Here’s why businesses are hiring ex consultants to the C-suite!

From the desk of Miles Everson:

Hello!

I’m thrilled to share another valuable insight for today’s “The Independent Investor.”

Every Wednesday, I talk about investing in the hopes of helping you attain financial independence through this activity.

Today, I want to take a deep dive on employee skill and why it plays a crucial role in company performance.

Curious?

Keep reading below to know more!

Here’s why businesses are hiring ex consultants to the C-suite!

Throughout the 20th century, America’s top executives usually came from General Electric , IBM , and Procter & Gamble .

Alumni from these conglomerates fanned out across corporate America and brought with them a rigorous and operations-first playbook

Fast forward to now, those days are firmly behind us, as a new crop of corporations now dominates the list of previous employers for newly appointed CEOs.

Consulting firms like McKinsey and Accenture now provide the bulk of C-suite employees, doing so from 2020 to 2024.

This is the first time consultants have claimed top leadership spots since researchers began tracking this data. Prior to this, manufacturers or tech firms served as previous employers of would-be top executives.

With this in mind, it’s a clear sign that what’s required of executive leaders are changing on a fundamental level.

Problem-solving > Operational Prowess

Back then, those who climbed the corporate ladder were the ones who ran big divisions.

However, today’s CEOs are being chosen for their ability to solve problems rather than operational skills. While the latter still matters, it’s no longer top priority.

This is because the modern C-suite needs integrators who can navigate challenges and disruptions, not just career operators.

In that kind of corporate environment, consultants just offer a different kind of edge.

Accenture is a great example of this. The consulting giant spends more than USD 1 billion a year on workforce development.

The company puts its employees through rotational programs where they get to experience working in multiple parts of the business, such as strategy and consulting, ending up with them getting exposure to clients in multiple sectors.

As a result, Accenture’s alumni often leave with a tool kit made specifically for executive leadership.

Other consultants like McKinsey, Bain , and Boston Consulting Group offer similar preparation as their people are trained to introduce creative thinking to help large organizations improve, making them well-equipped to lead companies towards growth and unpredictable environments.

Employee Skill is A Competitive Advantage

According to Professor Joel Litman , CEO of Valens Research and Chief Investment Officer of Altimetry Financial Research , there are 14 types of competitive advantage.

Some firms get ahead by being large enough to produce cheaper goods than their peers. Meanwhile, others rely on brand equity.

Consulting firms in particular build their advantage by hiring and training experts in specific areas and selling their time to customers as it’s often cheaper for clients to contract consultants for specific projects rather than hire directly.

However, this isn’t the case at the C-suite level, as companies will hire ex-consultants to help grow their own employee skill advantage.

The chart below shows competitive advantage from over 3,000 publicly traded U.S. companies.

The blue bars show how much of a profit boost each advantage grants above the baseline 5% cost of capital while the light blue dots show the average Uniform asset growth for companies with each advantage.

As can be seen above, companies with the employee skill advantage come in third place for profitability.

The only advantages that rank higher are “network” businesses. eBay is an example of a buying and selling network while Meta is an example of a social network.

While not every firm can be a network or operate like one, it cannot be denied that all businesses can benefit from employee skill.

This is exactly why companies nowadays are prioritizing CEOs who can sharpen employee skills across all levels of an organization.

Simply said, employee skill provides a competitive advantage that can propel companies to unlock higher levels of performance.

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Most investors often look to intangible assets like brand and intellectual property as they’re easy to understand and offer a competitive moat, even if it’s only for a short time.

However, organizational knowhow and employee skill just may be some of the most overlooked drivers of long-term performance of growth.

Companies that invest in their people tend to perform better than just about every other kind of business.

That’s why businesses across all kinds of industries are hiring at least one former consultant as they’re the ultimate employee skill experts.

Employee skill may not be the most attention-grabbing metric, but it can surely lead to steady improvement in performance.

That’s why as an investor, it’s important to keep this in mind when looking for opportunities in the market.

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Stay tuned for next Wednesday’s The Independent Investor!

There’s a saying in the investment world:

Learn more about why smart investors are pumping the brakes on China in next week’s article!