My final presentation for the Washington Campus Program, which I completed in January 2007. Contains some interesting insights on the management consulting industry and its historical ties to the federal government.

1. Management Consulting
and the Public Sector
Clayton Schloss
January 10, 2007
Washington Campus Program

2. Project Impetus
 My career goals
 Short-term: management consulting
 Long-term: government?
 I have prior work experience in both government and the private
sector
 Sen. Dianne Feinstein (D-CA)
 Thomson Financial
 Opportunities exist for governments to implement for-profit
strategies to improve performance, and for for-profit entities to
improve financial performance by addressing social needs
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3. Agenda
 Consulting Industry Origins
 Rise of the Contractor State
 Consulting Industry Today and Tomorrow
3

4. Great Depression era financial legislation sought to
prevent conflicts of interest and foster trust in the
financial markets
 Required all financing to be preceded by “due
Securities Act diligence”
of 1933  Restricted accounting firms just to auditing
 Separated commercial and investment banks
Glass-Steagall
 Outlawed consultative and reorganizational
Banking Act
activities of banks
of 1933
 Regulated industries in an attempt to promote fair
National competition, support prices and wages, and create
Recovery Act jobs
of 1933
 Mandated the need to perform “management
audits”
Source: The World’s Newest Profession (Christopher McKenna) 4

5. By making management consultants the only legal
conduit of “anti-competitive” financial information,
the reforms allowed the nascent industry to flourish
Even though the National Recovery Act was deemed
unconstitutional in 1935, consultants maintained their hold on the
management audit business
 Founded in 1914 by Edwin Booz
Booz Allen &  In 1926 only employed one other consultant
Hamilton
 11 consultants by 1936, opened New York office
 Founded in 1926 by James McKinsey
McKinsey &  25 consultants by 1936, opened New York office
Co.
Source: The World’s Newest Profession (Christopher McKenna) , Booz Allen & Hamilton: Seventy Years of Client Service, 5
McKinsey Memoirs: A Personal Perspective

6. The IT consulting industry, an offshoot of traditional
consulting, was created with the help of
government antitrust pressure in the 1950s
 IBM operated under Justice Dept. scrutiny since the 1930s
 IBM accepted a 1956 consent decree that was binding for 35 years
Forced to sell, not lease, its punch card and tabulation machines

 Had to make proprietary technology available to competitors
 Could not offer advice on the purchase and integration of computer
systems
 In effect, the government pressured IBM to cede the IT consulting
services business to accounting firms
Arthur Andersen (now Accenture) quickly became the market leader
in IT consulting
Source: The World’s Newest Profession (Christopher McKenna) 6

7. Agenda
 Consulting Industry Origins
 Rise of the Contractor State
 Consulting Industry Today and Tomorrow
7

8. World War II and its aftermath was a major catalyst
to the management consulting industry
 WWII provided several examples of success via collaboration
between government and private sector
 Atomic energy
 Penicillin
 Wartime fiscal deficit management via implementation of
Keynesian economic theory
 This record of cooperation led to the development of the
“proministrative state”, a symbiotic relationship between private
and public sectors aided by management consultants
Source: Chain Reaction: Expert Debate and Public Participation in American Commercial Nuclear Power, The World’s Newest 8
Profession (Christopher McKenna)

9. The heads of consulting firms did individual
projects during WWII, which led to consistent hiring
of consultants by the government
Firm Head Firm Government Projects
Robert Heller Robert Heller & Reorganization of U.S. Congress
Assoc.
Tom Kearney A.T. Kearney Reorganization of War Production
Board
Marvin Bower McKinsey & Co. Studies for Army Air Corps
Edwin Booz, Booz Allen & Projects for the Army, Navy, and War
James Allen Hamilton Production Board
Source: The World’s Newest Profession (Christopher McKenna) 9

10. The success of management consulting firms
during WWII led to continued business in the post-
war restructuring of the U.S. government
 Political pressure to reduce size of government after WWII led to the
formation of the Hoover Commission in 1947 to reorganize the
executive branch
 23 task forces headed by business executives, advised by
management consultants
 Recommended decentralization of government, use of external
experts to execute “government” tasks
 Key outcomes included:
 Creation of the Department of Defense, the General Services
Administration, and the job of White House Chief of Staff
 Restructuring of the federal personnel management process
 Reorganization of the Post Office
Source: The World’s Newest Profession (Christopher McKenna) 10

11. That trend continued in the 1950’s…
 Subsequent reorganizations by management consultants included:
 Federal Field Service, covering 90% of civilian employees
 Personnel administration for the Coast Guard
 Veterans Administration
 Civil Aeronautics Administration
 Dept. of Housing, Education, and Welfare
 McKinsey was particularly influential during the post-war period
 1952: President Eisenhower hired to advise on political appointees,
plan organization of White House staff
 1958: Organized NASA after its founding, promoting the use of
outside contractors over internal expertise
 By 1964, 90% of $5B budget spent on contractors
Source: The World’s Newest Profession (Christopher McKenna) , McKinsey & Co., Exploring the Unknown: Selected 11
Documents in the History of the U.S. Civil Space Program

12. …and led to an entrenchment of the consultant
ideology of using external contractors and advisors
instead of expanding government bureaucracy
 In the 1960’s and 1970’s, management consultants were used for
creation and promotion of legislative standards
 Dept. of Health, Education, and Welfare hired Booz Allen Hamilton
to examine the impact of revisions to the Social Security Act
 Dept. of Transportation hired A.D. Little to examine the impact of
the National Environmental Policy Act
 The affinity for smaller government and the use of external contractors
remained prevalent in the 1990’s and 2000’s
 President Clinton reduced the size of the post-Cold War federal
government
 President Bush increased reliance on contractors in the Iraq War,
and the newly created Dept. of Homeland Security relies heavily on
consultants
Source: The World’s Newest Profession (Christopher McKenna) , The Economist 12

13. It is debatable whether the rise of the contractor
state has been a positive or negative development
Positives Negatives
 Reduced ongoing direct  Reduced sense of
cost of government ownership in
 Reduced size of government
government bureaucracy  Less accountability,
 Benefit from oversight
specialization, use of  War profiteering,
private sector strategies corruption in Iraq
 Hurricane Katrina
response
 Dubai Ports World
deal
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14. Agenda
 Consulting Industry Origins
 Rise of the Contractor State
 Consulting Industry Today and Tomorrow
14

15. The number of management consultants has grown
dramatically over the last 30 years
Full-time Management Consultants vs.
Salaried Managers in the U.S.
Full-Time Mgmt. Salaried Managers per
Year
Consultants Mgmt. Consultant
1965 ~17,000 100
1995 ~120,000 13
By 2000, the U.S. management consulting industry consisted of
140,000 people who generated over $70B in advisory fees
Source: Management Consulting: A Guide To The Profession, www.careers-in-business.com, BusinessWeek 15

16. IT is one of the healthiest segments of the
management consulting industry today
 IT consulting is the fastest growing segment of the industry and
accounts for 60-70% of total consulting market
 Leading IT consulting firms include IBM, EDS, Accenture,
and H-P
 IBM reentered the IT consulting field in 1991 when the
government’s 1965 consent decree expired, which has led a
major turnaround in the company’s fortunes
 Annual services revenue of $47B in 2005 (52% of total)
 $810M in U.S. federal government revenue in 2006
 17th largest U.S. federal government contractor
Source: IBM 2005 10-K, www.washingtontechnology.com 16

17. Government continues to be a major driver of
consulting industry growth
 The public sector accounts for over 30% of global consulting
market revenues
 Public sector consulting revenue growth over the next 3 years is
expected to outpace private sector growth (6-9% vs. 1-4%)
 Booz Allen & Hamilton remains the top management consultant
to the U.S. government
 Moved corporate headquarters to suburban Washington,
D.C. in 1992 to better serve federal government clients
 $1.6B in U.S. federal government revenue in 2006
 9th largest U.S. federal government contractor
Source: The Economist, www.washingtontechnology.com 17

18. Political management consultancies founded by
former senior government officials have risen to
prominence recently
 Founded by Fmr. Sec. of Defense William Cohen
The Cohen  Provides legislative and regulatory advice on foreign
affairs
Group
 Has struck partnerships with PR, law, and private equity
firms, and is considering a partnership with a Big Five
consultancy
 Founded by Fmr. Sec. of State Henry Kissinger and Fmr.
Stonebridge National Security Advisor Sandy Berger
Kissinger  May partner with Booz Allen & Hamilton
McLarty
 Founded by Fmr. House Speaker Newt Gingrich
The Gingrich  Provides internal company communication and marketing
strategy advice
Group
 Has entered partnership with PricewaterhouseCoopers
Source: Vault 18

19. Recent financial legislation could have a mixed
impact on the consulting industry
 Repealed Glass-Steagall Act, allowed investment
Gramm- and commercial banks to rejoin
Leach-Bliley  Law helped justify and encourage a wave of
Act of 1999 consolidation in the financial services industry
 Makes potential threat of encroachment by
diversified financial services firms into
management consulting more real
 Consulting and audit functions separated after
Sarbanes- Enron bankruptcy and Arthur Andersen accounting
Oxley Act of fraud
2002  Should reinforce the competitive position of
independent management consulting firms
Source: Wikipedia 19

20. Nonetheless, underlying demand for consulting
services should remain robust due to a number of
economic and political trends
Increasingly
Complex &
Growing Markets
Pressure on due to
Politicians from IT and
Globalization Communications
Frequent
Elections Advances
Threat of Agency Consulting Government
& Department Services Budget Deficits
Budget Cuts
Demand
Greater Public
Greater Visibility Demand for
/ Transparency Increasing Government
in Government Complexity of Services
Government
Responsibilities
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21. Questions?
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