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Governments, companies, and other organizations have sought the advice of experts for thousands of years. The roots of modern consulting began in the mid- to late-1800s and early 1900s when the Industrial Revolution created a need for specialists to advise companies on production, staffing, and management issues.
Arthur D. Little is considered by many to be the first management consulting firm. It was founded by a Massachusetts Institute of Technology professor of the same name in 1886 (and incorporated in 1909).
Some early consulting firms were born as a result of communication needs. In 1906, a reporter, Ivy Ledbetter Lee, was named press representative for coal mine operators, who were suffering from bad press. Lee convinced the mine operators to respond to press questions and to supply the press with information on mining activities. After helping turn around the coal mine situation, Lee went on to work for the Pennsylvania Railroad Company, the wealthy Rockefeller interests, and other clients, establishing himself as a public relations expert.
In 1926, James O. McKinsey, a former professor of accounting at the University of Chicago, founded McKinsey & Company. He believed that management consulting firms should move from only providing the standard efficiency advice to inefficient companies to providing organization and management strategy expertise to healthy companies looking to grow and improve their operations. McKinsey died suddenly at age 48 in 1937, but his protégé, Marvin Bower, continued his work and introduced a culture of professionalism to the management consulting industry that improved its reputation and helped it to expand rapidly. Bower is also known for recruiting graduate students and MBAs (instead of established experts) to work as consultants, which fueled the growth of business schools in the United States. Today, McKinsey & Company is one of the top three consulting firms in the world.
Executive recruiting consulting (a subsector of human resources consulting) developed as an outgrowth of management consulting. Firms such as Booz, Allen & Hamilton and McKinsey & Company were hired by companies to solve management problems, which sometimes involved hiring new executives. In 1926, Thorndike Deland founded the first retained executive recruiting firm. According to the Association of Executive Search Consultants (AESC), the firm “focused on retail executives and charged clients a retainer plus a commission of 5 percent of the hire’s first-year compensation.” Many early retained executive search firms were founded by alumni of Booz, Allen & Hamilton and McKinsey & Company, and these firms also operated their own executive recruiting consulting departments.
In the 1930s, the Great Depression created demand for consultants to help businesses survive and prosper during this difficult economic period. The passage of the Glass–Steagall Banking Act and the establishment of the U.S. Securities and Exchange Commission in 1933 mandated a variety of banking and financial reforms, which also created demand for consulting firms.
During World War II, government agencies made a point of hiring publicity consultants since positive public exposure prompted congressional awareness and aided in fundraising. Consultants also played a key role in providing advice to the government regarding armaments manufacturing and other important wartime production, as well as helping staff manufacturing plants and other entities that faced worker shortages. In the years after World War II, the field of consulting gained respect as a result of its contributions to the successful war effort.
Consulting soon found its way into politics. Candidates running for office needed experts to communicate with the media to develop positive public images preceding an election. Hiring a full-time staff member with expertise in polling, for example, would be too expensive; however, hiring a consultant to work only during the pre-election period provided an excellent alternative. In the 1950s, Dwight Eisenhower hired advertising specialists to design effective ad campaigns. At the time, it was a new and relatively radical method of running a campaign, but one that has continued today. After Richard Nixon’s unsuccessful bid for the presidency in 1960, he hired public relations and press consultants to help him regain popularity in his bids for elected office. With their help, he reestablished a positive image among voters and was elected president in 1968. Today, high-priced political consultants work on all of the major political campaigns.
In the 1970s, consulting services became extremely popular, and many consulting firms opened offices in foreign countries.
The emergence of the personal computer in the 1980s and the Internet in the 1990s created strong demand for information technology consultants. Increasingly strict tax laws and government regulation on businesses and the financial services caused rapid growth in tax and accounting consultancy firms.
Demand also increased for consultants as a result of the passage of several laws, including the Sarbanes–Oxley Act (2002), which addressed accounting and corporate governance scandals and placed stricter controls on corporations and the accounting industry; the Dodd–Frank Wall Street Reform and Consumer Protection Act (2010), which increases regulation of the financial industry and offers improved protections to consumers; and the Patient Protection and Affordable Care Act (2010), which is expected to expand health insurance coverage to 25 to 30 million Americans and streamline the delivery of health care, but also create a variety of challenges for insurance companies, state governments, health-care providers, and businesses with 50 or more employees (those that do not provide health insurance to their employees must pay a penalty).
In 2009, the global recession hit the industry hard. Corporations reduced budgets for consulting services and many consulting firms experienced significant declines in revenue and were forced to layoff a large number of employees. Beginning in 2010, the consulting industry began to bounce back as corporate profits grew and demand for consultants increased.
Today, the consulting industry remains a key source of expertise for the business world, government agencies, and nonprofit organizations. Annual revenues in the global consulting industry have begun inching up again (hitting $415 billion in 2013), and more than 3.8 million new jobs are expected to be added by 2020 in the professional and business services industry (which includes consulting firms).
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