The biggest AI headline this week was McKinsey not Open AI
The Whole article in one paragraph
When CHAT GPT went public a year ago I predicted that it would be more of a threat to McKinsey, BCG, and Bain than to Google. (I wrote about it in this article.) That prediction is coming true. OPEN AI announced this week that it is rolling out an enterprise knowledge management tool. McKinsey and BCG both announced they were freezing entry level salaries among news that profits were under increased pressure. In this article I predict what will happen next: that many of the top consultants at the major consultancies will leave and take their biggest clients with them.
There were two disparate headlines this week that when coupled together paint a picture of a transformed future: AI’s growth will lead to the demise of McKinsey, BCG, and Bain.
The first headline was from Open AI’s developer day, in which the AI juggernaut announced that it will allow enterprise customers to build custom GPTs using their own proprietary data and knowledge bases. This is a threat to the knowledge management systems of the major consultancies.
The second, less popular headline was that McKinsey and BCG, two of the most prestigious consulting firms have frozen US entry level salaries for MBAs and undergraduates joining the firms. The stated reason is that they’re facing a record number of applicants. But that’s not the real reason. A quick data pull shows that quit rates have been increasing, and hiring has been going down at McKinsey. (I inserted the chart below.) The real reason the firms are freezing salaries was buried deep in the news. Management consultancies need to bolster profits because of ‘declining customer demand in some areas and pricing pressure across the board.’ In other words they froze salaries because profits are contracting, not because they are the most desired destination for high-achieving students.
Source: LinkedIn Insights
Ever since I first worked with McKinsey twelve years ago, I believed they were extremely intelligent and quite limited. They hire the smartest people in the world to produce grown up term papers and sell them as PowerPoint decks to companies for tens of millions of dollars. When I risked losing my job if I didn’t produce a product that made money, I found them to be extremely expensive and prestigious, but not useful or actionable. They bombarded me with insights without actionability, and advice without accountability. I needed the money we were spending on them to hire designers, developers, and other people who stayed up all night building high-growth products that customers loved at warp speed in a politically charged, big company. Many people who had the same responsibilities at other companies shared the same disappointment. But somehow, for reasons we never understood, we couldn’t fire them. They seemed to know the secret handshake that eluded us folks who weren’t members of their mysterious club.
But I think that dynamic is changing right now.
I believe that because of generative AI in 10 years McKinsey, BCG, and Bain will be a diminished think tank, similar to the RAND Corporation, which was a consulting powerhouse throughout the 1960s and 70s.
Here’s how this will play out:
PHASE 1. Happening Now. Products not PowerPoints. Most businesses need outcomes, not outputs. They hire outside help because they need to grow sales, mitigate risk, and/or reduce costs and they don’t know how. The PowerPoint deck that explains why and how to achieve those outcomes is useless if it can’t be executed. It is rarely an adequate level of ‘done’ - even if it’s gorgeous and smart. The major consulting firms have been trying to adapt to growing demand for digital outcomes through acquisitions, the creation of digital subsidiaries, and venture studios. But those digital units have never taken the lead. Speak to anyone who’s worked at McKinsey Digital or BCG Ventures and you’ll quickly learn that analysis paralysis by PowerPoint is still the dominant paradigm. Of course, there are exceptional innovators, transformationists, who have made a great home for themselves inside these consulting stalwarts. But they don’t exactly run the place.
PHASE 2. The next three years. Puncturing the data myth. A first step in most consulting engagements is conducting hundreds of interviews with experts and analyzing enormous amounts of data: some of which is private and confidential, some of which is public. I expect that more enterprise clients will find that GPT’s new enterprise capabilities will do this first step better, faster, and cheaper than a huge consulting powerhouse can. As soon as they are confident that proprietary data will be secure, they will start to question why that part of the engagement is still so expensive. (Incidentally, implementation of OPEN AI’s knowledge management capabilities will be a booming growth area for the consulting tier below McKinsey: PWC, EY, Accenture, KPMG, etc….)
One of the mythologies of consulting firms is that they are massive knowledge management superpowers. Through their decades of engagements they have data and insights about companies that no one else has. But it’s not true. Yes, they own the data. But they don’t share it very well among themselves or with the outside world. The partners will often hoard information to protect their fiefdom, and there is very little technology to manage the content. GPT will package this information cheaper, smarter, and faster than today. Which will eventually mean that the whole is worth less than the parts. The consultancy isn’t as valuable as the consultant.
PHASE 3. The next 2-5 years. Hire the consultant not the consultancy. There are outstanding consultants. A great consultant has a deep, high trust, empathetic relationship with their clients. They understand where the data ends and real life begins. They have been through the same Hell as the client has, and can pull them through to the other side. And they are willing to break every dogmatic rule about best practice in order to deliver results.
As knowledge management becomes better, faster, and smarter through AI, clients will say to their most trusted consultants, “I’d rather hire you than your consulting firm.” Some of the best performers will start to defect and will take their huge enterprise accounts with them. My view is that much of the work that is done by entry level employees will be done with AI, enabling them to deliver better value on their own than with a huge firm.
Reasons I might be wrong
Here are a few of the reasons why my prediction might be wrong. The AI disruption facing the 3 management consultants will be a huge windfall for the firms one tier below them: PWC, KPMG, Deloitte, EY, Accenture, IBM, etc... Companies will hire them to implement secure AI knowledge management systems at scale. There might be some M&A, JV, or other partnership that enables the top tier to add this technology. It would diminish their prestige. But it’s not impossible. They are undoubtedly smart, and are probably thinking about it already.
Another reason I’d be wrong is because I’m assuming the brand value of McKinsey/ BCG/ Bain is diminished more than it is. Many companies hire them to break a stalemate between leadership factions through a prestigious second opinion. It costs so much because something so expensive must be right. There will always be demand for an expert tie-breaker in politically dysfunctional companies. I believe that the expert tie-breaker might be an expensive individual, rather than an expensive institution. But, that might be wrong.
There are probably 30 more reasons that I’m wrong but these are the two that come to mind now.
Why this matters for you:
It’s a good time to be a consultant, a bad time to work for a consultancy. The value of an outside expert is as strong as it ever was. And the people who have the expertise, experience, and agility to guide a company through the hardest problems are more of an asset today than the companies which have historically dominated the space.
Scrappy executive presence. What the major consultancies always had was impeccable executive presence. They understand exactly how to comport themselves in the boardroom. The downside of this was that they undervalued the facts and people in the trenches. They took a perfunctory glance at the people out in the field, working with customers, building and struggling. They also often overlooked the social, environmental and geopolitical consequences of their advice. The best consultants bridge the gap between the trenches and the boardroom
Get good at AI. That’s fairly obvious at this point. But, you should absolutely get ahead of the curve with GPT’s new enterprise knowledge management tool. It will help you be part of the solution.
New AI knowledge management capabilities from OPEN AI is making it easier for companies to hire the best consultants without hiring expensive consultancies. This is a threat to the legacy consulting powerhouses, but a healthy opportunity for everyone else.
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