History of Consulting: The 8 important stages that shaped the industry [2023]

In short

The History of Consulting goes way back. Indeed, consulting has always existed. We can trace advisors to decision-makers back to the Antiquity. Marco Polo, Colbert, and Hamilton are, in a way, the first consultants. But modern Consulting originated in Europe at the end of the nineteenth Century during the second industrial revolution. The Consulting Industry has always followed the trends closely both in management theory and technology. The specialization and segmentation of the Consulting Industry continue to scatter the market. Each region evolves at its own pace depending on the maturity of both buyers and sellers of Consulting Services.

“Consultant” is not just a fancy name, but a professional who can make a difference in how a company address challenges and succeeds. A simple definition of a “consultant” includes the following: a provider of expert advice to another person or an entity who is compensated for their services.

How old is Consulting?

We don’t know for sure, but evidence of the first Consultants providing guidance dates back many centuries. Thought Leadership may have been words of wisdom and counsel, and consultants could not have been labeled “consultants.” A strong leader can inspire his supporters and lead by example, as this ancient quote from Homer to Achilles (from the Iliad, 750 BCE) suggests:

“Be both a speaker of words and a doer of deeds.” – Homer.

The modern management consulting is a $200 B+ industry, which generally follows the economic development starting in the 19th century, and it has been shaped by it in profound ways. Management consulting sprung out of the need to help businesses improve their performance.

The 8 Defining Stages in the History of Consulting

The history of Consulting is holistically intertwined with the growing needs of businesses, shaped by industrial developments worldwide.

Businesses needed expertise and independent perspective to help them achieve their goals, improve strategy, streamline processes, increase sales and profitability, and many more, and Consultants perfectly delivered in their role as Independent contractors.

1st. The Need for Operations Efficiency in the Early 20th Century

During the late nineteenth and early twentieth centuries, when the first demand for Work Rationalization arose, the history of consulting as we know it today began to take shape. First management consulting firms were created as a result of the demand for organizational, process, and machinery expertise.

When Arthur D. Little (1886) began his career as a general management service, he eventually specialized on technical and management engineering, leveraging the theories of Taylor and Babbage, who advocated specialization. For the first time, “scientific management” was introduced by them.

Using these techniques, firms can increase their operational efficiency by analyzing and optimizing each step of a task.

They were avidly accepted by U.S. factory managers in the early 20th century as they scrambled for efficiency and required measures to speed up their workers’ performance.

2nd. The Emergence of Management Consultancy

The boundaries of Management Consulting became clearer and more substantial as the service evolved. Clients began to recognize the need for Management Consulting and the benefits it could give.

Management consulting is a service that assists managers in making choices. It is both knowledge-intensive and self-sufficient. The work is organized as a standalone project that can be completed part-time or full-time.

New kinds of manufacturing, as Marc Baaji points out, sparked growth and increased capital requirements much beyond a company’s traditional financial capabilities. At the same time, there was a huge increase in the need for expertise and professional business management.

3rd. Growth, Profitability, and Challenges During the 2nd Industrial Revolution

The second industrial revolution paved the way for expansion and profitability in the third phase of the history of consulting. However, it brought with it a slew of problems that management couldn’t always solve on their own, particularly because investors weren’t as active in day-to-day operations as most owners were.

The divide between factory management and ownership evolved into chasms. Neither owners nor entrepreneurs, professional managers were. They sought guidance from consultants when faced with the task of making significant complex judgments.

Whether it was the US government engaging Booz Allen and Hamilton or the French government establishing scientific management in its defense industry, governments began to seek assistance from consultants.

4th. Demand for Financial Advice Following the Great Depression of the 1920s

Following the great financial crisis of 1929, The Glass-Steagall Banking Act in 1933 stopped banks from getting actively involved in re-organizations and consulting activities. This new law triggered rapid growth in demand for expert advice in banking, finance, management, strategy, and organization, which boosted the consulting industry.

McKinsey & Company, founded in 1926, was one of the first contemporary consulting firms to specialize in both accounting and strategy. The firm experimented with novel business growth tactics as banks and large accountancy firms were going out due to regulations. It gained corporate clients by leveraging the results of a general poll of company executives.

5th. Major Strategy Frameworks Created in the 1950s & 1960s

According to Raymond Chandler, the structure follows Strategy as a mechanism of implementation. In terms of consulting, strategic consulting appears to have followed the organizational efficiency form of the service. The BCG produced many strategy frameworks that are still in use today under Bruce Henderson’s guidance.

The two great examples would include:

1. The “Growth-share Matrix” helps companies evaluate where and how to allocate cash among their business units, and
2. The “Experience Curve” models the evolution of costs with the number of units produced for the first time.

6th. The Emergence of IT Consulting And The Big Four

The need for strategy and organizational consulting grew substantially in the 1980s and 1990s. Meanwhile, the demand for IT guidance and knowledge expanded at an exponential rate. The number of consultants and the scope of their work increased dramatically, expanding across Europe, Asia, and South America.

IT Consulting and the Big Accounting Firms mark a major development in Consulting.

The widespread usage of computer technology in economic and business terms brought in a new consulting industry.

IT consulting became a significant new market segment. However, due to antitrust concerns, computer makers were barred from selling their expertise. As a result, independent vendors began to offer IT consulting services. It led to the founding of EDS (Electronic Data Systems) by former IBM employee Ross Perot.

The Big Four, who were The Big Six at the time, quickly expanded their services to include consulting in addition to accounting and auditing. Seeing an opportunity to expand their consulting market share, they occupied the IT Consulting niche market, assisting clients in implementing enterprise resource planning (ERP) systems across the globe, among other services. By mid-1990, they had surpassed the majority of other consultancies in size. The majority of them ultimately disbanded as a result of the Enron Scandal.

Based on numerical methods, IT consulting is the largest and fastest-growing segment of management consulting, with only operational excellence coming close.

7th. The Business of Excellence

McKinsey was the first to establish the concept of “scaling up” success through excellence in the 1980s, therefore we should thank them for introducing the concept of “business excellence.” McKinsey introduced the 7-S framework by leveraging the work of Peters and Waterman from the book “In Search of Excellence.”

This framework served as the foundation for linking strategy, organization, and culture, and was also inspired by Nadler and Tushman’s Congruence Model and Galbraith’s Star Model. Competencies and, later, capabilities were identified as sources of competitive advantage.

McKinsey & Company is still a consulting sector leader today. The organization has offered Operations Excellence programs since the mid-1990s, and most large consultancies have embraced the same product to the point of commoditization. Furthermore, in today’s increasingly competitive world, true excellence across the board is required. Consider excellence in manufacturing, research and development, marketing and sales, and so on.

8th. The Segmentation and Specialization Era

It is always difficult for consulting firms that were formerly leaders in one discipline of management consulting to achieve a similar position in a new field. Diversification is difficult. Specialization by capability and industry sector is the most reasonable strategy. It has been a major role in the expansion of management consulting into various specialties as such below:

• Strategic management
• Information technology (IT) consulting
• Human resource consulting
• Digital management consulting
• Operations management consulting
• Engineering management
• Management science
• Research and development consulting
• Others such as disruptive innovation, branding, sustainability, etc.

Besides this segmentation, Consultants also began to focus more on specific industry verticals. The following are the five industries with the highest demand for consulting services:

• Financial services
• Public sector
• Health & Life Sciences
• Manufacturing
• Energy & Environment

Moreover, there are other dimensions to consider as well when looking at consulting firms. Management consulting is made up of different levels of specialization. While we already had the generalists, we now have other degrees of specialization as well. They are as follows:

• The specialists
• The niche players.
• The pure players
• The hybrids

And now what?

The consulting sector is constantly evolving. As clients have started to better understand what value consultants can bring them, many changes and trends will shape the future of the global consulting industry: Brexit, Covid, remote working…and more. Let’s briefly look at some of them.

COVID-19’s Impact on the Industry

Since the beginning of 2020, the COVID-19 pandemic has had a substantial impact on almost all industries, including the consulting industry. But despite the onslaught in the past couple of years or so, the consulting market is still pretty large and continues to grow rapidly at an impressive rate. And one of the main reasons behind the growth is that there has been a series of economic and socio-cultural events which have occurred during the previous years that have sparked considerable changes in the global consulting industry.

The Future of the Consulting Industry

We can safely say that the future of the consulting industry is in safe hands, especially with the recent trends that have transformed and continue to transform the global consulting industry. Some of those trends are as follows:

#1. Various Levels in Consulting: It’s important to note that the definition of “consulting services” is evolving. A highly qualified adviser with an established track record and greater costs provides the greatest degree of service. Then the second level of consulting services comprises specialized niche services with a pre-determined price range. The third level consists of highly qualified specialty experts hired for specific projects. Moreover, the levels of consulting are already branching out into education, offering training programs that compete with those offered by business schools.

#2. Micro-Consulting & Freelance Consultants: In recent years, we have seen a substantial rise in micro-consulting as well as freelance consultants. While micro-consulting is used for expert assistance for a couple of hours or so, on the other hand, freelance consultants work independently on much longer projects that range from a few hours to maybe even several months. These independent consultants get paid for their professional work or expert advice in a particular field or specialty.

#3. Use of Artificial Intelligence: Drastic changes are occurring in the business world, especially after the COVID-19 pandemic. And with the rise in new technology such as digitization, data, and analytics, this is creating a huge difference in how the future will look like. Moreover, the use of artificial intelligence, robotics, and machine learning, it has led to brand new business ideas as well as greater competition among existing players or companies.

The global consulting industry has been shaping up quite well, which is why the future of the consulting industry looks very bright. And if you want to learn more about the global management consulting industry, here’s a comprehensive guide that will help you better understand management consulting as a whole.

Furthermore, unless you have the same perceptual abilities as Tom Cruise in Oblivion or Jim Carey in The Truman Show, you have probably observed that everyone is talking about embracing Digital. Strategy consultants, the big four (they’re back), IT consultancies, and even media firms have all recognized this tsunami and are colliding at full speed. But that is a tale for another day.