The Firm: The Story of McKinsey and Its Secret Influence on American Business (2 page)

In situations like this, there is a potential anticlient bias to the consultants’ business, where the long-term result is dependence on, not independence from, the consultants. In other words, once they get the wedge end of a relationship into a company in the form of one engagement, they usually manage to hammer in the rest—becoming the so-called Men Who Came to Dinner. (To wit: They never leave.) McKinsey isn’t actually embarrassed by this notion—the firm calls it the “transformational relationship,” arguing that true change comes only from long-term relationships. But over the years, many McKinsey clients have paid for exorbitant, lengthy engagements with little to show for it.

•    •    •

What the McKinsey consultant himself has gained is a far simpler question to answer. He has gained money, power, and prestige, as well as the pretense of an intellectually minded pursuit within the corporate sphere. He is not a banker, accountant, or lawyer. He is a thinker. He has had the chance to whisper into the ears of power, to exercise influence while being insulated from responsibility. McKinsey was Enron CEO Jeff Skilling’s most favored outside adviser during the Houston natural gas company’s rise and fall. Skilling went to jail for his transgressions; McKinsey emerged from the scandal largely unscathed.

Perhaps best of all, a job at McKinsey is a ticket to almost anywhere in the world. The firm is the best finishing school in business, a launching pad, and a matchless résumé line. A job at McKinsey, regardless of duration, can serve as an enviable listening post for plum corporate roles, particularly at McKinsey’s own clients. The firm has an astonishingly successful network of alumni, occupying corner offices and boardrooms all over the world. Lou Gerstner, the man famous for turning IBM around, worked at McKinsey before decamping for one of his clients, American Express. Morgan Stanley CEO James Gorman spent a decade at McKinsey before jumping ship to his client, Merrill Lynch. It literally happens about once a week.

Of course, not everyone goes on to a distinguished career. Enron’s Skilling came from McKinsey. Two figures convicted in the greatest insider-trading scandal in history—the 2009–12 investigation of convicted hedge fund manager Raj Rajaratnam—are ex–McKinsey: former director Anil Kumar as well as former
managing director
Rajat Gupta.

You rarely see an old McKinsey consultant—like its symbiotic other, the Harvard Business School, the institution favors youth over experience. McKinsey is like Harvard in other ways. To the Harvard
grad, there is Harvard and there is nowhere else. Likewise McKinsey. Indeed, McKinsey alumni almost all wear their sense of specialness for the rest of their lives. This is why the Rajaratnam scandal has shaken the firm to its roots. Even though Anil Kumar sold client secrets and Rajat Gupta trashed the firm’s long-cherished value system in a public and mortifying way, neither event really affected the firm’s business. The damage to its self-image has been much more severe.

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Finally, what of society? There is little doubt that McKinsey has made the corporate world more efficient, more rational, more objective, and more fact based. But to what extent have its contributions gone beyond the bottom line?

McKinsey would have the world believe that its consultants are missionaries of the best in business thinking; that by pushing companies fearlessly into the future they are not just boosting profits but aiding the cause of human progress itself. There is more than some merit to this point of view. And if the smartest, most successful companies in the world continue to hire them, that in and of itself is evidence of the value they create.

But as with many of the world’s big firms, it is also hard to overlook the mounting number of instances in which McKinsey advisers have behaved no better than mercenaries, collecting huge fees for work of dubious worth. At their most craven, they can be recruited to provide a high-gloss imprimatur of objectivity that is in reality mere cover for executives. They are, without question, the go-to consultants for managers seeking justification for savage cost cutting as well as a convenient scapegoat on whom to blame it. While this is surely impossible to measure, there is a distinct possibility that McKinsey may be the single greatest legitimizer of mass layoffs than anyone, anywhere, at any time in modern history.

In a sense, McKinsey is the Goldman Sachs of the consulting world. Both occupy the top rung of their respective professions, but both have come to symbolize something else as well—a nagging question of whether all the brainpower and energy devoted to them have truly been worth the opportunity cost. Is this really where America’s best and brightest can make their most meaningful contributions? McKinsey itself has answered that question in part by shifting its sights to a more global clientele, as the U.S. economy faces its starkest challenges in more than fifty years. The country has been thoroughly McKinseyed, and there’s nothing left to do but rebuild it from the bottom up, a task for which McKinsey may be ill suited.

In that, a question for McKinsey is the same one we might pose to American business itself: Is it still coming up with new ways of thinking, or is it merely relying on past accomplishments to stay ahead of the competition? It is surely doing both, but in what measure of each?

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Consulting in general—and McKinsey in specific—has always been a difficult phenomenon to pin down. On the one hand, that’s because the ideal client-consultant relationship is one in which the consultant fades into the background almost immediately after the work is done and the checks are cashed. But there’s another reason, and that’s the elusiveness of what is actually being bought and sold in the first place.

In a word, McKinsey sells its own enlightenment, the firm’s ability to see things more clearly than its clients. Doing that once is no great accomplishment—a fresh perspective is the way out of many problems, in business or otherwise. Doing it for nearly a century is a tall order indeed, but it is one that McKinsey has apparently met.

When a CEO hires McKinsey, he knows he is hiring some of the smartest and hardest-working people worth opening the corporate checkbook for. Insight can—and often does—come from extreme
analysis, and there is no better army of analysts in the world than McKinsey’s. And they do always seem to be where the action is: In 2012, McKinsey’s China-based business was one of the most rapidly growing areas of the firm.

But the CEO who hires McKinsey is also hiring it for its influence and its power, for the fact that the firm is woven tightly into the fabric of decision making at the very highest levels—corporate, political, or otherwise. It really is no surprise that Rajat Gupta, the former McKinsey managing director, was dealing in inside information from his seat in the boardroom of Goldman Sachs. Sometimes it really is simply about whom you know. And McKinsey knows everybody.

For better or for worse, McKinsey just might be the most influential collection of talent in the world. How the firm managed to gain and hold on to that influence without most of us noticing is only one part of its story. What it has done with that influence since its founding in the 1920s is what this book is about.

The history of American business is the story of men who came along with a healthy dose of self-confidence. Henry Ford knew he had found a way to mass-produce cars. Steve Jobs knew there was huge opportunity in taking the computer out of the office and into the home. Jeff Bezos of Amazon.com saw the promise of the Internet early, and he took retailing into the ether.

James O. McKinsey’s confidence wasn’t about something so tangible. Did you have a problem in your business? Let him have a look at it, and he was confident he could help you figure out what to do about it. Not only that, he promised to tell the rich and powerful what they were doing
wrong
. It was on these two convictions that he founded the company that eventually became the most powerful consulting firm in the world. It was nervy, and it was new, and in that way it was a distinctly American business that helped shape the history of business itself.

“I have spent a considerable amount of my time during the last fifteen years in saying and doing things which should have been said and done by others, but which they hesitated to say and do,” McKinsey
wrote in a 1936 letter. “I assume this is due to the fact that because of my philosophical inclinations I have developed some tendency to think in a logical manner and when this thinking indicates a conclusion I think it difficult to resist the temptation of stating it. Furthermore, when such a conclusion indicates definitely the need for action I feel I am rendering a service by trying to secure such action. I suppose I am doomed, therefore, to go through life doing things which make people think I am aggressive and hardboiled.”
¹

Yes, people thought both those things. But they also thought he was the man to call when the problem seemed insoluble, the one who could set a wayward billion-dollar operation back on the right track. Even though McKinsey’s death at a relatively young age deprived him of the chance to properly reflect on his own career, he had already made it a long way from his days as a barefoot farm boy in the Ozarks,
²
and he died as one of the most respected businessmen and innovators of his era. He didn’t just understand the needs of the giant corporations that were reshaping American society in their own image—he anticipated those needs and helped companies solve problems they didn’t even know they had.

It all started with accounting, which McKinsey rescued from the dismal routines of bookkeeping and reimagined as a tool of strategic management. He was a straight talker whose air of assurance inspired others to follow his lead. He defined corporate management away from managing the routines of a bureaucracy and toward imagining the future and preparing a workforce for it. He was an early advocate of downsizing and other means of cost cutting as a way to save struggling firms. And he used all these ideas, and many more, to build what in time became the most powerful consulting firm, and one of the strongest business franchises, on the planet.

McKinsey was born in 1889 to James Madison and Mary Elizabeth McKinsey in Gamma, Missouri, and was raised in a three-room farmhouse.
At a young age, he distinguished himself as a wizard with numbers. One early biographer claimed that McKinsey’s high school principal hired him to teach algebra to his own teachers,
³
though another said that he merely taught other students, not teachers.
⁴
Whatever the version of the story, teaching was clearly his early passion, and it looked as if it would become his lifelong profession. He graduated from the state teachers college in Warrensburg, Missouri, in 1912 with a bachelor’s degree in pedagogy. He saw himself first—and above all—as a man who had lessons to give.

Those who met him remarked on his “presence”—he was tall, at six feet four—and forthright mien. He was also quite stubborn: Despite suffering temporary blindness while in college, he later ignored his doctor’s advice to quit smoking cigars or risk another loss of eyesight.
⁵
Whether or not the doctor knew what he was talking about is beside the point; McKinsey refused to change his behavior.

Teachers college was just the start of an education odyssey that included a bachelor of law degree from the University of Arkansas at Fayetteville, a stint studying and teaching bookkeeping in St. Louis, and a bachelor of philosophy degree from the University of Chicago. As it did for most of the young men of his era, World War I took him on a detour. In 1917 he was drafted into the army; starting as a private, he was promoted to lieutenant in the Ordnance Department the next year and traveled across the United States, working with suppliers of war matériel.
⁶
He was shocked by what he found: The inefficient and disorganized supply system offended his orderly accountant’s inclinations. Here was a problem that cried out for expert management, but where could it be found?

Following his discharge at the age of twenty-nine, McKinsey continued to add to his list of credentials. In the span of a single decade, he managed to obtain a master’s in accounting from the University of Chicago, was appointed an assistant professor of accounting at the
university, and joined fellow professor George Frazer’s accountancy firm of Frazer and Torbet. But that was not all. In 1923 he was named vice president of the American Association of University Instructors in Accounting, and in 1926 he became a professor of business policy at the University of Chicago.

This last appointment was the first hint that the man knew accounting could be more than mere bookkeeping—that numbers could reveal not just profit and loss, assets and liabilities, but the whole story of a business and what it could accomplish. To that point, accounting had been viewed as a record of the past. McKinsey spun it around and aimed it at the future, turning it into a tool of effective management.

Mac met Alice “Polly” Louise Anderson of Sioux City, Iowa, when she took an accounting class taught by McKinsey at the University of Chicago. In just the second session she told him that she was dropping the class, as she had decided there was nothing more she could learn from him.
⁷
With her boldness, she won his heart, and the two were married in 1920. In 1921 she gave birth to twin sons, Robert and Richard.

But McKinsey’s life was defined by ambition more than by family. His son Robert remembers him as an absentee father who bore the scars of his threadbare upbringing. Although he became very rich by his late thirties—he once rented a summer farm that had its own polo fields and eventually moved to one of Chicago’s elite addresses on the 1500 block of Lake Shore Drive—he refused his children toys because he considered them “inessential” purchases.
⁸

He was a workaholic who was rarely at home. He once claimed that he ate all his lunches, half of his breakfasts, and a third of his dinners with prospective clients.
⁹
When he was around, his children were not allowed to bother him while he was “working.” While he had the ability to be warm and affable, he deployed those qualities only for work. He had no interest in literature or culture. While he joined
many local clubs, he did it for professional contacts, not for the social or extracurricular pleasures of the clubs themselves.