The Firm: The Story of McKinsey and Its Secret Influence on American Business (26 page)

Though many within McKinsey doubted that someone with Gluck’s idiosyncratic background and skill set could ever lead the firm, Daniel had great, unwavering confidence in him, and he made it clear to all. It was one of Daniel’s strengths, said his admirers, that he could see beyond the McKinsey personality clichés and identify quality people who didn’t fit the mold. “Ron Daniel was one of the first to
recognize the importance of delivering content-driven expertise into the client agenda,” said McKinsey alumnus James Gorman. “McKinsey evolved from general advisers to ‘knowledge bearing’ advisers. Fred Gluck was at the forefront of that evolution and provided an intellectual spark to the firm in accelerating that change.”
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Before long, Daniel put Gluck in charge of the strategy initiative that was the firm’s response to the rise of BCG and Bain and thereby solidified his standing at McKinsey. Gluck was elected principal in 1972 and director in 1976, just nine years after joining the firm.

For all his support, Daniel did enjoy needling the younger man. He couldn’t help reminding Gluck that he didn’t quite measure up to historic McKinsey standards. “Ron used to do this terrible thing to Fred, who is his genetic opposite,” recalled one colleague. “When Ron introduced Fred at any event, just after Fred stood up and was ready to start, Ron would say, ‘Stand up, Fred.’ ”

By the time of the election for managing director in 1988, Gluck was one of two finalists for the position. The other was the immensely popular Jon Katzenbach, considered by many to be the soul of the firm in the post-Bower era. But Gluck’s work on strategy had reinvigorated the partnership. Katz actually came within an inch of beating Gluck, but he didn’t resign in a fit of pique. Indeed, he was so universally liked that his colleagues offered no resistance to his staying on six years past the mandatory retirement age of sixty.

Gluck’s main credential for rising to the top of the firm, insofar as it was understood by the outside world, was his work on the strategy initiative, which helped redirect the firm. That, supposedly, was more than enough to offset the fact that he’d never run an office or helmed an industry practice. But Gluck, who worked on more than a hundred engagements for AT&T and Bell Labs, was also one of the great rainmakers of his day. Between 1989 and 1994, AT&T paid McKinsey $96 million in consulting fees, including $30 million in 1992 alone.
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It was later revealed that Monitor, a competitor founded by Harvard professor Michael Porter and five others with connections to Harvard Business School, actually made more from AT&T, billing $127 million between 1991 and 1994. “Gluck was elected managing partner because of his deep client relationship at AT&T,” said one ex-McKinsey consultant. “And then we find out from a
BusinessWeek
cover story that Joe Fuller from Monitor was pulling in way more than Gluck was. Everyone looked at him and said, ‘Hey! We thought
you
were the guy at AT&T!’ ”

BusinessWeek
marked Gluck’s ascension with a cover story titled “What’s a Guy Like This Doing at McKinsey’s Helm?”
⁹
One thing he was certainly doing was laying out plans for expansion. In his first speech as managing director, he predicted the firm would have 5,000 consultants, 8,000 employees, and 75 offices in 30 countries by the year 2000. “I thought the guy was nuts,” recalled Nancy Killefer, who had been with the firm for nine years at that point. “He was describing a firm I could not conceive of.”
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She wasn’t alone. In 1988 the firm employed just 1,671 consultants and 3,034 employees in 40 offices across 21 countries. Gluck wanted to double the firm’s size in just twelve years.

In fact, he
underestimated
the firm’s potential. Twelve years later, McKinsey employed 6,210 consultants and 11,264 employees in 86 offices across 47 countries. Killefer recalled running into Gluck at the firm’s 2011 retired directors conference. “I said, ‘Fred, I don’t know if you’ve read that speech again, but you were right. And we are the firm you envisioned.’ ”

According to historian Matthias Kipping, there are three waves in the history of consulting. The first wave ushered the industry into existence:
the Taylorist focus on efficiency enhancement. The second was consulting top management on organization and strategy. And the third was advice on information technology (IT) based networking. By the late 1980s, it was no secret that a company’s IT strategy could be the difference between staying in the game and permanently falling behind. The IT budgets of financial institutions had grown to be larger than their profits, and telecommunications and healthcare companies were nearly as deeply invested.

Whereas McKinsey could relate to competitors like Bruce Henderson and Bill Bain, in the 1980s the firm came under siege from those it had long disdained: the accountants. But the Big Five accounting firms—Arthur Andersen, Deloitte & Touche, Ernst & Young, KPMG, and Price Waterhouse (later PricewaterhouseCoopers)—had sensed more quickly the profound changes afoot, and they had fielded legions of lower-priced consultants in the new realm of “systems consulting” to help their clients make moves in IT.

Then the attacks went full frontal: Arthur Andersen launched Andersen Consulting (later renamed Accenture), Deloitte & Touche created Deloitte Consulting, and Ernst & Young and KPMG also had their own efforts. The newer business models were different—they needed fast growth and larger size to make up for their lower price structure—but all this extra competition was clouding McKinsey’s future.

And that wasn’t all. More tech-focused competitors such as French computer and software company Cap Gemini, Computer Sciences Corporation, Electronic Data Systems, and IBM were also outmaneuvering McKinsey in bake-offs for information-technology consulting business that clients believed increasingly crucial to the survival of their companies.

In an effort to downplay the competition, McKinsey spread the notion that Andersen was the army to McKinsey’s marines, but that
didn’t take away from the fact that Andersen was fielding a much larger—and competitive—force of consultants. The new competition wasn’t just temporary, either. By 1998 Andersen Consulting reported $8.3 billion in revenues, PricewaterhouseCoopers $6 billion, and Ernst & Young $4 billion. McKinsey? A relatively minuscule $2.5 billion.

Luckily, the firm had just the right man in the wings to confront the challenge: Fred Gluck. Just as his entry into McKinsey had been a rough one, however, Gluck’s first big attempt to tackle the IT challenge was a bit of a misfire as well.

It wasn’t as if Daniel and Gluck hadn’t realized that technology strategy represented a paramount concern for clients. They saw it within their own business: McKinsey tested one of the first IBM personal computers in 1982 and, later on, beta-tested the fourth computer Compaq ever made. The firm test-drove one of the first releases of the spreadsheet Lotus 1-2-3—the son of VisiCalc and the father of Excel. But McKinsey was caught flat-footed by the whole new swath of competitors when it came to advising clients on the subject. And it did something uncharacteristic in response: It panicked, making the strategic blunder of acquiring Information Consulting Group, a technology-consulting venture, in 1990.

Gresham Brebach, the former head of consulting at accounting powerhouse Arthur Andersen, had founded ICG in 1988, bankrolled by a loan from advertising giant Saatchi & Saatchi. ICG’s stated mission had been to provide information-technology consulting to its clients. Brebach found a better target, though: Fred Gluck. “Fred went skiing with Gresh and came back in love,” recalled one of McKinsey’s original technology experts. With the support of Carter Bales—who
had found his way back into the good graces of the McKinsey leadership by taking a lead on all things technological—Gluck rammed the decision to buy ICG for a nominally small $10 million past a skeptical partnership.

Deep down, McKinsey consultants were worried that clients didn’t view them as the answer to crucial technology questions. They were right, and that was the main reason Gluck and his executives pushed through the ICG deal. Given McKinsey’s long-held emphasis on organic growth, it was deeply out of character and required some extra explaining. The firm tried to rationalize it by calling it recruitment instead of an acquisition. “What this is is a massive recruiting effort,” Bill Matassoni told the
New York Times
when news of the impending transaction leaked out. “About a year and a half ago we felt we really needed to build capability in this area. ICG represents an unusual opportunity to accelerate this process.”
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The transplant didn’t take. While embracing technical expertise made sense for McKinsey, its elitist generalists couldn’t help looking down on the plumbers of ICG. The merger brought in some major IT engagements, but the marriage was doomed from the start, with powerful McKinsey engagement managers refusing to staff their new geeky counterparts on major projects. Just over three years later, more than half of ICG’s partner-level consultants had left.
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Brebach himself left for Digital Equipment Corporation in 1993. “It wasn’t a particularly big acquisition,” recalled German office head Frank Mattern. “But it wasn’t done well. It was a failure.”
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ICG eventually evaporated entirely inside the hothouse of McKinsey.

Even though the move proved a misfire, it was an understandable one, given the times. In the late 1980s, United Technology picked Ernst & Young over McKinsey for an IT project, and German home-appliance maker BSHG hired Arthur D. Little to help with office automation concepts. As part of a “Worldwide Competitor Review” of
technology and systems consulting presented in Rome in September 1991, the consultants explored reasons they had lost consulting contracts for IT and concluded—not uncharacteristically—that those clients had made poor decisions. “Rightly or wrongly,” the review stated, “outsiders sometimes take the position that other service organizations can add value equal to ours.” The review also showcased a lingering denial about the technological changes afoot. “Frankly, [it’s] not that important an issue for the senior executives I serve,” an unnamed McKinsey consultant was quoted as saying.

In the late 1990s the firm made another run at the technology-consulting action, but this time it was from the ground up, launching a Business Technology Office. The goal wasn’t to compete head-on with the accounting firms—McKinsey’s relatively low associate-to-partner ratios wouldn’t support such economics—but to advise the chief information officer on information-technology management, providing answers to questions like: How do you run your IT department? How do you prioritize projects? How do you keep IT costs down? “Because we’re not actual vendors of technology like most IT consultants, we’re sitting on the same side of the table as the CIO, not the opposite side,” said Mattern. “That’s an enormously powerful and valuable position to be in.”
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This time it worked. And McKinsey succeeded in getting the upper hand once again. A McKinsey consultant didn’t do mere systems integration. He told you
why
you wanted one system or another. In this move, the firm was going back to its familiar put-down of the competition. When Hal Higdon wrote in 1969 that accounting firms were making incursions into consulting, he referenced the idea of their built-in advantage to the McKinseys of the world, what with their already doing auditing work for pretty much any client McKinsey might approach. “We don’t have to locate the bathroom,” he quoted one accountant as saying. The McKinsey retort: An accountant who knows
where the bathroom is located may be unable to recognize that the bathroom should be located elsewhere.
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And there it was: McKinsey took the high ground of IT consulting away from the pretenders to its crown. By 2011 the BTO was the third-largest “office” in the entire firm, after the United States and Germany.

By the end of the 1980s, McKinsey’s struggles at the end of the Marvin Bower era were long forgotten. The firm had moved into a higher gear, with revenues almost doubling, from $350 million in 1985 to $635 million in 1989. Over the next three years they nearly doubled
again
, hitting $1.2 billion in 1992. The Gluck-era focus on embracing one’s expertise was paying off in spades.

Remarkably, McKinsey was at that point demanding—and receiving—a substantial price premium over even its closest competitors. A “Competitive Assessment Review” from June 1989 showed just how powerful the brand had become. In a proposal for a large financial institution, Booz Allen Hamilton had offered to do the work in four to four and a half months, for $125,000 a month plus expenses, or about $675,000. McKinsey required more time—five to six months—and $175,000 per month plus expenses, a total of $1 million to $1.21 million. Despite its nearly double price tag, McKinsey won the assignment.

In 1982 McKinsey’s revenues per professional had been $180,000; by 1988 they were $320,000; and by 1992 they were $387,000. Booz Allen Hamilton pulled in just $200,000. And even if Andersen Consulting was by that point larger than McKinsey, its own revenues per professional were less than a third of McKinsey’s.
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It had always been Marvin Bower’s contention that McKinsey had no competition. As the years went on, the more right he became: If your direct competitors
can bill at only 60 percent of your level, are they really even competing with you? On the other hand, deep down, McKinsey viewed some firms as threats. “Monitor, though only founded in 1983, is becoming a formidable competitor for the firm,” read one internal report. Booz, on the other hand, “[does] not pose a great threat to McKinsey’s overall preeminence in management consulting.”

Occasionally McKinsey consultants wondered whether they were pushing a little
too far
on the fee front. Some of their clients told them that they were. In a letter consultant Tom Steiner wrote to his colleagues in the New York office in 1990, he related a conversation with Chase Manhattan executive Mike Urkowitz. “[In a discussion] . . . several weeks ago [he] got up and closed his door and said that among his banking peers at conferences and other gatherings McKinsey’s prices were a subject of conversation,” Steiner wrote. “He said, ‘We all have the view that you won’t do anything for less than $1 million. You have a problem.’ ”