The Consulting Crash Is Coming

“Timing the market is not my thing,” Peter Thiel told me a few days ago. “But if the consulting business was a stock, I’d be shorting it right now.”

I’d seen a short clip of the Palantir co-founder criticizing the consulting industry during a lecture he gave at Oxford in 2023, so I got him on the phone to hear more. Back in the 1980s, he told me, consulting firms were useful. Thanks to the corporate raiders of that era and the loosening of antitrust laws during the Reagan administration, acquisitions became the hot new trend, as big companies began acquiring other big companies. That meant that employees were going to be fired. Integrating two company cultures into one was likely to be difficult. And the CEOs of the merged companies would need to show shareholders that they could create business efficiencies, just as they had promised.

Who was going to do all that?

Consultants, that’s who! Firms like McKinsey & Company, Bain & Company, Deloitte, and PricewaterhouseCoopers had hundreds—nay thousands—of employees who could move into these newly merged corporations and figure out what had to be done. They could do the dirty work of firing redundant workers, so that the CEO wouldn’t have to. And they could come up with the strategies that would make the combined businesses more efficient and more profitable. Back then, said Thiel, “The consulting industry added value.”

But by the early 1990s, their utility had diminished. As corporations became lean and mean, there weren’t many ways left to squeeze more efficiencies out of the businesses.

Yet the consultants didn’t leave. They just got bigger and more profitable. They persuaded companies to take on new projects. And they worked to make sure they were retained anytime a company decided on a shift in strategy. “When you’re a senior partner at a consulting firm,” said a former consultant, “your whole job is to hold onto your big clients for literally 20 years. That’s your goal. That’s your dream. You want to be able to say that your client generated $20 million a year for 20 years.”

At which point, Thiel concluded, the consulting industry became “a scam.”

Anybody who has ever worked inside a big corporation during the last, say, 30 or 40 years has seen versions of the scam. I only had one such experience, but it was a doozy: As an employee at Time Warner when it was bought by AOL, I watched from my small perch as consultants from McKinsey and Bain advised the top executives on how to make the merger work.

Because both firms are privately held, we’ll never know how much they were paid, but it was undoubtedly tens of millions. Yet their “advice” did not prevent the deal from costing shareholders over $200 billion before it unraveled. But then, bad advice never seems to hurt the consulting firm that doles it out. McKinsey generated a record $16 billion in 2023, the most recent year it reported its numbers.

If you’re a former Kraft employee, you probably recall when Bain was hired to figure out why so many Oreo cookies were breaking before the box got to the grocery store. (A source involved in the project says the firm was paid millions, but at least they pinpointed the problem: mishandling at the factory. Mondelēz manufactures Oreos now.) Kraft also engaged Bain to figure out how to get consumers to quadruple their consumption of its Philadelphia cream cheese brand. (Cream cheese sales have increased over time, but gradually.)

Bain’s 2024 revenue of $7 billion has doubled since 2018, in case you were wondering.

Or remember when McKinsey (again!) was retained by CNN when it was planning its short-lived streaming service CNN+? The service was shut down a month after it launched in March 2022. And let’s not forget the Purdue Pharma fiasco, in which McKinsey was paid $93 million over a 15-year period to help the company ratchet up its sales of opioids. That one didn’t work out so well, with the firm paying $650 million to resolve a criminal investigation into its actions.

Consultants get offended when you describe their work as a scam; I know this because, well, you go try telling their spokesmen their work is a rip-off. And sure, there are engagements that are worthwhile; Booz Allen has helped the Veterans Administration reduce claims processing times, for instance. But so much of the advice they give, and the work they do, doesn’t help anybody except their own bottom line. “I have worked at 5 Fortune 25 companies and every time we had McKinsey in they have completely torpedoed our process. We had lay-offs of good people, but zero efficiencies,” one former executive wrote on X.

Another reason companies hire consultants is to cover their ass. As the old saying goes, “Nobody ever got fired for hiring McKinsey”; even if the project goes poorly, the CEO can blame the consultant instead of management.

But it’s becoming much more difficult for consulting firms to stick with their old tactics, and their old business model. The industry is being disrupted by two powerful forces. The first is the Trump administration’s crackdown on consulting for the federal government. According to the General Services Administration, the top 10 contractors alone were set to be paid $65 billion by the government in 2025—and the administration is adamant that that number be substantially reduced. It is voiding contracts that it does not believe are “mission critical.” And it is insisting that government consultants find significant savings—or else.

In a pointed letter to procurement officials throughout the government, acting GSA head Stephen Ehikian, complaining about the amount the government was spending on consultants, wrote: “This needs to, and must, change.”

The second factor is the arrival of artificial intelligence as a dominant force in American business. Although the big consulting firms are hoping to make money providing AI services to clients, the clients have figured out that AI can often provide an analysis in 10 minutes that used to take a team of junior consultants weeks or months to do. “It used to take two weeks to do a SWOT analysis with all the people engaged in doing research,” said Soren Kaplan, an innovation expert who has predicted for years that AI would upend the consulting business. (“SWOT” stands for strengths, weaknesses, opportunities, and threats.) “Now it takes two minutes with AI. It is going to change the economics in a huge way, making everything cheaper and faster. And this is going to come into play in consulting in a huge way.” Ten minutes of work versus two weeks means a lot less money for the consultants.

Let’s start with the Trump administration. From the moment Elon Musk arrived in Washington, D.C., chainsaw in hand, he and his young acolytes at the Department of Government Efficiency put consulting contracts on the chopping block. No client got scammed more than the government. “The government’s unquestioned reliance on consultants, renewing contracts year after year, has been a gravy train for some of the larger firms,” Kaplan told me.

“Do you mean that the big consulting firms have been taking advantage of the government?” I asked Kaplan. “Well,” he laughed, “I wouldn’t put it exactly like that.”

Here again, McKinsey offers the paradigmatic example. Five years ago, a GSA inspector general’s report found that the firm was overcharging the government by tacking on 10 percent more than its contracts called for, costing taxpayers an additional $65 million.

In a statement, a McKinsey spokesman said, “We support the federal government’s focus on delivering value and positive outcomes for American taxpayers. As we have highlighted in our research, there is significant opportunity to improve productivity in U.S. government services, and we are eager to contribute to these efforts.”

Within the first six weeks of Trump taking office, DOGE canceled over 1,000 contracts in their typical willy-nilly fashion; most were small, but some were substantial, including a $1.9 billion contract Deloitte had with the Internal Revenue Service for tech services. (Deloitte did not respond to emails asking for comment.) Many of these early cancellations were because the contracts contained language about DEI (Diversity, Equity, Inclusion) or climate change; for instance, Booz Allen Hamilton, an $11 billion technology contractor that does 98 percent of its business with the federal government, had a contract partially terminated “to comply with the diversity, equity and inclusion, accessibility (DEI) executive orders,” according to the Financial Times. “We are engaged in good faith in a much-needed process to assist the government in increasing efficiencies,” Booz Allen told the paper in a statement. “We look forward to demonstrating our capabilities to the administration.”

In early March, Josh Gruenbaum, a 39-year-old private equity guy newly installed as the government’s top procurement official at the General Services Administration, sent a letter to 10 of the biggest federal contractors, including Deloitte, Accenture, and Booz Allen. He told the firms they had a week to both justify their contracts, and recommend how contracts could be pared back or eliminated to save the government money.

Gruenbaum’s letter did not mince words. “Do not submit a scorecard that does not identify any waste and spend-reduction opportunities,” he wrote. “Scorecards that do not identify waste and spending reductions will not be deemed credible, and your firm will be seen as unaligned with the administration’s cost-cutting goals.” He added that their recommendations had to use language that “a 15-year-old should be able to understand.” After the firms’ initial response, Gruenbaum declared himself unsatisfied, describing their proposed cost reduction as wholly insufficient as to border on insulting.

If the firms had thought they could roll the administration, they now knew better.

In May, a GSA executive told Fox Business that the 10 firms had offered up $33 billion in overall savings, with nearly $9 billion of that in immediate savings. Gruenbaum then sent out two more letters aimed at additional groups of consultants. By early June, according to The Wall Street Journal, the GSA had canceled over 2,800 consulting contracts, while Politico reported that 20,000 contracts were still being scrutinized.

For the firms, the loss of government work—and even the threat of that loss—meant they had to downsize. Deloitte told employees that it would lay off workers in its government consulting practice. (The firm didn’t specify a number.) At Accenture, CEO Julie Sweet told investors that “many new procurement actions have slowed, which is negatively impacting our sales and revenue.” Accenture’s stock dropped nearly 30 percent between February and mid-June. Booz Allen announced that it was laying off 2,500 employees. Its stock, which stood at $182 a share the day before the presidential election, dropped to $100 by mid-June.

I had several conversations with Horacio Rozanski, 57, the CEO of Booz Allen, which does most of its business with the Defense Department. He characterized the government’s newfound scrutiny of government contacts as more of an opportunity than a crisis.“We have been part of efforts inside the government to do some of the things that they’re trying to do,” he told me.

Rozanski acknowledged that Booz Allen was likely to lose at least some. But, he added, “I think ultimately, if they really want to create these efficiencies, they’re going to need the kinds of insights and the kinds of technologies that we bring.” In fact, in his dream scenario, Booz Allen would be the administration’s partner as it sought to root out waste, fraud, and abuse. This, however, remains to be seen.

“We’re certainly not trying to put consultants out of business,” Gruenbaum told me when we spoke. “But the Trump administration takes its responsibility as a steward of the American taxpayers’ money extremely seriously, and we’re keeping a close eye on our balance sheet, just like a private enterprise would. We’re habituating ourselves to ask some basic questions: Do we need these services in the first place? Maybe the answer is no. Maybe it’s just wasteful. Maybe it’s just an extra bell and whistle that we can live without.”

Gruenbaum continued: “But in some cases, the answer is going to be yes. Then we need to ask ourselves, Is this something we could be doing internally? We have talented and experienced employees in the federal government who can get the job done. In that case, why are we relying on external subject-matter experts?”

All of this is happening in Washington as the biggest revolution since the internet rolls out of Silicon Valley and destroys the very idea of “expertise”—or rather, makes all of us experts. It’s not just the government that is rethinking its relationship with consultants; so are commercial clients, who are also doing the kind of analysis in-house using AI that they have previously paid millions of dollars to have a consulting firm do. And when they do hire consulting firms now, they are demanding that they pay less—a lot less—and that they only pay when the outcome is satisfactory, another radical change that will hurt consulting profits.

To get a sense of what consulting is likely to look like a decade from now, look at what streaming has done to the television business, or how the internet has disrupted the newspaper industry. Television and newspapers still exist, but they are a diminished force, with declining revenue, lower profits, and less cultural clout. That is what is about to happen to consultants.

“The industry is not going to die,” said Tom Rodenhauser, who has tracked the industry for three decades, “but it is going to fundamentally change.”

Consider the basic consulting contract of yore. For decades, the industry charged clients based on a combination of manpower and time spent on a project. The more people and the more time spent on a project, the bigger the profits for the consultants. “When you get right down to it, what they’re selling is time,” Rodenhauser told me. “If you look at any consulting organization, it’s a pyramid”—with junior consultants at the bottom of the pyramid crunching numbers and putting together spreadsheets, and senior partners at the top keeping the client’s top brass happy. One former consultant told me that a decent engagement should generate at least $1 million a month.

All those young staffers who did the grunt work? Thanks to AI, they are no longer needed. “Because AI can do things so much faster, the old business model no longer makes sense,” said a former industry executive. But—just like the TV and media industries when they were first disrupted—because the big firms are saddled with enormous overhead and other legacy costs, they are resistant to changing.

Rodenhauser told me that the “advice” part of consulting had long ago taken a back seat to implementation—which AI is going to make much easier and faster. Once new technology is installed, a company no longer needs a consulting firm hanging around. “So there’s not this driver for consulting services like there was during previous cycles of new technology,” Rodenhauser said. “That’s why I say consulting, as we’ve known it for the last 30 years, is under attack.”

What AI is really doing, said Humberto Salicetti, another consulting expert, is democratizing information, which will allow companies to “reduce their reliance on traditional consulting expertise” and handle work that it once outsourced internally. To put it another way, AI is commoditizing knowledge, which spells very bad news for people who make their living selling, well, knowledge.

“The holy grail,” said Gruenbaum, “the most ideal and optimal outcome, is if you could actually quantify the revenue generated or the costs saved because you’ve implemented a certain strategy.” But that’s not always possible, so at a minimum, the government wants to be able to say, “This is what I was paying for, and this is what I got.”

Which leads to the final radical change: contracts that are “outcome-based” rather than time-based—where the consultant and the company agree on deliverables and benchmarks, and money changes hands when those benchmarks are met. More and more companies are insisting on outcome-based contracts, and so is the government, which says they will be the default approach from now on.

“If you’re really good at your job, you should actually prefer outcomes-based, because you should then be able to win a lot more business,” said Gruenbaum. “If you’re as good as you say you are, you should be able to keep your cost structure down, deliver the mission and the outcome, and still make a margin. But if you’re somebody who can’t deliver and just clocks in and clocks out, charges for hours and not for outcomes in an unpoliced fashion, that’s not going to work for us anymore.”

It’s not going to work for anyone else either. I don’t have a crystal ball, but it’s not hard to imagine what consulting will be like a decade down the road. The big firms will see a drop in prestige; companies will no longer feel the need for a Good Housekeeping Seal of Approval from a consulting firm. Young MBA graduates will stop flocking to consulting firms—who won’t be hiring in any case because the work typically done by junior staff will have been taken over by AI. Consultants with truly valuable expertise will break off from big firms and start small boutiques where they will go from job to job instead of holding onto the same client year after year. Consulting will still exist, but it will be far less profitable than it is today.

And no one will call it a scam anymore because, as Gruenbaum said, “That’s not going to work anymore.”

*Joe Nocera is a senior editor and writer at The Free Press. During his long career in journalism, he has been a columnist at The New York Times, Bloomberg, Esquire, and GQ, the editorial director of Fortune, and a writer at Newsweek, Texas Monthly and The Washington Monthly.

 

Source: https://www.thefp.com/p/the-consulting-crash-is-coming