We’ve all heard the rumors that consulting recruitment is an enormously expensive ordeal.
In today’s article I’m going to attempt to size how much a consulting firm spends on recruiting based on information I’ve read from Duff McDonald & Victor Cheng (we’ll use McKinsey as an example, though they probably spend more than most), perform a sanity check on my calculations, and try to explain why it’s such a large number.
The initial assumptions are:
1. McKinsey hires ~2,000 people a year. (credit: Duff McDonald)
2. The average non-partner consultant at a top firm bills $25,000 a week. (credit: Quora)
3. A consulting firm breaks even every new hire after their first 2 years on the job. This is because the total recruiting cost / number of new employees is so high. (credit: Victor Cheng, but I can’t remember exactly where I read it, will update later)
4. A consulting firm’s profit margin is somewhere between 10-20% (credit: 2008 Survey by StatCan)
5. McKinsey made ~$8 billion last year (credit: Forbes)
6. The average consultant works 40-50 weeks a year. (we’ll say 40 to be conservative)
1. We calculate how much the average new consultant bills in two years by taking the time worked in weeks by the weekly billing rate:
2 years x 40 weeks worked / year x $25,000/week = $2 million
2. Next, we calculate how much profit McKinsey makes off of the average new consultant in those two years by taking the revenue multiplied by the margin:
$2 million x 15% margin = $300,000 / new consultant
3. Then, we calculate the total spend on recruiting by multiplying the amount of money made in 2 years per new hire times the number of new hires (at McKinsey, just as an example):
2,000 new hires x $300,000 = $600 million on recruiting annually.
4. Lastly, we calculate what percentage of McKinsey’s revenues were spent on recruiting:
($600 million / $8 billion) = 7.5% of McKinsey’s revenues were spent on recruiting last year.
Is This Accurate?
Is this possible? At first glance, it seems like these numbers are way too high. Especially when you consider that something like 80% of new consultants turn over in their first two years.
I’d say that my confidence in this number is low. It could be up to an order of magnitude off (I’ve heard $60,000 per recruited consultant from other sources).
How could they possibly spend so much money on this?
Opportunity cost is likely a big factor. Consultants bill out an enormous amount of money per hour (something like $400 – $500, I’ve heard figures as high as $1000+ for partners). It could be that if you take into account the money associated with lost time on projects, renting rooms for info sessions, travel costs, etc. this number could make more sense.
What Does This Mean?
On this topic, I recently read a very interesting article by Diane Dolinsky-Pickar, who was a McKinsey research analyst back in the 80s. Her theory is that consulting firms spend so much on recruitment as a way to advertise themselves to people who will likely be future clients, and that McKinsey in particular outspends all of the other consulting firms.
In her words:
“It is well-known that the way McKinsey recruits at top-tier business schools reflects a different strategy than others. Most other brass-ring firms set up highly selective interviews at the 10 best MBA schools.
That means it is hard to get an interview with them, but among those who do get a seat at the table, the chances of an offer are good. McKinsey does the opposite. They set up interview after interview for reams of candidates. So, for example, at Columbia Business School, which is superb by every measure but maybe a teensy bit down from the Harvard-Stanford-Wharton clique, if there are 500 students in the class, maybe 200 or more will get interviews with McKinsey.
An absolute ton of questions and answers, to my mind.
Does it make sense? Do they really have difficulty discerning who’s more attractive than the others? Can’t they do more initial culling to save time?
Of course, they could. But they don’t.
They want all 200 folks who interview with them to think that they are really smart, that they are the crème de la crème, that they have the caliber to get interviews with McKinsey.
Only a small portion receive job offers, but we know the rejects are not rejects, since plenty of gems don’t stand out from their peers in school. We know that school bears no resemblance to the real world.
The chance of getting into a top business school goes disproportionately to the well-off, better-connected, more affluent lucky ducks. But I digress. When the offers come to just a few, the rejected are prone to think they are not as smart as the winners. And they go on with the memory of that rejection to haunt them. What will happen to them?
They will succeed anyway.
As Dr. Seuss says, “Oh the places you will go.…”
And as they go, they comprise the fertile ground to which McKinsey promotes the message that McKinsey is smarter, better, and more capable, and is the right resource to get the job done.
That is how McKinsey throws down the gauntlet for that cool multi-million dollar gig. And those former interviewees may think to themselves, “These guys are indeed the cat’s pajamas; once I got close to the inner sanctum, but no dice. They are smarter.”
It’s a hoax. Don’t buy it.”
Now, I can’t speak to the accuracy of this. in my experience, the people at McKinsey are some of the nicest people you’ll ever find.
But, $300,000 per recruit is a lot of money.