The Origins of Modern Management Consulting

Christopher McKenna D. •
The JohnsHopkins University

In 1993, AT&T spentmore on management consulting services than on corporate research development, AT&T is notalone[8, p. 60]. Wall Street and and analystsexpectbillingsfor consulting services advanceat twice the rate of to corporate revenues over the next decade. Yet, despitethe size, growth,and influence consulting of firms,business historians haveremained uncharacteristically silent aboutthe origins,development, impactof management and consulting, or

"management engineering" was asit known before Second the World War. In this 2
paper, will describe professional I the origins management of consulting firmsat the turnof thecentury anddiscuss why, after slow,gradualgrowththroughthe 1920s, thesefirms took off duringthe 1930s. I argue(1) that historians have wrongly assumed that management consulting arosedirectly out of Taylorism,(2) that engineers,accountants, and lawyers, often supervised merchantbankers, by provided counselthat later became the primary repertoire of management consultants, (3) thatthelegalseparation investment commercial and of and banking in 1933drovetherapidprofessionalization growth management and of consulting duringthe GreatDepression. Recent historiansof scientificmanagement, includingDaniel Nelson, StephenWaring, and JudithMerkle, have tracedthe impact of Taylorismon

contemporary institutions diverse business as as education, public administration, andBritish industry longaftertheProgressive-era for "efficiency" craze ended [29, 36, 26]. The proponents scientific of management, Frederick Taylor, Henry Gantt,
Morris Cooke,FrankandLillian Gilbreth,andHarrington Emerson, consulted with

nearly businesses ways systematize activities theirworkers 200 on to the of through theapplication wageincentives, of time-motion studies, industrial and psychology [29, p. 11]. Naturally then,historians Taylorism of haveassumed theycould that describecontemporary practitioners "industrialengineering," of "production

Thisarticle drawn is frommydissertation, History Management "The of Consulting, 1880980."

2TheAssociationManagement of Consultants (ACME)defines management consulting as
a serviceprovidedfor a fee by objectiveoutsiders who help executives improvethe management,operations, and economic performanceof institutions. Since the institutionalization professionalization and of management consulting occurred withinfirms, not amongsolopractitioners, paperfocuses management this on consulting firms. BUSINESS AND ECONOMIC HISTORY, Volume twenty-four,no. 1, Fall 1995.
Copyright¸1995 by the Business History Conference.ISSN 0849-6825.
51

By the 1900s. did notwanta full-timeengineer staff. But Taylorists management and consultants actually verydifferent had professional andideologicalorigins.couldturn but on to consulting chemical engineers ArthurD.management consultants.andthe British "management consultancies" founded in the 1930s were undoubtedly Taylorist. As Hugh Aitken pointedout in ScientificManagementin Action. Rather. Taylorists [1. largeNew York corporate firmslike CravathSwaine. those executivesand their advisorsin large scalebusiness who were "concerned with problems formalorganization control theadministrative of and at level. lawyers and whichoffered independent corporate counsel [9." early as management consultants.noneof the largemodern Americanmanagement consulting firms have Taylorist origins [31. p. and often with backgrounds law or banking.52 engineering. executives largemanufacturing of companies who needed engineering advice. and Sullivan law & Cromwellprovided legaladviceto businesses headquartered New York. p. and Seidman Seidman & wereexpanding throughout country the [23. provideexternal to audits andfinancial controls theirgrowing for companies 9. on the efficiencyof theirshopfloors.largerfirmsor to foundnew specialtyfirms. 24]. it was out of this coupling and thattoday'sprofession wasborn[11. The [24. 22]. The concept combinedthe practice of engineering with the principlesof economics." and "efficiencyengineering. Little or electrical like engineering firms like Stone Webster technical & for knowledge [20. 17-18]. 1-3]. This expanding corporate clienteleenabledyoungerpartnersto build practices "management of engineering" withinolder.in the 1890s.464-468]. not The growthand complexityof the largestindustrial organizations the in UnitedStates created market the turn-of-the-century theprofessional a at for firms of engineers. pp. professionally-trained accountants engineers. all enjoyed and strong growthin firm numbers sizefromthe 1890s and onward because thespecialized of skillsthat largerpartnerships couldoffertheirexpanding corporate clients. Similarly. corporatemanagers employedAmericansubsidiaries the British of accounting firms."cameout of a different intellectual tradition thantheshop management movement fromwhich Taylormadehisreputation pp." "consulting engineering.Haskins & Sells. 19. Theseyoungerprofessionals intentionally borrowedskills and . tryingto tracethe historyof management consulting haveassumed that: undoubtedly the most influential factor in the growth of modern management consulting was the development the conceptof of 'scientific management' FrederickTaylor by .DavisPolk. werelargelyconcerned with industrialrelationswhile early management consultants focusedon problemsof bureaucraticorganization. 35]. While Harrington Emerson's firm of "efficiency engineers" surviveas a very smallconsulting did firm throughthe 1980s.. Thomas like Cody. accountants.. engineering. 386-391]. In law. pp. threeprofessions. At in the sametime growingregionalfirmslike Jones Day in Cleveland andBakerand Bottsin Houston served localdivisions national of companies p.. By the 1890s. Ernst & Ernst. accounting. law.like PriceWaterhouse. foundedthe early "management in engineering" firms to offer advice to executives the organization their on of boardrooms. 464]. pp. Similarly.American-based [ accountingfirms like Arthur Anderson.

organization. 5]. bankerscalled upon and coordinated workof bothinternal external the and professionals. Investment houses employedengineers valuations for and organizational surveys. FrankG. 3. as Basset Company. Arthur Andersen& Companybecamenationallyknown for its investigations "plants..53 credentials fieldsoutside from theirprofessional training theystruggled attract as to clients. To gain a thorough understanding increasingly of complexcorporations. in turn. 4Since merchant bankers provided commercial both and investment banking services. 21-24]. Bankersfrequentlyneeded evaluatethe worth. formerboss. 4 While thispaper not comparative. accountants marketed themselves engineers.coordinated wide arrayof services a whichwere. James as McKinsey. These engineers. of markets. Marvin Bower.Peabody installed and hisson. 6. Their appraisals combined engineering expertise accounting and skillsastheytraded on their Wall Streetcontacts? While engineers were performing accounting. example. reorganization a bankrupt the of company.at theturn of the century. his George Frazer.an accountant and lawyer from Chicago. p. afterthe 1893recession. pp. theadministrative or integration of twomerging corporations.P. p.Peabody 1905.followingthe in stockmarket crash. Duringthe 1920s. troubled loans Anaconda at Copper. asKidder.Edwin G. & in His father. themerger six separate and of business machine companies form Remington to Rand. newPresident[21. In the 1920s. was of at Peabody Company Boston.werebothtrained lawyers p. 156]. 1]. accountants.organization. accounting based & an firm in New York [28].Peabody's Jr.the closestfunctionalequivalentin the Americansettingto management consulting. and lawyersoften worked for merchant bankers who.products. futureprospects" companies investment and of that banksin 3Edwin Webster theson a partner Kidder.In 1927. like others struggling professional for status. Webster became headof Kidder. Franklin.James McKinseywas not alonein combining legal trainingwith management consulting. accountants. 7. electrical For the engineering consulting of Stone Webster firm & workedfor J. National City Bank(nowCitibank) performedmanagement engineering studies evaluatethe initial financingof to United Aircraft. Webster. lawyers assist and to them in reorganizing thirteenlargerailroadswhich failed between1893 and 1898 the [14. bankers hiredcountless engineers.put "accountants engineers" his and on letterhead. [2]. is bankers appear haveserved the source to as of organizational advicein NorthernEuropeandJapanthroughout period• this . bankers actedbothas internaladvisors helptheir to client companies as externalregulators safeguard and to investors' interests. Management as [17. In 1930. Morgan& Co.and lawyersto serve on of reorganizationand bond-holdercommittees. appraising valueof the electricalutility companies ownedby GeneralElectric[21.andhis protege. EdwinWebster purchased bankrupt the Kidder. p. accountants for auditsand the installation financialcost controls. Thisblurring professional of boundaries sometimes a was just response demand frequently wasthe resultof trainingin morethanone to but it profession. usedmultipleprofessional credentials to support their claimsto specialized knowledge professional and approvalin their efforts market newandpoorlyunderstood to a service [7]. For example. to and prospects companies projects diverse the valuation an initialpublic of for as as of offering. did Miller. engineers.

professional management counsel become important has an institution our business in world" [15. by the 1930s. and Sears routinely hired management engineers improvetheirorganization's to overallstrategy.J. and executive control. 451]. It wasno coincidence the economist that JoelDean wrote in 1938 that "unheralded.15% a year from an estimated100 firms in 1930 to 400 firms by 1940 [4.Kroger.Carrier.I will illustrate of thisprocess of institutionalization describing the reorganization U. O. In 1926. Duringthe 1930stheservices management that consulting firmsprovidedbegan to increase importance. on James McKinseyandCompany.. by Booz -Allen & Hamiltonhadelevenconsultants staff [5.P.by 1936. in had. on average. Similarly. structure.technical to problems.the rapid growth. pp. p. The growthof management as consulting in the 1930swasnot simplya "natural"marketresponse theeconomic to downturn. Table 2]. of independent management consulting firmsdid not beginuntilthe GreatDepression.acquaintances local companies in in hired management engineers analyzelimited.S. p.But. andfinancial performance. (2) the careerof management engineer GeorgeArmstrong. 1936.thenumber management of consulting firms grew.P. and (3) the development the "generalsurveyoutline"at of JamesO. It was. on organization. management consultants sufferedbadly during the 1920-21 recession and.In thislastsection thepaper. almost unnoticed. Consultants assumed thisgrowthduring later that the depression was a countercyclical reactionas troubledfirms usedmanagement engineersto cut costsand improveoperational efficiency. Yet.bankers provideda rangeof organizational advice.instead. vi].expanded morethan25 employees hada second to and officein New York [30. whichonly management consultants wouldlater equal. fifty years later. institutional an response new government to regulation. clientssimplyput off expensive studies their plantssatidle [27.Union Carbide.P. after twelveyearsin in business. EdwinBoozemployed onlyoneothermanagement engineer. McKinsey and Companyin the 1930s. p. Congress passed Glass-Steagall the BankingAct of 1933 to correctthe apparent structural problems industry and mistakes contemporaries that believed led to thestockmarket crash October1929 andthe bankfailuresof the early 1930s.In the 1920s. wasn't It until the 1930sthat management consulting firms grew beyonda few founding partners and established branches new cities. 11]. New Deal banking and securities regulationpropelledthe growth of management consulting the mid-1930s. backed a blue-blooded by reputation. example. following the 1973 oil embargo in bothcases. 13-14]. whichMcKinseyfounded Chicagoin 1926. Sunbeam. Steelby Ford. hundreds largecorporations of including Armour.U. 13]. Between 1930and1940. Borden. Johnson Wax. Morgan& Company. in Glass-Steagall dividedthe investment deposit-taking and functions withinbanks like J. for chose to remain commercial a bank.butseveral partners to formtheinvestment left banking . Firms of management in consultants prosperedas companiesturned from bankersto management engineersfor organizational advice. MorganandNationalCity Bankintotwoseparate industries: commercial banking investment and banking.54 New York andChicagowere underwriting 3. The growth thenumber firmsmirrored expansion the in of the of firmsthemselves. By drawingon a range [ of professional services they advisedcorporate as management planning.both in numbers and in size. by (1) of Bacon& Davisbetween1935and 1938. While management consulting services wereavailable fromtheturnof the centuryonward. 7.S. Upjohn.

Act. and (at J. As Taylor reported the stockholders U.personified changes the caused the by Glass-Steagall Duringthe 1920s. Steel'sChairman. real or management consulting. pp. Vice-President charge industrial a in of investigations at National City Bankbetween 1921and1932. Congress createdthe Securities Exchange and Commission regulate to financialmarkets enforcea and more opensystem corporate of disclosure [25.S. SinceGlass-Steagall prohibited commercial banks from engaging "non-banking in activities. the Ford. Wellington Co & [16]. labor.including McKinsey. while Glass-Steagall not restrictinvestment did banksfrom actingas management consultants.J. 619]. his GeorgeBacon. S. Steelinfluenced company's of the investment. Davismadeon the organization. In of 1901. and the recommendations whichFord. Federal regulationforced investment and commercial banks from 1934 onwardto hireoutside consultants renderopinions to on the organization a bankrupt of company the prospects a newly-formed or of public company. estatedevelopment. Myron Taylor. Bacon & Davis' studytook three years. GeorgeArmstrong.55 firm of Morgan. Steelin 1938.S. 1937 the for the accord reached with workers overturned long-standing a antagonistic relationship endorsed theMorgan by Bankwhich would haveimmobilized Steelin thetight U. Bacon& Davis' reorganization U.butin 1935. Simultaneously. 23]. The new institutional arrangements bankingopenedup a vacuuminto which firms of in management consultants rushed.S. Commercialbankerssimultaneously encouraged business executives hire management to consultants sinceofficersinsidethe bankscouldno longer coordinateinternal organizational studiesof their clients. 15-17]. Ford.and administrative policies through 1950s. commercial bankscouldno longeract as management consultants p.Bacon& Davisto go throughall of our properties. forcedcommercial banks to ceasetheir non-banking activitieslike insurance. pp. p. 169-171]. asked collegefriend. Federalregulators [32. personnel and markets and.And. In laborrelations.C.to oversee reorganization the largestindustrial the of firm in the country[22]. methods. the of Steel.Bacon. to of In 1935we retained firm of Messrs.and eventuallyincluded203 separate reportsproduced collaboration in with five different sub-contracting consulting firms.E.S. National City BankhadArmstrong conduct studies theirtroubled of loans theSaco-Lowell to Shops. and operations U. Kraft. Penney'spersonalrequest)a comparative study thePenney of chainstores theirrelative and expense ratios[2]• . It was the largeststudyever done by management engineers. labormarkets the Second of World War [34. regulations requiredthat underwriters performexternaldue diligenceon securities issues and corporate reorganizations investmentbanks could not use their internal management so engineersto certify new issues. The contrast between the old and new institutional order was evident in Ford. in collaboration with our engineers and executives formulate to definiterecommendations [citedin 18." management like engineering.2 million dollars. Steel between1935 and 1938.cost 3. theproposed of merger of Palmolive. instance.S. Theselegislative changes whichreconfigured banking promoted rapidgrowth independent and the of accounting audits alsoshaped institutionalization management the of consulting. and Hersey. & strategy. C.U. Stanley& Company. Pierpont Morganhadpersonally supervised initialorganization U.S.

by [2. Marvin Bower. The history of James O. McKinsey & Company illustrates the institutionalizationmanagement of consulting theGlass-Steagall During after Act.Armstrong resigned from NationalCity Bankto foundhisownconsulting firm. PerhapsJamesMcKinsey's greatest contribution the institutionalization his firm was the "generalsurveyoutline. 17]. Roosevelt intendedto breakapartcommercial and investment banking."The generalsurveyoutlinesurvived modifiedform in in McKinseyandCompany's trainingmanual until 1962 [30. The firm workedfor a succession investment of bankingfirms during the 1930s investigating such corporategiants as Jones& Laughlin.they were askedto preparea complete study a company wasin financial of that difficulties [30. however. As early asthe 1930s. claimed havetaken He to everyimportant banker Chicago in or New York to lunchand. with inside assurances from his uncle that Franklin D. His timingwas shrewd sincelawyerswhoexamined new statues the agreed. JamesO. Taylorismwas not the predominant influenceon the development consulting of firms. Armstrong Co. p.thepartners James McKinseyandCompany at O."'nearly everyone at onetime or another has given me some work. and lawyersto offer CEO-level studies of .inexperienced consultants a model to follow when. 11].This be by of wasinterpreted mean investigation the subject a firm of to the of by competent engineering consultants thereviewof theRegistration and Statement suchconsultants p. p.McKinsey methodically cultivatedcontacts throughout the financial community. 69]. Theseinternal arrangements allowedMcKinseyandCompany to overcome the limitations of novice consultants and variable economic conditions as the firm's organization grew beyond founderandexpanded its throughout the world. the 1930s." to of whichhe draftedin December1931. of engineers. PhilipMorris... transition waswell equipped a it to exploit.'" [37. Day [6. grew & rapidly not because offereda new form of organizational it advicebut because Armstrong founded independent had an firm. thatanyfinancing preceded theexercise duediligence. 12]. Indeed. p. Armstrong's newfirm.In order to securenew clients. to give young..56 In 1932. George and Armstrong profited fromthetransition frombanker supervision management of engineering studies to theinstitutionalization management of consulting eventhough typesof studies the that Armstrong performeddid not change. management engineers drew on the practices accountants. James McKinsey workedto systematize complicated the process of soliciting newclientsandconducting management a engineering survey. & wassuccessful from its foundingin 1933. George Armstrong Company S. p. as McKinsey specified. Seagrams.because consultants frequently prepared these general surveys investment for firms during the 1930s. Rather. McKinsey and Companywas profitingfrom the external imposition banking of andfinance regulation.in return. Contrary are to popular assumptions.whojoinedthefirm in 1933. The firm alsoprofited from its internal systematization clientcontact of andreportwriting.haswrittenthatthegeneral survey resembled the corporate reorganizations bondholders' for committees which Bower had previously overseen a young as lawyerat Jones. 42]. The originsof modern management consulting in the 1930s. GeorgeS. Birdseye Frozen Foods. cameto referto them as "banker'ssurveys. Armstrong's in words.

& -•Indeed. 3. Cresap. An in ArthurAndersen Co. .McCormick & Paget was working for the Hoover Commission restructuring Executive Branch [12].When American of management consultants expanded Europe theearly 1960s.] 908-1915 (Princeton. and ArthurD. and operations. disclosure Act regulations forcedcommercialand investment bankers abandon to internalmanagement consulting activitiesevenas regulators mandated theycommission that outside studies. 239]. New Deal legislation firm-levelsystemization and catalyzed development this the of particularly Americanform of professionalized corporate counsel. the Government Tanzania. 1960). HughG. Beforethe 1930s. J. Hamilton.andoversee rapidexpansion theFederal the the of Administration. p.E. As consultants the worked for the government. 2. into in theysoldAmerican management "knowhow"to European managers eager employ organizational to the structures J.notedthathandin handwith the growth American of industrial subsidiaries Europe. S. that Servan-Schreiber labeled "TheAmerican Challenge.Scientific Management Action: Tayh•rism Watertown in at Arsenal.the ascendancy American the of modelsof corporate organization after the Second World War. Engineer Wall Street(New York. Aitken."thethreeAmericanconsultant in firms withEuropean branches (Booz-Allen.merchant bankers coordinated these studies.C.throughthem. combined with the increasing acceptance management of engineers corporate by executives. TheFirst SixtyYears. strategy. the in Federal Governmenthired large numbersof consultants streamlinecivilian to production.or eventhe World Bank. References 1. they carried ideas betweenthe public and private bureaucracies. reorganize military. During the SecondWorld War.Royal the Dutch Shell. his bestseller in from 1968. 1962). Whetherreorganizing Bank of England.andMcKinsey andCo.)have doubled staffs their every yearfor thepast five years"[33.. the But. p. it wasthe institutional professional and growthof consultants duringthe 1930s that wasthe necessary precursor the predominance Americanmanagement to of consultants throughout world and. Little. Since other countries notlegislate separation commercial did the of and investment banking.1913 .Servan-Schreiber. By 1949. "• McKinsey andCompany haddecentralized one-quarter the hundred of largest companies in Great Britain [10. By the 1970s. emphasis in original].Inc.57 organization. acceleratingthe process of organizationalinnovation and dissemination. J. the Glass-Steagall and S. propelled rapidgrowth consulting the of firmsfromthe 1930s onward. 8.But. Sincethe 1930s. institutionalization management the of consulting never happened outside theUnitedStates. George Armstrong.1974).The majorchangein thisemerging quasiprofessiontook place in the 1930s and was primarily a product of political developments..1973(Chicago.Theserequiredstudies.management of consultants disseminated American management techniques throughout world.management consultants havereorganized largestand the most importantorganizations the world.

31. Summary A q['theHooverReport(New York. Channon. 1927). 1982). 72. . Franklin. Ford. Marvin A.Booz-Allen & Hamilton. Business School. State 1992).S. 12.GeorgeE. 60-66.Management G. DanielNelson. Miller. 1992). 37.J. "The Consultants Face a Competition Crisis.D. 24.1908). Franklin.The Changing Structure q/'American Banking (New York. Byrne. J.McKinsey Memoirs: A PersonalPerspective (New York. 20. Alfred D. 1989). Tran•s/brmed (Chapel Hill.' ed. 1900-1930 (Ph..75 Years TotalInvolvement: History(•['Seidman Seidman •' A and (New York..Dissertation.Casebook AmericanBusiness in History(New York. 22. 35. 1986) A Cresap. 16 ( 1938). 19. First Forty Years(Chicago. File 6." Business Week.(Nov. 1939). Growth. 29. 32. Larson.1914-1984(Chicago. Seventy Yearsq['ClientService. 15. PaulA. 1920). 1987). Judith A. JoAnneBrown. 1991). Harvard 23. AmericanChallenge The (New York.NH. M. 34. A MentalRevolution. 1889-1989 (New York.Perspective McKinsey on (New York. Joel Dean.Baker & Bottsin the Development ModernHouston J. 6. LamontPapers. 1938). 1983).1880-1930 (Baltimore. Basset Company. 1973). 28. The Definitionof a Pri•bssion: The Authorityq['Metaphor in the History Intelligence Testing. 1984). 17. Kahn. Frazer." The Harvard Business Review.1957). (Ithaca. Baker Library. 8. Merkle. Quigel. 1968). TheDeclineq/'American Steel(New York. JohnG. Management Consulting: Introduction James McKinsey and An to O. 30. 14. 1890-1930(Princeton. Stone & Webster.Taylorism P.J. Hughes. and A.' Historyof Arthur D. 5. Rose. 7. Little. JamesP. Strategy The and Structure q['BritishEnterprise (Boston. TheProblemSolvers. "The Placeof Management Counselin Business. 1978). ThomasK. Networks q['Power: Electrification Western in Society.and otherTrends Management in Consuhing the UnitedStates in (New York.Basset Company & (New York. Prophets Regulation of (Cambridge. 1984). 1985). Industrial Production & The and Engineering Service q/'Miller.Ba•set& Company. of (Austin. 1991). Franklin.1977). 26. I I. 27. William B.Jr.Jr. 25. TheFirst QuarterCentury(New York. 18. Pennsylvania University.andH. 17. 9. Inc. (Boston. The VisibleHand (Cambridge. 36. 13. NumericalData an the Present Dimensions.Jr. Miles Lasser. DerekF. 451-465. Neukom. I 0. Tiffany.1986).. Scientific Management sinceTaylor(Columbus. HistoricalCollections.Bacon& Davis. The Business *•['Selling Efficiency:HarringtonEmerson and the Emerson EJJ•ciency Engineers. 16. 1979).1973). A 21. Wolf. Servan-Schreiber. McCraw. ThomasP. 1988). McCormick& Paget. Kenneth Lipart(to. Consulting: GamewithoutChips(Fitzwilliam.Box 133.B. 33. 1992)..Inc. Joseph Pratt. Chandler. 1950). Patricia Tisdall. Thomas Cody. 1975). Stephen Waring. 1994). Miller. Agents Change:TheDevelopment Practice of and •'ManagementConsultancy (London. PeterS."Business Week. David Neal Keller. ThomasW. (ACME). UnitedStates SteelCompany:Final Study Summarizing Survey the (New York. StuartDaggett.58 4. Bower. N. E.(July 25.. 1964). Gras. JohnA. Jim Bowman. Association Consulting of Management Engineers. 1980)..Railroad Reorganization (Cambridge. Management and Ideology: The Legacyof the InternationalScienti/ic Management Movement(Berkeley."The Craze for Consultants.

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