The Firm: The Story of McKinsey and Its Secret Influence on American Business (24 page)

And McKinsey never really left the building. A decade later, when John Birt, then director-general of the BBC, stepped down from his job, McKinsey brought him on as a part-time consultant. In 2005 Birt severed all ties with the firm after critics suggested that working for 10 Downing Street in London
and
McKinsey posed a conflict of interest—as if hiring him shortly after extracting millions of pounds out of the BBC hadn’t been. Birt’s replacement at the BBC’s helm—Greg Dyke—immediately slashed spending on outside consultants by 75 percent.

Few clients are going to hire McKinsey and then say the consultants
weren’t
worth it. In a sense, the firm is a spiritual relative of “La Belle” Otero, a courtesan living in Paris in the early part of the twentieth century who was once considered the most sought-after woman in the world. Carolina Otero was very selective about her clientele and charged outrageous fees that reportedly topped $1 million in 2012 dollars. Her customers included Prince Albert I of Monaco and the king of Serbia, and it was widely argued that everybody who had the means had to have her at least once. And once you’d done that, what could you say? Once you’d paid a million francs for a roll in the hay, you weren’t about to admit it wasn’t worth the price paid.

It’s actually quite difficult to make the case that McKinsey has had any lasting—or fundamental—effect on the way businesses are managed since a few signal accomplishments such as reorganizing American conglomerates in the 1940s. Silicon Valley has surely had a far larger impact on the way businesses are run in the last thirty years than McKinsey might claim to have had. “What have they fixed?” asked former McKinsey consultant Michael Lanning. “What have they changed? Did they take any voice in the way banking has evolved in the past thirty years? They did study after study at GM, and that place needed the most radical kind of change you can imagine. The
place was dead, and it was just going to take a long time for the body to die unless they changed how they operated. McKinsey was in there with huge teams, charging huge fees, for several decades. And look where GM came out.”
¹³
In the end, all the GM work did was provide a revenue stream to enrich a group of McKinsey partners, especially those working with the automaker.

The last time McKinsey was influential at Apple Computer was when John Sculley was there, and that’s because he’d had a brand-marketing heritage from Pepsi. And Sculley was a disaster. Did McKinsey do anything to help the great companies of today become what they are? Amazon, Microsoft, Google? In short, no.

Still, McKinsey’s high self-regard survives even in the face of evidence to the contrary. McKinsey consultant Tom Steiner recalled a strategy study done for the New York office by another partner, Chuck Farr. “He had two slides. The first was the top clients of the New York office, by billings—companies like AT&T, American Express, and Manufacturers Hanover. All the partners got up to talk about what special thing McKinsey had done to become so vital to those clients. Before we knew it, there were only fifteen minutes left of what was supposed to be a two-hour meeting. Someone said, ‘What’s on the second slide?’ It was Booz Allen’s top clients. And they were pretty much the same companies.”
¹⁴
McKinsey may have been earning more than Booz at the time, but it was from a client base that was clearly willing to pay for advice from
everyone
. There’s nothing special about that kind of product.

McKinsey’s work for General Motors in the early 1980s showed quite clearly that consultants can sometimes do far more harm than good to
a company, even if it’s one of the most important clients they might ever have. At the time, General Motors—the
Titanic
of American business—was being pummeled by Japanese carmakers like Toyota. Chairman Roger Smith decided in 1984 to embark on the most massive reorganization of a company in American history. He hired McKinsey to devise it with him. The carmaker soon accounted for more fees than the rest of McKinsey’s entire U.S. manufacturing practice. According to one report, at one point GM was paying McKinsey as much as $2 million a month.
¹⁵

McKinsey interviewed the top sixty-five executives in the company and eight hundred employees, asking them what organizational problems they saw. With their poll results in hand, the consultants proposed a new structure. Instead of organizing the company by brand—Chevy, Cadillac, Buick, et cetera—the consultants said it should be organized by type of car—large, small, truck. This was a basic McKinsey maneuver—don’t organize around
this
, organize around
that
—and it had worked in the past. The consultants had successfully helped AT&T organize around its markets as opposed to its technologies, for example. But it was not the right prescription for GM.

“At the time, neither McKinsey nor General Motors understood the true nature of Japanese competitiveness,” said Maryann Keller, author of
Rude Awakening: The Rise, Fall and Struggle for Recovery of General Motors
.
¹⁶
“Only later did people begin to realize that it wasn’t the fact that the Japanese had a compliant low-paid workforce that got up every day and sang the Toyota hymn. It was that they built cars with fewer parts, fewer defects, continuous improvement processes, and took man-hours out of making cars without compromising productivity. I’m 100 percent sure McKinsey had no clue about these revelations.”

Instead, McKinsey just moved people around, and this had the
effect of destroying institutional knowledge and the informal networks of people who knew how to get things done inside the massive company. “They were flying perpendicular to where they should have been,” said Keller. “It was the thousands of little things Toyota did well that mattered, not the organizational design of General Motors.”

The reorganization was such an unmitigated disaster—it ran up huge costs with no measurable improvements in output or efficiencies—that Keller claimed it planted the seeds for GM’s bankruptcy in 2009. “But is it such a surprise?” she asked. “These are not people who have ever run anything. These are people who have spent their lives talking to high-level executives. And what do high-level executives know about making things? Not much, usually. Do you think Roger Smith knew anything about making a car?”

Whose fault was it? Not McKinsey’s, said McKinsey. Despite refusing to discuss the work in specific, one senior director told
Fortune
writer John Huey that the fault lay squarely with the General Motors management. “We told them like it was. We weren’t passive at all. We told them to take their medicine,” he said. “It’s like being a doctor. You do the best you can, but if the patient won’t quit smoking, he still dies. This is a problem the world over. Corporate executives are not risk takers. They don’t see trouble clearly until they’re going down the drain.”
¹⁷

General Motors offers one of the great lessons of strategy consulting. As Matthew Stewart so elegantly pointed out, “The idea of strategy, like the owl of Minerva, typically arises just as the sun is setting on an organization. An old saw has it that strategy is when you’re running out of ammo but you keep firing on all guns so that the enemy won’t know. As a rule, corporations turn to strategy when they can’t justify their existence in any other way, and they start
planning
when they don’t really know where they are going.”
¹⁸

The most valued possession of a McKinsey consultant is a long-term client relationship. That’s not so different from any business, but at McKinsey, with no particular products to speak of, the relationship is all. In any given year, some 85 percent of McKinsey’s revenues come from existing clients. “We insinuate ourselves,” Ron Daniel told
Forbes
.
¹⁹
It is a talent that bedevils the firm’s rivals and amazes even its alumni. “May we all get there, when clients just keep coming back to you,” said Alan Kantrow, former editor of the
McKinsey Quarterly
. “They have follow-on work not just because they’re good at what they do, but because they are trained in how to manage these kinds of client relationships. They understand that the core reality is the relationship and the conversation, and that any particular engagement is merely epiphenomenal.”
²⁰

Smart clients say that the best way to use McKinsey is
not
to let them insinuate themselves—to prohibit walking the halls of the client’s offices looking for new business. Jamie Dimon of JPMorgan Chase, for example, will hire McKinsey, but for one-off projects in which the entire body of knowledge generated is transferred to JPMorgan Chase at the end of the project. The firm’s operating committee has to approve any consulting engagement, and the JPMorgan Chase executives don’t take just any consultants; they pick and choose the specific people they want on the project.

“We’re not selling time and answers, like law or accounting firms,” Ron Daniel told Forbes in 1987.
²¹
“We’re selling a benefit called change. Change is where the value is.” Daniel told
Forbes
that clients must “trust McKinsey” to set a fair fee. But clients don’t always comply. When Jamie Dimon was CEO of Bank One, he hired McKinsey to look at the bank’s credit rules in 2002, something no one had done for years. He told the consultants they would get 50 percent of their
fee up front and 50 percent based on performance. McKinsey earned its full fee. A year later, on a project overseen by Dimon’s deputy Heidi Miller, Bank One decided McKinsey hadn’t earned its performance fee and refused to pay the second installment. The consultants were flabbergasted, but McKinsey partner Clay Deutsch conceded the argument, and the firm took home just half its “fair” fee. Despite Daniel’s lofty rhetoric, every now and then McKinsey is confronted with the simple fact that for some customers, consulting is little more than a packaged goods business. At the end of the day, the dogs have to eat the dog food.

And that brings the focus back to the difference between the elusive promise of big-picture, blue-sky thinking and the true value that a consultant can almost always provide. Real consulting, writer Kevin Mellyn has argued, isn’t about change or leadership or vision. It’s about helping people manage what one might call Industrial Prussianism—organizing activities through highly rational bureaucratic routines that promote effectiveness, efficiency, and honesty. The Prussians beat the French in 1871, but not because they had inspired leadership. They won because their system was based on rules, orders, and norms that allowed their army to run efficiently and
without the need
for heroes. Likewise, Industrial Prussianism skips the heroes and focuses on efficiency and frugality, with training and accountability. The only point of strategic planning is to think through all contingencies in advance so as to make fewer tactical execution errors; he who makes the fewest and has the best-organized and best-trained troops wins. The companies that survive, like the best armies, can recover from unexpected blows of fate and competitor breakthroughs.

Bower and his contemporaries understood this. They understood that when businesses become big, they need efficiency experts to help hone their internal processes. McKinsey was part of that wave of consulting engineers. Even today, the best consultants are ex-engineers,
not perfectly designed social operators with a Harvard MBA. Engineering teaches you to define your solution space, determine the relevant levers you can pull or push, and then find your solution. Strategize all you want, but if your processes aren’t well oiled, you’re a goner.

By the end of the 1980s, McKinsey’s brand had moved into a whole new realm. Observers had long been comparing it to IBM in the context of “you never got fired for hiring” either one of them, but now companies had begun to hire McKinsey
just to make a point
. The mere announcement of the hiring of the firm now had its own legitimizing effect: the press release as cattle prod of the corporate sphere. Every consulting firm does this. McKinsey just does it better than the rest of them. More than forty years ago, London’s
Sunday Times
put it thus: “Calling in McKinsey has proved to be a highly effective way of nailing the red rag of revolution to the masthead.”
²²

When you hired IBM, you were hiring it to do something specific and real—revamp your entire technology infrastructure, say, or outsource your payroll and personnel processing. With McKinsey, the hiring of the consultants could be a mere tactic. If, as CEO, you felt you needed to cut 10 percent of costs but didn’t feel you were getting buy-in from your employees, the hiring of McKinsey generally got the point across quite clearly. Companies still hire McKinsey to send this type of message.

In 2009 publisher Condé Nast famously hired the firm to ram the message through to a staff used to spending extravagantly that 30 percent needed to be removed from the company’s cost structure. Likewise, Warner Amex Cable Communications hired McKinsey in 1984 because of infighting that was getting in the way of executing a turnaround.
“We had to go outside for a view that wasn’t biased,” said then-CEO Drew Lewis. “And McKinsey did a fine job.”
²³

In 1993 Delta Air Lines was bleeding money as the result of some newly acquired European operations. Shareholders were in revolt. What did management do? It hired McKinsey, and told the world about it. “Such an announcement sends out several messages,” John Huey wrote in
Fortune
at the time. “ ‘We know we have a problem. We’re doing something about it. We hired the most expensive help we could find. Give us some time, okay?’ ”
²⁴
This brought McKinsey a whole lot closer to the bond rating-agency model than it liked—the McKinsey engagement as corollary to the AAA rating. But AAA-rated bonds can (and do) fail. So do some recommendations made by McKinsey.