The Firm: The Story of McKinsey and Its Secret Influence on American Business (16 page)

The staunch refusal of Bower and his partners to sell is quite likely the key to McKinsey’s enduring lead over its competition. Bower understood that selling shares to the public at a multiple of earnings (as opposed to selling back to his partners at book value) was a surefire way to become very, very rich. But it also created classes of haves and have-nots that most likely would eventually lead to the dissolution of the firm. That he chose not to do so is perhaps the most important road not taken in the history of the firm. John Forbis, at McKinsey from 1971 through 1983, put it simply enough: “Marvin not taking McKinsey public is like George Washington refusing the title of king—it did not match the founding principles.”
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Turnover and turmoil at those firms that did sell—Cresap was a money loser for Citibank, and Booz consultants took their firm private again in 1976 after its shares plunged—validated Bower’s vision. “Is Marvin Bower right?”
Consulting News
asked—and then answered in the affirmative.
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That didn’t mean McKinsey wasn’t facing serious challenges to its standing, and not just from interlopers like Bruce Henderson. The sputtering economy meant that its biggest customers were cash strapped. And the rise of Wall Street and the era of the modern CEO also threatened the self-image of a group of people who had previously luxuriated in their self-confidence. Consultants had long worn their IQ on their sleeves; bankers their W2. But things were starting to get out of hand.

The competition for talent from Wall Street firms—which started paying their people multiples of what McKinsey consultants made—was especially fierce, and the New York office watched with increasing alarm as associate turnover rose to unprecedented levels. Bower had long extolled the nonfinancial rewards of a professional career. But many consultants weren’t as drawn to them as he was. The partnership was concerned enough to yield to younger colleagues’ desire for more alternatives in the company’s profit-sharing retirement trust. In 1968 McKinsey added a second option to its investment choices in the trust. With a more aggressive tilt, the new fund lost value in the early 1970s, but it had bounced back by the end of the decade and was up 50 percent from its inception by 1977.

It wasn’t just Wall Street that was pushing up the cost of talent. Corporate executives, who up to that point had shown a “sense of stewardship and moderation”
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about their pay, started grabbing a larger portion of company profits for themselves. McKinsey consultants, accustomed to considering themselves equal, if not superior, to their client executives, were suddenly the poorest players at the boardroom table.

As much as McKinsey will argue that its people are not primarily motivated by money—and, in large part, they don’t seem to be—they still fought bitterly over their share of the annual spoils. Firm policy had been to set compensation according to two basic criteria: the quality
and quantity of one’s actual work during the year, and the squishier concept of one’s “enduring contribution” to the firm. “The most acerbic debates among senior directors were about that split,” recalled Peter von Braun.
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“People were always trying to claim that their enduring was more enduring than your enduring.” Von Braun’s contemporary Ed Massey put it more bluntly: “If you didn’t bring in clients, you argued your enduring contribution.”
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In the end, McKinsey started paying its people more than it had in the past. But to do that, it needed to grow, thus beginning a multiyear expansion process that strained the firm as much as its dry years had done.

Of all the painful ways that McKinsey had to adapt to a new era, perhaps none was more unsettling to the McKinsey ego than the waning of its time-honed generalist model of consulting. As late as 1967, Gil Clee had bragged to
BusinessWeek
that “many of [the firm’s] partners are generalists who will take on any problem and rely on logic and intelligence to arrive at answers.”
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Behind closed doors, many partners were not so sure. Arch Patton had already told a “skeptical”
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Marvin Bower that he thought a firm with six hundred generalists was untenable. He argued for a greater specialization by consultants. Bower countered that specialization would eventually entail flying people into and out of various local markets, undermining the firm’s practice of insinuating its consultants into the local business community.
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This issue with its push and pull was a constant for McKinsey, and one it wouldn’t ultimately resolve until the tail end of the century, when it stumbled on a characteristic solution. The firm capitulated to
client demands for more specialized consultants while still maintaining a generalist veneer. In time, McKinsey offered its clients specialists in a range of industries and functions (e.g., supply-chain management, corporate finance) but at the same time managed to hold on to a vaunted image as boardroom consultants. The result: As with many things McKinsey, surface appearance didn’t tell the whole story. But the transition didn’t just take years; it took decades.

In 1970 Lee Walton established a Practice Development Committee to look into carving out specific practice niches. The only problem: There weren’t too many consultants who wanted to put on such straitjackets. “Everyone wants to have specialists around and to have access to them, but no one wants to be one,” said one partner at the time.
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Author Hal Higdon compared the specialist role at a consulting firm to that of a field goal kicker on a football team: You might need one, but McKinsey men were trained to be quarterbacks.
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The firm hadn’t avoided specialization altogether. Arch Patton was a world-renowned expert on compensation studies. Dick Neuschel and Peter Walker were heavyweights in insurance, Lee Walton was highly regarded by railroad executives, and Andrall Pearson was already a giant in the world of marketing. Lowell Bryan was recruited from State Street in 1975 to help establish the firm’s banking practice.

But over the years, it had been the generalists who had proven the most successful at attracting and retaining clients and therefore wielded the most power. There were six key nodes in the firm’s power structure: engagement directors, who ran individual client projects; the partners (directors and principals); the associates; the office managers; the managing director; and the firm’s governing bodies, in particular the shareholders committee (basically its legal board of directors), the executive committee, and the various personnel committees. Engagement managers were the first-line managers on a
study. They were the core of the firm, and if you flamed out in that role you would never make director, because one essential skill needed in a director was the ability to jump in and rescue a study if the engagement manager was struggling. That’s a relationship skill, not one that demands high specialization. Sure, an associate or principal could choose to specialize, but the two main career roads led either to a generalist relationship director or to an administrative office manager director. There was no specialist lane on either.

Walton’s Commission on Firm Aims and Goals tried another tactic, endorsing the idea of the “T-shaped” consultant—one with breadth of perspective
and
depth of understanding. Amazingly, a study commissioned by the firm—in which other consultants consulted for the McKinsey consultants—found that the firm had been neglecting the professional and technical development of its people by taking on “routine assignments from marginal clients.”
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Principals and directors, in other words, were at fault for not being more selective with their studies. (This phenomenon wasn’t entirely dealt with until the 1990s, with the creation of an internal market for projects. Partners would put their studies up on the intranet and associates would choose which they wanted to work on. Boring, marginal studies wouldn’t get staffed, and the projects would be turned down.)

The conclusion was, on its face, startling: McKinsey’s lack of expertise was somehow . . . the fault of its own clients?

Though it took years, the firm had no choice but to relinquish its generalist approach and become more specialized. “Consultants once prided themselves on being generalists,” said partner Frank Mattern. “You went to your client and said, ‘I know nothing about your business,’ and that was a strength. If you said that to a client today they would think you were in the wrong movie.”
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A parallel development at the time—equally resisted by the old guard—was a shift to more visual client presentations. Up to that
point, the firm’s style had sprung directly from Bower’s lawyerly roots, and his insistence on dense, highly structured, wordy presentations was still the model.

But across the industry, new techniques were evolving. Consider ex-McKinsey consultant Barbara Minto’s
The Pyramid Principle: Logic in Writing, Thinking, and Problem Solving
, a text that is really a primer on modern McKinsey report writing. Minto’s principle wasn’t about pretty pictures or overlapping ovals. It was about laying out conclusions and supporting data and analyses of a study in a structured way that presumably wouldn’t overburden the already strained intellectual resources of the average CEO, whose available time for the consultants’ presentation and attention span during that presentation were often both denominated in minutes.

The pyramid principle is a kind of consulting poetry. Longtime McKinsey director of visual communications Gene Zelazny, a legend at the firm, further made the case in his 1985 book,
Say It with Charts
. Just as the generalist-versus-specialist impulse was a conflict, so too were the inclinations toward pictures and words. In both cases the old school lost out to the new one, but, as with all things McKinsey, it took years of thrashing through debates for the firm to find its new way.

Not all changes were improvements, either. While
The Pyramid Principle
was a terrific way to organize one’s thoughts on a Power-Point presentation, it was also a very poor structural guide for writing in plain English. The unfortunate side effect of pyramidizing was that some young consultants became so enamored of the logical, rational format that their actual writing began to verge on the unreadable. “We would frequently get article submissions to the
McKinsey Quarterly
that were completely unreadable—full of pure
consultese
,” said former partner (and third editor in chief of the
Quarterly
) Partha Bose. “We found ourselves constantly de-pyramidizing some of these young consultants.”
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While McKinsey battled new competitors and struggled to rethink its antiquated methods, it had to deal simultaneously with a much bigger and more fundamental change: the end of one era of modern capitalism and the start of another.

So-called neoliberal economists like Michael C. Jensen and William J. Abernathy were arguing that the lack of an active market for corporate control—corporate executives, once entrenched, can be hard to dislodge—had resulted in little managerial accountability. They espoused a new form of market logic that prized corporate takeovers as the optimal way to value companies. Making managers fear for their jobs was the best way to keep them honest and focused. This was the start of the era of investor capitalism.

The work of Jensen and others amounted to a direct assault on the Protestant precepts that Marvin Bower had so painstakingly laid down. Bower’s professional manager was a man who had an
obligation
to his community, “in the service of a higher end than self-interest.”
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And whereas Bower and his contemporaries believed that their management consulting had contributed to society in many ways, including as a bulwark against Communism during the Cold War, a new agency theory arose suggesting that if a corporation is merely a sum of contractual arrangements, then the managers have no claim to the idea of social good. They are pretty much just looking out for themselves. There’s nothing wrong with that, but it certainly contradicted Bower’s ideal of the professional consultant.

“Rarely, if ever, in American history had there been such a wholesale reinterpretation of economic history as that which occurred during the . . . decades of the 1980s and 1990s,” wrote Rakesh Khurana in
From Higher Aims to Hired Hands
. “As the narrative was revised, managerial capitalism was portrayed no longer as the key to America’s
economic success but, rather, as a liability. . . . Corporate takeovers came to be seen as a means of restoring power to the group now believed to be the only one with a legitimate claim to the value created by corporations—shareholders.”
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There really is no such thing as “shareholders” as a coherent entity. “Shareholders” is code for “Wall Street,” and starting in the late 1970s, that’s where power began to be concentrated. Corporate boardrooms were not where the action was anymore. McKinsey recognized that shift, helped it along, and made a lot of money along the way. But because of Bower’s own principles, it avoided being swallowed up itself, an astonishing feat.

While McKinsey never did hook up with an investment bank, partners spent years wondering how to become a bigger player in financial restructuring. Why? Money, of course. An internal McKinsey report from 1989 addressed the fact head-on: In the late 1980s, buyout shops like Kohlberg Kravis Roberts were pulling down revenues per professional of about $5 million, versus McKinsey’s mere $250,000 or so. The pressure to pay its people as much as Wall Street could strained McKinsey’s fabric over the next fifteen years.

From the 1920s through to the mid-1970s, the giant American corporation had been the ne plus ultra of organizations. Then capitalism took an axe to itself, and the never-ending era of cost cutting and rationalization was under way. Consultants often get called in to assist with such planning. But they can also be a casualty of the process.