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

by Duff McDonald

  The Safety Net

  Though most McKinsey consultants would be loath to admit it, the firm’s much-acclaimed risk-taking culture is actually one that offers great reward without taking too much risk. Want to go open an office in a new country? Unless you’re a complete failure, you can always come back home. Want to spend six months trying to reel in a big client? If you don’t succeed, just lean back on your old client list. Working for a firm that culls its ranks so ruthlessly is a form of risk taking, but if you’ve got the goods, it’s a far safer bet than heading out on your own.

  One associate admitted as much in the firm’s internal magazine about his move to Hong Kong. He realized there was almost no risk in the decision. “The safety nets were all in place,” he said.25 McKinsey considers its culture an entrepreneurial one. But it’s entrepreneurialism with a pillow waiting to soften any fall. Still, in its own insulated way, the firm allows an enviable spectrum of change-of-career options.

  Stefan Matzinger, whom Herb Henzler sent to Brazil in the mid-1980s, said that the ability to feel entrepreneurial within the context of having a secure salary is one of the best things about working at McKinsey. “You are evaluated on a prudent use of firm resources,” he explained. “We’re not a budget-driven organization. The only question you need to be able to answer is, ‘What’s the right thing to do to build the practice?’ ”26

  The key? You have to be able to bring the McKinsey network along with you. The power of McKinsey in its modern form is the number of people that can be brought into any particular client relationship. You can go to Brazil if you’d like, but you’re going to need the rest of McKinsey’s global partners on speed dial in order to make the office successful. This is one reason why the firm has found it difficult to make midcareer hires. Not only is there the indoctrination issue, but if you’re new to the place at the principal or director level, you’re not going to be able to bring the right people into your client relationships. One of the highest-profile lateral hires the firm ever made was luring famed media consultant Michael Wolf away from Booz & Company to be head of the firm’s global media and entertainment practice in 2001. Wolf brought the client contacts, but he failed to put together a working internal network at McKinsey. He’d run into the buzz saw of personal profiles at McKinsey: The most successful McKinsey consultants are networkers of the highest order. Wolf was, well, a lone wolf. He left the firm after just three years.

  Antiheroes

  The biggest corporate buzzword of the early 1990s was reengineering—the idea of breaking down a company into its constituent parts and then rebuilding it into a more efficient machine. With almost two million copies sold, Reengineering the Corporation, by James Champy and Michael Hammer, became one of the biggest-selling business books since In Search of Excellence. Neither was a McKinsey man, but that didn’t stop the firm from doing what it has done time and again—using someone else’s idea to its own advantage. But it took some time to figure out just how it would do so.

  Reengineering actually caused the firm a brief headache in the early 1990s, especially in Europe, where Cap Gemini, recently galvanized by its purchase of a bunch of “change management” firms, was running across the continent pushing what essentially was organizational transformation. Some partners, especially those in Scandinavia and the Netherlands, came up with their own versions of reengineering and wanted to brand their ideas. Gluck pushed back, arguing that the firm wasn’t going to brand anything but that it would push McKinsey’s established brand, which was built around long-term relationships and “transformational” work. His instincts were right: Reengineering faded out like a glowworm, but long-term clients kept reupping with McKinsey.

  Rethinking the way one does business is a hallmark of the American success story. Despite the brutal implications at the individual level, one of the primary differentiators between American companies and their foreign competition is the ability to lay people off with relative impunity. From a cultural perspective, for example, Japanese and German companies both struggle far more with the Darwinian implications of mass layoffs than do their American counterparts. McKinsey, once again, found itself in the position to ease the process for its client executives, providing fact-based justification as well as a philosophical backdrop for downsizing.

  McKinsey’s advice to Frito-Lay in 1991 led to the dismissal of nearly a third of its headquarters staff. For the price of just $3 million, the consultants offered conglomerate ITT $90 million in savings, a large part of which came through layoffs.27 A company in trouble has every reason to downsize. But just as McKinsey had taken the gospel of consulting from troubled companies to healthy ones, so it helped take the gospel of reengineering from the troubled to the healthy. In 1994 Procter & Gamble laid off 13,000 of 106,000 workers, while simultaneously claiming that it was in no way a sign of trouble at the firm. “That is definitely not our situation,” said the firm’s CEO at the time.28

  There was one great side effect of the reengineering boom, at least as far as consultants were concerned. If, as a corporate CEO, you’re going to rethink the entire way you do business, you’re going to need to commit a large swath of your own staff to any consulting project. “By the late 1980s, virtually all the major consulting firms had begun to perfect the means to target client managers to do and sell the consultants’ own work,” wrote Lewis Pinault in Consulting Demons. If your goal is to make cumulative fixes in the way you do what you do—removing choke points, finding persistently high expense zones, or merely rethinking the route by which the mail boy walks through the building—you’re going to need consultants who get really ingrained in your business.

  The McKinsey Society

  Whereas the occasional book has been written critiquing consulting as a whole—The Witch Doctors, Dangerous Company, and Consulting Demons were all published in a few short years at the turn of the twenty-first century—McKinsey has never been specifically and directly attacked in the United States, the world’s largest consulting market as well as its largest publishing market. In Germany, however, several books have been published that attack McKinsey by name. There’s a reason for it, too: Long after the reign of Herb Henzler, Germany remains, according to author Walter Kiechel, “pound for pound, the best market in the world for high-level consulting.”29

  He may be right, but it’s of a very particular sort, the kind that resulted in McKinsey’s earning the labels “job destroyers” and “axe wielders.” McKinsey was so nearly omnipresent in Germany that immediately after unification, the firm was called in to sell all of the former East Germany’s agricultural and industrial assets. (The firm later discovered that two McKinsey directors had been trading on the sales for their own accounts. Both were summarily fired.) German companies—if not German workers—had an inexhaustible appetite for McKinsey intervention.

  McKinsey’s success in Germany has been a double-edged sword, though. Nowhere else in the world—not even in the United States—has the sociocultural response to the “consultocracy” been as pointed and as persistent. Americans might work up a lather in the midst of a wave of layoffs in tough times, but their memories are as short as the economic cycle. Germans, on the other hand, for the better part of three decades and counting, have been launching sustained philosophical attacks on the whole idea of what has come to be known in Germany as “the McKinsey society.” The attacks on McKinsey’s particular brand of capitalism have intensified over the past decade.

  In 2003 Dirk Kurjuweit wrote Our Efficient Life: The Dictatorship of the Economy and Its Consequences, about the ruthless obsession with corporate profits. He decried the simplistic and fundamentally inhumane notion of a society in which efficiency is the ultimate goal. “In the Middle Ages, the church influenced thought and conduct,” he wrote. “Since the enlightenment, reason was regarded as the standard of all conduct. Today, the economy plays this role and marks our ideas of happiness, love and meaning of life.”

  McKinsey Is Coming, a play by Rolf Hochhuth, follow
ed Kurjuweit’s book. Hochhuth covered territory similar to Kurjuweit’s, including unemployment, social justice, and the “right to work.” He focused his audience on the question of whether Deutsche Bank had any right to lay off 11,000 employees in a year when it earned 9.4 billion euros—the most in its 130-year history. Hochhuth was criticized for advocating violence against corporate executives, which he denied.

  McKinsey partners don’t necessarily argue with the core premise of either work—that they stand for efficiency and rationality. What bothered them about Hochhuth’s, though, was that even though his work wasn’t about McKinsey per se, the firm was in the title of the play. “We stand for rationality and we stand for objectivity,” proclaimed German office head Frank Mattern. “If you read the theater pages in Germany, some of them talk about ‘the McKinsey society.’ But that’s ridiculous. There’s no such thing. For better or worse, we stand for originality, for objectivity. We stand for doing what’s right. It gives us a lot of clients and followers and friends. But you know, if you stand for anything, you’re going to have critics.”30 Or possibly worse: Herb Henzler had become very concerned about his own safety after the Red Army Faction assassinated Deutsche Bank chief Alfred Herrhausen with a car bomb when Herrhausen was on his way to work in 1989. Henzler was also rumored to have received death threats in light of the massive job losses in German industry in the early to mid-1990s.

  Journalist Thomas Leif wrote Advised & Sold: McKinsey & Co—The Big Bluff of the Management Consultant in 2006. The book caused momentary controversy but quickly faded from notice. Still, debate about the firm’s true and enduring effect rarely reaches the level of public discourse, so it does say something that even Germany—a country celebrated in 2011–2012 for the ruthlessness of its economic discipline in the face of Continental profligacy—has never quite managed to reconcile the wider social costs and benefits of embracing McKinsey ideas.

  The Jesuits of Capitalism

  Fred Gluck’s tenure at McKinsey was distinguished by his fixation on knowledge—amassing it, organizing it, and making it available to consultants and, ultimately, the firm’s clients. “When I joined the firm, I was kind of surprised by the relative lack of knowledge,” he recalled. “It wasn’t all relationships, of course, but the analyses weren’t based so much on knowledge as on the diagnostic guide, which said, ‘Look at inventory, look at this, look at that.’ It was kind of a menu approach.”31 Gluck had always had a different vision in mind: Jesuit-educated himself, he meant to turn McKinsey into the Jesuits of Capitalism. And he succeeded.

  “In the early 1980s we were still a generalist firm,” noted former partner Clay Deutsch. “There was a premium on free-association problem solving, and a sense that specific skills and knowledge were dirty and vocational. By the turn of the century, it was hard to succeed in the place without being a specialist of some sort. There’s still some mythology that McKinsey consultants are all still generalists. Today’s firm is incredibly specialized.”32 In other words, after fifty-plus years of experimenting with nonpartner-track associates, T-shaped consultants, and the 1990s variant—“spiky integrators”—the firm had finally been persuaded that expertise is good. It’s not as if McKinsey was alone in fetishizing the notion of generalists, either. As recently as 2012, McKinsey client General Electric finally capitulated to the idea itself and reversed a longtime policy of rotating senior leaders through different divisions in favor of leaving them in place to deepen their understanding of a particular business unit.33

  “[Today] McKinsey positions itself as the repository of all business information and theory worth knowing,” wrote John Huey in his infamous story in Fortune.34 The firm claimed to do more research on business issues than the business schools at Harvard, Stanford, and Wharton combined. With nearly two thousand consulting engagements a year, McKinsey considered its purview “an invaluable laboratory in which to observe and participate in real-time experiments in management.”35 That was Fred Gluck’s legacy. Well, that, and planting those seeds of greed that would bloom during the tenure of McKinsey’s next managing director, Rajat Gupta.

  “We had a saying at Bell Labs that with just three phone calls, we could reach the expert in any technical subject, anywhere in the world,” said Gluck. “And much of the time he or she would be at Bell Labs. My ambition for McKinsey was to be like that. That’s what drove me.”36 A small army of McKinsey partners threw themselves into the task to help the firm reach that destination. Three were dedicated to the task full-time: Hans Dieter-Bluhm, Roger Ferguson, and Brook Manville. Three others spent an inordinate amount of their time on it: Partha Bose, Alan Kantrow, and Bill Matassoni. Others took it upon themselves to drive knowledge development within their individual industry and functional practices, including Nathaniel Foote of the massive organization-design practice and Tom Copeland, the firm’s renowned corporate finance guru. But consultants had a hard time finding all these new ideas until Gluck asked Matassoni to create an effective way for the firm to share its knowledge. “Until we did that, if you wanted our best thinking on an issue, you would call the practice leader, who might be in Cleveland, get his secretary, and she would look in his files,” explained Matassoni. “Fred wanted a real system put in place that delivered documents. But he didn’t want it to replace conversation.”37

  And Gluck was willing to have this done at the expense of revenues. Other consulting firms talk a big game about knowledge building, but McKinsey might be the only one that has forsaken actual income to do it. “Other firms compile what they know in quiet times,” said Alan Kantrow, who worked with Matassoni, “but McKinsey actually ‘wastes’ money doing it. They could make more by maximizing consultant utilization, but instead associates sit there after a project and catalog everything they learned for the next generation.”38

  “You have to give credit to Gluck for basically saying, ‘Look, you should have as deep an intellectual understanding of your industry and the functional areas that support it,’ ” noted former McKinsey consultant Tom Steiner. “If you have those, you will serve your client well.”39 “I helped create a multiyear, $30 million knowledge effort in broadband,” recalled another former partner. “That’s way outside of investments that BCG or Bain would make.”

  “The pursuit of fresh content in the service of clients and in building a distinctive firm was paramount in the minds of leaders like Gluck,” proclaimed Partha Bose. “I once flew London to Denver, picked up the Stanford economist Brian Arthur, and the two of us drove up to Beaver Creek for a two-hour meeting with Fred. Brian, one of the leading lights in ‘increasing returns economics,’ had published a paper in Scientific American that was all the talk in economics and technology circles. At the meeting, Fred grilled Brian for the entire two hours, repeatedly asking, ‘So what would Lou do?’ ” He was referring to McKinsey alum Lou Gerstner, who was then CEO of IBM. “It was like watching an Ali-Frazier fight up close,” continued Bose. “Neither was willing to concede an inch.” At the end of the meeting, Arthur joked that he needed a stiff drink; Gluck said that he wanted to find a way to work with the economist. Over the next several years, a Dick Foster–led McKinsey team partnered with Arthur and the Santa Fe Institute in the study of complexity.

  The search for content didn’t stop at academic disciplines. During the First Gulf War, the head of the firm’s operations practice, Graham Sharman, went to Saudi Arabia with Bose to spend a week with the U.S. generals leading the multinational forces against Saddam Hussein. The Pentagon had cleared them for complete access, and McKinsey was privy to observing big strategic and operational decisions being made on the front lines of a literal war. “We were there in the sands of Arabia connecting with a treasure trove of knowledge and experience that could only help our clients do better,” explained Bose. “And you know what? I know the generals learned a lot from Sharman too. They said it.”40 Indeed, when one of the three-star generals wrote a book for Harvard Business Press on the management lessons learned in the Gulf War, Bu
sinessWeek advised readers to skip the book and read the McKinsey Quarterly article by Bose and Sharman instead.

  The shift to a knowledge culture that had begun under Daniel and picked up pace under Gluck was reflected in the nature of the firm’s partner conferences. In 1980, long before the McKinsey consultants had truly understood the need for a radical change in perspective, the conference was in Vienna. McKinsey partners and their wives stayed at the most expensive hotel in the city and were taken in horse-drawn carriages to a private concert of the Vienna Boys’ Choir. At the next conference, though, Daniel had redirected the partners’ attention toward the matter at hand. At that year’s conference, in Washington, D.C., the cocktail party to kick things off was at the National Air and Space Museum. “We had the whole place to ourselves,” recalled one partner, “so it was still pretty clear that we were doing okay. But it sent a different message than ‘Spend It If You’ve Got It.’ ”

  Despite some missteps, Gluck also grasped that the firm had to do a better job publicizing its accomplishments. Under his direction, in 1990 the firm launched the McKinsey Global Institute (MGI), an independent research operation with the goal of developing “substantive points of view on the critical issues” faced by McKinsey clients.41 Even in a world overflowing with economic think tanks, McKinsey brought a unique perspective to the table: The firm’s understanding of actual company economics and industry structures gave specificity to its work. “What’s different about MGI is the unique access we have to information that doesn’t show up in statistics that we can use responsibly to inform research,”42 said Diana Farrell, head of MGI from 2001 to 2008, when she left to join the Obama administration.

  MGI has been successful in giving the firm a quasi-academic glow that’s yet another in the long list of ways it is differentiated from the competition.43 The institute’s work on productivity in the early 1990s is widely regarded as groundbreaking in economic circles. Later work on global capital market developments, the U.S. healthcare system, and energy productivity continues to give McKinsey a voice in conversations to which its competitors are not invited. But it has also given an outlet to the firm’s recurring eruptions of arrogance. When the institute paid significant sums to lure Nobel laureate Robert Solow and other leading economists to its board, then-chairman Ted Hall reportedly professed the belief that the institute itself was doing Nobel-quality work instead of merely buying Nobel-quality window dressing.