McKinsey: AI Impact, Consulting, and the Bottom Line

Generated Title: McKinsey's AI Pivot: From Billable Hours to "Show Me the Money"?

The consulting world is changing, and McKinsey & Company, the 800-pound gorilla in the room, is feeling the shift. Forget the days of endless billable hours and vague strategy decks. Now, it's all about outcomes, AI, and a whole lot of pressure to deliver tangible results. Or so they say.

McKinsey is touting a move towards "performance-based arrangements," where fees are increasingly tied to the actual success they deliver for clients. Michael Birshan, a managing partner, claims about a quarter of their global fees already come from this model. Is this a genuine paradigm shift, or just clever marketing?

The AI Incentive

The rise of AI seems to be the catalyst. Kate Smaje, McKinsey's global tech and AI leader, argues that AI transformation projects are particularly well-suited to this outcome-based pricing. Clients, apparently, are demanding more than just strategic advice; they want "deep implementation expertise" and multi-year transformations. Strategy, which used to be a mainstay, now accounts for less than 20% of their work.

It’s a compelling narrative. But let’s dissect it. If AI is driving this change, shouldn't we see a corresponding increase in AI-related revenue as a percentage of that 25%? The information is not available to determine if this is true.

The shift towards outcome-based pricing isn't entirely new. McKinsey has been moving in this direction for several years, especially with those "big career bet" projects where client success directly impacts executive reputations. (Think massive restructuring or new market entries.) The idea is that McKinsey shares the upside when these transformations work, aligning their incentives with the client's.

But how is "success" actually measured? Smaje mentions scorecards that include investor targets, revenue/profit goals, operational metrics, and customer satisfaction. All standard corporate KPIs, sure, but also notoriously susceptible to manipulation and short-termism. Are these metrics truly capturing long-term value creation, or just incentivizing McKinsey to chase easily-achievable targets?

The CFO's Perspective

Adding another layer to this is the CFO's perspective. According to McKinsey's own Kevin Carmody, CFOs are entering a period of conservative budgeting, focused on "protecting the downside" amid geopolitical and economic uncertainty. This translates to increased scrutiny on investment dollars, prioritizing "must-haves" over "nice-to-haves."

Here’s the potential conflict: McKinsey is pushing for outcome-based pricing, promising shared upside, while CFOs are simultaneously tightening budgets and demanding greater accountability. If CFOs are becoming more risk-averse, will they be willing to gamble on these outcome-based arrangements, where a significant portion of the fee is contingent on success? It may be that McKinsey must take on more of the risk.

Carmody also emphasizes the importance of realistic stretch targets, urging CFOs to exercise judgment and potentially reduce targeted EBITDA for individual units. This highlights the inherent difficulty in forecasting growth, especially in the face of geopolitical uncertainty. So, how can McKinsey accurately predict the outcomes they’re promising to deliver, when even CFOs are struggling to set realistic targets? According to a McKinsey executive, CFOs are reaching for downside budget protections, McKinsey exec says.

I find this part genuinely puzzling. If uncertainty is high, and CFOs are becoming more conservative, shouldn't we see a decrease in outcome-based pricing, as clients opt for the predictability of traditional fee structures? The opposite seems to be happening.

The article also mentions that the budgeting process remains "static," despite technological advancements that enable continual closes and instant data updates. Companies still set formal annual budgets, which Carmody views as a valuable practice. This suggests a degree of inertia within corporate finance, a resistance to fully embracing the dynamic, data-driven approach that AI promises. If budgets are "static," how can McKinsey's performance be fairly evaluated against evolving market conditions?

Show Me the ROI

McKinsey's shift towards outcome-based pricing is undoubtedly a response to the changing demands of the consulting market, driven in part by the rise of AI. But beneath the surface, questions linger. Are the promised outcomes truly aligned with long-term value creation? Can McKinsey accurately predict success in an increasingly uncertain world? And are CFOs genuinely embracing this new model, or simply paying lip service to the idea? Until we see concrete data on the actual ROI of these outcome-based arrangements, it's wise to remain skeptical.