Thread by @RomeenSheth

Something most people in tech don't know:

McKinsey is a software 🦄hiding in plain sight.

I worked there for 3 years and saw 10 acquisitions that allowed McKinsey to shatter $100M+ ARR.

Here’s the breakdown 👇👇👇

Over the last century, McKinsey has been the iconic brand in consulting.

Engaged by the C-Suite for top tier strategy work, McKinsey has built a behemoth of a business.

A few highlights:

- $10B+ in revenue
- 80%+ of the F500 as clients
- <1% of applicants get hired

But like every company, McKinsey isn’t impervious to disruption.

"Pure strategy" work is now only 10% of McKinsey's portfolio. This is down 7x over the last 30 years.

Implication: Clients want tangible, measurable results.

McKinsey had 2 options when staring at disruption in the face:

1. Go upstream and flee to work that will be last touched by disruption (e.g. highly specialized)

OR

2. Leverage its strength, lean into the disruption and accelerate it industry wide.

They chose Option 2.

So how did they pull that off?

3 Tiered Approach: Build, Buy and Partner.

McKinsey does all 3, but it's M&A activity is the secret sauce.

Over the last 5 years, McK acquired 10+ companies and created McKinsey Solutions.

This is the business unit that drives $100M+ ARR.

McKinsey has a really specific acquisition type - it either acquires a company that aligns with a vertical or a horizontal.

Vertical: Solves for a problem widely observed in an industry

Horizontal: Solves for a problem widely observed across a function

These acquisitions are natural evolutions of how McKinsey works.

(A) Observe: Identify clear patterns across 1000+ clients

(B) Partner: Find software that fits into the consulting solution workstream

(C) Acquire: Buy the software company and own the SaaS revenue

Why do it this way?

2 reasons.

Defense - De-risk the deal. By the time an M&A offer is on the table, the two companies know how to work with each other.

Offense - Accelerate out the gates. Post acquisition, its a hard press to roll this out across every relevant client.

One of the latest examples is Orpheus, a procurement spend analytics product.

This sentence from the deal announcement is key:

“The combination of McK consultant expertise and Orpheus market-leading software will help create the future of digital procurement.”

Before McKinsey, Orpheus had been around for 15 years. They did ok, but now they can win.

Why?

(a) Better distribution - Access to C-Suite rolodex

(b) Stickier relationship - Hard to unbundle Orpheus / McK

(c) Pricing power - Packaged in a larger 7 figure engagement

Let’s do the math

If Orpheus charges $100K for the software and gets 100 clients (this is ultra conservative), they’re at $10M ARR.

Multiply this across 10 companies McK acquired in the last 5 years and you’re looking at a $100M+ ARR software portfolio.

McKinsey is growing fast and is best positioned to pull this off.

But how? Isn’t consulting a totally different business model than software?

Yes, but McKinsey consulting margins are 70%+.

The business prints cash allowing it to invest unlike other services firms.

The software play is a gamechanger for McKinsey.

Software is now at the core of the relationship. It creates a stickiness that allows McKinsey to hang around.

Every client problem that comes up, McKinsey is in position to solve.

It’s whack a mole on steroids.

It wouldn’t surprise me if McKinsey builds a $25B+ software biz over the next 10 years.

A lot of other top tier professional services firms are running the same playbook.

There’s a very quiet mega transformation story playing out.

Stay tuned. It’s only the first inning.