The Firm: The Story of McKinsey and Its Secret Influence on American Business (42 page)

“I’ve talked to Dominic about the issue,” said Ian Davis. “Which is: How do you create a feeling of real leadership amongst directors who don’t feel that they are leading the organization? That’s one of the reasons you create committees and networks. The key is keeping older consultants feeling connected. My father once told me that the mistake we all make is thinking teenagers are problematic. It’s really people in their late fifties and early sixties that are the problematic ones. That’s where real frustration arises.”
²⁷

The real regret, though, was not about Kumar. It was about Rajat Gupta and what many at the firm felt they should have known all along. The revelations have caused a stunning crisis of confidence among one of the world’s most confident collections of people. “They always felt a little unsure about Rajat,” admitted a former director. “He never quite embodied Marvin’s values. He was a much more commercial animal. That’s why it surprised no one that he joined Goldman’s board in the first place. That’s why the venom is so strong about him, because they could see it coming and they didn’t stop themselves. They just printed money when he was there, and now they’re all feeling guilty about it.”

There were clear signs that seem to have been ignored. For one, he’d muscled his way through objections from some partners and joined Goldman’s board before he’d officially resigned from the firm—a clear violation of Bower’s founding principles. And then came the worst news of all: A superseding indictment filed by the United States attorney in late 2011 suggested that Gupta was feeding Rajaratnam information from Goldman board meetings in 2008
when he was still working out of McKinsey’s New York offices
. He had given up his partnership in 2007, but still retained an office at the firm.

If you’d asked a McKinsey partner in 2011 whether Kumar and Gupta had damaged the firm, you would have gotten a resounding “yes” in response. But here’s the remarkable thing: Ask a client, and you would get a different answer entirely. For the most part, clients didn’t seem to care, or they even felt sympathetic. Despite a slight drop-off in 2009 due to the global financial crisis, the business continued to hold up relatively well in the face of the scandal. Even Walmart, which for years disdained consultants, had brought McKinsey on board at the end of the decade.
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McKinsey’s revenues actually
grew
by 9 percent in 2010—second in the industry only to PricewaterhouseCoopers.
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The firm hired two thousand people in 2010.

Loyal clients included companies that were clients of Anil Kumar himself. In 2009, for example, Tim Flynn, chairman and CEO of accounting and advisory firm KPMG, was in the midst of formalizing a project with McKinsey. On Wednesday, October 14, Kumar spoke to the board of KPMG. The next morning Flynn and Kumar had breakfast. And the next morning Kumar was arrested. But like many McKinsey clients, Flynn apparently subscribes to the “bad apples” theory: Every organization has them, and the thing that’s important is that once they’re discovered, you do your best to make sure there aren’t any more. KPMG decided to go ahead and work with the firm despite the controversy.

Peter Grauer, chairman of Bloomberg LP, expressed a similar sentiment. He first encountered McKinsey around 2006, when he asked the consultants to help chart a future for the financial information provider’s domestic television business. Bloomberg adopted a series of McKinsey’s recommendations in 2008, including bringing in proven talent—like network television veteran Andy Lack.

McKinsey also helped Bloomberg assess its strategy for an expansion into legal information through a new product, Bloomberg Law. At the time, Bloomberg was selling access to its law product on its famous terminals, and the product was priced more expensively than its main competitors, such as Thomson Reuters, Westlaw, and Reed Elsevier. McKinsey nudged the company toward a web-based platform that allowed for much more competitive pricing. “They did a great job on that one,” said Grauer.
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The consultants then moved on to a similar project on Bloomberg Government. Neither effort had been a resounding success through 2012, but, once again, the client is reluctant to pin any shortcomings on McKinsey.

“We have seen the quality of their work,” said Grauer. “It’s been fruitful working with them. We do business with other management consulting firms, but it just so happened that we find the intellectual processes and quality of output of McKinsey superior enough that we engage them more than others.” And then he added something that might put a smile back on Marvin Bower’s face: “We pay them what we think is fair, and I think we get value for it.”

The firm’s intellectual output continued to win raves as well. In mid-2010 Dominic Barton was meeting with Francis Mer, former minister of finance in France and then-chairman of French conglomerate Safran. Mer had read McKinsey’s January 2010 report, titled “Debt and Deleveraging: The Global Credit Bubble and Its Economic Consequences.” Mer told Barton that it was the single best piece of research he’d read in five years.

“Can I give you some feedback?” he asked Barton. “You couldn’t market yourself out of a paper bag. Why didn’t you take this report around to every single finance minister in Europe and force them to read it?” This was ignoring the obvious reason for McKinsey’s retreat from active outreach. Since the arrest of Kumar and the rumors about Gupta, the firm had leaned back on its most cherished of public relations strategies: It had closed ranks. It was still pitching to clients, but McKinsey wasn’t in a chest-thumping mode in 2010.

Despite the media frenzy over the insider trading scandal, the actual damage to McKinsey’s reputation remained unclear. In
Consulting
magazine’s 2009 ranking of the best firms to work for, McKinsey slipped from the number one spot to second, behind Bain & Company. But the firm remained at the top of the Vault.com survey of the most prestigious consulting firms in 2011, a spot it had held for a decade.

McKinsey’s Thursday night party at the Belvedere Hotel during the World Economic Forum in Davos is still considered the best event of the week. There is talk in WEF circles of when Klaus Schwab, the seventy-three-year-old founder of Davos, lets go of the reins that McKinsey will take over management of the Forum. McKinsey Man is Davos Man, after all.

In March 2012 McKinsey partners quietly reelected Dominic Barton to a second term as managing director. No one even bothered running against him, which wasn’t surprising. Barton radiates calm, and he is thus suited to lead the ever-larger collection of insecure overachievers as they once again do a little soul-searching.

E
ven as the Anil Kumar and Rajat Gupta episodes begin to fade in the rearview mirror, McKinsey is on a stretch of road as existentially foreboding as any in its history. The profession that it largely invented is more hotly contested than it has ever been. Everybody is competing to be a consultant. And many of the new, hot companies that are driving the economy have shown little or no interest in engaging McKinsey.

McKinsey’s main asset continues to be the trust its clients have in the firm, an unquantifiable, intangible thing that is constantly being tested. The consultants’ secondary assets—their trust in each other and the internal culture of the place—have likewise come under stress. The more the organization grows, the harder it is to enforce a coherent set of values. Marvin Bower’s little club of Harvard MBAs with their Anglo-Saxon mores is ancient history. McKinsey is now a truly global corporation. The place is so big that the presence of more rogues on the payroll is not a mere possibility but a near certainty.

If they are to be believed, they
do
continue to trust themselves. It’s the reason McKinsey partners spend such a ridiculous amount of time each year evaluating one another. And while there will certainly be more bad behavior by foolish people at McKinsey, it has never been a
place that attracted the truly greedy. People obsessed with wealth tend to go elsewhere: to investment banking, private equity, hedge funds, or venture capital.

Trust issues aside, McKinsey’s greatest challenge is finding things to tell its clients that they don’t already know. The business world is overflowing with MBAs these days, and McKinsey-like advice can be easily bought at low, un-McKinsey-like rates. What’s more, McKinsey’s vaunted “transformational relationship” isn’t a priority for many clients embroiled in global economic turmoil; results are. Even the most trusting client can lose enthusiasm for his consultants if they’re not helping him solve his immediate problems. Many companies today don’t have the luxury of indulging in long-term strategizing. They need to win right now. That’s never been McKinsey’s strength.

McKinsey was a great partner to the industrial era. This was especially true in the years after World War II—the era of Peter Drucker and the “invention” of management—when America was a place of giant firms that were quite literally out of control, conglomerates so large that their managers had trouble getting their arms around them. Marvin Bower and his peers gave them new tools and techniques for how to manage. The firm helped reshape the corporate sector as well as the government, often using McKinsey’s own internal designs as a template.

After being sideswiped by more aggressive competition once or twice, the firm was also a great partner to the first postindustrial era. McKinsey was an invaluable partner to CEOs in industries facing rapid change—from finance to pharmaceuticals. Indeed, McKinsey seems to have played a part in
every
big trend of the past century, from deregulation and loosened capital markets to the spread of new technologies and globalization.
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Whatever the corporate problem, McKinsey has often been able to offer a fix.

But while the firm continues to grow, there’s an argument to be
made that its influence has not kept pace. Few of today’s winners got where they are today because McKinsey told them how to get there—consider Apple or Google. McKinsey’s signature winners are from the old school: American Express, AT&T, Citibank, General Motors, or Merrill Lynch. McKinsey didn’t work for Microsoft until the software company was already huge. McKinsey, in a way, is the Microsoft of its own industry—never out ahead but with the resources to play catch-up occasionally when others advance first.

As McKinsey loses its vitality, it has become less alluring for young talent. The firm dominated the era of the MBA—the late 1980s and early 1990s—when all any business student wanted to do was get a job in consulting or banking. Nicholas Lemann wrote in the
New Yorker
in 1999 that McKinsey had effectively encapsulated the zeitgeist of the moment, much as the CIA had done in the 1950s, the Peace Corps in the 1960s, Ralph Nader in the 1970s, and First Boston in the 1980s.
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But that was thirteen years ago. Today, the crème de la crème flock to younger, more vibrant companies, in both entry-level and much higher positions. The brightest students tend to not want to work for large companies anymore, and McKinsey is a large company. In the 1970s every smart student received an offer from Arthur Andersen, then about ten thousand strong. The more adventurous went to McKinsey, which employed a paltry four hundred by comparison. Today Arthur Andersen is gone, and McKinsey has taken its place in the student imagination. It’s for the average Harvard Business School graduate, not the Baker scholars. And, as has always been the case, McKinsey consultants continue to leave for big positions elsewhere. Among others, Facebook chief operating officer Sheryl Sandberg is a McKinsey alumnus, as is Google chief financial officer Patrick Pichette. McKinsey may be a career firm for some, but it tends to lose its best people.

In
Fortune
magazine’s best companies to work for in 2010, all of McKinsey’s main competitors showed up—Boston Consulting Group (number 8), Ernst & Young (44), Deloitte (70), PricewaterhouseCoopers (71), Accenture (74), and KPMG (88). McKinsey didn’t make the list. The firm claims that the acceptance rate for offers made by it hovers around 95 percent. But an alumnus who worked at McKinsey for nearly three decades has said that, at least at Harvard Business School, that number is nowhere near accurate. Recent acceptance rates at Harvard, he argued, have fallen precipitously. Whereas in 1973 the firm made offers to 5 percent of the MBA class and had an acceptance rate of about 80 percent, in more recent years McKinsey made offers to about 30 percent of the class and enjoyed only about 50 percent acceptance.

Though the firm still invests more in its people than does any of its rivals, McKinsey is at risk of becoming a mere pit stop for talent, a place that trains young people for more exciting careers elsewhere. That presents a shocking disparity with the McKinsey of half a century ago. “Are they in the swiftest stream or not?” asked former McKinsey consultant Bill MacCormack. “What are they learning? In our day, we got to work at the very highest levels. It was an intellectual high. Is it still?”
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Winners don’t win forever, no matter who they are. Goldman Sachs, long the gold standard in finance, has been outmatched recently by its much larger and better-capitalized competitor, JPMorgan Chase. Microsoft, lazy and dull after decades of dominance, was utterly outflanked by Apple after the return of Steve Jobs. And McKinsey? The firm has been winning at the game so long that one can only wonder if it will realize when it’s lost what made it a winner in the first place.

The firm’s centrality in the management process is also more difficult to see with the abstraction of the economy. While many assume
that the growth of consulting is a direct result of the benefits it provides, there is an alternative view. “The world does not owe consultancies a living,” Stefan Stern wrote in the
Financial Times
in April 2010. “After all, there was a time, not so long ago, when people ran their business without the help of strategy consulting firms.”
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In many cases, that is also true today: McKinsey alumni may have infiltrated the ranks of Google or eBay, but the fleetest young companies that are changing the face of business today don’t have the time for McKinsey to establish a “trust-based relationship.”