The Firm: The Story of McKinsey and Its Secret Influence on American Business

by Duff McDonald

  Revenues climbed from $284,000 in fiscal 1940 to $420,000 in 1942. In 1943, when payments to the McKinsey estate ended, the underlying vitality of the business was revealed: a profit of a quarter-million dollars and a net margin in excess of 40 percent. The firm posted losses in the last two years of the war, but the business was growing. The year after the war, the consulting staff numbered sixty-eight, up from twenty-five in 1942. Numbers like that promised a bright future for consulting.

  At every pass, the firm expanded its vision of what consulting could be. Bower made speeches all over the country to professional organizations and composed treatises with paint-peeling titles like Unleashing the Department Store and The Management Viewpoint in Credit Extension. The point was to give the firm the patina of intellectualism, to sell big concepts to big clients.

  In 1937 the Boston office hired Paul Cherington, a former marketing professor at Harvard Business School and author of Consumer Wants and How to Satisfy Them. The book was one of the first expressions of the product cycle—the idea that, like humans, products had different life stages (birth, growth, maturity, and decline) and that opportunities and problems changed in each stage. After the 1935 Wagner Act, which mandated collective bargaining with unions, McKinsey created its own specialty in the field. It hired Harold Bergen, former labor-relations manager at Procter & Gamble, and began advising clients on how to deal with their growing masses of employees and the rise of labor unions.

  Bergen brought with him a client list that upgraded McKinsey’s roster in one fell swoop: Cluett-Peabody, H.J. Heinz, Johns Manville, Lukens Steel, United Parcel Service, Upjohn Company, Sylvania Electric, and Sunbeam Electric.21 McKinsey was never so foolish as to get labeled anti-union, but to its clients—corporate executives—it was clear which side of this growing struggle the consultants were on.

  James McKinsey’s animating idea was that the firm would operate like an exclusive private club admitting only the most prestigious clients. By 1940, it actually started to look that way: In addition to Bergen’s list, the membership included American Airlines, U.S. Steel—and Marshall Field. Despite the serious damage Mac’s brutal layoffs had inflicted on the firm’s image in Chicago, the retailer remained a client.

  A Strategy Around Strategy

  The firm specialized in turning problems into profits. With banks holding lots of foreclosed property and corporate assets from the Depression, McKinsey pitched its general surveys as essential tools. When the economy began to recover, McKinsey deftly began to pitch more aggressive methods for making businesses grow, all the way down to unraveling the workflow processes for companies like Four Roses Whiskey. “[It was] the most miserable thing I ever did,” recalled Warren Cannon. “[It] involved my traveling with whiskey salesmen to find out how they really sold the stuff which was, by the way, a lot of drinking.”22

  The key, though, was to persuade people that McKinsey’s ability to solve problems was just as inspired as the solutions themselves. When the Progressive Era ushered in a cultural acceptance of scientific methods, there was McKinsey, offering scientific evaluation of customer problems. Cutting back because of the Depression? McKinsey offered to help you downsize. When the challenge shifted to managing huge organizations, McKinsey offered advice on the newest thinking in organizational structure.

  This was not only satisfying people’s desire to better themselves. It was also preying on the insecurity of keeping up with the Joneses. McKinsey offered the former, but the implicit sell was the latter. In organization theory, they call this “mimetic isomorphism”—the tendency to imitate another organization in the belief that, if others are doing something, it must be worthwhile.

  In the first half of the century, the nation’s industrial giants were mostly preoccupied with maximizing economies of scale. The dominant idea had been to organize themselves around function—purchasing, marketing, sales—while executives overseeing those groups had responsibility for all of the company’s products. The insight of GM’s Sloan and his peers at DuPont and Sears was to invert that structure and put executives in charge of single product lines. This dissemination of responsibility—dubbed “multidivisional” or “M-form”—enabled companies to be more responsive to changes in the marketplace, and it allowed managers to make decisions without sending every single one up the executive chain for approval.

  By the mid-1940s, General Motors and a few others had embraced the M-form, to their tremendous benefit. But much of corporate America remained in the dark, and this was a great opportunity for the consulting industry—to spread the new corporate gospel, the secrets of the best companies. At this point, McKinsey was not even the market leader; it faced strong competition from the likes of Robert Heller & Associates; Cresap, McCormick and Paget; and Booz Allen Hamilton. Within the span of a decade, though, the firm not only grabbed the lion’s share of organizational work in the United States but also led the way into Europe, where the devastation of World War II had cleared the way for new thinking.

  The new corporate structure liberated the people at headquarters from day-to-day problems and allowed them to focus on the big picture. It also created a whole new class of top-tier executives—highly compensated free thinkers with no actual line responsibility. They got to spend their time doing “strategic thinking.” Strategy was not new—the word originated with the Greek strategos, meaning “army leader.” But as Walter Kiechel pointed out in The Lords of Strategy, the word didn’t really enter the corporate lexicon until the mid-twentieth century. One of the earliest mentions of the word was in New Jersey Bell executive Chester Barnard’s 1938 book, The Functions of the Executive, in which he mentioned “strategic factors.”23 Most people don’t strategize alone, however. And you certainly don’t strategize with your competitor. Enter, once again, the disinterested consultant. Consultants didn’t merely solve business problems—they helped this new breed of executives rationalize and protect their own existence.

  Business historians regard the emergence of strategic thinking as a big breakthrough. “Management is not just passive, adaptive behavior,” wrote Peter Drucker in his 1955 book, The Practice of Management. “It means taking action to make the desired results come to pass.” In other words, companies did not have to be at the mercy of impersonal forces, says Harvard Business School professor Pankaj Ghemawat. Strategic planning enabled them to control their own destinies.24 As executives of top American firms came to believe this and embrace it, they turned to McKinsey for help. And when those same companies shifted their focus to going abroad in the aftermath of the war to take advantage of momentarily crippled Continental competitors, McKinsey helped them find their way.

  One Final Obstacle

  Believing he was James McKinsey’s chosen heir, Bower wanted full control, which meant wresting the firm away from Tom Kearney, who had been James McKinsey’s first partner and was running the Chicago office. The New York operation was dominant, bringing in more than twice as much revenue as Chicago. With Crockett’s backing, Bower made plain his desire to bring the firm together under one name—McKinsey & Company—which irked Kearney, who was convinced it was his name that brought in business. A split was inevitable, and it came in 1947 when Bower and his partners bought full rights to the name McKinsey & Company and opened their own Chicago office under the leadership of Harrison Roddick. Roddick had joined the firm as a twenty-six-year-old in 1935 and had since risen to the level of director in the New York office.

  With Kearney out the door, Bower had just one last obstacle in his path to power—Guy Crockett—who served as McKinsey’s managing director from 1939 to 1950 but is largely a forgotten man in the firm’s history. Most accounts jump straight from James O. McKinsey to Marvin Bower. That is at least in part because Crockett was a pliable figure who was happy to let Bower, a driven, righteous man, consolidate power. While Bower took pains to acknowledge Crockett in his own writings, others haven’t been so kind. “Crockett was the head, but Bower was the drive and the idea person,” former
managing director Ron Daniel told an interviewer in 2003.25 Another colleague threw the dreaded pejorative at Crockett: “There was no comparison between [Crockett and Bower]. Crockett was an accountant.”26

  The McKinsey Process

  McKinsey insisted that it would work only for the chief executives of firms and not be shunted off to their underlings. Anything that wasn’t important enough to involve the CEO wasn’t important enough for the consultants. This had the added advantage of freeing McKinsey from having to offer specialized, technical advice. CEOs didn’t have time for such intricate details, so McKinsey didn’t bother with them either. This became a major piece of the firm’s identity: Narrow expertise is for chumps; we do vision.

  As the firm gained the confidence of its clients, it was able to institute a new and enviable approach to billing. Whereas it had historically billed like a law firm—on a per-diem basis—in the 1940s, McKinsey began what it referred to as “value billing”: simply charging clients what McKinsey deemed its services to be worth. It was a stroke of genius. To this day, McKinsey invoices for extensive consulting engagements can run little more than a single page, with a staggering total—say, $10 million—for services rendered. Should a client ever object, the firm can correctly claim that it’s been standard practice for more than fifty years.

  Another practice instituted fifty years ago was never to reveal the list of its clients. CEOs like this because they don’t want competitors, or anyone else, to know they need outside help. McKinsey is content to let credit for any success accrue to the client. As the journalist and biographer Robert Caro once observed: “You can get a lot of good done in this world if you’re willing to let someone else take the credit for it.”27

  That’s what McKinsey does: It sells the credit to its clients. And it’s a good idea. What manager would want to hire someone looking to take credit? In exchange, though, McKinsey does not take responsibility for what a firm does with the advice it receives. While some clients have broken the compact and tried to pin blame on McKinsey for this outcome or that one over the years, in large part both McKinsey and its clients have remained mum about the work it does. Only in the most extreme circumstances—in the 1990s, the collapses of both Enron and Swissair prompted the firm to publicly defend itself—has the firm ever deigned to engage in open and public debate about the quality of its work.

  Among the problems that McKinsey promised to solve for CEOs was the information bottleneck. Top executives are routinely criticized for not understanding what’s going on at the front line of their companies. McKinsey created a system for interviewing scores of employees and organizing the information for quick consumption by the chief executive. But the consultants didn’t see themselves as mere messengers. They were advisers. And they thought so highly of their advice that in the 1940s Bower began pushing the idea that clients had to act on the firm’s recommendations or McKinsey might reconsider future engagements. (Astonishingly, their clients tolerated it.) The firm’s mythology is replete with stories of partners who bravely rejected problematic clients. Consultant Ev Smith is said to have walked away from a study at Chrysler because the CEO wouldn’t fire someone who was “corrupt.”28

  In his privately published memoir, Bower tells of personally rebuffing the eccentric billionaire Howard Hughes when he sought McKinsey’s help with Paramount Pictures. After flying to Los Angeles to meet Hughes, Bower was led to an apartment by one of Hughes’s assistants and told that Hughes would be there when he could. A day and a half later, Bower called Hughes’s secretary and told her that if Hughes didn’t show by two o’clock the next afternoon, Hughes would not only lose the chance to meet him on this trip but also lose the chance to ever meet him. Hughes promptly showed up and, after some original discussions, convinced Bower to at least speak to some of his executive team. The results were disastrous: Bower concluded that a paranoid kook like Hughes was never going to listen to anyone, and the fees, high as they surely would’ve been, weren’t worth it.

  3. THE AGE OF INFLUENCE

  Decentralization Nation

  Marvin Bower had burned an immutable value system into the core of McKinsey. But it was the ways in which he forced McKinsey to adapt that kept it fiercely competitive. When government spending increased, McKinsey was there to offer Washington, D.C., its advice. When corporate Europe was ravaged by war and needed repair, McKinsey came on the next flight and set up a global operation. When competition for finding talented consultants heated up, McKinsey upended the industry’s recruiting with a masterstroke partnership with the Harvard Business School. And then, when the talent pool at Harvard started running dry, McKinsey led the way with “nontraditional” hiring—engineers, PhDs, MDs, and graduate students from other departments. This was McKinsey at its best: a rock-solid foundation with an ever-changing house sitting on top.

  When Crockett stepped down as managing partner of McKinsey in 1950, there was never a moment’s doubt about who would succeed him. Marvin Bower was forty-seven years old. He’d been at McKinsey for seventeen years. He had the respect of his partners, as well as their complete support. The only complaint about him was that he took too much advice from his wife, Helen. They were not that cliché of a detached 1950s couple. They were a team. When asked to name Bower’s best friend, his son Dick showed no hesitation before saying, “My mother.”1

  Well, she and the firm. McKinsey was the other great love of Bower’s life. He defined the firm, and the firm defined him. In The Pope of Wall Street, John H. Coleman wrote of Robert Moses, “Some men aren’t satisfied unless they have caviar. Moses would have been happy with a ham sandwich—and power.”2 But Bower didn’t want caviar or power. He wanted influence. And McKinsey was the means through which he obtained it.

  Bower was both McKinsey’s general and its drill sergeant. He guided the firm with big strategic ideas, while also attending to every last detail. There was a right way to do everything. Advertising pioneer David Ogilvy once remarked, “It is said that if you send an engraved wedding invitation to my friend Marvin Bower, the great man of McKinsey, he will return it to you—with revisions.”3 Those who knew him regarded him with a quiet, baffled awe. “When I got there in 1961, Marvin Bower was all over the place,” said former McKinsey consultant Doug Ayer. “We must have had lunch once a month for a year. He wasn’t a hell of a lot of fun, but he was the most single-minded person I have met in my life.”4

  Like all legendary business leaders, Bower was also quite lucky. The prime of his professional life happened to coincide with the magnificent postwar American boom. From the beginning of World War II through 1973, real per capita GNP grew at 3 percent a year—nearly triple the rate between 1890 and World War II, and 50 percent higher than that from 1973 through 2000. Meanwhile, the U.S. population exploded, growing by half between 1945 and 1973, and the peacetime federal budget soared as Washington wove its way into everyday American life.

  The consulting industry was one of corporate America’s shiny new toys, growing at a 15 percent clip through the 1950s and 1960s. McKinsey was the clear leader, outhustling the competition for the brightest young workers and endearing itself to CEOs. The postwar boom was marked by two related business phenomena—the rise of gigantism and managerialism5—and McKinsey was in the sweet spot to take advantage of both. Between 1947 and 1968, the share of corporate assets owned by the 200 largest industrial companies increased from 47.2 percent to 60.9 percent.6 When the Celler-Kefauver Act of 1950 prohibited corporations from merging with competitors in the same industry, managers pursued growth by acquiring unrelated businesses, which they typically knew little or nothing about.

  Companies that had ten to twenty-five divisions before the war suddenly had forty or more. In 1929, just 15 percent of the largest hundred firms in the country were diversified; by 1960, the proportion was 60 percent and still climbing—it topped out around 76 percent in 1970.7 In the 1960s, General Electric had 190 separate departments, each with its own operating budget. Overseeing these massive
corporate entities required managerial expertise that simply did not exist. This was McKinsey’s great opportunity. Its consultants became anthropologists of a modern and evolving social organism called the corporation. They were the first ones to truly understand how this human machine worked.

  As its business grew, McKinsey had to modify some of its core principles, such as James McKinsey’s original dictum that the firm consult only with a company’s chief executive. Work for a massive client like General Electric couldn’t all go through the CEO’s office. It wasn’t possible. So Bower decided that it was tolerable to deal with lower levels of management. “As organizations have grown in size and complexity . . . the CEO we serve now may be the chief executive of a subsidiary or division,” Bower wrote.8 He was unforgiving, though, with regard to his conviction that McKinsey work only on its clients’ most pressing problems. In 1963 he fired a partner for doing what he considered too much routine work for infant-formula pioneer Mead Johnson.9

  In the 1950s, McKinsey was working for just about every iconic American company: Colgate, Chrysler, General Foods, Philip Morris, and Raytheon. The firm did pro bono work for the American Red Cross and the Southern California Symphony. McKinsey also expanded its power base beyond New York and Chicago. By 1960 the San Francisco and Los Angeles offices were bringing in more than a million dollars of revenue combined, 16 percent of overall billings.10 A September 1955 story in BusinessWeek included a two-page map highlighting the headquarters of twenty unidentified McKinsey clients. Individual company names might have been kept confidential, but McKinsey’s success was out in the open: It was working with everyone.