How con­sult­ing com­pa­nies op­ti­mized Amer­i­can in­equal­ity

Orlando Sentinel - - WALL STREET REPORT - By Christo­pher In­gra­ham

WASHINGTON — Pete But­tigieg’s stint as a man­age­ment con­sul­tant at McKin­sey & Com­pany has be­come a point of con­tention for the pres­i­den­tial hope­ful, as it re­lates to his work for spe­cific com­pa­nies such as Blue Cross Blue Shield of Michi­gan, which fired hun­dreds of work­ers and raised pre­mi­ums af­ter bring­ing McKin­sey on board.

But the larger is­sue is the very na­ture of man­age­ment con­sult­ing firms; so much of their work “is about in­creas­ing in­vestors’ share of prof­its by re­duc­ing la­bor’s share,” Anand Girid­haradas, a former McKin­sey con­sul­tant turned jour­nal­ist and au­thor, re­cently put it.

Con­sult­ing firms, by this line of think­ing, are one of the driv­ers of the cur­rent state of run­away eco­nomic in­equal­ity. Aca­demic and jour­nal­is­tic find­ings tend to sup­port this idea.

Broadly speak­ing, man­age­ment con­sult­ing firms ad­vise other or­ga­ni­za­tions how to do their jobs bet­ter. They are hired, as CNBC’s Abi­gail Hess notes, “to as­sess and ad­dress prob­lems, such as down­siz­ing, ac­qui­si­tion or re­struc­tur­ing.”

The key to man­age­ment con­sult­ing firms’ func­tion is in the word man­age­ment. They work for a com­pany’s ex­ec­u­tives, not its em­ploy­ees, and the hir­ing of one is of­ten a sign that lay­offs are im­mi­nent. Wen­dell Pot­ter, a former vice pres­i­dent at health in­surer Cigna, says “it was clear that when (a man­age­ment con­sult­ing firm) was brought in there would be lay­offs. In my own de­part­ment there were times when I had to lay peo­ple off be­cause off be­cause of McKin­sey’s work.”

As Duff McDon­ald, au­thor of “The Firm: The Story of McKin­sey and Its Se­cret In­flu­ence on Amer­i­can Busi­ness,” once put it:

“McKin­sey might be the sin­gle greatest le­git­imizer of mass lay­offs in his­tory.”

McKin­sey, which did not re­spond to mul­ti­ple re­quests for com­ment, de­fines its mis­sion as help­ing “or­ga­ni­za­tions across the pri­vate, pub­lic, and so­cial sec­tors cre­ate the change that mat­ters.”

Other ma­jor con­sult­ing firms present them­selves in sim­i­lar terms. Their pro­mo­tional ma­te­ri­als place a strong em­pha­sis on con­cepts like so­cial re­spon­si­bil­ity, di­ver­sity, em­pow­er­ment and in­clu­sive­ness.

Pot­ter says the em­pha­sis on work that em­ploy­ees and oth­ers do to try to make the world a bet­ter place to live in is “done to largely ob­scure how the com­pa­nies re­ally op­er­ate, to have the pub­lic see them as good cor­po­rate cit­i­zens and over­look what it is they do for a liv­ing.”

For the hun­dreds of bil­lions of dol­lars spent an­nu­ally on man­age­ment con­sult­ing work, there’s sur­pris­ingly lit­tle in­de­pen­dent re­search into their ef­fects on busi­nesses or the econ­omy as a whole. In part this is be­cause the firms are the ones pro­duc­ing much of to­day’s busi­ness re­search. But what in­de­pen­dent re­search that does ex­ist is nev­er­the­less in­struc­tive.

In 2003, Ajay Prakash and An­drew Samwick of

Dart­mouth pub­lished a work­ing pa­per that an­a­lyzed the per­for­mance of com­pa­nies that hired man­age­ment con­sult­ing firms from 1991 to 2001. They found that af­ter one of these firms was brought on, two things tended to hap­pen: the com­pany’s stock per­for­mance went up and com­pany em­ploy­ment went down.

In­vestors prof­ited, in other words, while work­ers got laid off — a dy­namic that’s helped fuel in­come and wealth in­equal­ity since the 1970s.

Samwick cau­tions that causal­ity isn’t re­ally know­able here — it could be, for in­stance, that com­pa­nies look­ing to shed work­ers are more likely to bring on a con­sul­tant in the hopes of jus­ti­fy­ing lay­offs — and that not all com­pa­nies pub­licly dis­close when they hire a con­sult­ing firm, mak­ing it un­clear how rep­re­sen­ta­tive their sam­ple is of all U.S. com­pa­nies. But, he added, the re­sults they turned up 16 years ago still strike him as “em­i­nently plau­si­ble” to­day.

McKin­sey and other con­sult­ing com­pa­nies were also in­stru­men­tal in the pri­va­ti­za­tion of gov­ern­ment func­tions and pub­lic re­sources that be­gan in the 1960s and con­tin­ues to this day.

Demo­cratic pres­i­den­tial can­di­date Pete But­tigieg’s time with a man­age­ment con­sult­ing firm has be­come a con­cern.

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