Message from Partner

2014 - Beating Goliath

I am reading two books right now that I think is relevant to where SmithStreet is, and may help you to think about whether you want to join us on our quest: David and Goliath by Malcolm Gladwell, and The Firm by Duff McDonald, which is the history of a consulting company that you might have heard of, McKinsey & Co.  What I am thinking about is how SmithStreet as a small, young consulting company can compete with giants like McKinsey.  This is such a daunting task: not only is McKinsey the Goliath in our industry, it is the company that innovated and set the standards for what is modern-day consulting.  

The Firm begins with the story of James McKinsey.  He was an accountant whose insight was that businesses were willing to pay outsiders for business expertise.  He created the idea that budgets did not only have to have a projection of expenses but could be used as a control tool to implement a business’s strategic plan.  He died at an early age but was ultimately succeeded by Marvin Bower who created consulting as a profession the way law or medicine is practiced.  He created the standards and image of McKinsey & Co. through focusing on creating a one-firm culture.  When he retired he set an example of selling his shares back to the company at book value rather than market value.  He gave up the opportunity to enrich himself to better allow McKinsey & Co. to grow and last.

Today, McKinsey & Co. has the best reputation, has relationships at the board-level for nearly every relevant company in today’s world, and is able to recruit the best talent from around the world.

The story of David and Goliath offers me some hope.  It is the story of how Goliath, the largest and greatest warrior of the ancient Philistines was killed by David in one-on-one combat.  David was apparently a simple shepherd boy who fired a single stone with a slingshot.  Gladwell argues that what seems like great advantages that the favorite has are actually liabilities: Goliath is slow, and weighed down by heavy armor; David is brandishing a deadly weapon that he can use from a far distance and because he has no armor is light and mobile.  Gladwell makes it clear that the odds often favor the underdog because they are forced to use unconventional methods and play the favorites on their terms, and because the underdog is willing to outhustle the leader and do things their opponent are not willing to do.

What advantages does SmithStreet have?  We are small and mobile; we built this company in China for our clients to succeed in China; and we have grown up in a world where the internet has changed the way that information is collected and disseminated.  Firms like McKinsey & Co. have built up huge stores of intellectual capital.  But intellectual capital in China depreciates quickly.  Old ideas may equate to heavy armor.

Clay Christensen, of the Innovator’s Dilemma, argues that the consulting industry is in the process of disruption because big consulting firms are chasing big clients with big problems, whilst ignoring smaller projects that is taken on by smaller firms, who develop techniques in these less profitable areas that they later use to compete on bigger projects.

When we first started SmithStreet we were creating presentations for other consulting firms, and we used these learnings and moved on to more valuable research work. Now we have a methodology to use better insights on the marketplace as our weapon to compete with McKinsey and BCG for strategic consulting work.

I don’t think that the McKinsey that exists in the future at its size, in defending its status, and pursuit of new growth can continue the same noble culture that was created by James McKinsey and Marvin Bower.  Rajat Gupta, who worked there for 30 years and led the firm as Managing Director from 1994 to 2003, was convicted in June 2012 on insider trading charges for conspiracy and securities fraud.  In other words, he broke the law, and even worse violated his client’s trust for personal gain.  McKinsey & Co. was built on serving its clients’ interests but somewhere along the line, the culture changed.

I don’t mean this posting to be an indictment of McKinsey & Co.  My point is that the world changes and moves forward.  Even the Han Dynasty fell.  A small company like SmithStreet has a chance to compete if we keep pushing forward, and it continues with learning from all the great things that McKinsey and BCG and Bain have done in the past.  China could not have developed without learning all it can from the United States.  Modern day consulting was created in the United States and it brings great value to the developing of an economy.  That’s why we say “China Needs More Consultants”.

The book, David and Goliath, opens with a quote from the Bible:
 
But the Lord said to Samuel. “Do not look on his appearance or on the height of his stature, because I have rejected him; for the Lord does not see as mortals see; they look on the outward appearance, but the Lord looks on the heart.”
                                                                                    1 Samuel 16:7

I know we do not have a fancy office or business cards that have a brand name big company that your uncle has heard of.  But what we do have is heart and a goal to do something that seems impossible.  

And if you join, bring some stones.

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