgan& Co. afterthe 1893recession,            the
                                                   appraising valueof
                          ownedby GeneralElectric[21, pp. 21-24]. Their
electricalutility companies
appraisalscombined            expertise accounting
                    engineering       and           skillsastheytradedon
                         While engineers
their Wall Streetcontacts?                           accounting,
                                       were performing
accountants   marketed            as
                       themselves engineers.In 1927, James      McKinsey,an
accountant                                               and
             and lawyer from Chicago,put "accountants engineers" his     on
letterhead, did Miller, Franklin,        &           an
                                   Basset Company, accounting based  firm
in New York [28]. Thisblurring professional               was
                                              boundaries sometimes a      just
          to          but          it
response demand frequently wasthe resultof trainingin morethanone
profession.James     McKinseywas not alonein combining      legal trainingwith
management                his
              consulting; formerboss,    GeorgeFrazer,andhis protege,   Marvin
                          as       [17,
Bower,werebothtrained lawyers p. 7; 6, p. 1]. Management        engineers,  like
others            for
      struggling professional    status,usedmultipleprofessional credentials  to
support their claimsto specialized           and
                                   knowledge professional     approvalin their
       to         a
efforts market newandpoorlyunderstood        service[7].
       These engineers,   accountants,and lawyersoften worked for merchant
bankers                          a
        who, in turn,coordinated wide arrayof services  whichwere,at theturn
of the century,the closestfunctionalequivalentin the Americansettingto
management           merchant
                4Since           provided commercial
                           bankers      both      and
investment  banking  services, bankers                               to
                                        actedbothas internaladvisors helptheir
                  and                         to
client companies as externalregulators safeguard          investors'         For
example,  bankers hiredcountless             accountants, lawyers assist
                                    engineers,          and         to      them
in reorganizing thirteenlargerailroadswhich failed between1893 and 1898
[14, p. 5]. Bankersfrequentlyneeded evaluatethe worth,organization,          and
          of            for           as        as             of
prospects companies projects diverse the valuation an initialpublic
         the                of
offering, reorganization a bankrupt                or
                                          company, theadministrative   integration
of twomerging  corporations.   Duringthe 1920s,         City Bank(nowCitibank)
performedmanagement       engineering          to
                                        studies evaluatethe initial financingof
United Aircraft,troubled         at
                          loans Anaconda             and           of
                                             Copper, themerger six separate
business  machine               to
                   companies form Remington        Rand. [2]. To gain a thorough
understanding increasingly        complexcorporations,  bankerscalled upon and
            the                        and
coordinated workof bothinternal external                       Investment
                                                  professionals.           houses
employedengineers valuations           and organizationalsurveys, accountants for
auditsand the installation financialcost controls,and lawyersto serve on
reorganizationand bond-holdercommittees. In the 1920s, Arthur Andersen&
Companybecamenationallyknown for its investigations "plants,products,
       organization, futureprospects" companies investment
markets,           and              of          that         banksin

     Webster theson a partner Kidder,
3Edwin     was     of       at            &       in      His
                                    Peabody Company Boston.
      FrankG. Webster
father,             became                       in
                            headof Kidder,Peabody 1905. In 1930,followingthe
stockmarket     EdwinWebster
           crash,                      the
                              purchased bankrupt                   and
                                                   Kidder,Peabody installed
hisson.Edwin G. Webster, asKidder,Peabody's   newPresident[21, p. 3, 156].

                is              bankers
4 While thispaper not comparative,         to         as         of
                                      appear haveserved the source
             advicein NorthernEuropeandJapanthroughout period•
organizational                                       this

New York andChicagowere underwriting 3, p. 13-14]. By drawingon a range
of professional             as
                  services they advisedcorporate                            on
                                                           management planning,
organization,  and executive   control,bankers   provideda rangeof organizational
advice,         by
        backed a blue-blooded       reputation, whichonly management          consultants
wouldlater equal.
        While management     consulting  services  wereavailable     fromtheturnof the
centuryonward,the rapid growth,both in numbers            and in size, of independent
management    consulting  firmsdid not beginuntilthe GreatDepression. wasn't    It
until the 1930sthat management       consulting  firms grew beyonda few founding
partners  and established             in
                            branches new cities. In 1926, after twelveyearsin
business,  EdwinBoozemployed         onlyoneothermanagement                     by
                                                                      engineer; 1936,
Booz -Allen & Hamiltonhadelevenconsultants staff [5, pp. 7, vi]. Similarly,
James McKinseyandCompany,                                            in
                                      whichMcKinseyfounded Chicagoin 1926,
had,by 1936,expanded morethan25 employees hada second  and                 officein New
                                in             of
York [30, p. 11]. The growth thenumber firmsmirrored expansion the   the           of
firmsthemselves.   Between                                  of
                              1930and1940,thenumber management                 consulting
firms grew, on average,15% a year from an estimated100 firms in 1930 to 400
firms by 1940 [4, Table 2]. It wasno coincidence the economist                 JoelDean
wrote in 1938 that "unheralded,       almost unnoticed,professional         management
         has         an
counsel become important                        in
                                     institution our business       world" [15, p. 451].
Duringthe 1930stheservices management             consulting   firmsprovidedbegan      to
          in                                                 in
increase importance.In the 1920s,acquaintances local companies                      hired
management             to
              engineers analyzelimited,technical        problems.But, by the 1930s,
hundreds largecorporations      including  Armour,Union Carbide,Kroger,Carrier,
Sunbeam,U.P.S., Borden, Upjohn, Johnson            Wax, and Sears routinely hired
management              to
              engineers improvetheirorganization's          overallstrategy,    structure,
andfinancial  performance.                 later            that
                              Consultants assumed thisgrowthduring                    the
depression   was a countercyclical    reactionas troubledfirms usedmanagement
engineersto cut costsand improveoperational            efficiency. Yet, management
consultants  sufferedbadly during the 1920-21 recession           and, fifty years later,
following the 1973 oil embargo in bothcases,         clientssimplyput off expensive
studies their plantssatidle [27, 13]. The growthof management               consulting in
the 1930swasnot simplya "natural"marketresponse theeconomicto                  downturn.
It was,instead, institutional              to
                                 response new government           regulation.
        New Deal banking and securities        regulationpropelledthe growth of
management                 in
               consulting the mid-1930s. Firms of management                  consultants
prosperedas companiesturned from bankersto management                      engineersfor
organizational                              of
               advice.In thislastsection thepaper,I will illustrate          thisprocess
                      by               (1)                        of
of institutionalization describing the reorganization U.S. Steelby Ford,
Bacon& Davisbetween1935and 1938, (2) the careerof management                    engineer
GeorgeArmstrong,                                  of
                     and (3) the development the "generalsurveyoutline"at
JamesO. McKinsey and Companyin the 1930s.
        Congress           the
                  passed Glass-Steagall        BankingAct of 1933 to correctthe
apparent           problems industry
          structural          and                    that
                                           mistakes contemporaries           believed led
to thestockmarket        in
                   crash October1929 andthe bankfailuresof the early 1930s.
Glass-Steagall                            and
                dividedthe investment deposit-taking             functions  withinbanks
like J.P. MorganandNationalCity Bankintotwoseparate             industries:  commercial
banking investment      banking.J.P. Morgan& Company, example,    for            chose to
remain commercial    bank,butseveral              left
                                         partners to formtheinvestment           banking

firm of Morgan, Stanley& Company. Simultaneously,           Congress   createdthe
Securities Exchange                     to
                          Commission regulate                        and
                                                   financialmarkets enforcea
more opensystem corporate        disclosure  [25, pp. 169-171]. Theselegislative
changes  whichreconfigured           and           the              of
                             banking promoted rapidgrowth independent
accounting  audits             the                      of
                   alsoshaped institutionalization management          consulting.
SinceGlass-Steagall            commercial
                      prohibited             banks                in
                                                   from engaging "non-banking
activities," management      engineering, commercial  bankscouldno longeract as
management               [32,
              consultants p. 23]. Federalregulators      forcedcommercial   banks
to ceasetheir non-banking                              real
                             activitieslike insurance, estatedevelopment,      or
management                                              did
               consulting.And, while Glass-Steagall not restrictinvestment
banksfrom actingas management        consultants, S.E.C. regulations requiredthat
underwriters   performexternaldue diligenceon securities     issues and corporate
reorganizations investmentbanks could not use their internal management
engineersto certify new issues. Federal regulationforced investment           and
commercial  banks  from 1934 onwardto hireoutside              to
                                                     consultants renderopinions
on the organization a bankrupt                 or              of
                                    company the prospects a newly-formed
public company. Commercialbankerssimultaneously             encouraged   business
executives hire management     consultants sinceofficersinsidethe bankscouldno
longer coordinateinternal organizational      studiesof their clients. The new
institutional               in
              arrangements bankingopenedup a vacuuminto which firms of
management    consultantsrushed.
      The contrast between the old and new institutional order was evident in
Ford, Bacon& Davis' reorganization U.S. Steel between1935 and 1938. In
1901,J. PierpontMorganhadpersonally           the                 of
                                    supervised initialorganization U.S.
Steel,butin 1935,U.S. Steel'sChairman,                   his
                                      Myron Taylor, asked collegefriend,
                         the             of
GeorgeBacon,to oversee reorganization the largestindustrial   firm in the
                                to              of
country[22]. As Taylor reported the stockholders U.S. Steelin 1938,

      In 1935we retained firm of Messrs.    Ford,Bacon& Davisto go
      throughall of our properties,         personnel and marketsand,
      in collaborationwith our engineers                  to
                                          and executives formulate
      definiterecommendations   [citedin 18, p. 619].

Ford, Bacon & Davis' studytook three years,cost 3.2 million dollars,and
eventuallyincluded203 separate                      in
                                 reportsproduced collaboration       with five
differentsub-contracting         firms,including
                        consulting               McKinsey,               &
                                                             Wellington Co
[16]. It was the largeststudyever done by management       engineers, and the
recommendations                    &
                 whichFord,Bacon, Davismadeon the organization,      strategy,
                of                      the
and operations U.S. Steelinfluenced company's           investment,labor,and
administrative       through 1950s. In laborrelations, instance, 1937
              policies       the                         for         the
accord reached with workers           a
                            overturned long-standing              relationship
endorsed theMorgan     Bankwhich  would                   U.S.
                                         haveimmobilized Steelin thetight
labormarkets the Second    World War [34, pp. 15-17].
                        a              in        of
    GeorgeArmstrong, Vice-President charge industrial         investigationsat
National City Bankbetween                            the
                           1921and1932,personified changes              by
                                                                caused the
Glass-Steagall Duringthe 1920s,     NationalCity BankhadArmstrong     conduct
studies theirtroubled       to
                       loans theSaco-Lowell          of
                                              Shops, theproposed    merger  of
Palmolive, Kraft, and Hersey, and (at J. C. Penney'spersonalrequest)a
comparative       of
            study thePenney                and
                               chainstores theirrelative    expense ratios[2]•

                                       from his uncle that Franklin D. Roosevelt
In 1932, however, with inside assurances
intendedto breakapartcommercial               banking,Armstrong
                                 and investment                  resigned
from NationalCity Bankto foundhisownconsulting firm. His timingwas shrewd
sincelawyerswhoexamined new statues             in
                                         agreed, Armstrong's  words,

                          be       by          of
         thatanyfinancing preceded theexercise duediligence.This
                       to     the           of          by
         wasinterpreted mean investigation the subject a firm of
         competent           consultants thereviewof theRegistration
                   engineering          and
                   by               [2,
         Statement suchconsultants p. 69].

Armstrong's                 S.           &
            newfirm, George Armstrong Company                   from its
foundingin 1933. The firm workedfor a succession investmentbankingfirms
during the 1930s investigating such corporategiants as Jones& Laughlin,
Seagrams,  Birdseye  Frozen            and
                              Foods, PhilipMorris. George            Armstrong    profited
fromthetransition  frombanker                   of
                                   supervision management         engineering    studiesto
theinstitutionalization management        consulting                  the
                                                      eventhough typesof studies
that Armstrong    performeddid not change. GeorgeS. Armstrong Co. grew       &
rapidly not because offereda new form of organizational              advicebut because
           had              an
Armstrong founded independent               firm.
       The history of James O. McKinsey & Company illustrates the
institutionalizationmanagement                   after
                                       consulting theGlass-Steagall During   Act.
the 1930s, James   McKinsey workedto systematize complicatedthe                 processof
         newclientsandconducting management
soliciting                               a                engineering    survey.In order
to securenew clients,McKinsey methodically          cultivatedcontacts    throughout  the
financial               He
         community. claimed havetaken to            everyimportant             in
                                                                       banker Chicago
or New York to lunchand,in return,"'nearly everyone at onetime or another             has
given me some work....'" [37, p. 42]. PerhapsJamesMcKinsey's greatest
             to                          of
contribution the institutionalization his firm was the "generalsurveyoutline,"
whichhe draftedin December1931, to give young,inexperienced                 consultants  a
model to follow when, as McKinsey specified,they were askedto preparea
complete        of               that
         study a company wasin financial                difficulties [30, p. 11]. Marvin
Bower,whojoinedthefirm in 1933,haswrittenthatthegeneral                 survey  resembled
the corporate                      for
                reorganizations bondholders'           committees      which Bower had
previously             as
           overseen a young          lawyerat Jones,  Day [6, p. 17]. Indeed,because
consultants frequently   prepared  these general            for
                                                  surveys investment         firms during
                          at       O.
the 1930s,thepartners James McKinseyandCompany                     cameto referto them
as "banker'ssurveys."The generalsurveyoutlinesurvived modifiedform in
McKinseyandCompany's          trainingmanual    until 1962 [30, p. 12]. As early asthe
1930s, JamesO. McKinsey and Companywas profitingfrom the external
imposition banking        andfinance               a            it
                                       regulation, transition waswell equipped          to
exploit. The firm alsoprofited      from its internal                    of
                                                      systematization clientcontact
andreportwriting. Theseinternal       arrangements   allowedMcKinseyandCompany
to overcome the limitations of novice consultants and variable economic conditions
                         grew beyond founderandexpanded
as the firm's organization          its                        the
      The originsof modernmanagement           are
                                      consulting in the 1930s. Contrary
                      Taylorismwas not the predominant
to popular assumptions,                                influenceon the
development consulting  firms. Rather, management engineers drew on the
practices accountants,engineers,and lawyersto offer CEO-level studiesof

organization,strategy,and operations.The majorchangein thisemerging   quasi-
professiontook place in the 1930s and was primarily a product of political
developments. Beforethe 1930s,merchant bankerscoordinated thesestudies.But,
the Glass-Steagall and S.E.C. disclosure  regulationsforcedcommercialand
investment         to
           bankers abandon   internalmanagement consulting activitiesevenas
         mandated theycommission
regulators          that              outsidestudies.Theserequiredstudies,
combined with the increasing           of
                            acceptance management              by
                                                     engineers corporate
executives,        the            of
           propelled rapidgrowth consulting   firmsfromthe 1930sonward.
New Deal legislation firm-levelsystemization         the         of
                                            catalyzed development this
particularly                               corporate
            Americanform of professionalized        counsel.
      Sincethe 1930s,management   consultants               the
                                             havereorganized largestand
most importantorganizations the world. During the SecondWorld War, the
Federal Governmenthired large numbersof consultants streamlinecivilian
          reorganize military,andoversee rapidexpansion theFederal
production,         the                    the               of
Administration. By 1949, Cresap.McCormick & Paget was working for the
Hoover Commission                the
                   restructuring Executive Branch [12]. As consultants
worked for the government, they carried ideas betweenthe public and private
bureaucracies, acceleratingthe process of organizationalinnovation and
dissemination.  Since other          did            the           of
                            countries notlegislate separation commercial
and investment            the                    of
                 banking, institutionalization management       consulting  never
happened          of
          outside theUnitedStates.When American          management  consultants
          into        in
expanded Europe theearly 1960s,          theysoldAmerican   management    "know-
how"to European    managers       to         the
                             eager employ organizational                 that
                                                              structures J. J.
Servan-Schreiber   labeled "TheAmerican              "•
                                           Challenge. By the 1970s,   McKinsey
andCompany     haddecentralized               of
                                 one-quarter the hundred    largestcompanies   in
Great Britain [10, p. 239]. Whetherreorganizing Bank of England,Royal
Dutch Shell, the Government Tanzania,or eventhe World Bank,management
consultants disseminated American  management    techniques            the
                                                           throughout world.
But, it wasthe institutional professional   growthof consultantsduringthe 1930s
that wasthe necessary            to                     of
                        precursor the predominance Americanmanagement
consultants             the
            throughout world and,throughthem,the ascendancy Americanof
modelsof corporate   organization after the Second World War.


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