The Firm: The Story of McKinsey and Its Secret Influence on American Business (19 page)

What’s more, a real premium began to be placed on being part of this knowledge oeuvre—not just in what McKinsey knew but in who at McKinsey knew these subject areas. An unstated understanding emerged that if you were a logistics expert in, say, the retail sector and you were called by a partner you had never met who mainly did work with pharmaceutical companies, you would nevertheless return the call. That reputation for contributing was
your asset
in the firm. It was endlessly discussed and recognized, and in the process, such sharing really did enter the firm’s culture. “Other places have extensive systems for knowledge management, but what Daniel and Gluck built was a culture for sharing that was completely in the service of the firm,” said former partner Partha Bose.
¹⁶
Such a profound shift does raise the question of what constitutes knowledge of an industry or function and whether consultants can actually capture it, but clients were keen to let them try to do so in any event.

Despite Gluck’s resistance, the firm
did
produce a direct response to BCG’s matrix—the nine-box McKinsey matrix—but it also set about formulating a series of frameworks through which the consultants could analyze companies in new and important ways. Hours upon hours of data collection and analysis went into each framework, and the degree of intellectual engagement required of a McKinsey associate was substantial. By the end of the 1980s, the firm required that new recruits learn more than a dozen core analytical frameworks, ranging from “the raider’s perspective” to return-on-equity trees, business systems, industry cost curves, value-delivery systems, economic value to the shareholder (or customer), and the strategic game board.

While the inputs and thought processes differ greatly, most frameworks try to achieve the same goal, which is breaking down one’s business into component parts and thinking about them from a fresh perspective. The business system comes in two flavors, for example—the traditional product-orientated system and the value-delivery system. In the former, consultants break down a client’s business to its basics:
create the product
(product design, process design),
make the product
(procurement, manufacturing, and service), and
sell the product
(research, advertising, promotion, pricing, and sales and distribution. The latter is about the “value” involved—
choose the value
(understand desires, select the target, define the benefits),
provide the value
(product process design, procurement, manufacturing, distribution, service, and price), and
communicate the value
(sales message, advertising, promotion and PR). It all sounds simple—even banal—but every executive can lose sight of such fundamental issues when bogged down in the day-to-day, and McKinsey and others were offering to help them get centered again.

The frameworks also looked into the future. For its part, the strategic game board offered CEOs a way to think about their companies much as the BCG matrix did—with four types of potential strategic “moves.” Whatever it is you make or sell, McKinsey’s consultants learned to advise their clients, you should continuously be deciding whether to choose to do better and more of the same; re-segment the market to create a niche; create and pursue a unique advantage; or exploit a unique advantage industrywide.

Such were the more prosaic frameworks. The real ball-busters, though, were heavy on the numbers, from cost of capital to returns on all manner of investments. Just looking at a return-on-capital-employed tree can make the head spin with its accounting jargon overload, from “days sales in inventories and payables” to asset utilization, depreciation, and costs per unit made and sold. This was strategy
via microeconomic analysis—getting to the on-the-ground numbers at the heart of the issue—McKinsey’s expertise. Work for Citicorp in 1984, for example—code-named Project Alpha—was aimed at a so-called Activity Value Analysis, a database-heavy analysis of how the bank’s corporate office functioned and where cost savings could be found.

This increased focus paid off: Whereas banking clients represented just 3 percent of the firm’s revenues in 1975, by 1983 they accounted for 25 to 30 percent in both New York and London. This was not by accident. When brought to bear on a specific subject, the collective McKinsey intellect is powerful. In 1988 two consultants, Jim Rosenthal and Juan Ocampo, wrote
Securitization of Credit
, a road map that helped Citibank and Chase Manhattan survive the South American debt crisis. The book, the first on a subject that soon washed over the financial world like a tsunami, showed the banks, unable to earn their way out of their bad debt situation, that by securitizing the loans on their books—packaging them up and selling them into the secondary debt markets—they could effectively walk away from the loans, albeit while still taking a hit to their balance sheets.

The subtext to all the knowledge development was that consultants had to participate in cataloging and disseminating that knowledge into the firm’s burgeoning repositories of such. While Bower had paid lip service to contributions to the firm beyond billings, his consultants still largely ate what they killed. Top compensation went to top billers. But as Daniel began emphasizing knowledge development, the soft side of the compensation discussion became meaningful. With Gluck by his side, Daniel slowly persuaded his colleagues that knowledge development deserved to be a core, ongoing pursuit.

McKinsey’s efforts in this area would take the firm into uncharted territory: popular culture. The holy grail of the consultant is an idea that attracts clients but is still vague or complex enough that they need
your help in carrying it out. This is why consultants are great progenitors of buzzwords, ideas like scientific management or lean production or reengineering. If it’s got its own name, you probably want to hire the expert on it, don’t you? In the 1970s and 1980s, the argument extended all the way to the land of the rising sun. Having lost significant market share in industries from automobiles to consumer electronics, managers gladly paid through the nose for the inside scoop on Japanese management techniques, such as just-in-time production, total quality management, and continuous improvement. It was the existential threat posed by Japan that led to one of the most idiosyncratic achievements in McKinsey’s history: Its consultants produced a book that even Joe Six-Pack wanted to read.

While Ron Daniel relied on Gluck for strategy, he asked Cleveland-based director Jim Bennett to oversee work on bulking up McKinsey’s knowledge base in organizational effectiveness. Bennett, in turn, recruited an energetic San Francisco associate named Tom Peters to help lay the groundwork on the project, including a survey of all the extant literature as well as a poll of McKinsey clients. Later, Bob Waterman replaced Bennett as head of the effort. At the time, though, this was not a big priority for McKinsey. Expectations for the organizational work were somewhere between low and very low.

In fact, it transformed McKinsey. But that took years.

Though his tenure was relatively short and he left under contentious circumstances, Peters is the most famous consultant McKinsey has ever produced. His influence on the firm was enormous and helped raise its profile beyond Bower’s wildest dreams. More like Bower’s nightmares, actually. Peters helped
rebrand
McKinsey as a
group of thinkers while at the same time revealing some less-than-great qualities of McKinsey, such as its utter incapacity to deal with a star in its midst.

Peters, a Cornell graduate who majored in civil engineering, spent four years in the navy, then eventually got his MBA and PhD in organizational behavior from Stanford. After a stint in the Office of Management and Budget, he landed a job in McKinsey’s San Francisco office in 1974. “McKinsey was as cool as it gets at the time,” recalled Peters. “If you didn’t have some grand desire in life, it was the place to be.”
¹⁷
(That idea—the delaying of one of life’s major choices—still holds true for many McKinsey recruits today.)

Waterman, a graduate of the Colorado School of Mines with a Stanford MBA, had been at McKinsey since 1963. After focusing on banking and forest products in the San Francisco office, he’d been sent overseas to help open the Osaka office in 1970 and later took over management of the Melbourne office, which he ran for three years. He then did what few have done at McKinsey: He took a sabbatical with his wife and two kids that included some teaching in Switzerland. “When Ron took office, though, he made it quite clear that he wasn’t in love with my leave of absence idea,” said Waterman. “So we came back to San Francisco.”
¹⁸

In 1977 Bennett put Peters in charge of the project that aimed to find out what made companies effective beyond the areas of strategy and structure in which McKinsey excelled. Over the course of a few years, Peters and Bennett (and then Waterman) researched the question—Peters hopscotched all over the globe, visiting twelve business schools and a number of companies in both the United States and Europe
¹⁹
—and eventually compiled their findings in a twenty-page folio they called “Excellence.” It was presented to Shell in July 1979, along with talks from Fred Gluck on strategy and Ken Ohmae on “life.”

Even though Peters and Waterman had gotten Hewlett-Packard
president John Young and others to answer the question “What do you do to promote excellence at your company?”—a topic they thought would resonate with any executive interested in emulating the success of an iconic American firm—the presentation fell flat.
²⁰
The problem: Shell was a confident company. It knew what it knew and didn’t need the anecdotes of Hewlett-Packard executives to show it how to run its business.

“We got an awful response,” recalled Peters. “Gluck was long-winded and Ohmae was talking about the Japanese taking over the world. We had prepared the shit out of the stuff and finished up with twenty minutes. Shell didn’t want to hear it.”
²¹
Luckily, German partner Herb Henzler was in the audience.
He
liked it. And he sold the idea of the project to the German conglomerate Siemens. Suddenly the work was paying for itself. From the fall of 1979 through the spring of 1980, Peters and Waterman continued conducting research to fill out their theses. But a subsequent presentation to PepsiCo’s top hundred managers in Lyford Cay, Bahamas, in May 1980 also fell flat. Peters said the content was there, but he’d felt his delivery was uninspired.

Still, the work was slowly gaining converts, albeit primarily from outside McKinsey. Bill Matassoni, the firm’s communications chief, set up a meeting with Lew Young, the editor of
BusinessWeek
, and the next thing they knew, the research was trumpeted on the magazine’s cover on July 21, 1980. Harper & Row then came calling with an offer to publish a book. The consultants jumped at the opportunity, and before long they had a working title: “The Secrets of Excellence.”

Even though a book contract was in hand, however, the project still failed to garner much internal support. “The Secrets of Excellence” was, in part, offensive to the McKinsey mind. Peters and Waterman were suggesting that the secrets to success were not necessarily quantifiable, that they might be impervious to rigorous analysis. They
talked of focusing on the customer and on the employee, not just on org charts and spreadsheets.

The project took on a little more momentum when Waterman recruited two professors to aid in the effort, Anthony Athos and Richard Pascale. It was Athos and Pascale who suggested that Peters and Waterman organize their mushy and not always memorable concepts with a series of easy-to-grasp alliterations that came to be known as the 7-S framework. Whereas before, Peters and Waterman had been talking about a range of topics—from people to involvement, trust, listening, and wandering—with this new insight, the ideas now slid off the tongue: skills, staff, style, systems, structure, shared values, and strategy. (And propagating a tradition that has become accepted in most consulting circles but definitely within McKinsey: Every idea needs an
odd number
of bullet points to be explained.)

In one sense, this seemed right out of kindergarten. Did serious managers require such spoon-feeding? In another sense, though, it was homage to BCG: the virtue of simplicity. In the end,
Excellence
showcased forty-three American companies going about their business in “excellent” ways. Peters and Waterman cataloged the qualities of excellent firms: They had a bias for action; closeness to the customer; autonomy and entrepreneurship; productivity through people; a hands-on, value-driven emphasis; stick-to-the-knitting persistence; simple form, lean staff; and simultaneous loose-tight properties—new-age management jargon for simultaneously keeping overall control while still letting your top performers roam.

The book hit one notable roadblock. After hearing of the proposed title, Bower decreed that it had to be changed, because it sounded as if they were giving away the secrets of McKinsey’s clients. The compromise:
In Search of Excellence
. “We were royally pissed off,” said Peters. “But it turned out to be the best thing.
In Search of
is better than ‘Secrets of’ anyway.”
²²

In Search of Excellence
was published in October 1982. The message on its back cover neatly distilled its appeal: “There is good news from America. There is an ART OF AMERICAN MANAGEMENT—and it works!” The idea was that despite being pinned down on both sides by Japanese and German competitors, American management still had what it took to win.

In many important ways the book really was an attack on McKinsey thinking, on the idea that the secrets of success could be found in an analytical framework or in a new corporate structure. It was an attack on the rationalist idea that businesses were machines that could be fine-tuned. The work of Peters and Waterman served to remind managers about first principles in business: If they didn’t listen to their customers or employees, then the rest was irrelevant. If the strategy revolution was forcing companies to look outward more than they ever had before, what
Excellence
did was force that gaze right back inside again. And it wasn’t talking only about financial management. It was also talking about how you treated the people who worked for you. It was, in short, the first great manifesto of the idea of corporate culture.