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

by Duff McDonald

  As one part of his own long-term planning, Barton has nudged the firm toward investments in so-called proprietary knowledge that might not pay off for three, five, or even seven years. One example: the firm’s Organizational Health Index (OHI), which allows clients to benchmark any number of elements of organizational effectiveness—such as employee satisfaction, innovation, or company direction—against a proprietary database of 600-plus clients and over 280,000 employees. This kind of information can be a gold mine for executives looking for continual improvement in the way they run their businesses, and the OHI quickly became a powerful addition to McKinsey’s arsenal of client offerings.

  Another: McKinsey now tracks what it calls “global profit pools” of the entire banking industry. If a client wants to know, for example, if the profitability of its installment loan business in Korea is up to scratch, McKinsey can tell it where it stands compared with the entire industry. “We’re always going to be a client service firm, first and foremost,” said German office head Frank Mattern. “And with Dominic championing investments in proprietary knowledge, we’re moving much more in that direction.”5

  The Double-Edged Diaspora

  As the number of McKinsey alumni continued to grow—the firm’s alumni directory numbered 23,000 as of 2011—so too did the number of possible clients peopled with those loyal to the firm.

  Not only do alumni prove a source of future engagements—Stephen Kaufman, a McKinsey alum who became CEO of Arrow Electronics, commissioned eight studies from the firm over a period of 10 years6—they also tend to hire from their old stomping grounds. Andrall Pearson hired more than a dozen McKinsey alumni at PepsiCo, including Michael Jordan, who went on to run Westinghouse Electric. Lou Gerstner hired more than fifteen at American Express.7 “American Express was a McKinsey subsidiary in a lot of ways,” said one former partner. “They didn’t have the management timber they needed, so they would constantly be raiding us for it.”

  McKinsey alumnus Paul Chellgren, who went on to become president of Ashland Oil, explained the preference to BusinessWeek in 1993: “[Working at McKinsey provides] a cram course in business experience,” he said. “It was a compressed opportunity to see a lot of companies, industries, and problems in a short period of time. You got your BS, your MBA, and your MCK.”8

  Gerstner later carved his name on the door of fame at IBM, where he guided one of the most startling turnarounds in modern business, after which he became chairman of the Carlyle Group. At IBM, though, he showed that the Mafia doesn’t always help the mother ship. After his arrival at IBM, Gerstner created a consulting group that was bringing in $11 billion annually in just four years, clearly a direct assault on McKinsey’s own technology consulting business. This was taking money out of McKinsey’s pocket, not putting it in.

  Invariably, alumni who go on to prominent outside positions find they must make adjustments. First, they have to learn how to actually manage people, something they’re rarely called on to do at McKinsey outside a project team of four to six people. “That might be the toughest transition,” admitted one alumnus. “You find you need a lot more sensitivity than you need at McKinsey.” Second, they need to adjust to the fact that most corporate environments are, by nature, more hierarchical than McKinsey. “Early on [at American Express] I discovered, to my dismay, that the open exchange of ideas—in a sense, the free-for-all of problem solving in the absence of hierarchy that I had learned at McKinsey—doesn’t work so easily in a large, hierarchical-based organization,” wrote Gerstner in his bestselling autobiography, Who Says Elephants Can’t Dance?9 Gerstner managed to bring some of that McKinsey magic to American Express—and even more of it to IBM, which he famously rejuvenated after the once proud computer maker had suffered a long and slow slide toward complacency.

  Bill Matassoni explained that the network is a primary differentiating factor for the firm because it proves McKinsey is a “leadership factory.” It says much that Matassoni, who went on to spend five years at BCG after leaving McKinsey, still considers himself a McKinsey man above all else. “BCG asked me how come their alumni aren’t as happy as McKinsey’s,” he said. “I told them it was simple, that when a guy left BCG they shat all over him and considered him a failure. When people leave McKinsey, they are counseled out and are proud of their time there.”10 There is no McKinsey boneyard, in other words; you’re still McKinsey, even after you’ve left.

  Even those who lose turf battles and feel forced to leave eventually come around to warm and fuzzy feelings again. Tom Steiner, who lost a struggle to head the firm’s banking practice with Lowell Bryan, and another to oversee its in-house technology efforts with Carter Bales, left to head A.T. Kearney’s financial services practice in 1992, taking sixteen consultants with him. Yet he can speak with a near religious fervor of his time at the firm, even though he went on to make far more money than he had at McKinsey by founding and then selling his own consulting practice—Mitchell Madison—during the dot-com boom.

  The ability of McKinsey alumni to land in positions of real influence continues unabated. In June 2009 C. Robert Kidder—McKinsey alumnus and former chairman of both Borden Chemical and Duracell—became chairman of Chrysler Group LLC. In May 2010 alum Ron O’Hanley, who left McKinsey to join Mellon Financial, was hired to share duties atop mutual fund powerhouse Fidelity Investments with Fidelity scion Abigail Johnson (which possibly positions O’Hanley to be the next head of the firm when Johnson’s father relinquishes the post). In the span of four months in 2010, Ian Davis was named not only to the board of oil giant British Petroleum, but also to that of Johnson & Johnson as well as Apax Partners, the highly successful private equity fund co-founded by ex-McKinseyite Sir Ronald Cohen.

  Not all McKinsey alumni immediately pick up the phone and hire their former colleagues. Those of more recent vintage, in particular, are well aware of the nearly insatiable need among principals and directors to generate new business. Even if McKinsey does have continually deepening connections in business and government, it is also sitting across the negotiating table from more and more people who know just what McKinsey is good for and what its efforts—and associated billings—are wasted on. The virtuous cycle, in other words, can be self-defeating as well.

  One alumnus, now head of a major financial institution, explained that while he will use McKinsey for highly analytic and focused projects, he has no time whatsoever for the typical McKinsey schmooze fest. “Of people who have worked at McKinsey who are now clients,” he said, “there are two types. There are people like me who understand the bullshit side of it and who aren’t too smart. We don’t get caught up in the intellectual masturbation. And then there are the more cerebral people who hire them because they want other McKinsey people around. They get into these companies and think, ‘Oh my God! Everyone here is a dope. I want to start using the whiteboard with someone, to talk about the effect of the Internet on x, y, or z.’ Those are the guys who never left McKinsey. They carry it around with them, and their organizations hate them for it.” The best clients of McKinsey, in other words, are junkies who need their fix.

  “I have two senior partners who come and see me every three months,” this alumnus continued. “I tell them I only want one sheet of paper. But they come in, lean back in their chair, and say things like, ‘What’s going on? How are you feeling about progress?’ And my response is something like, ‘Why are we having this conversation?’ I don’t need therapy right now. It’s like someone told them to listen to the CEO and ask open-ended questions. It’s amateurish. I want them to tell me five ways to knock five basis points off the cost base of crucial lines of business. In those cases, when getting it right or wrong by a small amount is real money, I have no problem spending five million or ten million on consulting. But it’s a rifle shot, not a shotgun.”

  Would McKinsey hire itself? It does every single day, said Michelle Jarrard. “And while some people say the firm is a big pain in the ass as a client—that it’s not change ready—that’s
baloney. We move fast. There are multiple McKinsey teams working for McKinsey at any given moment, right down to having engagement managers and McKinsey billing.”11

  The diaspora brings with it increased scrutiny too, as investors and the media show an increased vigilance for any sign of cronyism. In June 2010 investors in financial services outfit Prudential responded with outrage when it was revealed that high-flying Prudential CEO Tidjane Thiam—himself a McKinsey alum—had paid the consultants three million pounds during a failed $35.5 billion bid to acquire AIA, AIG’s Asian business.12

  A Criminal Mind

  Here’s an amazing statistic: Until just a few years ago, McKinsey maintained that no partner or other employee had been charged with securities law violations in the eighty-plus-year history of the firm. (That’s not to say no violations had occurred; it’s just that no one had been charged with any.) That’s a remarkable claim to be able to make, especially in light of McKinsey’s philosophical proximity to Wall Street, home to nearly seasonal spasms of criminality. That all changed on October 16, 2009, when federal agents arrested McKinsey director Anil Kumar on charges of being part of the largest insider-trading ring in history.

  Because Kumar fainted upon being arrested and had to be briefly hospitalized, several hours passed during which McKinsey was in the dark about the charges. The confusion was such that for a time, it wasn’t even clear if the charges had to do with a “security” issue like terrorism or a “securities” issue like insider trading. Whatever it was, it wasn’t good.

  Barton moved into damage-control mode immediately, convening a group at McKinsey known as SORC, or the Special Operating Risk Committee, which included regional leaders; the firm’s general counsel, Jean Molino; and Michael Stewart, who heads media relations. The arrest had happened on a Thursday. By Saturday Barton had circulated a note to the staff alerting them to the news of Kumar’s arrest. On Sunday a similar message went to the firm’s alumni. Barton spent the rest of the weekend on the phone with a highly concerned clientele. By Monday morning Barton had almost nine hundred e-mails from distraught current and former partners of the firm asking for more information.

  Upon hearing the news famous McKinsey alum Tom Peters voiced what was surely a universal notion, even among those who hadn’t actually worked at the firm in decades. “McKinsey and I parted company due to strangeness on my part and our big tussle over the In Search of Excellence project,” he said. “But having worked for the institution was still a source of unmitigated pride for me. The first thing I did when I heard was call Bob [Waterman] and say, ‘What the fuck is going on? This isn’t my McKinsey. I smell a rat.’ Bob didn’t disagree with me.”13

  This was a trial by fire for Barton, who had been on the job just three months, not even enough time to appoint his own kitchen cabinet. And it was a mortification for Ian Davis. “The arrest and everything happened after I left, but the crime itself happened on my watch,” said Davis. “It was the worst thing that happened to me in my time as managing director.”14

  When it emerged that Kumar had indeed been charged with insider trading—selling client secrets to his Wharton classmate and hedge fund billionaire Raj Rajaratnam, who used them to generate profits for his $3 billion Galleon fund—the gravity of the situation became crystal clear. The basis of any client relationship with the firm is trust. Companies share their most competitive secrets with McKinsey with the understanding that confidentiality is paramount. McKinsey consultants aren’t even supposed to tell their own spouses about their client work—and here was a partner of the firm selling client secrets out the back door for cold, hard cash.

  If Kumar was acting as part of some sort of insider-trading ring within McKinsey, the likelihood of an Arthur Andersen–style collapse was high. Even if he’d acted alone, nervous clients could defect en masse. At the very least, those clients whose information Kumar had been selling—technology companies AMD, Business Objects, Samsung, and Spansion—seemed likely to sever relations with the firm.

  Known as a quiet, careful, and even shy man, Anil Kumar was one of McKinsey’s Silicon Valley experts. A protégé of Rajat Gupta—some say a “bag carrier”—he had as modest a profile as you could have at McKinsey and still be a senior partner. That was, those who knew him argued, at least in part due to his relationship with Gupta. “He was a Rajat follower,” said a former partner of the firm. “But that’s okay. The big dogs always had people they carried.”

  But Kumar did have an impressive résumé. After joining the firm in 1986, he’d moved to India in 1993 to help build the firm’s local operations, as well as to launch the New Delhi–based McKinsey Knowledge Center, a research and analytics subsidiary that was an early pioneer in the coming wave of outsourcing that was about to wash over India.15 In 1996 he and Rajat Gupta co-founded the Indian School of Business in Hyderabad in partnership with the Indian government. In 1999, the year the foundation stone was laid, he returned to the United States to work with technology clients out of McKinsey’s Palo Alto office. After his return, the Confederation of Indian Industries, a lobbying organization, asked him to cochair the Indian American Council.16

  Kumar quickly denied the charges through his high-profile veteran defense lawyer, Robert Morvillo, but it was merely a pro forma—and almost comical—denial. The government had wiretap evidence clearly implicating him, including an August 2008 call during which he advised Rajaratnam to buy shares of AMD in advance of an announcement coming after Labor Day that the government of Abu Dhabi intended to invest $6 billion to $8 billion in the microprocessor maker.

  McKinsey didn’t wait for the wheels of justice to start turning. The firm placed Kumar on an indefinite leave of absence and asked two law firms—WilmerHale and Cravath, Swain & Moore—to conduct internal investigations to find out just how far the rot had spread. By December McKinsey had severed relations with Kumar entirely. In January 2010 he pleaded guilty to one count of securities fraud and one count of conspiracy to commit securities fraud. He also agreed to forfeit $2.6 million authorities said he’d been paid by Rajaratnam since 2003, including money deposited in a Swiss bank account Kumar had set up under his housekeeper’s name and some placed in Kumar’s accounts at Rajaratnam’s Galleon hedge funds. In mid-2012, after testifying against both Rajaratnam and Gupta in their respective federal cases, Kumar managed to avoid jail time and received just two years probation for his crimes. His banishment from McKinsey, on the other hand, was permanent.

  But here’s the remarkable thing: Even as the McKinsey name was dragged through the mud of the Rajaratnam investigation and ensuing trial, McKinsey’s billings didn’t fall—or at least did not fall by much. Forbes estimated 2011 billings at $7 billion.17

  Resilient billings aside, it was still a public relations nightmare—and a worsening one. In March 2010 the Wall Street Journal reported that none other than Rajat Gupta himself was ensnared in the investigation. The Journal’s revelations prompted two almost unthinkable questions: Had a managing director of McKinsey engaged in insider trading? And had he done so while running the firm?

  Et Tu, Gupta?

  Of all the managing directors in the firm’s history, Rajat Gupta cultivated the highest public profile after he left McKinsey. Indeed, by the time he retired from the firm in 2007, he was already well on his way to a second career as a global citizen and philanthropist. In 2001 he helped raise $1 billion in relief funds after the Gujarat earthquake in India. He co-founded the American India Foundation with Bill Clinton. Gupta co-founded the Global Fund to Fight AIDS, Tuberculosis and Malaria. He took on roles with the United Nations and joined the board of the World Economic Forum. He chaired the India AIDS initiative of the Bill & Melinda Gates Foundation. He was, in effect, the de facto chairman of the international division of India, Inc.

  He also stayed connected to the corporate realm, and his long career as a well-connected corporate consigliere made him highly coveted as a director. Between 2006 and 2009, Gupta picked up seats on the boards of five publ
ic companies—American Airlines’ parent AMR, global outsourcer Genpact (of which he was also chairman), Goldman Sachs, audio equipment giant Harman International, and Procter & Gamble. He also joined the supervisory board of Sberbank, the largest bank in Russia and Eastern Europe by assets, and the board of the Qatar Financial Centre. All together, those positions paid him more than $3.2 million in 2009.

  In 2008 Sberbank paid him $525,000, while the next-highest-paid director on the board earned only $110,000. The question of whether he could actually be independent while being paid $525,000 was serious enough that RiskMetrics, the corporate-governance watchdog based in Washington, D.C., advised minority shareholders to vote against his nomination in 2009. He was reelected anyway.

  When Gupta joined the board of Goldman Sachs in November 2006, he seemed a perfect fit—the former top executive of one secretive, elite firm joining another. Less than two years later Gupta reportedly told Goldman CEO Lloyd Blankfein that he wanted to step down—he had spread himself too thin—only to be persuaded to stick around to avoid the public relations fallout of a director quitting in the midst of the financial crisis.

  Gupta’s extensive connections and status as one of the most prominent Indian businessmen on the planet made him a natural guest at President Barack Obama’s first state dinner in November 2009, in honor of Manmohan Singh, the prime minister of India. But if he put on a good face in the halls of power, there’s a good chance he was fretting on the inside. Kumar and Rajaratnam had been arrested just weeks before. The Feds had busted Kumar on the basis of several incriminating calls he had made to Rajaratnam in the summer and fall of 2008. During that same period, Gupta had made several intriguing calls to Rajaratnam himself.