How consulting companies optimized American inequality
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.