The Firm: The Story of McKinsey and Its Secret Influence on American Business (43 page)

McKinsey is now large enough that it tends to reflect the consulting cycle, which waxes and wanes with the global economy. As a result, McKinsey has not seen meaningful growth in the United States for many years and is seeing dramatically slower growth in Europe, where it prospered in the 1990s. Like the Roman army, McKinsey needs to keep moving just to forage for food to sustain itself. Chinese executives and bureaucrats, naturally, find themselves enjoying a disproportionate amount of attention from the consultants. Burgeoning demand in Asia for McKinsey’s services is due at least in part to the firm’s sterling brand reputation in the West. But that demand won’t last long if all McKinsey does is try to sell old formulas in new packages.

The firm’s business is also so global that the revenue breakdown generally mirrors that of world GDP. The United States, for example, which accounts for about 25 to 30 percent of global GDP, also represents 25 to 30 percent of McKinsey’s revenues. Europe and Africa? About 30 percent combined. And Asia and Latin America make up the balance. If the debt crisis takes down the European economy, more than a quarter of McKinsey’s revenues could be at risk.

McKinsey’s shareholder committee—its de facto board of directors—now numbers thirty-one people spread across the world. Such a cumbersome governing body is not built for speed. The firm’s size
has also finally voided the long-held pretense that the consultants work only with the corner office. They are now forced to admit that they accept assignments to work throughout large organizations. That has increased the volume of business available to them, but it has also dented their reputation as the close confidants of the corporate elite.

McKinsey still manifests strengths that its competitors have not been able to replicate. McKinsey’s one-firm ethos—in which the head of the German office doesn’t care if one of his local consultants is working for Daimler or Detroit—has allowed it to sidestep debates about intracompany profit centers and bonus pools that have terrorized the staffs of rivals. Its self-governing partnership—as opposed to a command-and-control setup—has also helped the firm avoid the pitfalls of more autocratic leadership models.

Most impressive, perhaps, is its still unrivaled ability to attract an enormous pool of smart people and to mold them into
like-minded
smart people—an army of highly motivated, high-impact consultants. This is done by weeding out those who can’t be molded; the most important jobs at McKinsey are those doing the molding at different levels of the firm. The winnowing can be brutal on young people who were the smartest in their class and then suddenly are shown the door by McKinsey after two years. But if you make it onto the partner track, it’s a contented little club of survivors. In a sense, McKinsey has solved the same riddle as the army has in convincing people to go to war and get shot at—for the feeling of serving something greater than oneself. None of its rivals have come even close to creating a system like this. They don’t quite hold hands and sing the Japanese national anthem at McKinsey, but it’s close.

McKinsey is as likely to cripple itself as a competitor is to do so. Which brings the focus back to size. Within McKinsey, the debate over what is the right size for the firm is a never-ending one. One
camp, generally older consultants, thinks the firm has grown too large and could afford to shrink in order to maintain the quality of its people and their work. The other camp, made up of younger and hungrier consultants, has no memory of those days when the firm was just four hundred or a thousand or even five thousand strong. To them, size is power, and they make an argument for continued growth.

With size, too, comes complexity—the kind McKinsey claims it is expert in solving for its clients. The firm now has so many internal networks or “cells”—of geography, industry, and function—that the primary challenge of the place has moved from bringing in new business to making sure the internal structures don’t fold in on themselves. The firm, in effect, is made up of dozens of mini-McKinseys. The benefit of such smallness in the presence of bigness is that it’s actually quite difficult to fail as an institution. The challenge, though, is one of leadership: Is it reasonable to think one can gather fifty mini-Bowers or mini-Bartons under one roof, especially in light of the fact that, by design, no one runs anything at McKinsey for much more than six years anyway? From the outside, it’s unclear how the cell system works. From the inside, it is also unclear how it works. And that’s a problem for a firm at which the connections among people are all that matters.

And is a model where senior partners spend several weeks a year reviewing one another as efficient as it needs to be in today’s hypercompetitive market? Especially from the perspective of the client, who might have a year-long project to contend with? McKinsey has long been enamored with the way it does things—going so far as to tell clients they can take the culture or leave it—but in an era of cautious corporate spending, McKinsey’s idiosyncrasies run the risk of not being tolerated anymore.

McKinsey will tell you that there really is no secret to its success—it
is based on a relentless focus on recruiting and training, rigorous peer review, hard work, and emphasizing one’s contributions to the firm rather than taking credit for client billings. The firm’s recruiting process has been compared to that for astronauts. That has surely allowed McKinsey to weather the necessary decline in selectivity that comes from hiring ten times more people a year than it did just ten years ago, but the job of keeping up the quality is an increasingly challenging one.

Yet it is also one at which the firm seems to be succeeding. Clay Deutsch, who recently left the firm after thirty years, said the McKinsey he joined and the McKinsey he left are two profoundly different firms. “Can a firm evolve and end up in a radically different place while still having many of the same central characteristics?” he asked. “Characteristics that animate rather than retard it? I think so, as cosmic an idea as that may seem.”
⁵

It can never be argued that McKinsey has not served its own people quite well. Those who leave the firm have what remains one of the business world’s most admired names on their résumé. Those who make a career of it have gotten extraordinarily wealthy and have found entrée into the halls of power around the world.

In the end, though, the value of a professional institution might be more appropriately measured by what it has done for others. On that count, the verdict is less clear.

It does remain an open question whether McKinsey has really transformed the way businesses are managed. Did it save General Motors, the great American icon, despite study after study for millions upon millions over the years? No. Did it foresee and push its clients to the front of the era of Internet-based business? No. Did it stop the wayward drift of the banking industry that led to the global financial crisis? Again, no.

Which raises another question: Just what
have
the consultants
done? Ask McKinsey about the greatest piece of advice the firm ever gave—Did it tell Coca-Cola to green-light Diet Coke? Did it assure McDonald’s that serving breakfast could work out? Or tell Chrysler to go for it with the Jeep?—and the answer will be wholly unsatisfying. There are no legendary consulting engagements at the firm. There are only legendary client relationships, the kind that keep money pouring in the door. One need not look further than this to realize that it’s all been about selling from the start. In short, it’s not
what
McKinsey sold, it’s
that
it sold. What’s more, despite its emphatic insistence on its culture of “values,” those values have often shown themselves to be conditional. They are applied when they are helpful. And they are not when they are not.

That said, through its objectivist, skeptical, fact-based, integrative, and analytical approach to solving its clients’ problems, McKinsey has certainly made the world a more efficient, rational, and objective place than it might otherwise have been. In a world full of talkers and blowhards, the firm is supremely capable of bringing the focus back to the data and research, and usually to efficient effect. Management guru Gary Hamel referred to the “machinery of management” as “one of humanity’s greatest inventions” in his 2007 book,
The Future of Management
.
⁶
If McKinsey hasn’t actually invented many of the bold ideas of management since the death of James O. McKinsey himself, it has certainly helped clients understand them and carry them out.

The firm has also served as a powerful talisman for the terrified executive, a corporate shrink for the insecure CEO, and a rubber stamp for the domineering boss who wants to ram a decision down his company’s throat. In other words, it plays the role its clients have scripted. That’s why the focus on personal relationships has worked for so long. What executive
wouldn’t
want a high-quality rapid-response team of well-dressed worker ants to satisfy his every need?

McKinsey has also been instrumental in enforcing the rules and customs of modern business—the modern company is no one’s nanny, it is not a permanent employer, and it is playing in a ruthless game of winners and losers. In that regard, McKinsey has also contributed to the effects of modern business on the rest of society. By serving the interests of the corporate suite, the firm has played a part in the growth of income inequality—the chasm between compensation of the heads of companies and their employees is the widest in history.

McKinsey’s continued focus on the problem to be solved, as opposed to all the ramifications of the proposed answer, remains perhaps its greatest weakness. The focus on the purity of that answer, as opposed to how easy or difficult it will be to get to where one wants to be, has never been the firm’s strong suit. Laying off 10 percent of the people might cut 10 percent of the costs, but it also might make the remaining employees 50 percent angrier about their increased workload.

In their worst moments, McKinsey consultants congratulate each other on being what more than a few have referred to as the greatest collection of talent the world has ever seen. And in a way, they may be right—it’s difficult to think of a comparable group of such smart, driven people working for the same organization anywhere in the world. But you can also look at it as McKinsey claiming to have won a game that no one else is playing. Most organizations—be they large multinational banks or entities like Facebook—don’t actually
need
everyone on the payroll to be a smart overachiever.

•    •    •

Charlie Munger, Warren Buffett’s longtime partner at Berkshire Hathaway, wrote in his book
Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger
that he had never met a corporate leader who’d actually read a consulting report.

Pin executives down, and they will surely be able to tell you about
the most important decisions of their career. In a large organization, though—the kind for which McKinsey works—the value of most decisions doesn’t necessarily reside in the actual choice made; it resides in the very fact that the choice is being made in the first place. Leadership is about getting people to follow you, but before they can do that you need to choose the direction in which you’re heading. There will always be demand for such a service, and that’s precisely what McKinsey provides.

At the moment, McKinsey is looking east. Its early successes in Asia offer an opportunity to get as strong a grip on the corporate imagination there as it once had in the days of the preeminence of the old-boy WASP culture of America’s northeast. Again: It is no coincidence that Dominic Barton, the current managing director of the firm, spent his formative years navigating the back rooms of corporate Asia. One of the greatest challenges facing any global business in the early twenty-first century will be understanding how to navigate the cross-currents of a rising Chinese economic power in the face of a stubbornly persistent American one. If McKinsey can manage to be seen as the holder of that key, the firm’s continued prosperity is assured, at least in the short term.

Marvin Bower wanted McKinsey to be considered in the same light as the trusted local banker. But the firm of today resembles much more closely a national or global banking conglomerate than the friendly face from down the block. McKinsey is now a large—and aging—company, much like the giants it advised in the 1960s and 1970s. Its clients—whether they are corporations or executives—are far bigger. The consultants push for and help bring about change on a massive scale. At the same time, though, McKinsey now spends more and more time navigating the same bureaucracies it once disdained, and the firm is inside those systems more than it is outside them.

McKinsey’s greatest challenge going forward—the true test of its genius—is no longer finding inspired solutions to its clients’ problems. The test is managing the complications that have resulted from its own stupendous success. One of the firm’s recently stated goals is helping to “[solve] the world’s great problems.”
⁷
But if it wants to achieve this, it’s going to have to continue solving its own.

When you finally put the pen down (figuratively speaking) after a project of this magnitude, the experience is an unusual one. Just a few months before, it felt like a boulder on your shoulders. And suddenly you feel as if you could fly. For that reason, it’s a good idea to keep a running list of the people you need to thank for helping you get over the finish line. Because if you went by your emotions alone, you might just suffer from the delusion that you managed to get there all on your own. Maybe some people do. I am not one of those people.

Let me start by thanking my publisher, Simon & Schuster. This is the second book with which these good people have entrusted me, and I greatly appreciate the repeat endorsement. First among equals at S&S: my editor, Priscilla Painton. I could not have hoped for a better hand-holder along the way. Thanks, Priscilla. Next, of course, is the man who signs the checks, publisher Jonathan Karp. Thanks for taking a chance on this one, Jonathan. Thank you too, Colin Fox, for your championing of the project. Thanks also to Victoria Meyer, Tracey Guest, and the S&S marketing team, as well as Michael Szczerban and Sydney Tanigawa.