Management Consulting

and the Public Sector

Clayton Schloss

January 10, 2007

Washington Campus Program

Project Impetus

My career goals

Short-term: management consulting

Long-term: government?

I have prior work experience in both government and the private

sector

Sen. Dianne Feinstein (D-CA)

Thomson Financial

Opportunities exist for governments to implement for-profit

strategies to improve performance, and for for-profit entities to

improve financial performance by addressing social needs

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Agenda

Consulting Industry Origins

Rise of the Contractor State

Consulting Industry Today and Tomorrow

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Great Depression era financial legislation sought to

prevent conflicts of interest and foster trust in the

financial markets

Required all financing to be preceded by “due

diligence”

Restricted accounting firms just to auditing

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Securities Act

of 1933

Glass-Steagall

Banking Act

of 1933

Separated commercial and investment banks

Outlawed consultative and reorganizational

activities of banks

Source: The World’s Newest Profession (Christopher McKenna)

National

Recovery Act

of 1933

Regulated industries in an attempt to promote fair

competition, support prices and wages, and create

jobs

Mandated the need to perform “management

audits”

By making management consultants the only legal

conduit of “anti-competitive” financial information,

the reforms allowed the nascent industry to flourish

Founded in 1914 by Edwin Booz

In 1926 only employed one other consultant

11 consultants by 1936, opened New York office

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Booz Allen &

Hamilton

McKinsey &

Co.

Founded in 1926 by James McKinsey

25 consultants by 1936, opened New York office

Source: The World’s Newest Profession (Christopher McKenna) , Booz Allen & Hamilton: Seventy Years of Client Service,

McKinsey Memoirs: A Personal Perspective

Even though the National Recovery Act was deemed

unconstitutional in 1935, consultants maintained their hold on the

management audit business

The IT consulting industry, an offshoot of traditional

consulting, was created with the help of

government antitrust pressure in the 1950s

IBM operated under Justice Dept. scrutiny since the 1930s

IBM accepted a 1956 consent decree that was binding for 35 years

Forced to sell, not lease, its punch card and tabulation machines

Had to make proprietary technology available to competitors

Could not offer advice on the purchase and integration of computer

systems

In effect, the government pressured IBM to cede the IT consulting

services business to accounting firms

6Source: The World’s Newest Profession (Christopher McKenna)

Arthur Andersen (now Accenture) quickly became the market leader

in IT consulting

Agenda

Consulting Industry Origins

Rise of the Contractor State

Consulting Industry Today and Tomorrow

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World War II and its aftermath was a major catalyst

to the management consulting industry

WWII provided several examples of success via collaboration

between government and private sector

Atomic energy

Penicillin

Wartime fiscal deficit management via implementation of

Keynesian economic theory

This record of cooperation led to the development of the

“proministrative state”, a symbiotic relationship between private

and public sectors aided by management consultants

8Source: Chain Reaction: Expert Debate and Public Participation in American Commercial Nuclear Power, The World’s Newest

Profession (Christopher McKenna)

The heads of consulting firms did individual

projects during WWII, which led to consistent hiring

of consultants by the government

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Firm Head Firm Government Projects

Robert Heller Robert Heller &

Assoc.

Reorganization of U.S. Congress

Tom Kearney A.T. Kearney Reorganization of War Production

Board

Marvin Bower McKinsey & Co. Studies for Army Air Corps

Edwin Booz,

James Allen

Booz Allen &

Hamilton

Projects for the Army, Navy, and War

Production Board

Source: The World’s Newest Profession (Christopher McKenna)

The success of management consulting firms

during WWII led to continued business in the post-

war restructuring of the U.S. government

Political pressure to reduce size of government after WWII led to the

formation of the Hoover Commission in 1947 to reorganize the

executive branch

23 task forces headed by business executives, advised by

management consultants

Recommended decentralization of government, use of external

experts to execute “government” tasks

Key outcomes included:

Creation of the Department of Defense, the General Services

Administration, and the job of White House Chief of Staff

Restructuring of the federal personnel management process

Reorganization of the Post Office

10Source: The World’s Newest Profession (Christopher McKenna)

That trend continued in the 1950’s…

Subsequent reorganizations by management consultants included:

Federal Field Service, covering 90% of civilian employees

Personnel administration for the Coast Guard

Veterans Administration

Civil Aeronautics Administration

Dept. of Housing, Education, and Welfare

McKinsey was particularly influential during the post-war period

1952: President Eisenhower hired to advise on political appointees,

plan organization of White House staff

1958: Organized NASA after its founding, promoting the use of

outside contractors over internal expertise

By 1964, 90% of $5B budget spent on contractors

11Source: The World’s Newest Profession (Christopher McKenna) , McKinsey & Co., Exploring the Unknown: Selected

Documents in the History of the U.S. Civil Space Program

…and led to an entrenchment of the consultant

ideology of using external contractors and advisors

instead of expanding government bureaucracy

In the 1960’s and 1970’s, management consultants were used for

creation and promotion of legislative standards

Dept. of Health, Education, and Welfare hired Booz Allen Hamilton

to examine the impact of revisions to the Social Security Act

Dept. of Transportation hired A.D. Little to examine the impact of

the National Environmental Policy Act

The affinity for smaller government and the use of external contractors

remained prevalent in the 1990’s and 2000’s

President Clinton reduced the size of the post-Cold War federal

government

President Bush increased reliance on contractors in the Iraq War,

and the newly created Dept. of Homeland Security relies heavily on

consultants

12Source: The World’s Newest Profession (Christopher McKenna) , The Economist

It is debatable whether the rise of the contractor

state has been a positive or negative development

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Reduced ongoing direct

cost of government

Reduced size of

government bureaucracy

Benefit from

specialization, use of

private sector strategies

Reduced sense of

ownership in

government

Less accountability,

oversight

War profiteering,

corruption in Iraq

Hurricane Katrina

response

Dubai Ports World

deal

Positives Negatives

Agenda

Consulting Industry Origins

Rise of the Contractor State

Consulting Industry Today and Tomorrow

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The number of management consultants has grown

dramatically over the last 30 years

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YearFull-Time Mgmt.

Consultants

Salaried Managers per

Mgmt. Consultant

1965 ~17,000 100

1995 ~120,000 13

Full-time Management Consultants vs.

Salaried Managers in the U.S.

By 2000, the U.S. management consulting industry consisted of

140,000 people who generated over $70B in advisory fees

Source: Management Consulting: A Guide To The Profession, www.careers-in-business.com, BusinessWeek

IT is one of the healthiest segments of the

management consulting industry today

IT consulting is the fastest growing segment of the industry and

accounts for 60-70% of total consulting market

Leading IT consulting firms include IBM, EDS, Accenture,

and H-P

IBM reentered the IT consulting field in 1991 when the

government’s 1965 consent decree expired, which has led a

major turnaround in the company’s fortunes

Annual services revenue of $47B in 2005 (52% of total)

$810M in U.S. federal government revenue in 2006

17th largest U.S. federal government contractor

16Source: IBM 2005 10-K, www.washingtontechnology.com

Government continues to be a major driver of

consulting industry growth

The public sector accounts for over 30% of global consulting

market revenues

Public sector consulting revenue growth over the next 3 years is

expected to outpace private sector growth (6-9% vs. 1-4%)

Booz Allen & Hamilton remains the top management consultant

to the U.S. government

Moved corporate headquarters to suburban Washington,

D.C. in 1992 to better serve federal government clients

$1.6B in U.S. federal government revenue in 2006

9th largest U.S. federal government contractor

17Source: The Economist, www.washingtontechnology.com

Political management consultancies founded by

former senior government officials have risen to

prominence recently

Founded by Fmr. Sec. of Defense William Cohen

Provides legislative and regulatory advice on foreign

affairs

Has struck partnerships with PR, law, and private equity

firms, and is considering a partnership with a Big Five

consultancy

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The Cohen

Group

Stonebridge

Kissinger

McLarty

Founded by Fmr. Sec. of State Henry Kissinger and Fmr.

National Security Advisor Sandy Berger

May partner with Booz Allen & Hamilton

The Gingrich

Group

Founded by Fmr. House Speaker Newt Gingrich

Provides internal company communication and marketing

strategy advice

Has entered partnership with PricewaterhouseCoopers

Source: Vault

Recent financial legislation could have a mixed

impact on the consulting industry

Repealed Glass-Steagall Act, allowed investment

and commercial banks to rejoin

Law helped justify and encourage a wave of

consolidation in the financial services industry

Makes potential threat of encroachment by

diversified financial services firms into

management consulting more real

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Gramm-

Leach-Bliley

Act of 1999

Sarbanes-

Oxley Act of

2002

Consulting and audit functions separated after

Enron bankruptcy and Arthur Andersen accounting

fraud

Should reinforce the competitive position of

independent management consulting firms

Source: Wikipedia

Nonetheless, underlying demand for consulting

services should remain robust due to a number of

economic and political trends

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Threat of Agency

& Department

Budget Cuts

Pressure on

Politicians from

Frequent

Elections

Greater Visibility

/ Transparency

in Government

Greater Public

Demand for

Government

Services

IT and

Communications

Advances

Consulting

Services

Demand

Increasing

Complexity of

Government

Responsibilities

Government

Budget Deficits

Increasingly

Complex &

Growing Markets

due to

Globalization

Questions?

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