The Firm: The Story of McKinsey and Its Secret Influence on American Business (27 page)

Still, as recently as the late 1980s, McKinsey’s fee arrangements with clients remained shockingly informal. The firm did not deign to explain to clients like Federated Department Stores how it arrived at a fee of $200,000 a month plus expenses—it was a take-it-or-leave-it proposition. In an interview with
Fortune
, Amsterdam office manager Mickey Huibregtsen said that the high fees were in the best interests of the company’s clients as well as McKinsey, because “they protect us from not being taken seriously by the client and that protects the client from having the wrong studies done. It also protects the quality of the work. When you charge that much, the quality has to be there.”
¹⁷

Even as McKinsey preached the sanctity of high fees to its clients, internally the firm was downplaying individual partner revenues in annual evaluations. In 1990 it was made official: Client impact, people leadership, and knowledge development were now more important than client billings. Huibregsten was also front and center in this development.
“Mickey was the first to articulate the idea that we’ll have some people with poor economics, and some with very good economics,” recalled Fred Gluck. “But most of the group was going to fall somewhere in the middle. And so we were going to forget about it, because no one could ever figure out who was behind this dollar of revenues or that one anyway.”
¹⁸

By the middle of Fred Gluck’s tenure as managing director, the brand was so powerful that rivals were reduced to competing for
second
place. Inevitably, the firm began articulating its sense of superiority in ways that beggared belief. The 1989 handbook for new client service staff stressed the necessity of delivering recommendations “that the client understands.” In other words, “Keep it simple, boys. Not everybody went to Harvard Business School like us.”

McKinsey was equally sure of its superiority to its competitors. One former partner recalled Jim Balloun, onetime head of the firm’s Atlanta office, offering this line to the CEO of a client the firm had just begun to serve: “Let’s say a client asks us what time it is,” Balloun offered. “If you ask Booz Allen, their response will be ‘What time do you want it to be?’ If you ask A. D. Little, who are a little more technical, they will tell you that ‘It’s 9:45:20, Greenwich mean time.’ But if you ask McKinsey, we will say, ‘Why do you want to know? What decisions are you trying to make for which knowing the time would be helpful?’ ”

Clients clearly bought the image. When Tom Steiner and a few colleagues first left for A. T. Kearney and then later started their own firm, the Mitchell Madison Group, they found that having McKinsey on the résumé mattered little when they were competing against the
mother ship. “It turned out to be much easier to sell work when we weren’t competing directly against McKinsey than when we were,” wrote Matthew Stewart in
The Management Myth
.
¹⁹
You might have McKinsey training, but if you couldn’t bring the McKinsey machine to bear on a problem, clients weren’t nearly as interested. That’s a dirty little secret of McKinsey: Ask any outside recruiter and he will tell you most McKinsey partners could not sell nearly as effectively outside McKinsey. Tom Steiner was a notable exception, eventually building and selling a significant firm in its own right.

McKinsey had grown so sure of itself by the mid-1990s that, in contravention of its longtime policy against speaking about itself to the press, the firm cooperated with a substantial profile in
Fortune
by writer John Huey. What a blunder that turned out to be. “Laconic John Huey shows up,” recalled a former consultant. “You can’t help but like the guy. Fred Gluck insisted that John meet with the eighteen people on the shareholder committee. He met with everyone except for the Machiavellian Rajat Gupta.”

In the 7,500-word story, Huey laid bare the firm’s growing level of arrogance. He quoted partner Mickey Huibregtsen making the infamous claim that McKinsey’s fees were high because such fees forced clients to take the firm seriously. Partner Pete Walker added this beauty: “It’s almost never that we fail because we come up with the wrong answer. We fail because we don’t properly bring along management. And if a company just doesn’t have the horses, there are limits to what we can do.”
²⁰

The article, which had been orchestrated by Gluck, was viewed
internally
as the epitome of arrogance and prompted healthy debate. McKinsey briefly contemplated severing all relations with
Fortune
as a result. It did so for a while but later rethought the notion. This was a whole new challenge for McKinsey—the idea of managing its
brand
as opposed to just its reputation.

The
Fortune
article demonstrated the extent to which the firm’s arrogance had grown—to such a point that it treated even valuable clients with disdain. In the United States McKinsey reaped long-running fees from American Express, which had so many McKinsey teams going at once that it was essentially a training program subsidized by a client. “God, we were sucking off that teat for so long,” said one New York–based employee of the firm. “McKinsey should be ashamed of themselves for that.” Others closer to the American Express business were more pointed. “Good business leaders do not hire consultants,” said a former partner of the firm. “Consultants feed off insecure megalomaniacs who are in fear of their own organization. [Amex CEO] Ken Chenault can’t take a shit without calling a consultant. They’re so deep over there, they’re in the phone book.” Daimler-Benz had a similar reputation as an easy mark. McKinsey performed a so-called “activity value analysis,” or AVA, so many times at Daimler and elsewhere that young German consultants bemoaned being staffed on another OVA (the German office’s version of the AVA).

Institutional arrogance occasionally led to blatantly unacceptable behavior. Suzanne Porter, a consultant in the firm’s Dallas office, put an embarrassing spotlight on the firm when she filed a sexual discrimination complaint with the Equal Employment Opportunity Commission in 1993. Porter claimed she had been harassed by several of the firm’s partners during her time there. McKinsey responded that she was disgruntled because she hadn’t been made a principal. Two weeks after her husband, also an employee of the firm, gave a deposition in support of her claims, he was fired. McKinsey said that move was justified because he secretly recorded phone conversations with “various potential witnesses” in his wife’s case.
²¹
A settlement was later reached with Porter.

One estimate in 1993 had McKinsey directors earning $2 million a year
²²
in salary and bonuses, and another pegged Gluck’s take-home
at $3.5 million.
²³
Even the youngsters were raking it in: Associates made more than $100,000 a year and principals made $250,000. A few years before he retired—in 1995—Marvin Bower told Jon Katzenbach that he was concerned about encroaching greed in the consulting industry. If it became
all
about the paycheck, he told Katzenbach, it wasn’t going to work anymore. “Do our young professionals really need a lot of money? If we allow money to become the primary source of motivation for our people, greed will override our values. A great professional firm cannot allow greed to take hold,” he told the younger consultant.
²⁴

It was the kind of success that allowed for team-building exercises that strain the imagination. When former senior partner George Feiger was put in charge of the professional portion of a partners conference in 1995 in Portugal, he split the assembled partners (and their spouses) into three groups and made each of them perform an opera. He’d had ex-opera singer David Pearl help him write a libretto, and also hired Barry Manilow’s producer to help out, but the three groups were responsible for everything from assembling the stage to making costumes, learning the music, and performing. The mere transport of all the required materials across the English Channel and down to Portugal cost McKinsey 1.5 million pounds.

Still, despite the occasional team-building boondoggle, work at the office wasn’t getting any easier: Only one in five associates became a principal, and only half of those who made principal became directors. McKinsey had built one brutally efficient meritocracy. But was it even that anymore? In the Ron Daniel era, the managing director’s take-home pay was around eight to ten times that of associates. Reasonable McKinsey directors were asking themselves whether they were actually paying themselves too much. Was Fred Gluck really worth thirty-five times more than an associate? Was the typical director worth twenty to twenty-five? Most disappointed McKinsey alumni
pinpoint the submission to avarice as a time during the tenure of Gluck’s successor, Rajat Gupta. But others claim it started before that. “Fred had to prove he was a player,” said one alumnus. “And in doing so, he sowed the seeds of greed at the firm.”

Though most McKinsey consultants would be loath to admit it, the firm’s much-acclaimed risk-taking culture is actually one that offers great reward
without taking too much risk
. Want to go open an office in a new country? Unless you’re a complete failure, you can always come back home. Want to spend six months trying to reel in a big client? If you don’t succeed, just lean back on your old client list. Working for a firm that culls its ranks so ruthlessly is a form of risk taking, but if you’ve got the goods, it’s a far safer bet than heading out on your own.

One associate admitted as much in the firm’s internal magazine about his move to Hong Kong. He realized there was almost no risk in the decision. “The safety nets were all in place,” he said.
²⁵
McKinsey considers its culture an entrepreneurial one. But it’s entrepreneurialism with a pillow waiting to soften any fall. Still, in its own insulated way, the firm allows an enviable spectrum of change-of-career options.

Stefan Matzinger, whom Herb Henzler sent to Brazil in the mid-1980s, said that the ability to feel entrepreneurial within the context of having a secure salary is one of
the best
things about working at McKinsey. “You are evaluated on a prudent use of firm resources,” he explained. “We’re not a budget-driven organization. The only question you need to be able to answer is, ‘What’s the right thing to do to build the practice?’ ”
²⁶

The key? You have to be able to bring the McKinsey network along with you. The power of McKinsey in its modern form is the
number of people that can be brought into any particular client relationship. You can go to Brazil if you’d like, but you’re going to need the rest of McKinsey’s global partners on speed dial in order to make the office successful. This is one reason why the firm has found it difficult to make midcareer hires. Not only is there the indoctrination issue, but if you’re new to the place at the principal or director level, you’re not going to be able to bring the right people into your client relationships. One of the highest-profile lateral hires the firm ever made was luring famed media consultant Michael Wolf away from Booz & Company to be head of the firm’s global media and entertainment practice in 2001. Wolf brought the client contacts, but he failed to put together a working internal network at McKinsey. He’d run into the buzz saw of personal profiles at McKinsey: The most successful McKinsey consultants are networkers of the highest order. Wolf was, well, a lone wolf. He left the firm after just three years.

The biggest corporate buzzword of the early 1990s was reengineering—the idea of breaking down a company into its constituent parts and then rebuilding it into a more efficient machine. With almost two million copies sold,
Reengineering the Corporation
, by James Champy and Michael Hammer, became one of the biggest-selling business books since
In Search of Excellence
. Neither was a McKinsey man, but that didn’t stop the firm from doing what it has done time and again—using someone else’s idea to its own advantage. But it took some time to figure out just how it would do so.

Reengineering actually caused the firm a brief headache in the early 1990s, especially in Europe, where Cap Gemini, recently galvanized by its purchase of a bunch of “change management” firms, was running
across the continent pushing what essentially was organizational transformation. Some partners, especially those in Scandinavia and the Netherlands, came up with their own versions of reengineering and wanted to brand their ideas. Gluck pushed back, arguing that the firm wasn’t going to brand anything but that it would push McKinsey’s established brand, which was built around long-term relationships and “transformational” work. His instincts were right: Reengineering faded out like a glowworm, but long-term clients kept reupping with McKinsey.

Rethinking the way one does business is a hallmark of the American success story. Despite the brutal implications at the individual level, one of the primary differentiators between American companies and their foreign competition is the ability to lay people off with relative impunity. From a cultural perspective, for example, Japanese and German companies both struggle far more with the Darwinian implications of mass layoffs than do their American counterparts. McKinsey, once again, found itself in the position to ease the process for its client executives, providing fact-based justification as well as a philosophical backdrop for downsizing.

McKinsey’s advice to Frito-Lay in 1991 led to the dismissal of nearly a third of its headquarters staff. For the price of just $3 million, the consultants offered conglomerate ITT $90 million in savings, a large part of which came through layoffs.
²⁷
A company in trouble has every reason to downsize. But just as McKinsey had taken the gospel of consulting from troubled companies to healthy ones, so it helped take the gospel of reengineering from the troubled to the healthy. In 1994 Procter & Gamble laid off 13,000 of 106,000 workers, while simultaneously claiming that it was in no way a sign of trouble at the firm. “That is definitely not our situation,” said the firm’s CEO at the time.
²⁸