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

by Duff McDonald

  “We do that for this explicit reason,” explained senior partner Larry Kanarek. “So that we cannot be purchased for a Good Housekeeping seal of approval. I was on a recent call when we flat out said no. We lost the work, because the client [wanted] to cite us in an IPO prospectus. We don’t want to be hired so somebody can say, ‘McKinsey says this is a good strategy.’ We are advisers, and it is management’s job to take all the advice they receive and make their own decisions. Not to say that McKinsey told me to do this.”25

  There’s that disconnect from ultimate responsibility again. McKinsey doesn’t ask for credit, but it won’t take the blame. Kanarek saw nothing wrong with this arrangement. “We have a different form of responsibility,” he said. “But we are also disconnected from the rewards. If our advice is consistently bad, the client will stop using us. But there have been many more times where the advice has been good and clients and shareholders get wealthy and we do not. Our rewards are damped because that’s what being a professional is all about. Theirs are higher and lower because they are the real players. Whenever someone in McKinsey tells me they think they know how to run a company, I tell them to go do it. Because that’s not what we’re doing here.”

  While McKinsey may have a problem with public use of its name, it doesn’t have any whatsoever with corporate executives using the firm to provide justification for a major decision. When First Interstate Bancorp made a bid for Bank of America in 1986, McKinsey was brought in to show how the combined organization would enjoy $700 million in savings, the big sort of number that First Interstate needed to convince board members and shareholders that it could take over a bank nearly twice its size.26 “Sometimes there are situations in which you want to impose an answer,” said a former McKinsey consultant now working at a rival. “In those cases, McKinsey is usually the better hire. There is a degree of arrogance about the place that works.”

  Nor does McKinsey take issue with being brought in to provide ammunition for an executive who is having trouble convincing his colleagues of a particular course of action. After General Electric purchased NBC in 1987, GE-installed president of NBC Bob Wright suggested a “budget exercise” aimed at achieving a 5 percent reduction in the news division’s $300 million budget. When NBC News president Larry Grossman publicly resisted the initiative, Wright brought in McKinsey.27 “If a consultant is being used, does he realize it?” Hal Higdon asked in The Business Healers. “And if he realizes it, does he care, or does he accept it as part of the price he pays for his home in the suburbs?”28

  McKinsey can also be hired when one executive needs “disinterested” support for an idea that might just also result in the removal of an internal rival. Lee Iacocca wrote in his autobiography that when Henry Ford wanted Iacocca out of the firm, he hired McKinsey to recommend a new organizational structure. Iacocca went to Chrysler, where he used Bain & Company instead of McKinsey.29

  Finally, McKinsey does what all its competitors do, which is act as de facto industrial spies. The firm would surely take umbrage at the suggestion, but the whole notion of competitive benchmarking is just a fancy way of telling one client what other clients are up to, with the implicit—and somewhat dubious—promise that their most sensitive secrets will not be revealed. “The strategy boutiques have produced some of the more ruthless and effective approaches to industrial espionage,” said Lewis Pinault, author of Consulting Demons.30

  Teflon Dons

  Considering that 85 percent of McKinsey’s business comes from repeat clients, it’s quite clear that the occasional disaster does not define the firm. And there’s good reason for that. For one, there will always be value to an outside opinion, no matter who you are, and if McKinsey can bring the best minds to bear on a project, its consultants will be hired again, despite its ability to make mistakes.

  Or its premium prices. “They pride themselves on being 2 percent above the market,” said rival consultant Frederick Sturdivant. “What a lovely place to be. How do they get away with it? It used to be terribly frustrating as a competitor. It’s one thing to be knocked off the block by a price competitor, but another thing entirely by someone who is charging a premium.”31

  Even so, critics have long marveled at McKinsey’s ability to shrug off failed consulting engagements such as that of General Motors and to just keep marching forward, getting repeat work from the very same clients it has occasionally failed in the past—be they large banks like Citicorp or companies like AT&T.

  One reason for this success is the firm’s self-confidence. McKinsey is all about confidence. The McKinsey sales pitch is a simple one: “Whatever your problem is, we’re the smart guys that can help you fix it.” Is it a con? Maybe. The young MBAs the firm fields on its engagement teams learn on the job on the client’s dime, and it’s hard to argue that a McKinsey associate has anything to offer the clientele but long nights.

  Marvin Bower told his protégés that the secret to success was to act successful. He wasn’t just talking about McKinsey. He was talking about a specific kind of American confidence that allowed the country to conquer the economic globe to a degree that is only now being called into question, some fifty years later. The country has that confidence—or it used to—and McKinsey expressed that as totally and fully as any company the world has ever seen. So it made mistakes. It could fix them. And it did.

  Another reason the firm has been so successful is that it has peopled the global business community with alumni and friends—all of which it treats very well. Like almost no other firm in existence, McKinsey becomes a part of its people’s self-image. Years after leaving the firm, ex-consultants still use “we” when referring to McKinsey, even in the present tense.

  One primary factor setting McKinsey apart from its competition—indeed, from most institutions—is that extraordinary alumni network—the McKinsey mafia. While the firm had been running alumni outreach for some time by this point, it wasn’t until the turn of the century that the number of alumni became truly meaningful. By 2000, there were more than 19,000 living professional alumni of the firm.

  More than seventy past and present CEOs of Fortune 500 companies are McKinsey alumni. A 2008 study by USA Today calculated that the odds of a McKinsey employee becoming a CEO at a public company were the best in the world, at 1 in 690. The closest rival was Deloitte & Touche, at 1 in 2,150. McKinsey is certainty the most efficient producer of CEOs the world has ever seen. In 2011 more than 150 McKinsey alumni were running companies with more than $1 billion in annual sales.

  Perhaps the only alumni network with more reach and lifelong relevance to its members is that of Harvard University. And there’s no small amount of overlap between the two.

  7. REVENGE OF THE NERDS

  A Guy Like Fred

  Fred Gluck was not a born-and-bred McKinsey man. Born in 1935, he grew up in a one-bedroom apartment in a Roman Catholic neighborhood in Brooklyn with his mother, father, grandmother, and five siblings.1 Few from his neighborhood ever made it to college. Gluck did that and more. After attending a Jesuit high school, he obtained a degree in electrical engineering from Manhattan College, then a PhD from Columbia in operations research. His first job was at the legendary Bell Labs, where he worked on antimissile systems. He was an actual rocket scientist. And this is why he is crucial to McKinsey’s story—he shepherded the firm into the age of technology. In the process, he led it into its full realization as a truly global entity.

  Gluck loved being a rocket scientist until the moment he abruptly lost interest in it. “When I was about thirty, I had a dream,” recalled Gluck. “At the time, I was at Bell Labs and was the program manager for the Spartan missile, which was our long-range interceptor against ICBMs. And in the dream, I saw my tombstone. It said, ‘Fred Gluck died. He worked for forty-five years designing antimissile systems.’ ”2 He cast about for a new job, eventually hooking up with a recruiter in New York City. A series of interviews with chemical giant Union Carbide went nowhere, and he decided he’d wait until Bell
Labs fired its first missile in the interceptor program. Lo and behold, it worked. He then called his recruiter back and said he was ready for a change. The recruiter said he’d found the perfect job for Gluck: at McKinsey. Like many of the firm’s eventual starts, Gluck had never heard of the place. But he interviewed anyway and took a job in 1967. He was thirty-one years old.

  Gluck did not get off to a good start. And even though he had overseen a $300 million missile program, that did not qualify as business experience from a McKinsey point of view. Nor did he look the part: A short, bespectacled man, Gluck was hardly an Oxford crew team member like Rod Carnegie. He was an odd duck at McKinsey, and when executives considered him for staffing on a job, the typical response was: “No, he talks a different language. Plus he’s a short little guy.” But those who passed on the chance to make an ally of Gluck in those early days came to regret it.

  When Gluck finally had his first assignment at the firm—on a study for specialty glassmaker Corning—the partner in charge was Carnegie himself. “He had shoulders about this wide,” recalled Gluck with a laugh, “and one of the first things he said to me was, ‘Oh, Gluck. You’re the guy we hired from Bell Labs. The firm should have never hired a guy that was dumb enough to spend ten years in an R&D lab.’ ”3 Carnegie reportedly forbade Gluck to make any contact with Corning executives, for fear of putting the McKinsey image at risk. Gluck was a show-not-tell sort, though, and before long his superior work habits and rigorous commitment to research had managers fighting over him. Soon enough, he was running projects himself, with a specific focus on electronics and telecommunications. (For his part, Carnegie doesn’t quite recall what he actually said to Gluck that day, but does remember telling him that he had to go slow, especially with a proud client like Corning that might not take too kindly to a novice consultant breaking any glass on his first big project. “I told Fred to take it quietly until he understood the culture of their research effort,” recalled Carnegie. “It was different from the one at Bell Labs, and he just needed to figure out how they did what they did before he could add any value to the process.”)4

  Gluck’s work with Northern Electric, the predecessor to Northern Telecom and, subsequently, Nortel Networks, showed how McKinsey could bring novel thinking to routine problems. In an initial meeting with the chairman of the company—Vernon Marquez, who went by “Marq”—the consultants were told that the one thing they didn’t need to look at was the telecom company’s R&D program, which was working like a charm.

  This had the unintended effect of making Gluck and his colleagues want to look at R&D first. What they found was, in fact, a system in desperate need of reform. Northern had recently changed the way it evaluated R&D proposals. Instead of focusing on the here and now, the company was asking managers to estimate the return on investment for each initiative and then basing the decision to proceed on that. Rosy projections abounded, so much so that in the few years since the change, no project had been turned down. “Think about that,” said Gluck. “To calculate the return on investment of a project that’s still in R&D means you’re projecting sales way out into the future. You can project anything you want, which makes it a totally useless way of selecting projects. The way you should select R&D projects is based on what it does to your competitive position. Or whether it opens up a new market to you.”5

  Another simple but powerful piece of advice Gluck and his team gave Marq had to do with international expansion. At the time, Northern was a purely Canadian company with big dreams. Marq had a point man for his international plans named Ernie Kovats, who was Hungarian and had negotiated contracts with Hungary and Czechoslovakia with fractional market shares to manufacture switching equipment for rural telephone systems. What Kovats and his team had overlooked, though, was that while the rest of the world used so-called CCITT standards, the United States and Canada used the Bell protocol. Gluck and his team presented Marq with a simple pie chart showing that 53 percent of all the world’s telephones were in the United States. The message was clear: Northern was chasing a very small market with protocols that would require substantial reengineering of its products. Marquez was no fool: Northern immediately shifted its focus—and engineering—to the United States and became the world’s dominant maker of telephone hardware over the next few decades.

  One person who took a shine to Gluck from the beginning was Ron Daniel. Which was surprising, in a way, because the two were an odd match. Daniel had graduated from Wesleyan—a small Ivy—and gave off the aura of a stately ocean liner parting the waves, large, impenetrable, and radiating gravitas. He was a picture of impeccably tailored elegance with just enough intentional discord—the man had great sideburns—to signify the ease with which he wielded power. Gluck, on the other hand, looked (and acted) a bit like a street fighter, with a devil-may-care grin and an irreverent sense of humor. What they shared was a deep understanding of how technology was revolutionizing the business world. While in the navy, Daniel had managed one of the country’s earliest large-scale computer installations, and when he joined McKinsey in 1957 he was the firm’s first computer expert.6 He and Gluck were a couple of nerds.

  Though many within McKinsey doubted that someone with Gluck’s idiosyncratic background and skill set could ever lead the firm, Daniel had great, unwavering confidence in him, and he made it clear to all. It was one of Daniel’s strengths, said his admirers, that he could see beyond the McKinsey personality clichés and identify quality people who didn’t fit the mold. “Ron Daniel was one of the first to recognize the importance of delivering content-driven expertise into the client agenda,” said McKinsey alumnus James Gorman. “McKinsey evolved from general advisers to ‘knowledge bearing’ advisers. Fred Gluck was at the forefront of that evolution and provided an intellectual spark to the firm in accelerating that change.”7

  Before long, Daniel put Gluck in charge of the strategy initiative that was the firm’s response to the rise of BCG and Bain and thereby solidified his standing at McKinsey. Gluck was elected principal in 1972 and director in 1976, just nine years after joining the firm.

  For all his support, Daniel did enjoy needling the younger man. He couldn’t help reminding Gluck that he didn’t quite measure up to historic McKinsey standards. “Ron used to do this terrible thing to Fred, who is his genetic opposite,” recalled one colleague. “When Ron introduced Fred at any event, just after Fred stood up and was ready to start, Ron would say, ‘Stand up, Fred.’ ”

  By the time of the election for managing director in 1988, Gluck was one of two finalists for the position. The other was the immensely popular Jon Katzenbach, considered by many to be the soul of the firm in the post-Bower era. But Gluck’s work on strategy had reinvigorated the partnership. Katz actually came within an inch of beating Gluck, but he didn’t resign in a fit of pique. Indeed, he was so universally liked that his colleagues offered no resistance to his staying on six years past the mandatory retirement age of sixty.

  Gluck’s main credential for rising to the top of the firm, insofar as it was understood by the outside world, was his work on the strategy initiative, which helped redirect the firm. That, supposedly, was more than enough to offset the fact that he’d never run an office or helmed an industry practice. But Gluck, who worked on more than a hundred engagements for AT&T and Bell Labs, was also one of the great rainmakers of his day. Between 1989 and 1994, AT&T paid McKinsey $96 million in consulting fees, including $30 million in 1992 alone.8

  It was later revealed that Monitor, a competitor founded by Harvard professor Michael Porter and five others with connections to Harvard Business School, actually made more from AT&T, billing $127 million between 1991 and 1994. “Gluck was elected managing partner because of his deep client relationship at AT&T,” said one ex-McKinsey consultant. “And then we find out from a BusinessWeek cover story that Joe Fuller from Monitor was pulling in way more than Gluck was. Everyone looked at him and said, ‘Hey! We thought you were the guy at AT&T!’ ”

  Busin
essWeek marked Gluck’s ascension with a cover story titled “What’s a Guy Like This Doing at McKinsey’s Helm?”9 One thing he was certainly doing was laying out plans for expansion. In his first speech as managing director, he predicted the firm would have 5,000 consultants, 8,000 employees, and 75 offices in 30 countries by the year 2000. “I thought the guy was nuts,” recalled Nancy Killefer, who had been with the firm for nine years at that point. “He was describing a firm I could not conceive of.”10 She wasn’t alone. In 1988 the firm employed just 1,671 consultants and 3,034 employees in 40 offices across 21 countries. Gluck wanted to double the firm’s size in just twelve years.

  In fact, he underestimated the firm’s potential. Twelve years later, McKinsey employed 6,210 consultants and 11,264 employees in 86 offices across 47 countries. Killefer recalled running into Gluck at the firm’s 2011 retired directors conference. “I said, ‘Fred, I don’t know if you’ve read that speech again, but you were right. And we are the firm you envisioned.’ ”

  The Third Wave

  According to historian Matthias Kipping, there are three waves in the history of consulting. The first wave ushered the industry into existence: the Taylorist focus on efficiency enhancement. The second was consulting top management on organization and strategy. And the third was advice on information technology (IT) based networking. By the late 1980s, it was no secret that a company’s IT strategy could be the difference between staying in the game and permanently falling behind. The IT budgets of financial institutions had grown to be larger than their profits, and telecommunications and healthcare companies were nearly as deeply invested.