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

by Duff McDonald

  McKinsey’s ultimate push into Europe actually came by way of Venezuela, via a 1956 project that came through a referral from Texaco’s Augustus “Gus” Long to Royal Dutch Shell’s John Loudon. Loudon asked McKinsey to reorganize the giant oil and gas company’s operations in Venezuela as a kind of tryout for further work. The firm passed with flying colors. Upon becoming Shell’s chairman in July 1957, Loudon immediately cabled McKinsey about a study of the entire company. Marvin Bower himself went to The Hague for a negotiation in which the American company held a pretty sweet position. Shell’s joint Dutch-British ownership had produced a stalemate, as the British side of the firm would not countenance Dutch consultants, nor would the Dutch side countenance British consultants. McKinsey represented a compromise, and it landed a giant new client. A London office became a near necessity.

  Still, this being McKinsey, there were memos to write. Clee penned one in March 1958 titled “Proposed London Office.” His previous efforts, in 1956, had been rebuffed, in part because the consultants didn’t believe Europeans would stand for McKinsey’s fees. The Shell contract suggested this was not true. At the April 8, 1958 meeting of McKinsey’s directors, when further study of the matter was proposed, Bower replied that it had been studied enough and asked for a show of hands. The vote was unanimous: McKinsey would open a London office. In April 1959, McKinsey announced the opening of its new office at 4 King Street, St. James, London. Just as it had insinuated itself into the American establishment by way of establishment hiring, McKinsey tapped then-New York–based consultant Hugh Parker, who had rowed at Cambridge, as its first London head. Parker was given a budget of $25,000 to get things going, and in the first year he managed to bill $4,625 to the British subsidiary of Hoover.

  “He understood the British,” Bower later wrote.34 More to the point: “To establish a staff equivalent in caliber to our U.S. staff, we first needed honors graduates of Cambridge and Oxford who could attract others.”35 Parker was a McKinsey man, through and through, as evidenced by remarks like the one in which he said McKinsey men should have “the basic habit of success.”36 That, and an “Oxbridge” degree—from one of just two schools. Bower had his own chestnut: “The successful consultant has a personality that causes most people to like him.”37

  Still, Parker was an American. As the bulk of the London office’s business shifted from serving the overseas operation of U.S. companies to major UK companies, its staffing had to change. British managers wanted to talk to British consultants. To that end, McKinsey lured Sir Alcon Copisarow, a veteran of the UK civil service, as its first non-American director in 1966. It was an astute move, as the governor of the Bank of England thereafter personally requested Copisarow on assignments.38

  In January 1959, Shell announced that it had adopted McKinsey’s organizational recommendations, some of which remained in effect through the 1990s. This was great press for the firm, but it claimed to be troubled by the publicity. “They go around boasting of hiring the McKinseys,” partner Everett Smith told author Hal Higdon. “Our name hits the Times regularly, and quite frankly it scares the devil out of us.”39

  Mike Allen, a former McKinsey consultant who went on to found his own successful consulting firm, was another American who helped London get off the ground. “We were like movie stars,” he said. “After General Electric had decentralized in the 1950s, we seized on the idea and exported it.” Allen recalled challenging the most sacred of British cows: the tea break. “When we worked for the British Post, we quantified it. It was supposed to be fifteen minutes, but it was two hours. They actually only worked about three hours out of eight. The head of the union said it was management’s fault. He was right.”40

  Business ramped up quite quickly. By 1962 London’s client list included the British subsidiaries of Heinz, Massey Ferguson, and Hoover, as well as local firms like Dunlop Rubber and chemical giant ICI. By 1966 the London office was the second largest at McKinsey, with thirty-seven clients to New York’s ninety-six.41 The product, naturally, was decentralization: In short order, the firm decentralized twenty-five of the top 100 British companies. “Honestly, though, it was like shooting fish in a barrel,” said former McKinsey consultant Doug Ayer. “It was okay to be a businessman in the U.S. by that point. But in England, it was still civil service, clergy, or the army. Their businesses needed help.”42

  It’s been said that McKinsey consultants traveled across Europe with a copy of Alfred Chandler’s Strategy and Structure in their briefcases. Chandler’s multidivisional model was the sine qua non of organizational structures, and McKinsey acted as its chief proselytizer. According to historian Christopher McKenna, one European manager told his colleagues to save McKinsey’s $100,000 fee by merely buying a single copy of the book. Le Monde coined the term prêt-à-penser—an analog to prêt-à-porter, or “off-the-rack.” In short, the paper accused McKinsey of selling off-the-rack ideas, tailored only at the cuffs.

  If the criticism cut into McKinsey’s growth, it was undetectable. McKinsey’s European excursion was so successful that the firm entered the popular vernacular. The Sunday Times defined the verb McKinsey as follows: “1. V. To shake up, reorganize, declare redundant, abolish committee rule. Mainly applied to large industrial companies but also to any organization with management problems. See: British Broadcasting Corporation, the General Post Office and Sussex University. 2. N. An international firm of American management consultants.”43 In the view of many, McKinsey reorganized Europe itself.

  McKinsey consultants described their expansion with the same benevolent jargon that had worked so well in the United States. “McKinsey . . . did as much as any institution to rebuild European productivity,” said partner John Macomber. “[And] . . . there was never one scintilla of a doubt about what was motivating us. And it wasn’t money. It was trying to help them.”44

  Over the next decade, McKinsey “helped” an enviable roster of British clients, including Cadbury Schweppes, Cunard, Rolls-Royce, Imperial Chemical Industries, Tate & Lyle, Unilever, and Vickers. It had even greater success in the public realm, working with the Atomic Energy Commission, the Bank of Ireland, British Rail, the British Broadcasting Corporation, the National Health Service, and, in 1968, the Bank of England. That last one was perceived as an affront by British consultants: “The Post Office was a slap in the face; the BBC was a humiliating blow; but the Bank of England was the crowning disaster,” said the chairman of the British Management Consultants Association. Was British management consulting so bad that they had to bring in the colonials?

  The public uproar caused by the Bank of England contract only reinforced the perception of McKinsey’s competitive superiority. As the London correspondent for Science magazine wrote, “And then there is McKinsey, projecting an image which suggests that, if God decides to redo creation, He will call in McKinsey.”45

  By the end of the 1960s, Europe was in full-fledged panic about the economic invasion from the United States. American direct investment in Europe, which had been $1.7 billion in 1950, reached $24.5 billion in 1970.46 French journalist Jean-Jacques Servan-Schreiber’s 1968 book, The American Challenge, argued forcefully that American companies’ ability to manage their operations over vast geographies was crushing European competition, and that the secret to their success was in their organizational structure: in other words, the decentralized form.

  This was Scale and Scope all over again, except this time on a global playing field. “Fifteen years from now it is quite possible that the world’s third greatest industrial power, just after the United States and Russia, will not be Europe, but American industry in Europe,” wrote Servan-Schreiber.47 But “American industry” was an abstraction. And at the time McKinsey, more than anyone else, was its concrete manifestation.

  After London, the firm rolled across Europe like an invading army. It opened an office in Geneva in June 1961, soon picking up Swiss clients like Geigy, Nestlé, Sandoz, and Union Bank. Paris followed in November 1963, and consultants worke
d for the likes of Air France, Crédit Lyonnais, Pechiney, Renault, and Rhône-Poulenc. In 1964 the firm opened offices in Amsterdam and Dusseldorf and began working for BASF, KLM Airlines, Deutsche Bank, and Volkswagen. By 1969 more than half of the firm’s revenue came from outside the United States. In 1950 the M-form was relatively unknown in Germany; by 1970 half of the largest hundred companies in the country had implemented it, most with the help of McKinsey.48

  From 1967 through 1974, the firm had a notable presence in Tanzania, with more than sixty consultants from nine different offices working with Tanzanian president Julius Nyerere to help him plan the nation’s future. While the firm did some work pro bono, journalist Michael Useem reported that the fees were still so high that they became a line item in Tanzania’s budget.49 Indeed, Logan Cheek, who worked at McKinsey from 1968 to 1971, remembers being in the room when Nyerere read the firm’s proposal. “He read most of it, and said, ‘That’s what I want.’ Then he saw the fees. There was a long silence, and he said, ‘Do you realize that the lowest-paid associate on this team will be making more than my most senior minister?’ Roger Morrison thought we’d blown it. But then Nyerere stood up, walked to the window, paused, and said, ‘But . . . back in my village, we have an expression: if you offer peanuts, you get monkeys.’ We got the study.”50 (That Nyerere was a tyrant who quite literally destroyed his country despite vast infusions of Western and Soviet aid during his reign, from 1961 to 1985, did not seem to dissuade McKinsey from doing the work.)

  In 1971 McKinsey was asked to study the administration of the British crown colony of Hong Kong. That was another old-boy connection: Sir Alcon ran into the British governor of Hong Kong, Murray MacLehose, “in the Club” and walked out with a mandate.51

  The ease with which McKinsey colonized Europe left the firm wholly unprepared for a fairly sudden leveling of its growth that arrived as the go-go 1960s came to an end and the more turbulent 1970s took their toll on business in general and American business in particular. But for the time being, Europe was McKinsey’s for the taking.

  McHarvard

  In 1953 McKinsey became the first consulting firm to focus on the crème de la crème of students at graduate business schools—choosing youth and possibility over age and experience. At Harvard, these were Baker Scholars, the top 5 percent of each class, and over the next decades McKinsey became so intertwined with the university that author Martin Kihn facetiously coined the term “McHarvard.” The first two hires from this group, John Macomber and Roger Morrison, stayed at the firm for a combined fifty-eight years. Morrison eventually ran the firm’s London office from 1972 to 1985, while Macomber ran Paris and, after leaving McKinsey in 1973, became chairman of chemical maker Celanese Corporation and president of the Export-Import Bank.

  Within the firm, this decision to prize youth over experience was controversial. “I can tell you, I had Roger Morrison on his first assignment and I was sweating blood,” said partner Ev Smith. “It was Chrysler and those boys don’t play patsy out there.”52 Even Bower himself wasn’t totally convinced. “When . . . Marvin interviewed me, he spent the entire time telling me why it was impossible for someone without experience to be an effective consultant,” recalled Morrison.53

  But the idea caught on. Between 1950 and 1959, as the proportion of consultants at the firm with MBAs climbed from 20 percent to over 80 percent, the median age of McKinsey consultants dropped by almost ten years.54 Younger and hungrier—and a lot cheaper. Betting on potential has become one of McKinsey’s defining characteristics. The idea was simple: It was easier to mold a young mind than to change an older one. “Harvard . . . doesn’t teach you accounting or finance,” McKinsey alum and convicted fraud Jeff Skilling once said. “They teach you how to be convincing.”55

  Most people are convincing when they mean what they say. But Skilling was referring to the remarkable subset of American society known as the insecure overachiever. “Why do people work there?” asked former McKinsey consultant and author James Kwak. “They recruit from the pinnacle of the education system. I spent a lot of time at that pinnacle—I went to Harvard, Berkeley, and Yale Law. The people at these schools are driven by desire for status and fear of failing. You have spent your life trying to get into the best schools and being the best at everything you do. When you graduate, you reach that terrifying point in your life when the next thing to do is not obvious, when there are a lot more choices than before. McKinsey makes it very easy for people whose primary goal is to keep their options open. A lot of people in this situation don’t know what they want to do with their lives.”56 It doesn’t end there. In a true “profession,” one’s legitimacy rests on an actual body of knowledge. In consulting, it’s mere insecurity mixed with arrogance. The degree to which juniors at McKinsey are bullied is actually quite shocking, if not necessarily unique among professional services firms.

  Lou Gerstner, then a young consultant who went on to head RJR Nabisco, IBM, and The Carlyle Group, the king of the buyout firms, wrote of McKinsey’s approach of throwing young and hungry but still largely ignorant talent at its clients’ problems in his autobiography, Who Says Elephants Can’t Dance? “My first assignment was to conduct an executive compensation study for the Socony Mobil Oil Company. I’ll never forget my first day on that project. I knew nothing about executive compensation, and absolutely nothing about the oil industry. Thank goodness I was the low man on the totem pole, but in the McKinsey world one was expected to get up to speed in a hurry. Within days I was out meeting with senior executives decades older than I was.”

  In other words, McKinsey had perfected personnel development: It hired the young and inexperienced for a pittance, then made its clients pay for their further education. It wasn’t as obvious a move as it may seem in retrospect. More than half a century after the first of them had been established, the nation’s business schools—including Harvard’s—were still struggling for professional recognition, much like the consulting industry. But McKinsey’s move started a virtuous cycle that provided substantial reciprocal benefits for both parties. More than perhaps any other firm, McKinsey legitimized the Harvard MBA, giving it cachet that was real and enduring. In return, Harvard has acted as a breeding ground of future McKinsey consultants who understand the firm’s values and principles long before they start working there. By the mid-1960s, at least two of every five McKinsey consultants had gone to Harvard. In 1968 the firm offered jobs to twenty-seven HBS graduates, and fourteen accepted.57 Amazingly, by 1978, when the professional staff was approaching seven hundred, HBS graduates still accounted for more than a quarter of all consultants.58 (This raises an ironic counterclaim to business schools that claim to groom “leaders” but whose graduates tend to follow each other into safe career paths such as consulting. The cult of “leadership” might better be considered a cult of conformism.)

  McKinsey’s influence at Harvard ran deep: When Harvard president Derek Bok proposed jettisoning the business school’s well-known “case study” methods in 1979, Bower himself wrote a fifty-two-page report arguing that there was no justification for doing so.59 The idea was scrapped. Ron Daniel later became treasurer of Harvard, overseeing its endowment. The connections continue to this day, with McKinsey hiring a disproportionate number of grads in any given year. About a quarter of business school graduates now begin their careers advising experienced executives how to run their businesses.60

  But even for graduates of Harvard, landing a job at McKinsey is hardly a lifetime appointment. Most young consultants spend just a few years at the firm before being tossed back out into the workforce. Only one in six hires stays at the company for five years or more. This merciless system, widely referred to as “up-or-out,” was pioneered by law firm Cravath, Swaine & Moore early in the twentieth century and is sometimes called the “Cravath system” as a result. Bower and his partners began formally employing the policy in 1954, inaugurating a relentless performance review cycle. At least once a year, the firm’s consultants are subject
ed to an exhaustive review, wherein dozens of their colleagues are asked to comment on their progress and performance.

  The pressure doesn’t subside over time, either. In 1963 the firm extended the policy to principals—junior partners—for whom “up-or-out” was rechristened “grow-or-go.” It was later applied to directors, who had to “lead or leave.” Once they hit age sixty, partners are pointed toward the door, through which they are strongly encouraged to exit at the age of sixty-five. The average age of McKinsey’s professionals was thirty-two about fifty years ago; it’s still thirty-two today. You don’t hold the line on a number like that without constant churn, especially at the top. Longtime partner MacLain Stewart described the McKinsey model not as “dog eat dog” but more as “dog eat old dog.” Even so, McKinsey has the temerity to refer to its “tradition” of people leaving the firm to seek greener pastures. In most companies, that’s called quitting or getting fired. At McKinsey, it’s raised to the level of ritual.

  Author Matthew Stewart recalled hearing that at an internal presentation on the future of McKinsey, the presenters joked that in ten years or so, only 1 percent of those in the room would still be with the firm. “It is on account of this pyramid principle, of course, that under normal circumstances the opportunity to become a partner in a respectable firm arises only after eight or so years of youth-destroying labor,” he wrote.61 “[And] in the end, just about everybody who plays the game is a loser.”62 Martin Kihn pointed out an additional paradox in the whole system: At McKinsey (as at other consultancies), one is generally promoted from associate to principal on the basis of one’s ability to analyze and present data. But thereafter, one is promoted almost solely on the basis of one’s ability to sell the firm’s services.63 “It’s the only job I can think of where you start in general management, and then, if you’re successful, you end up in sales,” said an alumnus of the firm.