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

Introduction: The McKinsey Mystique

1. The Ozark Farm Boy

2. The Making of the Firm

3. The Age of Influence

4. The Decade of Doubt

5. A Return to Form

6. The Crucial Question: Are They Worth It or Not?

7. Revenge of the Nerds

8. The Money Grab

9. Bad Advice

10. Retrenchment

11. Breaking the Compact

Epilogue: The Future of McKinsey

Acknowledgments

About Duff McDonald

Notes

Index

For the most wonderful gift any man can receive: a daughter.
Thank you, Marguerite, for being mine.

NEW YORK, MARCH 2013

T
wo minutes out of business school, Jamie Dimon decided to become a consultant. The experience left him unimpressed, and he has looked down on it since. “It’s substitute management,” he told me when I was deep into writing his biography. “A
Good Housekeeping
seal of approval. It’s political, so if you make a decision, you can say, ‘It’s not my fault, it’s their fault.’ . . . I think consultants can become a disease for corporations.” Dimon, who went on to become the chairman and CEO of JPMorgan Chase and was hailed as an Olympian financier for steering the bank above Wall Street’s 2008 humbling—only to be somewhat humbled himself four years later when its own trading caused more than $5 billion in losses—made one exception to his consultant rule. Most consulting engagements weren’t worth the price paid, he said, but McKinsey—well, it was the real thing.

Four years later, the Republican candidate for president, once a consultant himself, was asked how he would reduce the size of government. “So I would have . . . at least some structure that McKinsey would guide me to put in place,” Mitt Romney told the editorial board of the
Wall Street Journal
. When his audience seemed surprised, he added, “I’m not kidding. I probably would bring in McKinsey.”

After almost a century in business, McKinsey can lay claim to the
following incomplete list of accomplishments: Once before, well before Romney was running for the presidency, it remapped the power structure within the White House; it guided postwar Europe through a massive corporate reorganization; it helped invent the bar code; it revolutionized business schools; it even created the idea of budgeting as a management tool.

Above all, McKinsey consultants have helped companies and governments create and maintain many of the corporate behaviors that have shaped the world in which we live. And in becoming an indispensable part of decision making at the highest levels, they have not only emerged as one of the great business success stories of our time but also helped invent what we think of as American capitalism and spread it to every corner of the world. The abstract, white-collar nature of modern business—the fact that the greatest value in our economy is now created by people sitting in air-conditioned skyscrapers and corporate parks who manipulate information—is a reality that McKinsey was instrumental in establishing, championing, and profiting from. The best evidence for McKinsey’s expertise is the firm itself. It has followed its own advice into an enviable position of power and prestige.

At the same time, however, the company can also be saddled with a list of striking failures, missteps that would have doomed lesser firms. McKinsey consultants were on the scene when General Motors drove itself into the ground. They were Kmart’s advisers when the retailer tumbled into disarray. They pushed Swissair in a direction that led to its collapse. They played a critical role in building the bomb known as Enron and collected massive fees right up until the moment of its spectacular explosion. And these are just the clients unlucky enough to have had their woes splashed across headlines. Many more have paid handsomely for guidance that shortchanged shareholders, led to unnecessary layoffs, and even prompted bankruptcies. And yet
the consultants are rarely blamed for their bad advice—at least not publicly so.

Remarkably, that pervasive influence has come even though McKinsey contains more contradictions than the Bible. The firm is well known, but there is almost nothing known about it. Precious few McKinsey employees have ever become acclaimed in the outside world. The employees are trusted and distrusted—and loved and despised—in equal measure. They are a collection of huge egos that are yet content to stay behind the scenes. They are confident but also paranoid. And they are helpful yet manipulative with their clientele—and even their own people.

What do they actually do? They are managerial experts, cost cutters, scapegoats, and catalysts for corporate change. They are the businessman’s businessmen. They are the corporate Mandarin elite, a private corps, far from prying eyes, doing behind-the-scenes work for the most powerful people in the world. How do they do it? Well, their methods have been compared (by others and by themselves) to the Jesuits, the U.S. Marines, and the Catholic Church. They feel so strongly about themselves that they have insisted on a proper noun where one need not exist. To an outsider, they are a consulting firm. To themselves, simply, The Firm.

•    •    •

But the McKinsey story is even more than all of that. It’s also about the rise and reach of American business in the twentieth century—and its remarkable adaptability to changing times. American capitalism may be under stress now, but modern American management technique—which McKinsey has played a part in both creating and disseminating—has distinguished itself as much by its innovative ability as by its sheer might. Today McKinsey is a global success story. But first it was a distinctly American one.

One of the secrets of McKinsey is its very similarity to America—it has a solid foundation with an adaptive overlay, all topped off with a bit of old-fashioned luck. Make no mistake: McKinsey is not an enduring institution by accident. It has been built with much purpose. Still, could it be an accident of history, founded in the right place at the right time? Yes, but only in the same way that Google, LEGO, and Toyota are accidents. Other companies stumble into extinction.

McKinsey started in typically American fashion: with self-invention. Although it was technically founded in 1926 by a University of Chicago accounting professor named James O. McKinsey, the mythical leader of the firm is a successor, Marvin Bower, a man whose abiding goal was to invent a new profession committed to preparing clients for the challenges and uncertainties of the onrushing future. Plenty of other firms had the same idea at the same time, some even earlier, but none could match Bower’s discipline and focus. He distinguished McKinsey not just for what it did but for
how
it went about it, starting with the physical appearance of its employees and moving right on through hiring, training, and the culling of their ranks through a merciless system known as “up-or-out.”

Consultants of one kind or another have existed for centuries. Han Fei Tzu, founder of the so-called legalist school of ancient Chinese philosophy and adviser to the emperor, has been called the first consultant.
¹
But McKinsey can nevertheless claim a remarkable number of firsts: It was the first consulting firm to realistically apply scientific approaches to management, solving business problems with a method of hypothesis, data, and proof. It was the first to gamble on youth over experience, and the first to take on the challenge of becoming truly global.

McKinsey was a major player in the efficiency boom of the 1920s, the postwar gigantism of the 1940s, the rationalization of government and rise of marketing in the 1950s, the age of corporate influence
in the 1960s, the restructuring of America and rise of strategy in the 1970s, the massive growth in information technology in the 1980s, the globalization of the 1990s, and the boom-bust-and-cleanup of the 2000s and beyond. So pervasive is the firm’s influence today that it is hard to imagine the place of business in the world without McKinsey.

•    •    •

So what is the net effect of McKinsey consultants in the world? What has been gained and lost as this relatively small group of like-minded people has consolidated power and spread the gospel of American capitalism? It’s best to take that question from a few different perspectives.

McKinsey’s clients, specifically those in the executive suite and the boardroom, have gotten an extremely intelligent if high-priced sounding board, a beacon in the night of managerial uncertainty. McKinsey offers a kind of industrial espionage couched in the language of “best practices.” Want to know what the competition is up to? Hire McKinsey. After all, it’s working with everyone else as well. The flip side of that argument is that your competitors find out about you too. But most clients have found the tradeoff rewarding.

When IBM wanted to expand into Europe in the 1950s, whom did it call for some hand-holding? McKinsey. So too did scores of other companies, from Heinz to Hoover. And then when Europe started recovering its own confidence? Why, McKinsey was there to tell the likes of Volkswagen and Dunlop Rubber that they could surely bounce back from near devastation with the consultants’ help. With McKinsey’s army of hardworking and youthful overachievers—what one reporter called “a SWAT team of business philosopher-kings”
²
—clients have surely gotten more effort per dollar spent than you might find anywhere else in the corporate milieu.

They have a remarkable ability to be in the right place at the right time—so many times, in fact, that you have to wonder whether they really can see the future. But the truth is subtler than that. They have created one of the most flexible business models in the history of Western capitalism: They sell what their clients are buying, and where the clients are buying it.

So powerful is the McKinsey name that merely hiring the firm can bring the desired effect—as in 2009, when publishing giant Condé Nast brought in McKinsey to demonstrate its seriousness about reducing expenses by 30 percent. The rank and file got the message. The act of hiring McKinsey can be as symbolic as it is practical.

Of course, criticisms of McKinsey’s contributions to client welfare are not hard to find. For one, once McKinsey is inside a client, its consultants are adept at artfully creating a feedback loop through their work that purports to ease executive anxiety but actually creates more of it, offering and then obscuring what one author has referred to as “an illusion of a sure path to the future.”
³
Executives can get so accustomed to McKinsey’s presence that they can’t function without it, leading to situations like the one at AT&T in the early 1990s, when the company paid the firm $96 million over five years for ongoing work.