The Firm: The Story of McKinsey and Its Secret Influence on American Business

by Duff McDonald

  “Partners in consulting firms have a natural tendency to view your issues through the prism of their own experience and capabilities,” wrote the authors of Extract Value from Consultants.53 McKinsey took this to an extreme: From the late 1980s onward, its advice to many clients was merely to be more like McKinsey. The firm has launched countless initiatives studying itself in order to pass that wisdom on to clients. But that’s exactly what some clients wanted. “Everyone asks McKinsey how they do it,” said Jim Coulter, a co-founder of private equity firm TPG Capital. “They’re a global matrix organization based on knowledge. The key to running that is to know where your knowledge is and to keep your people steady in their seats so you don’t have high turnover. We have studied and admired them, as we have thought about our own multiproduct, multicountry growth.”54 Law firm Latham & Watkins hired McKinsey in 1999 to help it with its plans to go global. “One of the attractions of working with McKinsey was that we shared a similar culture, which made it easier for McKinsey to understand us,” said chairman Robert Dell. “Unlike other consultants, McKinsey didn’t just present canned recommendations that had been used elsewhere, but rather really listened to us, understood us, and provided recommendations that were tailored to us.”55

  In May 1987 Business Review Weekly ran a cover story titled “The Power of McKinsey: Why Top Companies Seek Its Cure.” The piece was timed to Gluck’s elevation to managing director. Five months later, Forbes responded with “The McKinsey Mystique: Is It Worth the Price?” McKinsey wouldn’t deign to answer that question. The firm’s official position is that measuring its value is difficult, evoking a kind of Heisenbergian notion that the intervention of consultants themselves destroys any basis for such a calculation. There’s some merit to the argument: According to Professor Matthias Kipping, the product of consulting is hard to evaluate in advance, because it is both intangible and also consumed at the same time it is produced. In the end, impressions can be all that matter.

  McKinsey also drove the competition to distraction with its ability to bounce back from any setback. In 1985, when Steve Jobs was first exiled from Apple in favor of John Sculley, the computer company saw a large drop in its market share in schools. Former McKinsey consultant Fred Sturdivant saw an opportunity and landed the company he then led, the MAC Group, a choice consulting assignment. “We came in and did a bang-up job,” he recalled. “We got applause. I was convinced that we were in the catbird seat to have a relationship with Apple. We were home free. But within weeks, word came out that a big new strategy engagement had been taken on by guess who? McKinsey.” How? “They never go away,” answered Sturdivant. “They were wining and dining executives and walking the halls while we had our heads down working on their channel strategy.”

  The firm continues to frustrate competitors in similar fashion more than a quarter-century later: “I lost a project to a UK-based client because the new chairman of the company was ex-McKinsey,” said a former McKinsey partner now working for a competitor. “Their head of strategy wanted to work with us. The chairman told him he could hire whomever he wanted to, as long as it was McKinsey.”

  The firm eventually institutionalized its high opinion of itself. Whereas Marvin Bower had defined McKinsey’s mission singularly—to provide outstanding client service—in 1984 Daniel added a second piece: the building of a great firm. By that he meant hiring, training, and retaining the best people it could. At the time McKinsey was pretty sure it was succeeding in this regard. Daniel also tilted annual evaluations away from a singular focus on one’s direct economic contribution to one’s overall contribution to the firm—including developing people and building knowledge. To this day, partners serving on the firm’s various evaluation committees spend five to six weeks a year on the task, forgoing client work while doing so.

  Plus Ça Change

  But under Daniel the idea of building a great firm never meant stretching the definition of a McKinsey consultant too far in new directions. Despite slight advances in diversity, the firm was still a white male bastion in the 1980s. By the early 1990s, when the firm approached Bill Clinton’s pal and Washington operator Vernon Jordan for help in expanding into South Africa, he asked how many black partners McKinsey had. The answer: none. He reportedly replied, “I’ll try to help you, but for God’s sake, man, if you want to do business in Africa, get yourself some black partners.”56 The firm didn’t elect its first black director—Byron Auguste—until 2005.

  McKinsey did only slightly better with women. One of the firm’s most famous female alumni, Barbara Minto—author of 1987’s The Pyramid Principle: Logic in Writing, Thinking, and Problem Solving—joined the newly opened Cleveland office in 1963 and stayed with the firm for a decade before leaving to start her own consulting firm. The firm elected its first female principal in 1979—Linda Levinson—and a total of nineteen to the partnership in the 1980s. Still, by the end of the 1990s, women constituted just 5 percent of the partnership.

  The firm later embraced India as a talent source. Tino Puri, one the first Indians to join McKinsey, in 1970, had long set his eyes on opening an Indian outpost for the firm. McKinsey finally opened a Bombay office in 1993, though it had served clients in India for a full fifteen years before that.

  “The problem with McKinsey is that it’s a suffocating environment,” former McKinseyite Don Carlson told BusinessWeek in 1986. “They want a certain person, a certain look, a certain way of doing things.”57

  The kind of consultant McKinsey produced did change over time, and by the 1990s the firm was favoring a scientifically bent technocrat. Ron Daniel might not have as much success at McKinsey today as he did in the 1980s. As one of his former colleagues noted, he—along with many of his contemporaries—might not have the IQ required to survive in the global institution he helped build. When he was hired, the fact that you had been to Harvard Business School was enough. Today that doesn’t even guarantee an interview. The consultant of today is more likely to look like Daniel’s successor, the proudly geeky Fred Gluck—a man who ran an antimissile program at Bell Labs before he came to McKinsey—as opposed to one who merely knows the right people from the right places. Indeed, outside the U.S. government’s national laboratories, McKinsey is the biggest recruiter of scientific and engineering PhDs at places like MIT, and it is also a top recruiter at law schools and medical schools.

  Partner Jon Katzenbach thought the firm shortchanged itself by being overly focused on analytical smarts instead of creative qualities in its recruiting. “At McKinsey, hard guys are better,” he told Fortune. “Issues like organization and leadership are thought of as soft. Unfortunately, that’s where client demand is increasing. We have major corporations asking us to help them change their culture; we need to make major changes in our own culture. . . . We’re really good at tapping into intellectual smarts, as measured in quantitative and conceptual ways. But in our search for bright guys, we throw out a lot of creative ones. We’ve got to be less cookie-cutter in our hiring.”58 When he left McKinsey after a storied career, Katzenbach founded a rival firm with the intention of doing precisely that. It didn’t work out quite as planned, and he ultimately sold his firm to Booz & Company in 2009 after an eleven-year run that had shown promise at first but sputtered along with the global economy. The soft stuff, in other words, is for the good times.

  Since the early 1980s, Bower was a lonely voice in thinking the firm had grown too far, and too fast, and was therefore being forced to serve clients it shouldn’t have served, or work on issues that weren’t really of importance to top management. At an internal conference around this time when one consultant explained how technology would speed McKinsey’s growth, Bower growled from the back of the room, “The firm should not be growing at all. It’s far too big already. It should never have gotten above 700 people.” But it was far too late to turn back.

  When Daniel took over, there was not a lot of separation from Booz Allen and other competitors. When he stepped down, McKinsey was unique and
dominant in its industry. And he accomplished all this without shutting the door on tradition.

  6. THE CRUCIAL QUESTION: ARE THEY WORTH IT OR NOT?

  Even as McKinsey consultants will go to their grave saying it’s impossible to measure their impact precisely—thus providing cover for their sky-high fees—at some point in a history of the firm the question must be asked: Has that money been well spent?

  The short answer is yes. No enterprise lasts nearly a century without delivering value of some sort. The real question, then, is: Who has benefited from its advice? The executives who continue to hire McKinsey time and time again certainly seem to find the corporate expenditure worthwhile. Do companies themselves benefit? On balance, one can only conclude they do as well, since the forces of competition would surely drive an inferior product out of the market over the years, and certainly over decades.

  As Stuart Crainer, author of The Tom Peters Phenomenon, put it, “Management theorizing has become expert at finding new angles on old topics. (In Search of Excellence was, after all, a 1982 reworking of the oldest managerial chestnut of them all: How can you be successful?) There is nothing wrong with this. Indeed, management is fundamentally concerned with seeking out modern approaches to age-old dilemmas. The final word . . . is unlikely ever to be uttered.”1 In other words, there is no Rosetta stone of management, no unified theory. It’s pretty much about making it up as you go along.

  But has the spread of McKinseyism been good for business in general? Or for society? When McKinsey spreads the gospel of downsizing in order to enhance corporate profitability, it surely helps individual clients, but is the overall effect a good one?

  If you’re AT&T in the 1980s, McKinsey provided terrible advice. If you’re Condé Nast in 2009, it helped you convince your employees that the time had finally come to cut costs. If you’re General Motors under attack from Toyota, McKinsey missed the point entirely. But if you’re North Carolina National Bank, it put you on the path to greatness.

  Clearly, where you stand on the value of McKinsey depends very much upon where you sit.

  Yes, They Are

  When McKinsey is at its most effective, it thoroughly identifies and analyzes a problem for its client, enumerates all available options, presents them in easily digestible fashion, and then helps the client choose a course of action.

  And even at McKinsey’s lofty price, most clients have concluded that hiring the firm is more than worth the fees paid. Mellon Bank chairman Frank Cahouet paid McKinsey $16 million over a six-year period but estimated that the return on that expense was at least twenty times as much.2 “I joined Mellon in 1987,” recalled Cahouet. “It was a tense time, and there was a real question of whether we were going to survive. Regulators were openly hoping that we would be acquired. But I didn’t join Mellon to sell it. I joined it to build it.”

  One important project Cahouet assigned the McKinsey team, led by partner Clay Deutsch, was separating Mellon into two parts—the so-called Good Bank/Bad Bank exercise. They spun the Bad Bank off to shareholders, leaving the Good Bank on a much more solid financial footing. “McKinsey did a lot of the analysis for us,” said Cahouet. “And their reputation and credibility helped us in the market as we raised the capital for that.” Cahouet subsequently hired McKinsey consultant Ron O’Hanley to join him running Mellon as vice chairman.3 In 2010 O’Hanley was made copresident of Fidelity Investments.

  Work done for the Dutch government in the late 1980s shows the firm in optimal interaction with the client. Dutch officials had contacted McKinsey about a plan to impose a moratorium on subsidies to the steel industry, which would severely hamper the company’s largest producer, Hoogovens. They asked McKinsey to come up with a figure for how much money it would take to shore up the company’s finances so that it could stand on its own two feet. McKinsey studied the situation for six months and came up with a shocking number: $1 billion.

  The country’s minister of economic affairs then asked McKinsey for advice on getting the parliament to approve such a gigantic corporate capital injection. The resulting presentation explained the state of the global steel industry, rising Japanese competition, and the powerful effect of Hoogovens on the Dutch trade balance and economic infrastructure. Working with both the government and Hoogovens at this point, the consultants spent another six months figuring out how the money would be invested, down to the last dollar. The result was a twenty-two-page bill, which the minister presented to parliament. It passed on the first round.4 The company survived and in 1999 merged with British Steel to form Corus Group, one of the world’s largest steel producers.

  Another remarkable public sector project involved work the London office did around the same time for the Scottish Development Agency. Glasgow was mired in unemployment and crime. Partner Norman Sanson and a team of Scottish consultants helped devise a survival strategy for the city. The consultants offered a number of ideas, from encouraging tourism to shifting away from manufacturing toward a service economy, and focusing on the importance of the city center as an anchor of development. The consultants also proposed an idea that fits quite well in the history of McKinsey advice: a public/private partnership that would allow private sector interests to partner with politicians to push for a revival of the city’s core. “We literally saved Glasgow,” said former London office head Peter Foy, in a typical display of McKinsey self-regard.5 But the remark may also have the virtue of actually being true: Less than a decade after McKinsey’s 1984 arrival on the scene, and in no small part due to urban regeneration efforts, Glasgow was named the 1990 European City of Culture. McKinsey helped Carlos Salinas privatize Mexico and Margaret Thatcher on similar efforts in England, and it would go on to aid in privatizing government assets in newly liberalizing countries in Latin America, Central America, Eastern Europe, and Asia.

  In 1981 Hugh McColl, then the new president at then-tiny bank North Carolina National Bank (NCNB), asked McKinsey for help in designing an organizational structure that he wouldn’t have to change until NCNB became the biggest bank in the country. If he was going to go on an acquisition spree, in other words, he didn’t want to be modifying the company’s organizational structure at every turn. This was ambition on a huge scale, considering that NCNB’s $6 billion in assets were paltry in comparison with industry leaders like Citicorp and Chase Manhattan. But it was also McKinsey’s bread-and-butter, organizational advice. The firm’s suggestion: to shift the company’s customer focus from geography to types such as retail customers or commercial banking clients. That way the company didn’t need to introduce whole new units when it entered new territories; it just added these territories to the existing customer groups. Seventeen years later, when what was then known as NationsBank acquired Bank of America, it created the largest bank in the country. That had been McColl’s goal, so McKinsey’s advice had been worth whatever McColl paid for it.

  All of the above point to the fact that McKinsey can do very sophisticated work.

  And then there’s this: While it may seem simplistic, the job of a CEO is to keep his own job. Even your most reliable lieutenants have a tendency to stab you in the back. So the smart CEOs hire expensive (albeit structurally disloyal)6 lieutenants in the form of consultants. Even if consultants have long been accused of fomenting uncertainty rather than eradicating it, the life span of current CEOs impels them to ignore that deleterious side effect, while simultaneously extending their own tenure. Roger Smith leaned on McKinsey to keep his grip on the top job at General Motors, Robert Allen did the same at AT&T, and Phil Purcell (a McKinsey alumnus) did the same at Morgan Stanley. McKinsey may proclaim its capability to tell truth to power, but in reality it rarely bites the hand that feeds it.

  No, They’re Not

  An important question: Should the arrival of McKinsey at one’s door always be seen as a positive for any particular client? Or, by extension, for business itself? Stanford professor Harold Leavitt, a proponent of the human aspects of business over the numerical ones, answere
d in the negative in the 1980s: “The new, professional MBA-type manager began to look more and more like the mercenary soldier—ready and willing to fight any way and to do so coolly and systematically, but without ever asking the tough pathfinding questions: Is this war worth fighting? Is it the right war? Is the cause just? Do I believe in it?”7

  In House of Lies, his 2005 attack on the industry, later turned into a series on the cable network Showtime, ex-consultant Martin Kihn wrote of the “Slide” that McKinsey showed at the end of recruiting sessions in 2000. “The Slide is deceptively simple,” he wrote. “[It] is simply a curve showing 20 percent annual growth. That’s 20 percent compound annual growth over the past decade in both revenues and in the size of McKinsey’s staff. . . . To put it bluntly, the Slide implies that McKinsey is on a path toward total world domination. . . . If you don’t get a job with them this time around, you can always wait. You’ll be very old in May 2060—but it won’t really matter. They’ll have to hire you. Every single man, woman, and child in the U.S. is a McKinsey consultant by May 2060. Every person on earth is a McKinsey consultant by 2075.”8

  Tales of failed consulting engagements—or failed attempts to carry out a McKinsey strategy—don’t usually make the front page of the business section. McKinsey won’t talk about its clients, and corporate executives don’t like to talk about failed projects of any sort, whether or not a consultant was involved. Every now and then, however, a project has a high enough profile—or its failure is public enough—that McKinsey’s role comes into full public view. And it is in these instances that McKinsey’s grand bargain with its customers—take no credit, take no blame—can prove unworkable. “It is the same with the medical profession,” Hal Higdon wrote. “A doctor can perform a thousand successful operations, but everyone remembers the one where his scalpel slipped.”9