The PE Funcast is a team of readers. We fly through books. Lots of books. Not just business books and technical books, but novels and short stories, newspapers, even some comic books—-We highly recommend Usagi YoJimbo. Urban legend has it that Warren Buffet and his longtime business partner, Charlie Munger, try to read an hour each day and that’s as good a reason as any to pick up a book. We read because we love to and we read because there are tons of people out there that know more than we do about lots of different things. It's the same reason that we listen to lots of podcasts too. We read on planes and trains, and we listen to podcasts in cars. We get lots of interesting ideas from reading, and this post is one of them.
I recently finished Duff McDonald's The Firm: The Story of McKinsey. The book got mostly positive reviews on Amazon--3.9 stars out of 5 as of this writing—-but it was the subject that caught my eye. McKinsey is considered to be "the" name in strategic consulting, an industry that is very intertwined with private equity. Whether every vignette in McDonald's book is true or not isn't relative to this piece. It was enjoyable to read and provided me some fascinating insight into McKinsey and their ilk, and into the strategic consulting business.
McKinsey is famous for a particular discipline: "Never taking credit" and "Never taking the blame". They provide strategic advice upon which the client can choose to act or not. Sometimes their advice was good and sometimes it was bad. (Read the chapter on Enron for more details on the bad advice.) For those of us that live and die in working with smaller companies, the McKinseyites and their kind are, as Phil Connors would say, "a colossal waste of time". Smaller companies need partners that are as committed to the solution as we are. As the saying goes, "when it comes to breakfast the chicken is involved but the pig is committed".
We need pigs not chickens.
I am not saying that smaller companies don't EVER need help with strategic decisions. I'm saying that more often than not they need help EXECUTING on strategic decisions, not getting consultants to MAKE their strategic decisions for them.
If you read the McKinsey book you will certainly get an appreciation for where they can (and have) added value. Historically it has been very large companies that were hamstrung by indecision or political issues in the "C" suite. McDonald's book provided a balanced view of McKinsey and their value in this regard. However, at our end of the market we just don't see these same types of problems -- and we certainly don't have the EBITDA to absorb the massive fees that these consultants charge for their services. McKinsey famously doesn't keep track of hours, and merely presents an invoice that they deem to be "fair" for the work performed.
We get cold calls from the high-end strategic consulting firms all the time. Some of the biggest, most successful, private equity shops are big users of the McKinseys of the world; some even have their own in-house mini-McKinseys at their disposal. Most strategic consulting groups view private equity groups as a terrific target market: You sell me on how smart you are and I turn around and jam you and your $2500+ per day down the throat of my portfolio companies. Portfolio company managers will figure it's the cost of having a private equity partner involved in their business, shrug their shoulders and deal with it. Then your strategic consulting firm bills a bunch of hours, makes a bunch of non-binding recommendations and takes the private equity partners out for a nice golf outing once a year.
I don't golf.
C-Suite executives at our companies are rarely at a loss to determine strategy. They are often at a loss for good, effective, tactical consulting resources that can help them to implement their strategy. And that isn't to say that all strategy consulting is bad. We get tons of value within our portfolio from Gartner Group technology research, at a price well below the standard daily rate of McKinsey-style consulting.
Larger corporations have different problems; problems that may be better solved via independent third-party consults like McKinsey. What makes a problem strategic? Let's take some examples straight from McDonald's book: CEO succession planning, matrix management of staff, large-scale acquisitions or divestitures, designing sophisticated financial structures or entering entirely new markets.
We don't have these kinds of problems in our market. CEO succession planning? We don't have dozens of divisions with trusted lieutenants that are vying to move up into the big chair. When we buy a company we are most often buying it from a founder who already has a COO ready to step into the big chair. If they don't, and they don't want to run the day-to-day business anymore, then we are coming to the table partnered with a CEO to run the business post-close.
Matrix management? We never have a management bench large enough that a single employee is reporting to multiple managers. In fact we are often tasked with recruiting new managers to fill key holes in the team. We need head-hunters, not consultants.
Our companies make tuck-in acquisitions. Small competitors or tangential technology pieces that fit into the grander scheme of things. We aren't looking at large-scale mergers with other billion dollar companies and trying to figure out integration and redundancy plans. Likewise, we don't have billion dollar divisions that we'd like to spin-off into their own publicly traded entity.
We do make use of state-of-the-practice financial structures to minimize the tax burden for our selling founders. But we aren't designing sophisticated holding structures and off-balance sheet subsidiaries à la Enron and their ilk.
If we are entering a new market, we are following a Geoffrey Moore model and moving to a parallel "bowling alley". We don't need help identifying these markets or understanding the concept of "the bowling alley".
Our companies often need consultant/contractor hybrids. Folks that are both capable of providing some experienced advice but are also capable of getting their hands dirty; folks who are committed instead of just involved. We are happy to give you the credit; we just want to get the work done.