McKinsey’s Financial Loops
Today: McKinsey is acquiring SaaS companies—finally becoming a capitalist enterprise.
The Agenda 👇
Are consulting firms on a collision course with SaaS companies?
Interestingly, McKinsey is buying SaaS companies these days
It’s a typical move from the market economy to capitalism
But will it work? There are two ways it can play out
Some sources to go further
Last summer, I wrote 11 Notes on McKinsey (which has been one of my most-read pieces ever). It helped me launch a stream of reflections on the future of consulting, of which you can read Round 1 and Round 2. Here’s a quote from Round 2:
Think about all the players, both legacy and new entrants, that don’t actually belong to the consulting industry but are still able to deliver consulting-like services to clients in need. A clear example, I think, would be SaaS companies that are willing to deliver one-off consulting/support services to hasten deployment of their product and scale up their operations so as to maximize recurring revenue. Indeed the evolution of the enterprise market is a direct threat to legacy players within the industry: deploying a Saas solution, which is rather rigid by definition, forces the client to upgrade their organization and processes. And who is better positioned to provide the related management consulting services if not the SaaS company itself? That’s unprecedented competition that clients expect to be matched!
Well it turns out that McKinsey is aware of that, if we are to believe this thread by Shaan Puri and McKinsey alumnus Romeen Sheth:
Today I’ll make it short, but it inspires two ideas in me. First of all, McKinsey appears to be about to turn its business into proper capitalism. As you may remember, following Fernand Braudel’s categories:
You’re a part of the “market economy” if you buy something at a price and you sell it at a higher price, pocketing the difference in the process. This is exactly what consulting firms are about: they buy talent by hiring consultants and they sell it at a premium to clients. It’s fine, you can build a $10B+ business (= McKinsey) doing that, but it’s still part of the market economy. There are no increasing returns to scale—except maybe, in the case of McKinsey, for the brand.
You’re a part of “capitalism” if your business generates increasing returns to scale, which usually requires inserting capital into the production process—“capitalists” being the ones who bring the capital. In some rare cases, businesses that belong to the “market economy” generate so much money that they can insert it into another part of the business in the pursuit of increasing returns, thus effectively turning the whole business into a capitalist enterprise.
This is exactly what McKinsey seems to be doing, complying with the framework I developed in Every Successful Business Has Two Financial Loops:
The best approach for any business is to combine the two loops into a system, and make them fit together—that particular “fit” being a key component of a company’s strategic positioning. Indeed, it’s not about operating a trading business on one side and a capitalist business on the other. It’s much better than that: it usually consists in diverting a fraction of revenues derived from trading to insert them into the capitalist part of the system so as to generate those increasing returns to scale.
The second idea was inspired by an expert in everything consulting and business services I talked to earlier today. My question to them was: “Will McKinsey succeed? Can they become a SaaS company on top of being a consulting firm?”
Here’s the answer: Maybe! It could work because McKinsey is rather unique in the consulting industry and, unlike their direct competitors (the Boston Consulting Group, Bain & Company), they definitely have the culture to pull off such a trick. But even if it doesn’t work, they’ll make sure to learn everything they can from their acquisition targets in the software industry and use it to become a better consulting firm. Then, thanks to their brand, they’ll end up selling their portfolio of SaaS companies at a premium, making huge capital gains in the process. Neither case would be a bad outcome!
Do you know McKinsey from the inside? What do you think is the most likely scenario?
A few articles linked above:
Capitalism and the Future of Nation States (me, European Straits, December 2019)
11 Notes on McKinsey (me, European Straits, May 2020)
The Future of Consulting (Round 1) (me, European Straits, May 2020)
Think You Understand Capitalism? Think Again. (me, European Straits, May 2020)
Fourth-Wave Consulting (Venkatesh Rao, The Art of the Gig, September 2020)
The Future of Consulting (Round 2) (me, European Straits, September 2020)
An Important Point About Increasing Returns (me, European Straits, September 2020)
Every Successful Business Has Two Financial Loops (me, European Straits, December 2020)
If you’ve been forwarded this paid edition of European Straits, you should subscribe so as not to miss the next ones.
From Munich, Germany 🇩🇪
Nicolas
