The Firm: The Story of McKinsey and Its Secret Influence on American Business (30 page)

McKinsey was not the largest consulting firm on the planet. Andersen Consulting’s nearly $5 billion in 1995 revenues was three times larger than McKinsey’s. But McKinsey still occupied the high ground.

No country provides a better showcase for the modern ambition of McKinsey than China. And no consultant better exemplifies that ambition than Gordon Orr. A slim, studious-looking Brit, Orr joined McKinsey in 1986 and was elected to the partnership in 1993. In search of a new challenge, he asked the firm for a transfer to Hong Kong. “My wife and I weren’t there for much more than a year when we said, ‘This is actually pretty exciting, but if we’re serious about this, the great big thing is up there to the north of us. Why don’t we think about moving to Beijing and opening the office up there?’ ”
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It’s at this point that the admirable efficiency of McKinsey’s form of governance came into play. All Orr needed to do was present a brief
to the firm’s shareholders committee: “Here’s what we want to do, here’s what we think the opportunity is, and here’s how we would go about making it happen.” McKinsey’s overlords approved the idea, and Orr, along with colleagues Tony Perkins and Josh Cheng, started laying the groundwork for McKinsey’s second China outpost. (Consultants Jonathan Woetzel, Ulrich Roeder, and Olivier Kayser had opened an office in Shanghai in 1994.)

As with most new country initiatives, McKinsey was patient with Orr as he went in search of clients. McKinsey purposely doesn’t set financial targets for new offices, preferring to let the
reason
for doing something take precedence over short-term expense issues. The push into China was no exception. In 1993, the firm opened offices in Bombay, Cologne, New Delhi, Prague, St. Petersburg, and Warsaw. In 1994, Budapest, Dublin, and Shanghai. In 1995, Jakarta, Johannesburg, and Moscow. In Moscow, the firm used its usual modus operandi to gin up goodwill in the country, doing pro bono work for the Bolshoi Theater as well as the St. Petersburg Hermitage Museum.

By 1996 McKinsey was ready to begin recruiting local Chinese in Beijing. The firm scheduled a recruiting seminar at Tsinghua University. Orr expected twenty or thirty people to show up. The turnout was eight hundred. True to form, McKinsey hired just two of them, one of whom stayed with the firm for almost a decade before becoming CEO of South Beauty, the largest Chinese “restaurant entertainment” company. The other is still with McKinsey and might soon be the firm’s first female mainland Chinese director.

Finding new clients wasn’t as easy as it had been when the London office was being opened. Orr and his colleagues had to figure out not only which companies had issues that McKinsey could solve, but also those that were willing to be helped. The Chinese business culture wasn’t accustomed to paying for anything that wasn’t 100 percent tangible.

McKinsey had to make other adjustments in China. Throwing young Harvard MBAs into the fire by making them present to CEOs so soon after being hired wasn’t prudent in a hierarchical society that values age and experience over youthful promise. This wasn’t a new issue for the firm: In the 1980s, when he was managing director, Ron Daniel had one meeting with the parents of a prospective Japanese recruit in which he had to reassure them that their young son was not being sold into some sort of modern slavery. “Asians venerate age,” he explained. “We tend not to.”
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“Gordon called me up one day and said he wanted to publish the
McKinsey Quarterly
in Chinese,” recalled Partha Bose, who was editor in chief of the publication at the time. “We didn’t have any foreign-language editions, and I wondered if he was going to be able to sustain a pipeline of new articles. He told me he wanted to use
past articles
that explained the basics of management, so that he could build the practice on a strong foundation. Part of that foundation was going to be translating and making available the best management thinking in Chinese.”
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The conversation led to the launch of the Chinese
Quarterly
.

One of the first successes of the Beijing office was helping four Chinese rice farmers who had decided to get into the bottled-water industry. “They had just bought a bunch of machinery,” Orr said. With McKinsey’s guidance, the outfit eventually became the number-two bottled-water provider in China, worth $200 million. McKinsey also advised two companies—Ping An Insurance and Legend Computers—that went on to become global players.

McKinsey’s success in China hasn’t been linear. The firm has had to contend with counterfeit operations that offer “McKinsey Reports” for as low as a hundred dollars. And the early years were very lean. Orr recalled at least one stretch in 1997 when
one
client supported the entire fifty-plus-person Beijing office. Some competitors pulled out of
China when the times got tough—Booz-Allen left, only to return a few years later—but McKinsey hung in there, and its perseverance ultimately paid off. Within ten years, McKinsey had three hundred professionals in China. By 2011 it had eight hundred. The firm also built a Consumer Insights Center in China, to monitor the spending patterns of sixty thousand Chinese consumers and inform McKinsey research about the increasingly important economy, and in 2012 opened the McKinsey China Leadership Institute in Beijing.

Back in the United States, McKinsey continued its intimate dealings with the rapidly growing financial sector. The firm’s influence ran so deep that it could actually make good on its mandate to confront clients with uncomfortable truths. MacLain “Mac” Stewart, a key figure in McKinsey’s financial services practice, had a particular knack for dispensing blunt, unflattering advice to even the most puffed up of Wall Street CEOs. After sitting through a terrible presentation given by Dick Fuld, then beginning his career as CEO of Lehman Brothers, Stewart looked Fuld in the eye and told him that if he wanted to be successful, he’d better hire a speech coach.

In another instance, Stewart dressed down Citicorp chief Sandy Weill, whose meeting style was to say his piece, and then, while others responded, compulsively watch Citi’s stock price on his Quotron. In a meeting with Stewart, Weill did just this and then briefly left the office. While he was away, Stewart put a book in front of the screen. When Weill returned and noticed the book, he erupted, asking who had had the temerity to do such a thing. “You’re wasting my time,” Stewart told him. “That’s sending the wrong message.” Weill paused, then said, “No one ever told me that before.” The engagement moved forward.

Former Federal Reserve chairman Paul Volcker once told a pro-McKinsey dinner companion that there are four signs of an impending bank failure: (1) The bank has “rebranded”; (2) it has built a new headquarters; (3) it has acquired a corporate jet; and (4) McKinsey has been in there. That might not be good news for the bank involved, but it was very good news for McKinsey. The firm had become the consultants of last resort.

McKinsey was pulled in to mediate the battle inside Lazard Frères between chairman Michel David-Weill and deputy chairman Steven Rattner over the question of how the boutique investment bank should govern itself, particularly in divvying power among its three primary offices in New York, London, and Paris. According to journalist William Cohan, in 1998 McKinsey interviewed forty-six of Lazard’s partners and helped establish a power-sharing arrangement in the mergers and acquisitions department.
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The engagement highlighted the respect with which McKinsey was by this point held by its Wall Street clientele—the struggle for control at Lazard was one of the investment world’s most Machiavellian dramas, and the idea that McKinsey could help find a way for two of Wall Street’s largest egos to find peace was a high compliment indeed. With a McKinsey-aided fix, Lazard went on to strengthen its niche as a boutique M&A advisory power.

There was some criticism of the work at the time, including the suggestion that McKinsey had produced a “camel”—a horse designed by a committee—instead of actually solving Lazard’s power-sharing problems. “[We] ended up with this mishmash of a structure that wasn’t any better than we already had, really,” one Lazard employee told Cohan. Still, the firm helped stop Lazard from splitting at the seams, a real accomplishment for a boutique bank that had been on the verge of doing just that.

A big part of McKinsey’s influence in the financial sector was due to its alumni network. In 1996 the firm had well-placed alumni in
the management suites of SBC Warburg (George Feiger), Lehman Brothers (John Cecil), HSBC Capital (Steven Green), Swiss Re (Lukas Muhlemann), UBS (Peter Wuffli), Morgan Stanley Dean Witter (Phil Purcell), and Goldman Sachs (Larry Linden).
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Hamid Biglari left McKinsey in 2001 to join Citicorp. Jay Mandelbaum, until 2012 one of Jamie Dimon’s closest advisers at JPMorgan Chase, is an alumnus. Not all of them have had successful runs—Purcell’s Morgan Stanley tenure ended in his being deposed in a coup, Muhlemann’s post-McKinsey career was a decidedly mixed bag. But that didn’t stop boards of directors from going back to the McKinsey talent well again and again.

The firm infiltrated private equity as well. Don Gogel left McKinsey to become CEO of private equity powerhouse Clayton Dubilier. Chuck Ames, also formerly of McKinsey, worked alongside him. Ex-McKinseyite Sir Ronald Cohen was an early player at Apax Partners, one of England’s largest private equity shops.

One primary reason that McKinsey has made significant inroads into the financial sphere is that finance is all about the numbers; it takes no stretch of the imagination to conclude that financial problems can submit to McKinsey’s style of fact-based analysis. What’s more, both consulting and finance tend to attract similar personalities—think MBA Mitt Romney instead of free-ranging “intellectual” Newt Gingrich—and so the two populations find themselves speaking similar problem-solving languages. And once deregulation had all the CEOs in finance looking to acquire or be acquired, they lined up for McKinsey’s help in understanding the brand-new competitive landscape. Gupta wasn’t part of McKinsey’s New York financial institutions mafia, but he, like his predecessors in the corner office, knew to leave it well enough alone—that extended from Lowell Bryan’s iron grip on the banking practice to Pete Walker’s in the insurance industry.

McKinsey wasn’t just in finance, though; it was everywhere. By the late 1990s the CEOs of America West Airlines, American Express, Delta, Dun & Bradstreet, IBM, Levi Strauss, Morgan Stanley, Polaroid, and USG were former McKinseyites.
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In 1999
Fortune
ran a story titled “CEO Super Bowl.” The story suggested that just as the University of North Carolina “manufactures” basketball stars, and the University of Michigan “cranks out” football stars, so too was there a CEO factory in the country—McKinsey. The network is without a doubt the most powerful the world has ever seen. “You don’t realize it until you’re gone,” IBM chief Lou Gerstner later told another McKinsey partner.

Gupta initially seemed to grasp the importance of the firm’s culture and values. In his first year as boss, he commissioned an internal task force, which aimed to identify what was wrong in the life of the firm’s junior partners and what could change. It had impact. Whereas in previous years, the firm’s profit sharing was split in the directors’ favor—as a group, they received two-thirds of the pool, to principals’ third—the task force convinced the shareholders committee to merely divvy the profits proportionally. Gupta also oversaw EAGLE—Exciting Associates for Greater Long-Term Enrichment—proving that a firm addicted to acronyms will always find newer and sillier ones.

Another effort, the Firm Strategy Initiative (FSI) in 1997, showed quite clearly just how rigorous McKinsey consultants can be. The goal of FSI, which they called “the mother of all engagements,” was nothing short of a reconsideration of the most basic questions about McKinsey’s raison d’être:
To whom should we provide our consulting services? What scope of services should we provide? What kinds of delivery
models and fee arrangements should we employ?
A management group of more than six hundred members attended two conferences; sixty partners served on the task force; fifty associates and analysts worked on the project; more than a thousand survey questions were asked; forty “vision” papers were written by partner teams; six progress reports were produced, a total of more than fifteen hundred pages; over a hundred videos were made; more than a hundred and fifty exhibit decks were prepared; and over two hundred speeches were delivered.

One of the main conclusions of FSI was that McKinsey must restrict client engagements to the very top rungs of management. If they allowed their work to slip down to the middle rungs, the consultants reasoned, the money they’d make would come at the expense of their hard-won reputation for being the confidants of CEOs. This was a demonstrative reinforcement of Boweresque values. The FSI also reiterated McKinsey’s commitment to loose corporate governance, despite the firm’s growing size. This was also true to the firm’s tradition of giving consultants the freedom to exercise their entrepreneurial instincts.

At the margins, however, change was creeping in. Usually it had to do with money. One result of FSI was the establishment of new “fee mechanisms” to enable the consultants to work with small but fast-growing companies. In lieu of its customarily high rates, the firm started taking equity in clients, something Marvin Bower had considered unwise. But the dot-com boom was in full flower, and McKinsey wanted a piece of the action. FSI also concluded that the consultants should officially enter the M&A advisory business, where they would compete with investment banks.

Rajat Gupta didn’t change the firm all by himself—he needed his partners’ assent and he had it. Still, under his watch, McKinsey began to chase top billings in a way it never had before. More than half of the partners had told the FSI that about 20 percent of their work wasn’t interesting. And if you’re going to be bored, you might as well be making
money. Everyone else was. “His first term was very good,” said an expartner of the firm. “But I think he took counsel of the wrong people. If you couldn’t invoice $1 million from a client by 1997, you were encouraged to drop that client. That was pretty much the minimum.”