One problem was that the firm had never taken good care of its stars, in the misguided belief that the company was all that mattered, that individuals could be replaced. This cost it talent: People like Rod Carnegie—so revered by associates that they called him “Rod the God”—left the firm in 1970 to become finance director (and later CEO) of Cozinc Rio Tinto. Carnegie was the typical McKinseyite. He didn’t just go to Oxford; he rowed varsity crew. (He also redesigned the blade used by rowers for the previous hundred years.) He didn’t just go to Harvard Business School; he became its top-performing Baker Scholar. And he didn’t just join McKinsey; he became the youngest director in its history. But he eventually tired of the company’s self-satisfaction. “It was a question about what they wanted to do,” Carnegie later said. “There was no gripping vision which led everybody to feel that this was a place that could really take a next major step forward.”79 This was widely interpreted as a swipe at then-managing director Lee Walton, but it also pointed to the larger fact that McKinsey was resting on its laurels.
As much as McKinsey consultants attributed their performance in the 1950s and 1960s to their own skill and intellectual prowess, they were aided by the giant wave of American corporate success that followed World War II. For two decades, most leading industrials maintained their domestic market share without substantial price competition.80 Business was, in a word, easy. Despite their claims to glory, managing the problems of giant oligopolies (or, better yet, monopolies) was not that big a challenge. Without the pressure that came from competition, operational problems were relatively easy to solve.
Internationally, McKinsey had utterly failed to plan for a slowdown. After a period of largely unrestrained growth, McKinsey had conquered Europe, at least in terms of organizational consulting. By 1970, more than half of Britain’s largest industrials had engaged the firm. It should have been clear that such rapid growth could not be sustained, but the firm continued hiring and expanding. Bower later observed that “in 1965 we were overextended on the Continent incurring considerable quality risks in the countries where we had offices.”81 He wrote those words more than a decade later, though, and it’s not entirely clear whether he’d had that understanding at the time.
Where’s the Value-Add?
Marvin Bower had impeccable timing. He hitched his wagon to James O. McKinsey’s star just when consulting was starting to take off in the United States, and he stepped down as managing director in 1967, just before demand for consulting services fell off a cliff. His stewardship had been a profitable one: In 1967 firm revenues hit $21 million, more than 10 times the amount when he had taken over. The number of consultants had grown from 84 to 390. The firm served 19 of the top 25 industrial companies in the United States, and 58 of the top 100.82 In the early 1950s, McKinsey had been an idea in search of business success. Marvin Bower thought he knew the best way to run a professional firm, and he set about implementing that philosophy. By the time he stepped down, his vision had been ratified. His plan had been the right one.
But for whom? Things had certainly worked out for McKinsey. And there was no question that most of its clients—in particular, their CEOs—felt McKinsey had worked out for them. The only remaining question was whether McKinsey was good for society. Despite all its claims to big-picture thinking, the firm had, since James O. McKinsey’s days at Marshall Field, made the bulk of its money helping its clients slash costs. In this sense, McKinsey was a true forerunner of the 1980s revolutions in reorganization, downsizing, and rationalization—which are really just layoffs in different guises. One British journalist coined the term “to be McKinseyed” to describe this often painful corporate experience. McKinsey once argued that it “only assesses situations, not people.”83 But that’s just a bullet point. The theory might be about company structure, but the reality is about people’s jobs.
It’s an impossible number to quantify, given that McKinsey doesn’t actually make final decisions for its clients, but it may not be too far off the mark to suggest that McKinsey has been the impetus for more layoffs than any other entity in corporate history. While many of those layoffs were surely called for—at ailing firms, or ailing divisions of ailing firms—the notion surely raises the ultimate question of whether McKinsey is a net increaser of value or merely the most capable mercenary force in the corporate world. Here’s the problem for mercenary forces, though: When the fun stops, they turn on each other. And that’s precisely what was about to happen to McKinsey.
Marvin Bower created an entity that reflected the triumphant story of American business in the mid-twentieth century, a global empire the likes of which the world had never seen before. Like all empires, though, it faced its challenges, the greatest of which came in the 1970s, when, for an instant, both McKinsey and America itself lost the compass.
4. THE DECADE OF DOUBT
Lost Moorings
In the heady days of the postwar boom, nobody had particularly minded that managers were sprouting like weeds. But the social contract between business and society—work hard, sublimate your personality, and we will give you something approaching lifelong employment—broke down in the economic crisis of the 1970s. When the turmoil also exposed a clueless managerial class that had failed to prepare its companies for rough sledding, public—and intellectual—opinion turned sharply against it. As Alfred Chandler put it, “Top managers began to lose the competence essential to maintaining a unified enterprise in which the whole is more than the sum of its parts.”1
Since the dawn of the American conglomerate, so-called managerial capitalism had been the dominant business philosophy in the United States. In 1920 the ratio of so-called administrative (i.e., managerial) employees to production employees had been 15.6 percent. By 1970 it had nearly doubled, to 30.3 percent. Economists call this a measure of “managerial intensity”—and it demonstrates just how far Organization Man had come since he had stepped out from the shadows of the robber barons.2
But he’d actually made a fine mess of things: By 1973, fifteen of the top two hundred American manufacturing companies were conglomerates, and analysts began to doubt that any value had been created.3 In fact, it looked suspiciously as though most conglomerates were worth decidedly less than the combined value of the companies they owned. And so the great dismantling began. Whereas in 1965 there were eleven mergers or acquisitions for every divestiture, by 1977 the ratio was just two and a half to one.4 Wall Street investment banks had nary a mergers and acquisitions department in the mid-1960s. By the late 1970s, M&A departments were the banks’ biggest earners.
It’s hard to imagine that in October 1967, after holding power at McKinsey for more than two decades, Marvin Bower didn’t have these enormous changes in mind when he did what few men of his stature ever do: He left voluntarily. He was sixty-four years old. Those who knew him were not the least bit surprised. A graceful, timely exit was in keeping with a life lived according to principle. It was nearly a foregone conclusion that a member of the three-person executive committee he’d set up in 1963—Gil Clee, Dick Neuschel, and Ev Smith—would succeed him. The only question was which.
McKinsey hadn’t dealt with such a momentous transfer of power since the death of James O. McKinsey himself. It was about to lose a cherished leader, and the future was therefore unclear. All three members of the executive committee were respected partners of the firm, but none of them was Bower. The transition set the firm on a course of uncertainty from which it took almost a decade to recover.
In preparation for the change, Bower appointed an election committee that produced an elaborate set of rules. There would be a secret ballot, for starters, with the results tallied by McKinsey’s auditors, Arthur Andersen. A 60 percent supermajority would be required for victory, and managing directors could serve multiple three-year terms until the age of sixty.
Like Franklin Delano Roosevelt with the presidential term limit, Bower helped establish a system that practically ensured his tenure as managing director would fore
ver rate as the longest at McKinsey—a crafty move for a man obsessed with his own legacy. But it was nevertheless an elective process. There are precious few private enterprises of comparable size or influence in the world that actually allow the senior people to elect their leaders.
Still, the partners couldn’t keep themselves from adding a classic piece of McKinsey casuistry: There was to be no campaigning. Of course, with so much at stake, that was impossible. If campaigning weren’t permitted to be overt, it would be covert. Factions emerged, as did aggressive behind-the-scenes lobbying. In the first election, international partners lined up behind Clee, who had spearheaded expansion outside the United States. Domestic partners, particularly those in New York, lined up behind Neuschel, known as the Silver Fox for his stylish gray hair. Smith, lacking a meaningful constituency, withdrew from the race and threw his weight against Neuschel. When the first round of votes was tallied, Neuschel was out, leaving Clee to face the forty-one-year-old Lee Walton, the Chicago office manager whose support among younger partners forced a number of votes. On June 21, 1967, Clee was victorious.
“I know that any former holder of a leadership position can best assist the new leader by standing aside,” Bower wrote in a note to the firm the following day. He stayed true to his word over the next thirty-six years.
The orderly transition proved short-lived. Clee, who was the son of a Presbyterian minister and had served in both houses of the New Jersey legislature, took office in October. A tall and attractive man, he famously wore just one type of suit: dark blue with white pinstripes. He was also one of the most widely liked consultants in the firm, and this made it all the more jarring when in February 1968, he was operated on for lung cancer. He stepped down as managing director the next month. A nervous partners group begged Bower to retake the reins. Never mind the bylaws, they pleaded. Those could be changed. He refused, though, and Lee Walton was elected on March 30 without significant opposition. Clee died in July. He was the second McKinsey leader to pass away in two years: Guy Crockett had died in August 1966.
According to Ian Davis, who served as managing director from 2003 to 2009, Clee had one particularly significant achievement in his brief reign: He reaffirmed a basic tenet of how McKinsey governed itself. Talented people don’t like to be managed, Clee argued, and so if the firm wanted to attract and retain talented people, it had to trust them to do the right thing without undue oversight. It is a challenge the firm has had to confront as it has grown larger: Can McKinsey allow partners the autonomy they seek while still maintaining enough control to keep the thing from spinning apart? One way it has done so is by strict enforcement of its cult of servitude, but even servants can act contrary to instruction.
On the day of Walton’s election, Clee wrote a memo to his partners titled “Notes on the Election of a New Managing Director.” It was a moving tribute by a dying man to the ideals to which he had devoted his career. “I know of no other profession and no other firm within this profession where there is such a rich balance of challenge, satisfaction, and material rewards,” he wrote. It was a perfect distillation of the McKinsey ethos, the firm’s sense of itself as a collection of the smartest, most stimulated group of people on the planet. But in the hard years that lay ahead, that ethos would be put to the test.
Between 1967 and 1972, McKinsey enjoyed a final burst of growth. The firm opened six new offices—in Toronto, Milan, Mexico City, Sydney, Tokyo, and Copenhagen—and increased its professional headcount to more than 650. Revenues doubled again, to $45 million. In each new country, too, the firm was able to attract an elite clientele: Alitalia in Italy, Pemex in Mexico. But McKinsey was about to discover the downside of riding a sidecar attached to the American economy: When the tank is full of gas, it’s a nice ride. But the tank was about to run dry.
A Perfect Storm
America’s belief in itself was badly shaken in the early 1970s. There was the Vietnam War as well as the oil embargo, runaway inflation, a brutal recession, the abandonment of the gold standard and subsequent devaluation of the dollar, and the revival of European and Asian industry. The American economy—and, by extension, its consigliere, the consulting industry—went into a tailspin. After two decades of nonstop growth, the consulting industry’s revenues stalled at $2 billion in 1970, and the figure wouldn’t tick upward for the next six years.5 For a firm accustomed to limitless horizons, this was nothing short of devastating.
McKinsey suffered a financial squeeze in its 1971 fiscal year, as flattening client demand and the expense of opening new offices drained the firm’s cash accounts. The experience revealed the extent to which McKinsey had not prepared for tough times—it had no rigorous cost controls. It also led the firm to resolve that it would borrow only to fund operations. Capital expenditures would have to be self-funded.
The 1970s were not merely an inflection point for the American economy; they were also an inflection point for the American self-image. Company Man finally looked in the mirror and saw what others had long seen: Conformity had its costs, and the flush postwar years had left him fat and lazy. The era of managerialism was coming to a close, to be replaced by a more aggressive, less genteel era of so-called shareholder capitalism. Along with it came an emphasis on leaner companies—and thus less demand for McKinsey’s bread-and-butter business, organizational consulting. In 1969 the United States was home to forty of the world’s top fifty industrial firms. By 1974 that number had dwindled to less than thirty. Management was indicted—justifiably so—for its failure to prepare for such seismic shifts in the global economy. The auto industry was hit hardest. In 1950 85 percent of all cars worldwide were made in the United States. By 1980 Japan had overtaken the United States as the world’s largest producer of cars.6 America was in the throes of its own corporate Pearl Harbor.
Billings disappeared virtually overnight, and McKinsey found itself dealing with its own executive bloat. “Almost overnight, McKinsey’s enormous reservoir of internal self-confidence and even self-satisfaction began to turn into self-doubt and self-criticism,” explained a Harvard Business School case study.7 A 1971 Commission on Firm Aims and Goals concluded that McKinsey had chased growth at the expense of quality.
“We realized that we didn’t have nearly as strong a partner group as we should have, that we had elected a lot of partners who should not be partners, that the [firm] was capable of doing bad work, and that we weren’t necessarily on a winning streak forever,” future managing director Ron Daniel said later. “It was an era of coming to terms with the fact that the giddy growth of the 1960s was over for us.”8 As for Bower, semi-retirement didn’t bring contentment. The firm’s troubles were his troubles, and the years 1967 to 1972 have been called his “dark years,” as the institution he had so painstakingly built struggled for balance.
Second Generation
Lee Walton, a five-foot-seven Texan partial to gold steer cuff links,9 had joined the firm in 1955 after stints in the Air Force and oil industry. He had worked in the Chicago office, in Venezuela on the Shell project, then in London, Amsterdam, and Chicago again. While he’d been a favorite of Bower, particularly due to his contributions to European expansion, he was no Bower acolyte as managing director. In fact, he pointedly chose not to consult the older man on major decisions, a move he later conceded might have rubbed Bower the wrong way. He even made a ruling or two contrary to Bower’s cherished “professionalisms,” such as when he decided to let Bower’s contemporary John Neukom serve on a few corporate boards while still working at McKinsey. To Bower, such arrangements presented glaring conflicts of interest.
Walton was the first of the second generation of McKinsey leaders. Only forty-two when he was elected, he took the brunt of the frustration that the firm’s older partners surely felt at turning over their creation to a band of ungrateful youngsters. Worse yet, his era as managing director—from 1968 through 1973—was a painful time for the firm, as was that of his successor, Al McDonald. The nine-year period following Bower’s st
epping down in 1967 through the election of Ron Daniel in 1976 is quite clearly one the firm would like to forget. McKinsey had to contend with not only lackluster growth, but also the appearance of savvy new competitors.
Walton opened his tenure as head of the firm in a way that has since become tradition. He formed a number of new committees, like the Management Group Administration Committee, to evaluate candidates for advancement to director, as well as compensation for both principals and directors; and the Principal Candidate Evaluation Committee. These were, in effect, his cabinet.
He also devised new ways for the firm to study itself, putting together the Commission on Firm Aims and Goals. (McKinsey’s navel-gazing knows no bounds). A year later, the commission reported that the targeted growth of the firm’s professional staff should be 7 to 8 percent annually, and that its associate-to-partner ratio should be no more than 5 or 6 by 1975. These were reasonable targets, and ones the firm unremittingly stuck to for two decades.
Like the law firms it emulated from the start, McKinsey was fundamentally conservative. But its model of white Protestant males in dark suits counseling other white Protestant males in dark suits was out of sync with the times. The firm responded belatedly to the civil rights movement, not hiring its first black consultants—Bob Holland and Jim Lowry—until 1968. Holland became the firm’s first black principal in 1974, before leaving to become CEO of Ben & Jerry’s in 1981. At the end of the 1990s the firm had just five black principals, and it didn’t name a black director until 2005.
The Firm: The Story of McKinsey and Its Secret Influence on American Business Page 10