SPEAKER_00: Amazing, fascinating stories of inventions, ideas and innovations. Yes, this is the podcast about the things that have helped to shape our lives. Podcasts from the BBC World Service are supported by advertising. Hello, welcome to the podcast. Management consulting is coming right up. But first,
SPEAKER_02: I wanted to let you know that if you're listening to this in September or early October 2017, you can now vote on a 51st thing that made the modern economy. Details coming up at the end.
SPEAKER_04: 50 Things That Made the Modern Economy with Tim Harford The Place. A textile plant near Mumbai, India. The time? 2008.
SPEAKER_02: The scene? Chaos. Rubbish is piled up outside the building, and there's almost as much inside, for that matter. There are piles of flammable junk and uncovered containers of chemicals. The yarn that the factory produces is scarcely neater. It is at least bundled up and protected in white plastic bags, but those bags are scattered around the plant in unmarked piles. Such shambolic conditions are typical in the Indian textile industry, and that presents an opportunity. A team of researchers from Stanford University and the World Bank is about to conduct a novel experiment. They're going to send in a team of management consultants to tidy up some of these companies, but not others. Then they'll track what happens to their profits. This will be a rigorous, randomised, controlled trial. It will conclusively tell us whether the management consultants are worth their fees. That question's often been raised over the years with a sceptical tone. The industry battles a stereotype of charging exorbitant fees for advice that, on close inspection, turns out to be either meaningless or common sense. Still, it's big business. The year after Stanford and the World Bank started their Indian study, the UK government alone spent well over $2 billion on management consultants. Globally, consulting firms charged their clients a total of about $125 billion. Where did this strange industry begin? There's a noble way to frame its origins. Economic change creates a new challenge, and visionary men of business provide a solution. In the late 19th century, the US economy was expanding fast, and thanks to the railway and the telegraph, it was also integrating, becoming more of a national market and less a collection of local ones. Company owners began to realise there were huge rewards to be had for companies that could bestride this new national stage. So began an unprecedented wave of mergers and consolidations. Companies swallowed each other up, creating giant household names. US Steel, General Electric, Heinz, AT&T. Some employed over 100,000 people, and that was the challenge. Nobody had ever tried to manage such vast business organisations before. Enter a young professor of accountancy by the name of James McKinsey.
SPEAKER_02: McKinsey's breakthrough was a book published in 1922 with the not entirely thrilling title Budgetary Control. But for corporate America, Budgetary Control was revolutionary. Rather than using traditional historical accounts to provide a picture of how well a business had been doing over the past year, McKinsey proposed drawing up accounts for an imaginary corporate future. These future accounts would set out a business's plans and goals, broken down department by department. And later, when the actual accounts were drawn up, they could be compared to the plan, which could then be revised. McKinsey's method helped managers take control, setting out a vision for the future rather than simply reviewing the past. McKinsey was a big character, tall and fond of chomping cigars, ignoring his doctor's advice. His ideas caught on with remarkable speed. By the mid-1930s, he was hiring himself out at $500 a day, about $25,000 in today's money. And as his own time was limited, he took on employees. If he didn't like a report they wrote, he'd hurl it in the bin.
SPEAKER_01: I have to be diplomatic with our clients, he told them. But I don't have to be diplomatic with you bastards.
SPEAKER_02: And then, at the age of 48, James McKinsey died of pneumonia. But under his lieutenant, Marvin Bower, McKinsey and Company thrived. Bower was a particular man. He insisted that the men who worked for him wore a dark suit, a starched white shirt and, until the 1960s, a hat. McKinsey and Company, he said, was not a business, but a practice. It didn't take on jobs, it took on engagements. It was not a company, it was a firm. In fact, it eventually became known as The Firm. Duff McDonald wrote a history of The Firm, arguing that its advocacy of scientific approaches to management transformed the business world. It acquired a reputation as perhaps the world's most elite employer. The New Yorker magazine once described McKinsey's young Ivy League hires parachuting into companies around the world a SWAT team of business philosopher kings. But hold on, why don't company owners simply employ managers who've studied those scientific approaches themselves? There aren't many situations where you'd hire someone to do a job and also hire expensive consultants to tell them how to do it. What accounts for why companies like McKinsey have gained such a foothold in the economy? Part of the explanation is surprising. Government regulators cleared a niche for them. The Glass-Steagall Act of 1933 was a far-reaching piece of American financial legislation. Among many provisions, Glass-Steagall made it compulsory for investment banks to commission independent financial research into the deals they were brokering. Fearing conflicts of interest, Glass-Steagall forbade law firms, accountancy firms, or the banks themselves from conducting this work. In effect, the Glass-Steagall Act made it a legal requirement for banks to hire management consultants. For a follow-up, in 1956, the Justice Department banned the emerging computer giant, IBM, from providing advice about how to install or use computers, another business opportunity for the management consultants. Minimizing conflicts of interest was a noble aim, but it hasn't worked out well. A few years after leaving the firm, McKinsey's long-serving boss, Rajat Gupta, managed to get himself convicted and imprisoned for insider trading. McKinsey also employed Enron's Jeff Skilling, and then was paid well for advising him before quietly fading into the background while Enron collapsed and Skilling went to jail. No doubt the consultancy firms will
SPEAKER_02: claim that their expertise is giving the taxpayer value for money, which brings us back to India and that randomized controlled trial. The World Bank hired the global consulting firm Accenture to put some structure into those jumbled Mumbai textile factories, instituting new routines, preventative maintenance, proper records, systematic storing of spares and inventory, and the recording of quality defects. And did it work? It did. Productivity jumped by 17%, easily enough to pay Accenture's consulting fees. We shouldn't conclude from this study that cynicism about management consulting is always misplaced. These factories were, after all, what a jargon-filled PowerPoint presentation might call low-hanging fruit. But it's scientific proof of one thing at least. As so often in life, when an idea is used simply and humbly, it can pay dividends.
SPEAKER_03: Chris McKenna's book, The World's Newest Profession, is a fascinating account of the history of management consulting. For a full list of our sources please see bbcworldservice.com slash 50 things.
SPEAKER_02: Thank you to everyone who sent in your suggestions for the 51st thing that made the modern economy. We had hundreds of them and there were some fantastic ideas. Trying to narrow them all down was quite a challenge. It's been tough work but I have chosen six. And now I want you to choose your favourite. If you're listening to this in September or early October 2017 you can vote and there will be a special extra podcast all about the winning 51st thing. But before you do that I need to tell you what the six are. The six I've chosen from your suggestions are the credit card, glass, the global positioning system,
SPEAKER_02: irrigation, the pencil and the spreadsheet. The next podcast is going to cover all six of them. So here's how to vote. You can do so anytime up to 12 noon GMT on Friday the 6th of October 2017. Simply go to bbcworldservice.com slash 51 things, that's 51. You'll find the full terms and conditions there too. Please remember the deadline for voting is 12 noon GMT on Friday the 6th of October 2017.
