The Firm: The Story of McKinsey and Its Secret Influence on American Business (22 page)

McKinsey partners had always done well; now top directors were pulling down as much as $500,000 a year. That’s the kind of thing that happens when your income growth far outstrips growth in head count. The firm had accumulated so much money that in 1985 it established the McKinsey Investment Office, which operated as a kind of internal family office/fund of funds from that point forth. At a later conference of firm partners in Boca Raton, Marvin Bower asked his partners: “Do you know when you’re making too much money? When you need someone else to manage it for you.” While those in attendance nodded in agreement with the old man, they still wanted to know what their bonuses would be that year.

Everyone wanted to talk to McKinsey, in part because its massive scope certainly did give it perspective on the best practices of one’s competitors, whether they were in New York, London, or Tokyo. Merrill Lynch and Citicorp both hired the firm to help plan for a newly deregulated world. Japanese financial institutions Nippon Life Insurance and Sumitomo Bank hired McKinsey to help them determine in which Wall Street firms to take a stake. The firm helped guide Nippon to Shearson Lehman and Sumitomo to Goldman Sachs.
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Not surprisingly, the consultants exhibited a renewed confidence that occasionally veered right into arrogance. “There are only three great institutions left in the world: The Marines, The Catholic Church, and McKinsey,” one partner told
BusinessWeek
in 1986.
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London office manager Peter Foy suggested, “There is no institution on the planet that has more integrity than McKinsey and company.” In a
Forbes
article, a McKinsey partner summed up the self-image neatly: “We don’t learn from clients. Their standards aren’t high enough. We learn from other McKinsey partners.”
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“There is nothing so exhilarating as listening to one of our consultants . . . hold forth on a subject that he has thought deeply about and that he can apply to a client’s particular situation with confidence and impact,” Fred Gluck wrote in a 1982 memo to his colleagues. Former San Francisco office head Ted Hall was notorious for his sky-high opinion of his own worth. “I saw Ted Hall in a room with two guys who’d won Nobel Prizes, and yet he still thought he was the smartest guy in the room,” recalled a colleague. Hall was notorious for passive-aggressive office-speak: he pretended to engage others but was not really interested in doing so. He would suggest that colleagues “rise up a few levels of abstraction with me” or “invite” them to reconsider their position. “At the end of his career at McKinsey, he’d mellowed a bit,” said a former colleague. “He actually acknowledged that there were others in the room.”

That said, the man
was
smart. He was credited with helping the Federal Reserve shift the way it counted money from counting bills to a weight-based approach. (Las Vegas casinos owe him a debt of gratitude.) Hall and former partner George Feiger also helped launch the consolidation of the U.S. banking industry by pushing Wells Fargo to acquire Crocker Bank in 1986. “We’d been hired by the Comptroller of the Currency to find out what would happen with deregulated interest rates,” recalled Feiger. “The answer was consolidation. So we took that work and explained its implications to private companies. Anyone can buy a competitor, but we showed Wells Fargo how to make money at it.”
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“The real competition out there isn’t for clients, it’s for people,” explained Daniel. “And we look to hire people who are: first, very smart; second, insecure and thus driven by their insecurity; and third, competitive. Put together 3,000 of these egocentric, task-oriented people, and it produces an atmosphere of something less than humility. Yes, it’s elitist. But don’t you think there has to be room somewhere in
this politically correct world for something like this?”
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Then again, another partner said, “People ask who our greatest competitors are . . . it’s our clients. Their first choice is not McKinsey or someone else, it’s hiring anybody at all.” It seems inevitable that one will soon say that McKinsey’s greatest competition is itself.

When Walter Kiechel wrote a cover story for
Fortune
in 1982 titled “Corporate Strategists Under Fire,” the article was accompanied by a cartoon of a boxing ring filled with different-sized boxers, McKinsey being the biggest among them. “Everybody loved it,” said Matassoni. “Ron Daniel even bought the original art. But I thought it made the wrong point. I told Ron, ‘We need to get out of the ring entirely.’ ”
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This wasn’t a new idea: McKinsey had always pushed people to believe that it didn’t “compete” with BCG, Bain, or any other firm. Bower had elucidated it first: As far as he was concerned, McKinsey didn’t have
any
competitors.

“Partners in consulting firms have a natural tendency to view your issues through the prism of their own experience and capabilities,” wrote the authors of
Extract Value from Consultants
.
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McKinsey took this to an extreme: From the late 1980s onward, its advice to many clients was merely to be more like McKinsey. The firm has launched countless initiatives studying itself in order to pass that wisdom on to clients. But that’s exactly what some clients wanted. “Everyone asks McKinsey how they do it,” said Jim Coulter, a co-founder of private equity firm TPG Capital. “They’re a global matrix organization based on knowledge. The key to running that is to know where your knowledge is and to keep your people steady in their seats so you don’t have high turnover. We have studied and admired them, as we have thought about our own multiproduct, multicountry growth.”
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Law firm Latham & Watkins hired McKinsey in 1999 to help it with its plans to go global. “One of the attractions of working with McKinsey was that we shared a similar culture, which made it easier for McKinsey to
understand us,” said chairman Robert Dell. “Unlike other consultants, McKinsey didn’t just present canned recommendations that had been used elsewhere, but rather really listened to us, understood us, and provided recommendations that were tailored to us.”
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In May 1987
Business Review Weekly
ran a cover story titled “The Power of McKinsey: Why Top Companies Seek Its Cure.” The piece was timed to Gluck’s elevation to managing director. Five months later,
Forbes
responded with “The McKinsey Mystique: Is It Worth the Price?” McKinsey wouldn’t deign to answer that question. The firm’s official position is that measuring its value is difficult, evoking a kind of Heisenbergian notion that the intervention of consultants themselves destroys any basis for such a calculation. There’s some merit to the argument: According to Professor Matthias Kipping, the product of consulting is hard to evaluate in advance, because it is both intangible and also consumed at the same time it is produced. In the end, impressions can be all that matter.

McKinsey also drove the competition to distraction with its ability to bounce back from any setback. In 1985, when Steve Jobs was first exiled from Apple in favor of John Sculley, the computer company saw a large drop in its market share in schools. Former McKinsey consultant Fred Sturdivant saw an opportunity and landed the company he then led, the MAC Group, a choice consulting assignment. “We came in and did a bang-up job,” he recalled. “We got applause. I was convinced that we were in the catbird seat to have a relationship with Apple. We were home free. But within weeks, word came out that a big new strategy engagement had been taken on by guess who? McKinsey.” How? “They never go away,” answered Sturdivant. “They were wining and dining executives and walking the halls while we had our heads down working on their channel strategy.”

The firm continues to frustrate competitors in similar fashion more than a quarter-century later: “I lost a project to a UK-based client
because the new chairman of the company was ex-McKinsey,” said a former McKinsey partner now working for a competitor. “Their head of strategy wanted to work with us. The chairman told him he could hire whomever he wanted to, as long as it was McKinsey.”

The firm eventually institutionalized its high opinion of itself. Whereas Marvin Bower had defined McKinsey’s mission singularly—to provide outstanding client service—in 1984 Daniel added a second piece: the building of a great firm. By that he meant hiring, training, and retaining the best people it could. At the time McKinsey was pretty sure it was succeeding in this regard. Daniel also tilted annual evaluations away from a singular focus on one’s direct economic contribution to one’s overall contribution to the firm—including developing people and building knowledge. To this day, partners serving on the firm’s various evaluation committees spend five to six weeks a year on the task, forgoing client work while doing so.

But under Daniel the idea of building a great firm never meant stretching the definition of a McKinsey consultant too far in new directions. Despite slight advances in diversity, the firm was still a white male bastion in the 1980s. By the early 1990s, when the firm approached Bill Clinton’s pal and Washington operator Vernon Jordan for help in expanding into South Africa, he asked how many black partners McKinsey had. The answer: none. He reportedly replied, “I’ll try to help you, but for God’s sake, man, if you want to do business in Africa, get yourself some black partners.”
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The firm didn’t elect its first black director—Byron Auguste—until 2005.

McKinsey did only slightly better with women. One of the firm’s most famous female alumni, Barbara Minto—author of 1987’s
The
Pyramid Principle: Logic in Writing, Thinking, and Problem Solving
—joined the newly opened Cleveland office in 1963 and stayed with the firm for a decade before leaving to start her own consulting firm. The firm elected its first female principal in 1979—Linda Levinson—and a total of nineteen to the partnership in the 1980s. Still, by the end of the 1990s, women constituted just 5 percent of the partnership.

The firm later embraced India as a talent source. Tino Puri, one the first Indians to join McKinsey, in 1970, had long set his eyes on opening an Indian outpost for the firm. McKinsey finally opened a Bombay office in 1993, though it had served clients in India for a full fifteen years before that.

“The problem with McKinsey is that it’s a suffocating environment,” former McKinseyite Don Carlson told
BusinessWeek
in 1986. “They want a certain person, a certain look, a certain way of doing things.”
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The kind of consultant McKinsey produced did change over time, and by the 1990s the firm was favoring a scientifically bent technocrat. Ron Daniel might not have as much success at McKinsey today as he did in the 1980s. As one of his former colleagues noted, he—along with many of his contemporaries—might not have the IQ required to survive in the global institution he helped build. When he was hired, the fact that you had been to Harvard Business School was enough. Today that doesn’t even guarantee an interview. The consultant of today is more likely to look like Daniel’s successor, the proudly geeky Fred Gluck—a man who ran an antimissile program at Bell Labs before he came to McKinsey—as opposed to one who merely knows the right people from the right places. Indeed, outside the U.S. government’s national laboratories, McKinsey is the biggest recruiter of scientific and engineering PhDs at places like MIT, and it is also a top recruiter at law schools and medical schools.

Partner Jon Katzenbach thought the firm shortchanged itself by being overly focused on analytical smarts instead of creative qualities
in its recruiting. “At McKinsey, hard guys are better,” he told
Fortune
. “Issues like organization and leadership are thought of as soft. Unfortunately, that’s where client demand is increasing. We have major corporations asking us to help them change their culture; we need to make major changes in our own culture. . . . We’re really good at tapping into intellectual smarts, as measured in quantitative and conceptual ways. But in our search for bright guys, we throw out a lot of creative ones. We’ve got to be less cookie-cutter in our hiring.”
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When he left McKinsey after a storied career, Katzenbach founded a rival firm with the intention of doing precisely that. It didn’t work out quite as planned, and he ultimately sold his firm to Booz & Company in 2009 after an eleven-year run that had shown promise at first but sputtered along with the global economy. The soft stuff, in other words, is for the good times.

Since the early 1980s, Bower was a lonely voice in thinking the firm had grown too far, and too fast, and was therefore being forced to serve clients it shouldn’t have served, or work on issues that weren’t really of importance to top management. At an internal conference around this time when one consultant explained how technology would speed McKinsey’s growth, Bower growled from the back of the room, “The firm should not be growing at all. It’s far too big already. It should never have gotten above 700 people.” But it was far too late to turn back.

When Daniel took over, there was not a lot of separation from Booz Allen and other competitors. When he stepped down, McKinsey was unique and dominant in its industry. And he accomplished all this without shutting the door on tradition.

E
ven as McKinsey consultants will go to their grave saying it’s impossible to measure their impact precisely—thus providing cover for their sky-high fees—at some point in a history of the firm the question must be asked: Has that money been well spent?

The short answer is yes. No enterprise lasts nearly a century without delivering value of some sort. The real question, then, is: Who has benefited from its advice? The executives who continue to hire McKinsey time and time again certainly seem to find the corporate expenditure worthwhile. Do companies themselves benefit? On balance, one can only conclude they do as well, since the forces of competition would surely drive an inferior product out of the market over the years, and certainly over decades.