The Firm: The Story of McKinsey and Its Secret Influence on American Business (18 page)

Compared with McDonald’s forced rehabilitation, Daniel was a soothing balm. “Al McDonald made Ron Daniel both possible and necessary,” reads the firm’s internal history.
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Why? Because McKinsey men don’t like constraints. More important, they don’t like autocratic rule, even if the times demand it, and they needed a leader after McDonald who would loosen the reins again.

“The funny part about Ron Daniel is that he wasn’t much of a consultant,” said one of his longtime partners. “He only had one big client, and that was Mobil. But he was a gifted judge of talent.” Daniel nurtured future McKinsey managing director Fred Gluck from the
get-go, while also presiding over the emergence of McKinsey standouts like Tom Peters and Kenichi Ohmae.

Daniel wasn’t much of a revolutionary thinker himself. But he believed, above all, in the partnership. He knew how to bring people inside and how to lead. He took risks by pushing as yet unproven consultants into important positions. Within five years of his election, 40 percent of the members of every committee—except for the members of the shareholders committee, who were elected—owed their appointments to Daniel.
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But he didn’t overly rely on committees. He was too smart for that. He wasn’t going to come up with the next great theory about economic value, but he, as much as anyone, was responsible for helping McKinsey transition from a primarily domestic concern to a global partnership. The man sailed through twelve years of leadership without a challenge.

Some managing directors of McKinsey enjoyed a rising economic tide as the backdrop to their tenure—Marvin Bower, for example, and Rajat Gupta in the late 1990s. Ron Daniel had the 1980s boom at the end of his term, but when he took over in 1976, neither the U.S. nor the global economy could be called healthy. This was the era of Jimmy Carter and stagflation. How did Daniel keep McKinsey headed up and to the right of the growth chart? One major way was by embracing the idea of the “transformational relationship” and encouraging consultants to push it to their clients. McKinsey no longer pitched itself as a project-to-project firm; from this point forth, it sold itself to clients as an ongoing prodder of change, the kind a smart CEO would keep around indefinitely.

The sell worked: Once ensconced in the boardrooms of the biggest corporate players in the world, McKinsey rarely left, ensuring a steady and growing flow of billings for years if not decades. In 2002, for example,
BusinessWeek
noted that at that moment, the firm had served four hundred clients for fifteen years or more.
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Not only that,
but the firm continued to raise billing rates even in the face of stiff competition.

Some problems are solved once and solved forever. Others are piano-tuner problems. McKinsey decided that the real money was in the latter. One great trick was to issue a progress review at the end of any study—raising the implication that the completed work should necessarily lead to further work. An internal joke at the company, according to journalist Dana Milbank: “A transformational relationship is where we transform their money into our money.”
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You will never hear this from McKinsey, but with its business concentrated in continuous clients, a huge part of its effort is spent figuring out how to turn a middling client into a $10 million-per-annum cash cow.

Critics of the firm conveniently ignore that it wasn’t just luck that turned one-off clients into relationship clients. Even when there was no hope of any billings, either immediately or in the near future, McKinsey partners would make it their business to meet the CEO and his top team on a regular basis. They would inform the C-suite on an issue they knew its members were grappling with or an emerging issue that the industry might be addressing. “I never thought twice about boarding a plane and flying from New York or London to São Paulo or New Delhi to accompany my partners in meetings for clients where there was no hope of any commercial benefit right away,” said former partner Partha Bose.
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One former consultant recalled that the
only
time he heard talk of a client’s actual profitability was when a young principal had just learned that a senior director he’d managed to cross had just used the firm’s internal billing processes to put him in his place. The director ran a big proposal effort for the client and then billed the effort to the principal, who then saw his internal profit and loss measurements collapse. The principal left McKinsey soon after, acrimoniously.

Overall, the numbers were increasingly coming in as they had before the rough transition out of the Marvin Bower era. In 1973 McKinsey had the highest billings of any consultancy. In 1978 it was in fifth place, behind Arthur D. Little, Booz Allen Hamilton, Arthur Andersen, and Cooper’s & Lybrand.
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The firm had never prided itself on being the industry’s largest player—it just felt it was the most important one—but losing ground opened the eyes of partners to the ways in which the firm had become a hostage to its traditions. Whereas McKinsey had always focused on its image and its relationships, BCG, Bain, and other upstarts had shifted the battle to the realm of ideas, where McKinsey had little to offer. “BCG and Bain had convinced the world that they had better ideas than McKinsey,” said academic Matthias Kipping.
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Under Daniel’s leadership, McKinsey created the machinery to produce ideas of its own. By the time he was done, the firm had recaptured the client mindshare that had gotten away from it.

Under Bower, McKinsey had a small, idiosyncratic leadership structure. He managed the firm with a kitchen cabinet of three or four people at most. Lee Walton expanded that, creating a shareholders committee of some forty-five members. Daniel brought more than a hundred partners into firm management decisions, a power-sharing arrangement that enabled the firm to become a global force. What Daniel proved was that McKinsey could evolve. In the Bower era, the firm rode the wave of growing demand for basic organizational consulting, first in the United States and then in Europe. The next four managing directors had to contend with a stagnation of demand and the internal complications that ensued. To find new opportunities for McKinsey, Daniel shifted the focus of the firm to “knowledge.”

This is a critical concept, and one that took a while for McKinsey old-timers to absorb and get used to. They were accustomed to working with industrial firms that never needed to explain to their customers what they “knew”—they had a product, and the customer could choose to buy it or not. Some professional services firms—lawyers, for instance—have no need to explain themselves either. People know when they need a lawyer. But consultants have to, in essence, constantly make an argument for their own existence, which by the mid-1970s McKinsey had grown confused about. What exactly was its expertise, and how could it convince the world to keep buying more of this?

After his election, Daniel made a point of asking the firm’s partners what they thought the firm should be focusing on. Fred Gluck responded with a memo detailing how McKinsey was falling behind, not only in strategy but in operations and organizational consulting too. Sure, BCG had outflanked McKinsey with a couple of savvy charts, but there was an underlying problem more insidious than that: Clients now wanted consultants who knew something, and McKinsey’s database of knowledge was razor thin.

The partners agreed that the most pressing need was to expand its offering of strategic planning tools. Daniel asked Gluck if he would head up a new strategy practice. Gluck was concerned about being pigeonholed—the generalist ethos still held great sway at the firm—and he offered instead to act as head of a strategic steering committee. As Walter Kiechel pointed out in
The Lords of Strategy
, this made him, de facto, the head of the firm’s strategy practice, but at McKinsey, where semantic subtlety was an art form, the compromise worked for everyone.
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Peter Foy, who managed the London office from 1984 to 1991, said that McKinsey’s fortunes changed after a June 1977 meeting of the firm’s strategy experts at the Westchester Country Club. Twenty-three
of McKinsey’s top strategy buffs sat around bouncing ideas off each other. And even in a gathering of that much intellect, Tokyo consultant Kenichi Ohmae stood out. At the end of the meeting, Foy offered the group a scorecard: “Lions 10, Christians 5, Ohmae 37.” Years later, he sent Gluck a silver tray with that inscription. Although he was one of the firm’s first champions of a strategy practice, Ohmae became famous for his later repudiation of the idea of formal corporate strategy—arguing a variant of Prussian general Helmuth von Moltke’s dictum that all strategic plans become nullified on first contact with the enemy. By definition, you improvise in battle, and he who improvises best wins.

The meeting was an early step in the firm’s belated response to the major competitive threat posed by BCG and Bain. Gluck soon put together an immodestly named group, the Superteam: a half-dozen consultants from different offices who were to midwife a strategy practice over the next decade. It was about time: One 1979 survey showed that 45 percent of the
Fortune
500 were using some sort of BCG-style matrix analysis in their strategic planning.
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One thing Gluck didn’t want to do was merely mimic BCG. “People were saying, ‘What we need, Fred, is not a lot of complicated stuff. We need a conceptual supernova, a direct response to BCG’s matrix. And I rejected that notion. That was exactly what we didn’t need. We want to help our clients solve the problems they have, not the problems we know how to solve. We don’t want to be a solution in search of a problem, and that’s what the four-box matrix was. That’s what the experience curve was. Sometimes they worked. And sometimes they didn’t.”
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Gluck continued: “I said we should forget about trying to do what BCG did. That we should tip our hat to them for what they accomplished, and then get on and do what we do best, which is to understand our clients’ strategic problems and bring our extensive
knowledge and experience to solving them.” To that end, Gluck introduced practice bulletins, one-page summaries of what had been learned on a particular engagement or series of engagements with clients, so as to keep all consultants abreast of current work being done by the firm. Gluck intended to build an internal McKinsey knowledge network one piece of paper at a time.

And McKinsey approached strategy in a far more nuanced way than drawing a couple of graphs on a page. Gluck’s 1978 paper,
The Evolution of Strategic Management
—the inaugural McKinsey Staff Paper—was something of a battle cry, marking the firm’s intention of taking back lost market share. The paper’s approach to strategy was the furthest thing imaginable from the General Survey Outline. The GSO was based on the premise that by following a checklist, managers could better understand their companies. But it was too inward looking. The strategic revolution was about looking outward, and adding exhaustive competitive analysis to the simple data gathering that was the core of the GSO.

Gluck’s paper laid out four phases of a company’s evolution in strategic decision making. The first, financial planning, was essentially old-school budgeting. The second, forecast-based planning, considered a far larger number of factors affecting the company. The third, externally oriented planning, called for in-depth analysis of a company’s “business environment, the competitive situation, and competitive strategies.” The fourth phase was full-fledged strategic management.

In a lengthy and colorful breakdown of the four phases, Walter Kiechel, author of
The Lords of Strategy
, credited McKinsey with bringing the discussion of strategy back around to organizational structure. The answer to a desire to be strategic, Gluck and his colleagues were arguing, was to organize one’s company around that desire. And nobody understood organization better than McKinsey. By
the end of 1979, some 50 percent of the firm’s billings came from fine-grained strategy work, making it a bigger player in the realm than either BCG or Bain. “Bain and BCG turned consulting into a rock star profession,” said former McKinsey partner Clay Deutsch. “But we benefited more than they did. Once we got our act together, we cornered it.”
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Indeed: Whereas in 1980 BCG was over one-third the size of McKinsey, by 1985 it was less than one-fifth.
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The revolution in how the firm collected and synthesized just what its consultants knew went far beyond its push into strategy. McKinsey also put two overlays on its geographic setup, establishing fifteen functional groups (e.g., corporate leadership, finance, organizational behavior) as well as increasing the number of industry specialties (e.g., banking, insurance, consumer products) from three to eight. The smart consultant maintained a generalist image while cultivating a niche in one or more functional or industry practices. Gluck oversaw this effort too, a clear indication of his status with Daniel.

In beseeching his colleagues to develop something more than a generalist expertise, Gluck uttered a line that became enshrined in McKinsey lore. In arguing that the firm needed both “snowball makers” (specialists) and “snowball throwers” (generalist rainmakers), he said, “Every McKinsey consultant needs to be a generalist, but it’s not necessarily a handicap to know what you’re talking about.” He later added, “Would you want your brain surgery done by a general practitioner?”
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It was under Daniel that the firm first produced its practice-information system (a database of client engagements), its practice-development network (for knowledge gleaned by the firm’s different
practice groups), and a knowledge-resource directory (basically, an in-house phone book of experts and document titles). The last of the three—which didn’t become computerized for years—became one of the McKinsey man’s prized possessions, a little red spiral-bound book running to several hundred pages, never to be let out of his grasp.