The Origins of Modern Management Consulting D. 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 of influence consulting historians firms,business haveremained uncharacteristically and silent aboutthe origins,development, impactof management or consulting, 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, of 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 of 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- Consulting, 980." of Consultants 2TheAssociationManagement management (ACME)defines as consulting 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. consulting BUSINESS AND ECONOMIC HISTORY, Volume twenty-four,no. 1, Fall 1995. History Conference.ISSN 0849-6825. Copyright¸1995 by the Business 51 52 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 by 'scientific management' FrederickTaylor .... The concept combinedthe practice of engineering with the principlesof and economics, it was out of this couplingthattoday'sprofession wasborn[11, p. 24]. and But Taylorists management consultants had actually verydifferent professional andideologicalorigins. 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 [1, Taylormadehisreputation pp. 17-18]. Taylorists werelargelyconcerned with industrialrelationswhile early management consultants focusedon problemsof bureaucraticorganization. While Harrington Emerson's firm of "efficiency did 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, in often with backgrounds law or banking, foundedthe early "management engineering" on firms to offer advice to executives the organization their of not 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 for 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, 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 and firm numbers sizefromthe 1890s onward of because thespecialized skillsthat largerpartnerships couldoffertheirexpanding corporate clients. This expanding corporate clienteleenabledyoungerpartnersto build of practices "management engineering" withinolder,largerfirmsor to foundnew specialtyfirms. Theseyoungerprofessionals intentionally borrowedskills and 53 from 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 as letterhead, did Miller, Franklin, & an Basset Company, accounting based firm of in New York . 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. 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 consulting. 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 interests. example, bankers hiredcountless accountants, lawyers assist engineers, and to them the in reorganizing thirteenlargerailroadswhich failed between1893 and 1898 to [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) National 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. . To gain a thorough of understanding increasingly complexcorporations, bankerscalled upon and the and coordinated workof bothinternal external Investment professionals. houses for employedengineers valuations and organizationalsurveys, accountants for of auditsand the installation financialcost controls,and lawyersto serve on reorganizationand bond-holdercommittees. In the 1920s, Arthur Andersen& of 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 Jr., 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 54 [ 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, on Booz -Allen & Hamiltonhadelevenconsultants staff [5, pp. 7, vi]. Similarly, O. James McKinseyandCompany, in whichMcKinseyfounded Chicagoin 1926, to 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 that 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]. that 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, of 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 as studies their plantssatidle [27, 13]. The growthof management consulting in the 1930swasnot simplya "natural"marketresponse theeconomicto downturn. an 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 and banking investment banking.J.P. Morgan& Company, example, for chose to a remain commercial bank,butseveral left partners to formtheinvestment banking 55 firm of Morgan, Stanley& Company. Simultaneously, Congress createdthe and Securities Exchange to Commission regulate and financialmarkets enforcea of 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 like 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 so 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 of on the organization a bankrupt or of company the prospects a newly-formed public company. Commercialbankerssimultaneously encouraged business to 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 of 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. As Taylor reported the stockholders U.S. Steelin 1938, the In 1935we retained firm of Messrs. Ford,Bacon& Davisto go methods, 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 . 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 antagonistic by endorsed theMorgan Bankwhich would U.S. haveimmobilized Steelin thetight of 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 Act. Glass-Steagall Duringthe 1920s, NationalCity BankhadArmstrong conduct of 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• 56 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 the 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 wassuccessful of 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 of theinstitutionalization management consulting the eventhough typesof studies that Armstrong performeddid not change. GeorgeS. Armstrong Co. grew & it 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 of 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 in 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 of 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 throughout world. The originsof modernmanagement are consulting in the 1930s. Contrary Taylorismwas not the predominant to popular assumptions, influenceon the of development consulting firms. Rather, management engineers drew on the of practices accountants,engineers,and lawyersto offer CEO-level studiesof 57 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, Act 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. and New Deal legislation firm-levelsystemization the of catalyzed development this particularly corporate Americanform of professionalized counsel. Sincethe 1930s,management consultants the havereorganized largestand in most importantorganizations the world. During the SecondWorld War, the to 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 . 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 the Great Britain [10, p. 239]. 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