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

by Duff McDonald

  But while the firm could control some of its big egos and force them to submit to the greater good, some consultants nevertheless still managed to achieve a level of renown—both internal and external—that set them apart from their otherwise inconspicuous peers.

  King Herb

  In 1987 Edzard Reuter, then CEO of Daimler-Benz, made a remarkable claim: “Nothing happens in Germany without McKinsey being consulted first.” More precisely, nothing happened in Germany without Herbert Henzler being consulted first. From his base in Dusseldorf, Henzler had turned McKinsey’s German operations into the envy of his colleagues, eventually achieving the greatest penetration of major businesses of any country in which McKinsey had a presence. At one point in time, the office served twenty-seven of the top thirty companies in the nation. The German magazine Wirstschaftswoche ran a cover story about Henzler called, simply, “King Herb.”

  It wasn’t always this way. When former McKinsey consultant Logan Cheek, who worked for the firm from 1968 to 1971, arrived for a two-year stint in Dusseldorf in 1969, he felt as if no one in Germany had ever heard of management consulting. “The Germans couldn’t understand why someone in authority would pay someone else to tell him what to do,” recalled Cheek. “Many of our German friends concluded that McKinsey had something to do with Alfred E. Kinsey, and that we were nothing other than a front for sex consultants.”35

  By the time Henzler was done, few in Germany were so confused, and the German office was the V8 engine under McKinsey’s hood. “I remember very clearly another twentieth anniversary,” Ron Daniel once said, “this time in the German office, where Henry Kissinger was a speaker. He was amazed. He got to that party in Munich and found sixty major industrialists at our semi-private seminar, many of whom he had heard of but never met, all of them top drawer. . . . Mobilizing the firm’s network and power is something we do every day on behalf of our clients.”36

  While the firm strives to make its decisions through consensus, there have been a number of uniquely powerful consultants over the years, from Bower to Daniel to the relatively unknown Warren Cannon, who was consigliere to both men. Henzler too was a breed apart. His colleagues referred to him as the last of the barons. Fred Gluck, of German ancestry himself, even used to call Henzler and his German colleagues Friedrich Schiefer and Helmut Hagemann “the U-boat commanders.”

  In the fourteen years Henzler headed the German office, it grew from a hundred consultants to eight hundred, getting him tagged with another nickname: “Growth Herbie.”37 By 2011 there were 150 partners in Germany and another 80 German partners in other McKinsey offices internationally. “Herb had this thing where he would say, ‘We will know we have arrived when the cabdriver picking you up at the airport knows exactly where to take you when you simply say McKinsey,’ ” recalled a former partner of the firm. “We would joke, ‘Let’s hope that cabbie isn’t one of the five million people in Germany who have been laid off as a result of McKinsey’s work.’ ”

  While he’s admired for what some describe as a ruthless German efficiency, Henzler had the good fortune of running the show when Germany underwent a fundamental transformation in the 1980s and 1990s. During that period, the German establishment shifted toward a much stronger market orientation than in the past, dismantling the stolid and collusive Germany Inc. and opening up industries to genuine competition and innovation. McKinsey played a huge role in that, and also became a valued consultant to the trillion-euro reconstruction of East Germany.

  Henzler helped McKinsey’s European contingent gain an equal voice in the firm’s governance against the “New York mafia.” “The gravity of the firm was moving anyway, but Herb was the one that came to symbolize the shift,” said former managing director Ian Davis.38

  To some, Henzler also symbolized a growth-at-all-costs attitude that Rajat Gupta later embraced as managing director of the firm. “He was dictatorial and driven and arrogant,” said a former colleague. But Henzler was also a forceful proponent for changing the way the consultants paid themselves. Even as Ron Daniel succeeded in bringing to the fore considerations of consultants’ noneconomic contributions to the firm, in the 1980s McKinsey nevertheless shifted much of the economic portion of the conversation away from one’s effects on the long-term value of the institution and toward a “What have you done for me lately?” approach.

  A young and aggressive German contingent resented what they saw as older American consultants coasting on past glories, and they succeeded in radically changing how the firm managed its finances. Henceforth, McKinsey would liquidate itself at the end of every year—paying out all profits to the consultants—a move that encouraged short-termism over true stewardship of the long-term value of the institution. McKinsey may say it encourages its clients to think long-term, but its own people value today over tomorrow. “Germany has been the piston that keeps the engine going for many years,” said one European alumnus. “McKinsey has been more German than American for some time. That’s why they asked for more of the cash in the 1980s.”

  Indeed, Henzler accumulated enough power that at one point he openly defied Ron Daniel. Daniel had closed the firm’s São Paolo office in 1977, just two years after it had opened. When Henzler told him that a German client, which had a significant trucking operation in Brazil, wanted McKinsey to reopen an outpost there in the mid-1980s, Daniel told him to focus on Germany and to leave Brazil to the Americans. Henzler did no such thing, dispatching Stefan Matzinger to set up a covert operation. He then presented the office to the shareholders committee as a fait accompli. Some partners were upset, but Henzler got his way in the end.39 Twenty-three years later, the firm had 230 people in Brazil. The German office also played a part in opening practices in Russia, Taiwan, and Turkey, all of which were the result of Henzler’s edict to young partners: “You want to prove yourself? Do something completely entrepreneurial, like opening a new office.”

  Henzler’s abiding goal was to be considered the equal of his clients, not just a hired hand, and in this he succeeded. His connections within Germany ran so deep that there was talk he might become chancellor. When Henzler retired in 2001, he later told author Walter Kiechel, he had consulted for Siemens with no interruption for twenty-seven years, and with both Daimler and Bertelsmann for nearly two decades.40 “Our partners have become very respected senior business figures,” said subsequent German office head Frank Mattern. “We’ve established ourselves as true peers of the leaders of German industry.”41

  Henzler’s singular ambition was tolerated because of his staggering economic contributions to the firm, although in time he eventually managed to alienate a partnership that thought he was getting a little too big for his McKinsey britches. But he had a strong competitor on that front in Japan.

  Emperor Ohmae

  If Herb Henzler was the last of McKinsey’s barons, Kenichi Ohmae was its one and only emperor. But whereas Henzler was a sales machine, Ohmae was more of a rabble-rouser. He was the firm’s most prominent and oft-quoted consultant in the late 1980s, head of its Tokyo office, and author of several international bestsellers, including The Mind of the Strategist and Triad Power.42 McKinsey had always hired smart people, but Ohmae was truly brilliant. His PhD in nuclear engineering from MIT told only part of the story. He was known in Japan as Keiei no Kamisama—the “God of Management.”

  Bill Matassoni was an ardent supporter of Ohmae. “I remember one time I told Ron Daniel that I wanted to place a full-page ad for $22,000 for Ohmae’s Triad Power in the Wall Street Journal,” Matassoni recalled. “He said he couldn’t spend the firm’s money on one book. And he was right. But Triad Power did just fine. Ohmae wrote thirty-seven editorials for the Wall Street Journal. He didn’t need any help.”43 That’s not entirely true: The unsung man in the background of this event was Alan Kantrow, who moved to Tokyo for several years to be Ohmae’s “thought partner.” Ohmae’s 1990 book, The Borderless World, correctly foresaw the era of corporations overtaking governments as the most powerful ent
ities on the planet. The firm’s 1993 annual report included the joke: “We published 11 books last year. Only 3 were by Ken Ohmae.”

  The first native Japanese to run the Tokyo office, Ohmae became office manager in 1979, and the office made its first positive financial contribution to the firm in 1981.44 More important, Ohmae helped establish an elite reputation for the firm in Japan. Nicknamed “Mr. Strategy,” he led high-profile engagements for the likes of Sumitomo Bank and helped change Japanese attitudes toward management consulting. This was another example of Ron Daniel’s deftness. At one point all of the firm’s office managers were American. After he installed Ohmae in Tokyo, Daniel did likewise all over the world: Gerard Thuillez in France, Peter Foy in London, Henzler in Germany, Paco Moreno in Spain, Christian Caspar in Denmark, and Rolando Polli in Italy. (Mind you, Thuillez was not a Frenchman but a Belgian—and this was a source of great consternation for the firm’s French partners.)

  In a company overflowing with big egos, Ohmae managed to stand far above the rest. This was a man prepared to draw up a manifesto for the government of the entire world, after all. “I didn’t know Ohmae,” said one former McKinsey consultant who overlapped with him. “But everyone told the story that when you met him, you would realize that you were talking to the smartest person that ever lived. And that’s because he would tell you that it was so. It was cause for great ridicule.” It also drove many senior partners to distraction that Ohmae had a bodyguard, who sat all day long with a thick pistol on his desk for all to see.

  That said, counter other McKinsey consultants, he was also hugely generous and charming if you engaged with him on the right issue. “In my sixth month at McKinsey, I got home to White Plains in New York, where I lived with my wife and nine-month-old daughter,” recalled Partha Bose. “At ten p.m., I got a call from Tokyo: ‘Ohmae-san wants to speak with you.’ I motioned to my wife with my finger going across my neck that I must be getting fired. But it was nothing of the sort. I had sent Ohmae a report our Cleveland office had done on the future of Japanese auto suppliers in the United States and he spoke to me for half an hour about it, asking for my perspective on a number of its conclusions. I kept thinking: ‘Does he realize he’s speaking to someone with only six months at the firm?’ But that was Ohmae for you. If you had a good idea, you were in. But he didn’t tolerate fools lightly.”45

  Many McKinsey directors speak fondly of spending time with Ohmae and his family at one of the many houses he owned around the world. Ohmae was also a concert-level clarinetist, a bon vivant, and a connoisseur of the finest things in the world. Including himself: In 2009 he saw the need to write a paper titled “The Inside of Ohmae’s Brain.”46 After he wrote in Triad Power that multinational corporations ought to have the “Anchorage perspective”—it was equidistant from New York, London, and Tokyo—the mayor of Anchorage presented him with a key to the city for putting it so forcefully on the map.

  Ohmae’s high profile was a double-edged sword for McKinsey. Business flowed from Japanese clients enamored with him, but his reputation also put a stress on McKinsey’s firm-before-individual ethos. He came to personify the firm’s Tokyo operations to such a degree that when he left the firm in 1994, McKinsey found that many Japanese clients didn’t want to work with just any McKinsey consultant. They wanted Ohmae, and if they couldn’t have him they didn’t want to work with McKinsey at all. So great was Ohmae’s popularity that a poll conducted in the 1990s by one Japanese newspaper ranked him as the nation’s most trusted man.

  Ohmae also favored a command-and-control method of management that even his supporters have described as “tyrannical.” There’s that, and the fact that the Tokyo office didn’t actually generate much profit under his leadership. After leaving McKinsey, Ohmae experienced a comedown familiar to many a McKinsey man who finds that the rarefied air of consulting doesn’t always play well in the real world. In 1995 he ran for governor of Tokyo and lost to an entertainer (and occasional drag comedian) named Yukio Aoshima. (Another comedian, Isamu Yokoyama, won in Osaka the same year.)

  Still, along with Fred Gluck, Ohmae came to symbolize the true intellectualization of McKinsey, and he helped give the firm an answer to BCG’s Bruce Henderson and Michael Porter, who had gone on to consult on his ideas through the firm he and several of his close associates formed: Monitor. And it was Ron Daniel who gave them the freedom to do so.

  Three of McKinsey’s biggest stars—Tom Peters, Herb Henzler, and Ken Ohmae—poked their heads above the rest for a time. All three gave McKinsey something invaluable. But after they’d all left, McKinsey went back to a system that quietly rewarded a brigade of high-performing no-names.

  McKinsey Ist Überall!

  By the mid-1980s, McKinsey was as big and complex a company as many of its clients. In 1972 revenues had totaled $45 million. By 1987 they had topped $500 million. (They doubled again over the next four years, topping $1 billion by 1991.) The German magazine Manager wrote in 1984 that McKinsey ist überall! (McKinsey is everywhere!) And it truly seemed to be: The firm had employed 537 professionals in 1970. In 1987 it had more than double that, with 1,300. Between 1976 and 1988, it opened fifteen offices around the globe, including Boston, Madrid, Lisbon, and Stuttgart.

  McKinsey partners had always done well; now top directors were pulling down as much as $500,000 a year. That’s the kind of thing that happens when your income growth far outstrips growth in head count. The firm had accumulated so much money that in 1985 it established the McKinsey Investment Office, which operated as a kind of internal family office/fund of funds from that point forth. At a later conference of firm partners in Boca Raton, Marvin Bower asked his partners: “Do you know when you’re making too much money? When you need someone else to manage it for you.” While those in attendance nodded in agreement with the old man, they still wanted to know what their bonuses would be that year.

  Everyone wanted to talk to McKinsey, in part because its massive scope certainly did give it perspective on the best practices of one’s competitors, whether they were in New York, London, or Tokyo. Merrill Lynch and Citicorp both hired the firm to help plan for a newly deregulated world. Japanese financial institutions Nippon Life Insurance and Sumitomo Bank hired McKinsey to help them determine in which Wall Street firms to take a stake. The firm helped guide Nippon to Shearson Lehman and Sumitomo to Goldman Sachs.47

  Not surprisingly, the consultants exhibited a renewed confidence that occasionally veered right into arrogance. “There are only three great institutions left in the world: The Marines, The Catholic Church, and McKinsey,” one partner told BusinessWeek in 1986.48 London office manager Peter Foy suggested, “There is no institution on the planet that has more integrity than McKinsey and company.” In a Forbes article, a McKinsey partner summed up the self-image neatly: “We don’t learn from clients. Their standards aren’t high enough. We learn from other McKinsey partners.”49

  “There is nothing so exhilarating as listening to one of our consultants . . . hold forth on a subject that he has thought deeply about and that he can apply to a client’s particular situation with confidence and impact,” Fred Gluck wrote in a 1982 memo to his colleagues. Former San Francisco office head Ted Hall was notorious for his sky-high opinion of his own worth. “I saw Ted Hall in a room with two guys who’d won Nobel Prizes, and yet he still thought he was the smartest guy in the room,” recalled a colleague. Hall was notorious for passive-aggressive office-speak: he pretended to engage others but was not really interested in doing so. He would suggest that colleagues “rise up a few levels of abstraction with me” or “invite” them to reconsider their position. “At the end of his career at McKinsey, he’d mellowed a bit,” said a former colleague. “He actually acknowledged that there were others in the room.”

  That said, the man was smart. He was credited with helping the Federal Reserve shift the way it counted money from counting bills to a weight-based approach. (Las Vegas casinos owe him a debt of gratitude.) Hall and former partner George Fei
ger also helped launch the consolidation of the U.S. banking industry by pushing Wells Fargo to acquire Crocker Bank in 1986. “We’d been hired by the Comptroller of the Currency to find out what would happen with deregulated interest rates,” recalled Feiger. “The answer was consolidation. So we took that work and explained its implications to private companies. Anyone can buy a competitor, but we showed Wells Fargo how to make money at it.”50

  “The real competition out there isn’t for clients, it’s for people,” explained Daniel. “And we look to hire people who are: first, very smart; second, insecure and thus driven by their insecurity; and third, competitive. Put together 3,000 of these egocentric, task-oriented people, and it produces an atmosphere of something less than humility. Yes, it’s elitist. But don’t you think there has to be room somewhere in this politically correct world for something like this?”51 Then again, another partner said, “People ask who our greatest competitors are . . . it’s our clients. Their first choice is not McKinsey or someone else, it’s hiring anybody at all.” It seems inevitable that one will soon say that McKinsey’s greatest competition is itself.

  When Walter Kiechel wrote a cover story for Fortune in 1982 titled “Corporate Strategists Under Fire,” the article was accompanied by a cartoon of a boxing ring filled with different-sized boxers, McKinsey being the biggest among them. “Everybody loved it,” said Matassoni. “Ron Daniel even bought the original art. But I thought it made the wrong point. I told Ron, ‘We need to get out of the ring entirely.’ ”52 This wasn’t a new idea: McKinsey had always pushed people to believe that it didn’t “compete” with BCG, Bain, or any other firm. Bower had elucidated it first: As far as he was concerned, McKinsey didn’t have any competitors.