McKinsey & Company is known worldwide as a management consulting company. But did you know it is disrupting and reinventing itself into a software and AI unicorn?
Pure consulting play no longer works in the world. Why? With the advent of global MBA programs, the talent in the market has grown, and it is easier to hire an in-house strategy person than go for a management consulting firm. The fees companies like McKinsey charge is per hour billables (just like in Suits).
🏛 The pillars of consulting
First, let us try to understand the 4 pillars of consulting i.e the way management consultants try to provide value to their clients:
- Information: Deep information on an industry and translating complex market information into understandable insights.
- Expertise: Bring unique perspectives for a given problem and come up with different ways of solving it.
- Insight: Distill the expertise into actionable insights that will help the company succeed.
- Execution: Prepare a clear roadmap on implementing the changes to be made.
In this globalized world, access to information has become much easier and hiring strategy people in-house has become easier. Moreover, clients started wanting measurable and tangible results and not just a slides deck proposal as output. So it is time for McKinsey to disrupt itself.
👇 McKinsey's Gambit
“Pure strategy” work is currently around 10% of McKinsey’s portfolio, down 7x over the last 30 years. So there are two paths to go:
- Go more specialized, i.e. go for industries where the disruption is least and continue consulting the old way in these niche industries.
- Adopt the disruption and accelerate it.
McKinsey chose the 2nd option and went on an M&A spree to acquire digital companies. They went for two types of companies:
- Vertical: solves for a company widely observed in an industry
- Horizontal: solves for a problem widely observed across a function.
A simplified look into the McKinsey process: observe the clear problems faced by 1000s of its clients. Find a company that neatly solves the problem. Acquire the company and own the revenue.
👊🏻 Examples of McKinsey’s Acquisitions
McKinsey & Company identified a critical issue within their client organizations: the struggle to make sense of various purchasing data sources, such as accounts payable, credit card information, and the challenge of managing budgets efficiently. To address this problem, McKinsey acquired Orpheus, a company specializing in offering SaaS (software as a service) solutions to streamline and optimize procurement processes.
By acquiring Orpheus, McKinsey has unlocked the potential to leverage its access to C-suite executives, propelling the expansion of Orpheus' client base.
Simple Math: if Orpheus charges $100k for their software and has 100 clients (a very rough estimate), it has $10M Annual Recurring Revenue. Look at say, 10 acquisitions of McKinsey following the same trends, it amounts to $100M of revenue from their software portfolio
With a software play, there is a stickiness. Think of providing a deck vs selling the software which solves the problem and pays for a long time - a predictable revenue stream as well as tangible outcomes.
That’s the bet McKinsey is taking - we will have to see the size of the software play of McKinsey.
A key lesson is that anyone can be disrupted, so it is essential to do experiments that have the potential to unlock a new revenue stream.
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