The Firm: The Story of McKinsey and Its Secret Influence on American Business (23 page)

As Stuart Crainer, author of
The Tom Peters Phenomenon
, put it, “Management theorizing has become expert at finding new angles on old topics. (
In Search of Excellence
was, after all, a 1982 reworking of the oldest managerial chestnut of them all: How can you be successful?) There is nothing wrong with this. Indeed, management is fundamentally concerned with seeking out modern approaches to age-old dilemmas. The final word . . . is unlikely ever to be uttered.”
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In other
words, there is no Rosetta stone of management, no unified theory. It’s pretty much about making it up as you go along.

But has the spread of McKinseyism been good for business in general? Or for society? When McKinsey spreads the gospel of downsizing in order to enhance corporate profitability, it surely helps individual clients, but is the overall effect a good one?

If you’re AT&T in the 1980s, McKinsey provided terrible advice. If you’re Condé Nast in 2009, it helped you convince your employees that the time had finally come to cut costs. If you’re General Motors under attack from Toyota, McKinsey missed the point entirely. But if you’re North Carolina National Bank, it put you on the path to greatness.

Clearly, where you stand on the value of McKinsey depends very much upon where you sit.

When McKinsey is at its most effective, it thoroughly identifies and analyzes a problem for its client, enumerates all available options, presents them in easily digestible fashion, and then helps the client choose a course of action.

And even at McKinsey’s lofty price, most clients have concluded that hiring the firm is more than worth the fees paid. Mellon Bank chairman Frank Cahouet paid McKinsey $16 million over a six-year period but estimated that the return on that expense was at least twenty times as much.
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“I joined Mellon in 1987,” recalled Cahouet. “It was a tense time, and there was a real question of whether we were going to survive. Regulators were openly hoping that we would be acquired. But I didn’t join Mellon to sell it. I joined it to build it.”

One important project Cahouet assigned the McKinsey team, led by partner Clay Deutsch, was separating Mellon into two parts—the
so-called Good Bank/Bad Bank exercise. They spun the Bad Bank off to shareholders, leaving the Good Bank on a much more solid financial footing. “McKinsey did a lot of the analysis for us,” said Cahouet. “And their reputation and credibility helped us in the market as we raised the capital for that.” Cahouet subsequently hired McKinsey consultant Ron O’Hanley to join him running Mellon as vice chairman.
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In 2010 O’Hanley was made copresident of Fidelity Investments.

Work done for the Dutch government in the late 1980s shows the firm in optimal interaction with the client. Dutch officials had contacted McKinsey about a plan to impose a moratorium on subsidies to the steel industry, which would severely hamper the company’s largest producer, Hoogovens. They asked McKinsey to come up with a figure for how much money it would take to shore up the company’s finances so that it could stand on its own two feet. McKinsey studied the situation for six months and came up with a shocking number: $1 billion.

The country’s minister of economic affairs then asked McKinsey for advice on getting the parliament to approve such a gigantic corporate capital injection. The resulting presentation explained the state of the global steel industry, rising Japanese competition, and the powerful effect of Hoogovens on the Dutch trade balance and economic infrastructure. Working with both the government and Hoogovens at this point, the consultants spent another six months figuring out how the money would be invested, down to the last dollar. The result was a twenty-two-page bill, which the minister presented to parliament. It passed on the first round.
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The company survived and in 1999 merged with British Steel to form Corus Group, one of the world’s largest steel producers.

Another remarkable public sector project involved work the London office did around the same time for the Scottish Development Agency. Glasgow was mired in unemployment and crime. Partner
Norman Sanson and a team of Scottish consultants helped devise a survival strategy for the city. The consultants offered a number of ideas, from encouraging tourism to shifting away from manufacturing toward a service economy, and focusing on the importance of the city center as an anchor of development. The consultants also proposed an idea that fits quite well in the history of McKinsey advice: a /files/14/19/59/f141959/public/private partnership that would allow private sector interests to partner with politicians to push for a revival of the city’s core. “We literally saved Glasgow,” said former London office head Peter Foy, in a typical display of McKinsey self-regard.
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But the remark may also have the virtue of actually being true: Less than a decade after McKinsey’s 1984 arrival on the scene, and in no small part due to urban regeneration efforts, Glasgow was named the 1990 European City of Culture. McKinsey helped Carlos Salinas privatize Mexico and Margaret Thatcher on similar efforts in England, and it would go on to aid in privatizing government assets in newly liberalizing countries in Latin America, Central America, Eastern Europe, and Asia.

In 1981 Hugh McColl, then the new president at then-tiny bank North Carolina National Bank (NCNB), asked McKinsey for help in designing an organizational structure that he wouldn’t have to change until NCNB became the biggest bank in the country. If he was going to go on an acquisition spree, in other words, he didn’t want to be modifying the company’s organizational structure at every turn. This was ambition on a huge scale, considering that NCNB’s $6 billion in assets were paltry in comparison with industry leaders like Citicorp and Chase Manhattan. But it was also McKinsey’s bread-and-butter, organizational advice. The firm’s suggestion: to shift the company’s customer focus from geography to types such as retail customers or commercial banking clients. That way the company didn’t need to introduce whole new units when it entered new territories; it just added these territories to the existing customer groups. Seventeen
years later, when what was then known as NationsBank acquired Bank of America, it created the largest bank in the country. That had been McColl’s goal, so McKinsey’s advice had been worth whatever McColl paid for it.

All of the above point to the fact that McKinsey can do very sophisticated work.

And then there’s this: While it may seem simplistic, the job of a CEO is to keep his own job. Even your most reliable lieutenants have a tendency to stab you in the back. So the smart CEOs hire expensive (albeit structurally disloyal)
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lieutenants in the form of consultants. Even if consultants have long been accused of fomenting uncertainty rather than eradicating it, the life span of current CEOs impels them to ignore that deleterious side effect, while simultaneously extending their own tenure. Roger Smith leaned on McKinsey to keep his grip on the top job at General Motors, Robert Allen did the same at AT&T, and Phil Purcell (a McKinsey alumnus) did the same at Morgan Stanley. McKinsey may proclaim its capability to tell truth to power, but in reality it rarely bites the hand that feeds it.

An important question: Should the arrival of McKinsey at one’s door always be seen as a positive for any particular client? Or, by extension, for business itself? Stanford professor Harold Leavitt, a proponent of the human aspects of business over the numerical ones, answered in the negative in the 1980s: “The new, professional MBA-type manager began to look more and more like the mercenary soldier—ready and willing to fight any way and to do so coolly and systematically, but without ever asking the tough pathfinding questions: Is this war worth fighting? Is it the right war? Is the cause just? Do I believe in it?”
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In
House of Lies
, his 2005 attack on the industry, later turned into a series on the cable network Showtime, ex-consultant Martin Kihn wrote of the “Slide” that McKinsey showed at the end of recruiting sessions in 2000. “The Slide is deceptively simple,” he wrote. “[It] is simply a curve showing 20 percent annual growth. That’s 20 percent compound annual growth over the past decade in both revenues and in the size of McKinsey’s staff. . . . To put it bluntly, the Slide implies that
McKinsey is on a path toward total world domination. . . .
If you don’t get a job with them this time around, you can always wait. You’ll be very old in May 2060—but it won’t really matter. They’ll have to hire you. Every single man, woman, and child in the U.S. is a McKinsey consultant by May 2060. Every person on earth is a McKinsey consultant by 2075.”
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Tales of failed consulting engagements—or failed attempts to carry out a McKinsey strategy—don’t usually make the front page of the business section. McKinsey won’t talk about its clients, and corporate executives don’t like to talk about failed projects of any sort, whether or not a consultant was involved. Every now and then, however, a project has a high enough profile—or its failure is public enough—that McKinsey’s role comes into full public view. And it is in these instances that McKinsey’s grand bargain with its customers—take no credit, take no blame—can prove unworkable. “It is the same with the medical profession,” Hal Higdon wrote. “A doctor can perform a thousand successful operations, but everyone remembers the one where his scalpel slipped.”
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One such engagement was a 1980 project for AT&T. AT&T had invented an early version of wireless technology but was worried about the return on its investment in radio towers, among other things. McKinsey, as always, carefully studied the issue and came up with an estimate that was, to say the least, laughably off the mark: In the year 2000, McKinsey deduced, the total wireless market would have less than one million subscribers.

It’s worth remembering that at the time, handsets were so clunky and expensive and bandwidth was so limited that the only customers were very wealthy people and corporate executives. It’s also worth remembering that predicting the future is hard. However, this was clearly a blunder, and a very costly one. AT&T dropped the project, dooming the company to playing catch-up in wireless and necessitating its eventual sale to SBC Communications in 2005. That’s the consultant’s equivalent of a malpractice case, in which the patient dies an awful, avoidable death.

Sometimes McKinsey has been accused of selling not just faulty research but defunct strategy, such as when it worked for the Continental Illinois Bank, then one of the nation’s hottest banks, in the 1970s. Continental saw itself on a par with Chase Manhattan and Citibank, two well-known McKinsey clients, and wanted a new organizational structure. The consultants told Continental the same thing they had told numerous other banks: It needed to move away from its hierarchical management structure toward something called “matrix management.” The idea, in simple form: In a matrix system, different people may work in one department and may technically report to one manager, but they may also be assigned to a different project and a different manager at any point in time. The result is a theoretical increase in flexibility in return for a diffusion of responsibility and accountability. At first the reorganization seemed brilliant. Between 1976 and 1981, Continental had the fastest asset growth of any major bank, a remarkable 110 percent. Lending grew at an ever-faster rate, 180 percent. The bank’s return on equity during that time—14.4 percent—was second only to Morgan Guaranty.

But James McCollom, a former employee of the bank and author of
The Continental Affair
, claimed the advice doomed Continental. The bank’s loan-to-asset ratio also increased to 69 percent in 1981, the highest
in the industry, arguably making the bank the riskiest of its peers. McCollom pointed to the findings of Peters and Waterman, who later wrote in
In Search of Excellence
that executives “shared our disquiet about conventional approaches [of organizational design]. All were uncomfortable with the limitations of the usual structural solutions, especially the latest aberration, the complex matrix form.” In other words, McKinsey was pushing on Continental a structure that its own employees had concluded didn’t work. “McKinsey had sold us matrix management, the very snake oil that excellent companies avoided,” wrote McCollom. “They had sold us lawyers, secrecy . . . [and] buzzwords. . . . McKinsey had sold the Continental Bank its obsolete equipment.”
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A few years later, Continental earned the dubious distinction of being the biggest bank failure in U.S. history to that point.

In the consulting the London office did for the National Health Service, McKinsey failed to move the stultified British bureaucracy an inch. (The consultants were still in there in 2012, with critics still questioning the benefits of their work, as apt an example of the controversial nature of the McKinsey transformational relationship as any.) McKinsey was in the BBC for years with similar effect, at one point pushing the idea of an internal market in which BBC staffers bought and sold services to one another. This was another consulting theme that looked good in theory but was to be poor in practice, one that forced producers to engage in endless negotiations
internally
just to do things as simple as reserving a studio or finding airtime for a project. In other words, the consultants pushed excessively complex management systems on an oblivious client. One project reportedly had the consultants working with BBC staffers by cutting out paper frogs and pretending to sell them to one another.
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A scathing June 1995 newspaper investigation had already put the lie to the notion that McKinsey had helped cut costs in return for its extravagant fees: “The BBC now costs more to run while employing less people than ever before,”
the investigation concluded. “The ‘savings’ have turned out to be an extra staff cost of 140 million pounds compared to four years ago.”
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