elite fees threatened by climate change and AI
At first glance the high-level manoeuvrings at consultants McKinsey and EY could not be more different.
McKinsey head Bob Sternfels has failed to win a second term as global managing partner after a majority of the firm’s 750 senior partners put others as their first choice. At EY, its UK chief, Hywel Ball has had his tenure extended for the second time.
Chalk and cheese, upheaval and continuity. In reality, it’s not so clear-cut. Both moves come on the back of great uncertainty in the professional services world.
Just last year at EY Mr Ball mothballed a project, code-named Project Everest, to split the firm – part of which tells managers how to turn around failing business models – into two between its consulting and audit operations.
Why Everest? EY was moving a mountain or reaching for the summit. Take your pick. Whatever the meaning, it failed.
Mr Ball’s response was to make sweeping executive management changes, among them shrinking the leadership team from 13 to eight, and in the process losing two highly rated women members, which did not go down well.
Yet the context mattered, something that has now swung in Mr Ball’s favour.
EY’s scheme was driven by the UK accounting watchdog pushing firms to separate auditing and consulting and reduce conflicts of interest.
It comes after a whole host of scandals in the UK surrounding audits of major companies, which have resulted in questions being asked about the independence of those checking and certifying the books.
Mr Ball is the former head of audit at EY and was chosen as a safe pair of hands to steer the firm through the shake-up demanded by the regulator. He is now expected to try again.
At McKinsey, the huge, sprawling practice remains divided on a whole range of issues, from corporate governance to financial performance. Last year, Sternfels launched Project Magnolia, intended to secure partner earnings at the 45,000 strong organisation. Part of that restructuring included the deeply unpopular laying off of 1,400 back-office staff.
The mighty McKinsey brand is built on its teams telling clients how they should reorganise. Within the corporate world, they’re given a hallowed, almost mythical status, often selected from the brightest and best graduates, possessed of sharp intellects, applying the “McKinsey Way”.
Clients pay small fortunes to have McKinsey crawl over their businesses, delve into the darkest recesses, the lowliest subsidiaries, talk at length to the senior players and biggest hitters, and come up with a detailed plan for performance and profits transformation.
But when McKinsey came to reshaping itself, the super-slick firm was found lacking. One source of unhappiness was the way those made redundant were selected, with, it was claimed, not enough consultation and not enough regard paid to those with long service and good records.
Mr Sternfels was regarded in some quarters as keeping things too close to himself and not involving his colleagues in the planning and execution – something that did not go down well in a partnership structured on egalitarianism, on consensus and sharing.
It’s bizarre, how in male-dominated professions, testosterone-soaked bosses love the idea of cloaking their activities in strange codenames, shrouding them in secrecy and giving them a mystique they do not merit.
Investment bankers are the same, forever dreaming up exotic titles for their projects – so much so that you could be forgiven for supposing the very act of choosing a name occupies more of their time than the actual problem they are meant to tackle.
Magnolia and Everest – both intended to simplify, both failing spectacularly to achieve their objectives.
At McKinsey, Mr Sternfels was credited with inducing a period of calm after his predecessor Kevin Sneader was denied a second term following McKinsey being dragged into the controversy over opioids. The partnership, which prides itself on remaining in the shadows, had to endure a rare bout of unwelcome publicity over its work for the makers of the addictive drugs. It also had to pay $900m to settle claims it helped contribute to the US opioid crisis.
The uncertainty at the top of both firms comes at a time of change in the industry. Clients are choosier than they were, questioning whether they are receiving value for money – reflecting more straitened finances but also, they’re less in awe of consultants than they once were.
Source Global Research, which analyses consulting and produces an annual report on its condition, says that clients are rethinking the use of consultants. More than three-quarters of users of professional services firms had pulled existing projects or scrapped future ones. Two-thirds had paused current project work.
Global uncertainty was a factor as well as a tougher economic outlook. Demand for consultants remains high but users are more searching when it comes to paying fees, wanting to know why they are so high. Pressure on partners’ profits is increasing.
According to Source Global chief executive Fiona Czerniawska, clients are five times more likely to expect fee rates to come down than they were before Covid struck. She estimates that only 50 per cent of clients think that firms add value above the fees they charge.
The days of management consultants raking in large sums and enjoying luxury lifestyles are threatened. Certainly, the old method of swamping a project with associates and consultants, all of whom must be paid for, seems to be over. Fees must be justified to the client’s satisfaction if that bill is going to be paid.
A war in Europe involving a superpower, which never appeared likely, has rocked this end of the professional services market. Those confident, smart consultants did not see the conflict and the knock-on effects coming. Now there is a second war between Israel and Hamas. Against this backdrop the use of consultants carries an air of luxury.
Corporate have other, pressing issues to detain them. Climate change and AI, which carry existential repercussions, are above and beyond the usual consultancy remit. They want answers to those questions and how they will be affected, and these are not areas in which traditional management consultants can claim any particular insight.
This is forcing the firms to take a hard look at what they are offering. Hence the turmoil on high.
Consultants are businesses too, and, for all their super-smart claims, just as exposed to the same threats and imponderables as everybody else.
Published: January 23, 2024, 5:50 PM