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McKinsey offers to take a bullet for Wall Street
August 21, 2008
As well as getting rid of staff, financial firms have put the squeeze on their travel and entertainment spending in response to deteriorating economic conditions.
Now McKinsey claims that some US investment banks could save up to $2bn a year by cutting costs in ways that are less likely to antagonise their remaining workers.
The consultant reckons that for some banks, spending on things like real estate, IT and office supplies grew too fast during the fat years and could now be pruned aggressively without sowing discord among the troops:
Inititatives to curb expenditures need not be extremely demoralizing to frontline employees… 80 percent of fixed costs have minimal or no impact on a bank’s employees or culture. Launching initiatives that target these areas, we estimate, could in many cases produce most of the noncompensation savings that banks aim to achieve while reducing the possibility of targeting areas that could damage employee morale.
Hang on a minute. I’ve just noticed the fifth entry on McKinsey’s list of investment bank costs that could be cut with “minimal or no impact on employees/culture”. The entry says “consulting”.
Let me try to get my head around that. Is McKinsey - a consultant - seriously recommending that investment banks consider ways of cutting their spending on consultants?
It looks that way to me. A McKinsey spokeswoman declined to comment.
An interesting point, but i suspect McKinsey will be referring to technical consultants and contractors in the main, rather than strategy consultancies such as themselves.
Posted by: David | August 21st, 2008 at 3:03 pm | Report this commentHa.Funny.
Posted by: Pan | August 21st, 2008 at 4:14 pm | Report this commentHats off to McKinsey. Shows they’re not afraid to give objective advice, even when their interests conflict.
Posted by: Bob Nimocks | August 21st, 2008 at 4:39 pm | Report this commentThis is analogous to a scenario when all doctors do a great job and cures everyone….and then wonder where the patients disappeared!!
Its not unlikely that some of the unbridled expansion of expenditure by investment banks may actually have their genesis in some consultant’s advice.
Re David’s comment, I dont see why this cut should be limited to technical consultants. Apart from IT, they dont have a great role in that space
Posted by: Moderngypsy55 | August 22nd, 2008 at 7:31 am | Report this commentWhat if McK just knows the same as other consultancies do: the investment banks will anyway be forced to decrease spending on consulting. By subtly reminding in their publication that they know the industry very well, they might hope to gain even more favorable position in the minds of Wall St. executives - who will not totally stop buying consulting services. Marketing takes many forms.
Posted by: RR | August 22nd, 2008 at 9:08 am | Report this commentActually you could put McKinsey’s kind of consulting at the top of the list of things that could be cut quite happily with no bearing on overall performance over time. In fact the employees might actually appreciate seeing the back of consultants who get paid a fortune to state the blindingly obvious.
If they have no practical skills of their own - then the business will function fine without them. The IT department on the other hand can’t be cut in the same way without the risk of a catastrophic failure in the bank’s systems.
I remember a case where a company cut back on their pure water specialists - in a microchip manufacturing environment. Fine when the process is working but you are majorly stuffed if something happens and you don’t have anyone to fix it!
Posted by: Lorne | August 22nd, 2008 at 9:38 am | Report this commentAll strategy consultants know that we’re overpaid for what we do and the benefits we bring.
Let’s be honest, in a downturn you need more accounting controls than blue-sky strategy and any management guru or company that tells you differently is giving you a sales pitch. The sensible approach is to cut growth-focused consultancy now, manage cash flow and focus on core markets and customers over the next 18 months. Consultancy is at the end of a bullwhip and will be hit hard in the downturn. Now, I’ve got a lovely 2×2 matrix to represent this, so if you give me £5k I’ll show it to you, but then let’s talk about the other projects you need doing…
Posted by: Luthers | August 22nd, 2008 at 10:59 am | Report this commentLovely contribution, Luthers. Thank you.
Posted by: Adam Jones | August 22nd, 2008 at 11:05 am | Report this commentDelighted to be of insight! By the way, it’s now £10k, but I’ll throw in a research paper I wrote last year with a guy I didn’t like about a subject that I don’t care about….
Posted by: Luthers | August 22nd, 2008 at 1:57 pm | Report this commentLuthers,
Isn’t now exactly the wrong time to cut growth related spending? The most important time to invest is when the market is bottoming, and the earning curve starts going positive and getting steeper.
That is, of course, if the firm has the liquidity to ride out the storm. But most do.
Posted by: David M | August 22nd, 2008 at 4:10 pm | Report this commentMcKinsey appears to stick to its claim of putting the clients’ interests ahead of their own.
Posted by: McKinsey_Goldman | August 22nd, 2008 at 10:26 pm | Report this commentBut this suggestion again seems to be in conflict with recent reports of McKinsey recruiting bankers made redundant…
Banks need also some advice when they should make some cuts. For this and other reasons, not always ethic reasons, Consultants still bill banks in bad times. Banco Internacional de Investimentos. www.bancoii.com
Posted by: Banco Internacional de Investimentos | August 24th, 2008 at 11:03 pm | Report this commentno doubt in my mind that ‘consultants’ means ‘other consultants’.. IT contractors in the banking industry particularly are constantly needed and its not beyond McK’s ability to understand that. What banks should be doing is replacing IT contractors with permies who won’t move too soon because the market is in a downturn.
Posted by: Gaz | September 2nd, 2008 at 12:18 pm | Report this comment