The Firm: The Story of McKinsey and Its Secret Influence on American Business (11 page)

After London, the firm rolled across Europe like an invading army. It opened an office in Geneva in June 1961, soon picking up Swiss clients like Geigy, Nestlé, Sandoz, and Union Bank. Paris followed in November 1963, and consultants worked for the likes of Air France, Crédit Lyonnais, Pechiney, Renault, and Rhône-Poulenc. In 1964 the firm opened offices in Amsterdam and Dusseldorf and began working for BASF, KLM Airlines, Deutsche Bank, and Volkswagen. By 1969 more than half of the firm’s revenue came from outside the United States. In 1950 the M-form was relatively unknown in Germany; by 1970 half of the largest hundred companies in the country had implemented it, most with the help of McKinsey.
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From 1967 through 1974, the firm had a notable presence in Tanzania, with more than sixty consultants from nine different offices working with Tanzanian president Julius Nyerere to help him plan the nation’s future. While the firm did some work pro bono, journalist Michael Useem reported that the fees were still so high that they became a line item in Tanzania’s budget.
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Indeed, Logan Cheek, who worked at McKinsey from 1968 to 1971, remembers being in the room when Nyerere read the firm’s proposal. “He read most of it, and said, ‘That’s what I want.’ Then he saw the fees. There was a long silence, and he said, ‘Do you realize that the lowest-paid associate on this team will be making more than my most senior minister?’ Roger Morrison thought we’d blown it. But then Nyerere stood up, walked to the window, paused, and said, ‘But . . . back in my village, we have an expression: if you offer peanuts, you get monkeys.’ We got the study.”
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(That Nyerere was a tyrant who quite literally destroyed his country despite vast infusions of Western and Soviet aid during his reign, from 1961 to 1985, did not seem to dissuade McKinsey from doing the work.)

In 1971 McKinsey was asked to study the administration of the
British crown colony of Hong Kong. That was another old-boy connection: Sir Alcon ran into the British governor of Hong Kong, Murray MacLehose, “in the Club” and walked out with a mandate.
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The ease with which McKinsey colonized Europe left the firm wholly unprepared for a fairly sudden leveling of its growth that arrived as the go-go 1960s came to an end and the more turbulent 1970s took their toll on business in general and American business in particular. But for the time being, Europe was McKinsey’s for the taking.

In 1953 McKinsey became the first consulting firm to focus on the crème de la crème of students at graduate business schools—choosing youth and possibility over age and experience. At Harvard, these were Baker Scholars, the top 5 percent of each class, and over the next decades McKinsey became so intertwined with the university that author Martin Kihn facetiously coined the term “McHarvard.” The first two hires from this group, John Macomber and Roger Morrison, stayed at the firm for a combined fifty-eight years. Morrison eventually ran the firm’s London office from 1972 to 1985, while Macomber ran Paris and, after leaving McKinsey in 1973, became chairman of chemical maker Celanese Corporation and president of the Export-Import Bank.

Within the firm, this decision to prize youth over experience was controversial. “I can tell you, I had Roger Morrison on his first assignment and I was sweating blood,” said partner Ev Smith. “It was Chrysler and those boys don’t play patsy out there.”
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Even Bower himself wasn’t totally convinced. “When . . . Marvin interviewed me, he spent the entire time telling me why it was impossible for someone without experience to be an effective consultant,” recalled Morrison.
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But the idea caught on. Between 1950 and 1959, as the proportion of consultants at the firm with MBAs climbed from 20 percent to over 80 percent, the median age of McKinsey consultants dropped by almost ten years.
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Younger and hungrier—and a lot cheaper. Betting on potential has become one of McKinsey’s defining characteristics. The idea was simple: It was easier to mold a young mind than to change an older one. “Harvard . . . doesn’t teach you accounting or finance,” McKinsey alum and convicted fraud Jeff Skilling once said. “They teach you how to be convincing.”
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Most people are convincing when they mean what they say. But Skilling was referring to the remarkable subset of American society known as the insecure overachiever. “Why do people work there?” asked former McKinsey consultant and author James Kwak. “They recruit from the pinnacle of the education system. I spent a lot of time at that pinnacle—I went to Harvard, Berkeley, and Yale Law. The people at these schools are driven by desire for status and fear of failing. You have spent your life trying to get into the best schools and being the best at everything you do. When you graduate, you reach that terrifying point in your life when the next thing to do is not obvious, when there are a lot more choices than before. McKinsey makes it very easy for people whose primary goal is to keep their options open. A lot of people in this situation don’t know what they want to do with their lives.”
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It doesn’t end there. In a true “profession,” one’s legitimacy rests on an actual body of knowledge. In consulting, it’s mere insecurity mixed with arrogance. The degree to which juniors at McKinsey are bullied is actually quite shocking, if not necessarily unique among professional services firms.

Lou Gerstner, then a young consultant who went on to head RJR Nabisco, IBM, and The Carlyle Group, the king of the buyout firms, wrote of McKinsey’s approach of throwing young and hungry but still largely ignorant talent at its clients’ problems in his autobiography,
Who Says Elephants Can’t Dance?
“My first assignment was to conduct an executive compensation study for the Socony Mobil Oil Company. I’ll never forget my first day on that project. I knew nothing about executive compensation, and absolutely nothing about the oil industry. Thank goodness I was the low man on the totem pole, but in the McKinsey world one was expected to get up to speed in a hurry. Within days I was out meeting with senior executives decades older than I was.”

In other words, McKinsey had perfected personnel development: It hired the young and inexperienced for a pittance, then made its clients pay for their further education. It wasn’t as obvious a move as it may seem in retrospect. More than half a century after the first of them had been established, the nation’s business schools—including Harvard’s—were still struggling for professional recognition, much like the consulting industry. But McKinsey’s move started a virtuous cycle that provided substantial reciprocal benefits for both parties. More than perhaps any other firm, McKinsey legitimized the Harvard MBA, giving it cachet that was real and enduring. In return, Harvard has acted as a breeding ground of future McKinsey consultants who understand the firm’s values and principles long before they start working there. By the mid-1960s, at least two of every five McKinsey consultants had gone to Harvard. In 1968 the firm offered jobs to twenty-seven HBS graduates, and fourteen accepted.
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Amazingly, by 1978, when the professional staff was approaching seven hundred, HBS graduates still accounted for more than a quarter of all consultants.
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(This raises an ironic counterclaim to business schools that claim to groom “leaders” but whose graduates tend to follow each other into safe career paths such as consulting. The cult of “leadership” might better be considered a cult of conformism.)

McKinsey’s influence at Harvard ran deep: When Harvard president Derek Bok proposed jettisoning the business school’s well-known
“case study” methods in 1979, Bower himself wrote a fifty-two-page report arguing that there was no justification for doing so.
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The idea was scrapped. Ron Daniel later became treasurer of Harvard, overseeing its endowment. The connections continue to this day, with McKinsey hiring a disproportionate number of grads in any given year. About a quarter of business school graduates now
begin
their careers advising experienced executives how to run their businesses.
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But even for graduates of Harvard, landing a job at McKinsey is hardly a lifetime appointment. Most young consultants spend just a few years at the firm before being tossed back out into the workforce. Only one in six hires stays at the company for five years or more. This merciless system, widely referred to as “up-or-out,” was pioneered by law firm Cravath, Swaine & Moore early in the twentieth century and is sometimes called the “Cravath system” as a result. Bower and his partners began formally employing the policy in 1954, inaugurating a relentless performance review cycle. At least once a year, the firm’s consultants are subjected to an exhaustive review, wherein
dozens
of their colleagues are asked to comment on their progress and performance.

The pressure doesn’t subside over time, either. In 1963 the firm extended the policy to principals—junior partners—for whom “up-or-out” was rechristened “grow-or-go.” It was later applied to directors, who had to “lead or leave.” Once they hit age sixty, partners are pointed toward the door, through which they are strongly encouraged to exit at the age of sixty-five. The average age of McKinsey’s professionals was thirty-two about fifty years ago; it’s still thirty-two today. You don’t hold the line on a number like that without constant churn, especially at the top. Longtime partner MacLain Stewart described the McKinsey model not as “dog eat dog” but more as “dog eat old dog.” Even so, McKinsey has the temerity to refer to its “tradition” of people leaving the firm to seek greener pastures. In most companies,
that’s called quitting or getting fired. At McKinsey, it’s raised to the level of ritual.

Author Matthew Stewart recalled hearing that at an internal presentation on the future of McKinsey, the presenters joked that in ten years or so, only 1 percent of those in the room would still be with the firm. “It is on account of this pyramid principle, of course, that under normal circumstances the opportunity to become a partner in a respectable firm arises only after eight or so years of youth-destroying labor,” he wrote.
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“[And] in the end, just about everybody who plays the game is a loser.”
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Martin Kihn pointed out an additional paradox in the whole system: At McKinsey (as at other consultancies), one is generally promoted from associate to principal on the basis of one’s ability to analyze and present data. But thereafter, one is promoted almost solely on the basis of one’s ability to sell the firm’s services.
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“It’s the only job I can think of where you start in general management, and then, if you’re successful, you end up in sales,” said an alumnus of the firm.

Given the turnover, leaving McKinsey is no disgrace. The firm has institutionalized what one author has referred to as a “kind but aggressive outplacement program,”
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and former employees are referred to as “alumni.” By 1959, McKinsey was already maintaining a list of their addresses and sending them annual Christmas letters. (The firm was still solidly WASPish at the time.) Like everything the firm does, this has a strategic purpose, as many will turn out to be future clients. In 1957 a small number of McKinsey people had an informal Christmas get-together at a local bar in New York. They called themselves the Rotten Corps. By 1960 it was mostly ex-McKinsey people who attended. Bower reportedly forbade current staffers to attend but was largely ignored. Ten years later, the firm could count 499 people as alumni, and it had by that point fully embraced the community. McKinsey’s thoughtfulness and skill in placing its outbound people is now a distinctive feature of the firm.

By the end of the 1960s, McKinsey was the envy of its industry. The notion that only a troubled firm called in the consultants had been turned on its head: It seemed that only successful firms hired McKinsey. “Like the doctor who recently refused to treat a man bleeding of a gunshot wound, management consultants dislike death on the premises,” journalist John Huey later wrote in
Fortune
describing the shift. “It can be messy, and people may draw conclusions that can be bad for business.”
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One outcome of Bower’s focus on training and consistency is that the firm’s only physical product—the McKinsey report delivered at the end of a consulting engagement—has an identity all its own. “From the 1950s on, you could tell,” said historian Christopher McKenna. “They were higher quality. They were better written. They were more thoughtful. And they had a certain kind of style. It would be like picking up a lawyer’s letter and actually knowing which law firm it came from.”
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Mind you, that didn’t necessarily mean they contained anything that might shock the client. Most McKinsey engagements begin with the consultant asking the client CEO, “What would you like to get out of this project?” In other words, conclusions can be preordained, or, at the very least, arrived at with no surprises along the way. McKinsey
always
sits down with the client to discuss the work in progress several times during an engagement. Consultants call this process pre-wiring. But it’s also a rare thing indeed that the final presentation includes anything at all that the CEO didn’t see coming, despite the fact that this flies in the face of the whole truth-telling self-image.

McKinsey may surprise its clients with the rigor of its research, but it rarely surprises them by offering a conclusion the client didn’t play a part in arriving at. The firm is not admired for revolutionary ideas; it is admired for its systematic approach to forcing multiple hypotheses
to survive or wilt in the hot glare of factual reality. Even so, the firm can—
and does
—sometimes recommend what the client wanted without properly considering the implications. McKinsey deserves a fair share of the blame for the destruction of General Motors in the 1980s, the bankruptcy of Swissair, the charade that was Enron, and many smaller mistakes.