The Firm: The Story of McKinsey and Its Secret Influence on American Business (39 page)

McKinsey has a long tradition of feigned ignorance of its own financials in favor of obsessing about client needs. Do good work, the saying went, and the numbers would always come through at the end of the year. But that kind of informality doesn’t really work anymore when you’re so big that any line item on your income statement runs in the hundreds of millions or more. In 2008, despite outwardly robust results, McKinsey rolled a third of its partners’ bonuses over to 2009.
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The firm proceeded to slash some $440 million out of support services, including marketing, “reputation,” risk, and IT support.

Ian Davis had done what he was elected to do, which was to steady McKinsey & Company after the turbulent Gupta years and impose some stringent internal controls. He not only did that; he oversaw continued robust growth. On July 1, 2009, the relatively low-key Dominic Barton, a Canadian who had spent much of his McKinsey career in Asia, succeeded him. Barton was the coauthor of a book titled
Dangerous Markets: Managing in Financial Crises.
It was an apt title for the era. But Barton soon found himself managing over another kind of crisis entirely.

In 2009, Dominic Barton was elected just the eleventh managing director of McKinsey—following in the footsteps of James O. McKinsey, Crockett, Bower, Clee, Walton, McDonald, Daniel, Gluck, Gupta, and Davis. And he is surely the most understated in the firm’s history. Despite his enormous influence in global affairs, he still carries around a bit of the small-town boy from Sardis, a farming community outside Vancouver, British Columbia. Press him, and he will even evince a certain amount of surprise at his being elected at all.

But he would be the only one to do so. Because once more, McKinsey seemed to have found the managing director fit for the times. On the surface, Barton represents a continuation of the more restrained leadership of Ian Davis. He had been mentored by Davis, after all. And this was clearly what the rank and file was looking for: In one industry survey, he was one of only six CEOs of the top fifty companies to receive a 100 percent approval rating from his employees.
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But he is more than that. If Al McDonald was a dose of tough medicine in the 1970s, Fred Gluck a signal of the importance of expertise in the 1980s, and Rajat Gupta a celebration of global growth in the 1990s, the selection of
Dominic Barton showed that, like the rest of the world, McKinsey was turning its attention to the Far East, as a source not just of both clients and consultants, but of ideas about business itself. McKinsey was taking the long view again.

Barton joined McKinsey in 1986, as part of what was still a relatively rare breed at the time—the new hire without an MBA. Not that he was too far outside the norm—the graduate of the University of British Columbia went on to win a Rhodes scholarship and obtain an MPhil in economics from Oxford. And he had what McKinsey values almost as much as academic degrees and good comportment: a restless curiosity as well as genuine and fruitful interactions with his colleagues. Two years before his election, Barton was the director cited by the most consultants as a mentor. Senior partner Larry Kanarek noticed it at the time but says he didn’t realize he was looking at the 2009 election results twenty-four months in advance.

In a stark departure from past managing directorships, Barton gave a wide-ranging interview to Canada’s
Globe and Mail
newspaper just two weeks after taking office. This was the new McKinsey, one that once again proactively maintained strong relationships with journalists, after several years of a much more defensive posture. In the interview, Barton told the reporter of being born and spending his early childhood in Uganda, where his parents—an Anglican missionary and a nurse—were scolded by an army officer for letting their son sneak aboard a Land Rover without permission. That officer: Idi Amin, the future tyrant.
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While the family did return to Canada—Barton spent the first eleven years of his McKinsey career in the Toronto office—the Ugandan
experience had given him wanderlust, and Barton jumped at the chance to move first to Sydney, Australia, and then Seoul, South Korea, when the firm was having trouble finding partners to staff that office. Almost as soon as he arrived, the Asian financial crisis hit, dealing a severe blow to the Korean banking system. For Barton, though, the crisis was a bit of a godsend: With thirty-four of the country’s banks insolvent, his first big project was to help Korea restructure its entire banking system. “The public sector work was exciting,” he recalled. “And then when the entire region was on the move, it was totally enthralling.”
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Barton later ran the firm’s Asian operations out of its Shanghai office before moving to London upon his election as managing director. (Like all McKinsey partners, he’s done quite well financially and keeps homes in Shanghai, London, and Singapore, as well as a summer cottage in Canada’s exclusive Muskoka region.)

Barton is the polar opposite of Rajat Gupta in terms of academic output. He has written more than eighty articles on Asia alone, and two years after his election he wrote a prescription for the mess that had been made of Western economies, “Capitalism for the Long-Term,” published—where else?—in the
Harvard Business Review.
He is so academically inclined, in fact, that in his early years with the firm, the Toronto office partners informed him that while wearing tweed jackets with elbow patches might play well in the ivory tower, it was a no-no at the firm.

The paper was a clarion call for business leaders to take control of their own destiny by reforming “the system” before governments exerted control. It was also a reaffirmation of one of McKinsey’s basic tenets: that business should be a force for good, and that it was incumbent on executives to fix the failures of “governance, decision-making, and leadership.” In it, Barton espoused a move from what he called “quarterly capitalism” to “long-term capitalism.”

“In my view, the most striking difference between East and West
is the time frame leaders consider when making major decisions,” he wrote, drawing on the twelve-plus years he’d spent in Asia. “In my discussions with the South Korean president Lee Myung-bak shortly after his election in 2008, he asked us to help come up with a
60-year
view of his country’s future . . . [whereas] in the U.S. and Europe, nearsightedness is the norm.”
⁴

Barton cited McKinsey research that has found that 70 to 90 percent of a company’s market value is related to cash flows expected three or more years into the future. “If the vast majority of most firms’ value depends on results more than three years from now, but management is preoccupied with what’s reportable three months from now, then capitalism has a problem,” he wrote. He even dared touch the third rail of the corporate governance debate, excessive CEO pay, and suggested a number of changes to current approaches, including the idea of evaluating executives over rolling three- or five-year time frames.

As one part of his own long-term planning, Barton has nudged the firm toward investments in so-called proprietary knowledge that might not pay off for three, five, or even seven years. One example: the firm’s Organizational Health Index (OHI), which allows clients to benchmark any number of elements of organizational effectiveness—such as employee satisfaction, innovation, or company direction—against a proprietary database of 600-plus clients and over 280,000 employees. This kind of information can be a gold mine for executives looking for continual improvement in the way they run their businesses, and the OHI quickly became a powerful addition to McKinsey’s arsenal of client offerings.

Another: McKinsey now tracks what it calls “global profit pools” of the entire banking industry. If a client wants to know, for example, if the profitability of its installment loan business in Korea is up to scratch, McKinsey can tell it where it stands compared with the entire
industry. “We’re always going to be a client service firm, first and foremost,” said German office head Frank Mattern. “And with Dominic championing investments in proprietary knowledge, we’re moving much more in that direction.”
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As the number of McKinsey alumni continued to grow—the firm’s alumni directory numbered 23,000 as of 2011—so too did the number of possible clients peopled with those loyal to the firm.

Not only do alumni prove a source of future engagements—Stephen Kaufman, a McKinsey alum who became CEO of Arrow Electronics, commissioned eight studies from the firm over a period of 10 years
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—they also tend to hire from their old stomping grounds. Andrall Pearson hired more than a dozen McKinsey alumni at PepsiCo, including Michael Jordan, who went on to run Westinghouse Electric. Lou Gerstner hired more than fifteen at American Express.
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“American Express was a McKinsey subsidiary in a lot of ways,” said one former partner. “They didn’t have the management timber they needed, so they would constantly be raiding us for it.”

McKinsey alumnus Paul Chellgren, who went on to become president of Ashland Oil, explained the preference to
BusinessWeek
in 1993: “[Working at McKinsey provides] a cram course in business experience,” he said. “It was a compressed opportunity to see a lot of companies, industries, and problems in a short period of time. You got your BS, your MBA, and your MCK.”
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Gerstner later carved his name on the door of fame at IBM, where he guided one of the most startling turnarounds in modern business, after which he became chairman of the Carlyle Group. At IBM, though, he showed that the Mafia doesn’t
always
help the mother ship.
After his arrival at IBM, Gerstner created a consulting group that was bringing in $11 billion annually in just four years, clearly a direct assault on McKinsey’s own technology consulting business. This was taking money out of McKinsey’s pocket, not putting it in.

Invariably, alumni who go on to prominent outside positions find they must make adjustments. First, they have to learn how to actually manage people, something they’re rarely called on to do at McKinsey outside a project team of four to six people. “That might be the toughest transition,” admitted one alumnus. “You find you need a lot more sensitivity than you need at McKinsey.” Second, they need to adjust to the fact that most corporate environments are, by nature, more hierarchical than McKinsey. “Early on [at American Express] I discovered, to my dismay, that the open exchange of ideas—in a sense, the free-for-all of problem solving in the absence of hierarchy that I had learned at McKinsey—doesn’t work so easily in a large, hierarchical-based organization,” wrote Gerstner in his bestselling autobiography,
Who Says Elephants Can’t Dance?
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Gerstner managed to bring some of that McKinsey magic to American Express—and even more of it to IBM, which he famously rejuvenated after the once proud computer maker had suffered a long and slow slide toward complacency.

Bill Matassoni explained that the network is a primary differentiating factor for the firm because it proves McKinsey is a “leadership factory.” It says much that Matassoni, who went on to spend five years at BCG after leaving McKinsey, still considers himself a McKinsey man above all else. “BCG asked me how come their alumni aren’t as happy as McKinsey’s,” he said. “I told them it was simple, that when a guy left BCG they shat all over him and considered him a failure. When people leave McKinsey, they are counseled out and are proud of their time there.”
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There is no McKinsey boneyard, in other words; you’re still McKinsey, even after you’ve left.

Even those who lose turf battles and feel forced to leave eventually
come around to warm and fuzzy feelings again. Tom Steiner, who lost a struggle to head the firm’s banking practice with Lowell Bryan, and another to oversee its in-house technology efforts with Carter Bales, left to head A.T. Kearney’s financial services practice in 1992, taking sixteen consultants with him. Yet he can speak with a near religious fervor of his time at the firm, even though he went on to make far more money than he had at McKinsey by founding and then selling his own consulting practice—Mitchell Madison—during the dot-com boom.

The ability of McKinsey alumni to land in positions of real influence continues unabated. In June 2009 C. Robert Kidder—McKinsey alumnus and former chairman of both Borden Chemical and Duracell—became chairman of Chrysler Group LLC. In May 2010 alum Ron O’Hanley, who left McKinsey to join Mellon Financial, was hired to share duties atop mutual fund powerhouse Fidelity Investments with Fidelity scion Abigail Johnson (which possibly positions O’Hanley to be the next head of the firm when Johnson’s father relinquishes the post). In the span of four months in 2010, Ian Davis was named not only to the board of oil giant British Petroleum, but also to that of Johnson & Johnson as well as Apax Partners, the highly successful private equity fund co-founded by ex-McKinseyite Sir Ronald Cohen.

Not all McKinsey alumni immediately pick up the phone and hire their former colleagues. Those of more recent vintage, in particular, are well aware of the nearly insatiable need among principals and directors to generate new business. Even if McKinsey does have continually deepening connections in business and government, it is also sitting across the negotiating table from more and more people who know just what McKinsey is good for and what its efforts—and associated billings—are wasted on. The virtuous cycle, in other words, can be self-defeating as well.

One alumnus, now head of a major financial institution, explained that while he will use McKinsey for highly analytic and focused projects, he has no time whatsoever for the typical McKinsey schmooze fest. “Of people who have worked at McKinsey who are now clients,” he said, “there are two types. There are people like me who understand the bullshit side of it and who aren’t too smart. We don’t get caught up in the intellectual masturbation. And then there are the more cerebral people who hire them because they want other McKinsey people around. They get into these companies and think, ‘Oh my God! Everyone here is a dope. I want to start using the whiteboard with someone, to talk about the effect of the Internet on
x, y
, or
z
.’ Those are the guys who never left McKinsey. They carry it around with them, and their organizations hate them for it.” The best clients of McKinsey, in other words, are junkies who need their fix.