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

by Duff McDonald

  Marvin Bower instilled the firm’s values system, Ron Daniel perfected its personnel processes and institutionalized the place, and Fred Gluck was the architect of the firm’s knowledge culture. Gluck’s was probably the most difficult task of the three. After all, he was the one who managed to convince as self-confident a group of people as the world has ever known to reconsider their way of doing business. What’s more, he helped keep the firm on its steady trajectory upward: During his six years at the helm, revenues had doubled to $1.5 billion. In 1993 the firm received 50,000 résumés for just 550 new consultant spots.

  In the course of his career, Gluck remade himself completely. He took to wearing Brioni suits and started going to Studio 54. (He was single at the time, and there were even rumors of his being seen with Hollywood actress Karen Black.) And while he can be quite rightly credited for focusing the firm on the need to know what it was talking about, he also deserves a share of credit for kick-starting the shift toward a more commercial—and greedier—McKinsey.

  Today he lives with his third wife, Linda, in a sprawling mansion in Montecito, California, where, among others, Google chief Eric Schmidt, Al Gore, and Carol Burnett own homes. He calls it Casa Leo Linda, and when you enter the gigantic front door, you pass by the house’s ceremonial guards—two statuary lions. Once inside, past a number of rooms where marble seems the main building material, you can cozy up in Gluck’s library, where a waiter serves you coffee and croissants. In 2006 Gluck went toe to toe with the actor Rob Lowe, who bought a parcel of land next door for $8.5 million in hopes of building a 10,000-square-foot mansion.44 Gluck complained that the 24-foot-high fence Lowe proposed for privacy would diminish his ocean views and said the house was disproportionately large, even though Gluck’s own house was larger than town regulations allowed. The town’s planning commission sided with Lowe;45 McKinsey influence doesn’t extend everywhere.

  Gluck became vice chairman of the largest engineering firm in the United States—Bechtel Group—after leaving McKinsey. He still consults with the firm on occasion, but he’s just as happy schmoozing with his old scientist pals on the West Coast, talking about spaceships and lasers. Or helping his McKinsey friend Kevin Sharer examine the future of new molecules from his board position at Amgen, of which Sharer is CEO. In that way, he is unlike many of his McKinsey peers, for whom McKinsey becomes more important than anything else they’ve ever done. Not so Gluck: McKinsey did not define him. He is Fred Gluck first and a McKinsey man second. The two intersected for a time, but Fred Gluck came out on the other side. For many others, that separation never happens. This is why, even after McKinsey people have been retired for a decade or more, a scandal at the firm can inflict mortal pain on them. And the next decade provided a few.

  8. THE MONEY GRAB

  Quantum Shift

  Though McKinsey was, by the 1980s, a truly global firm, there was never any doubt about where the power still resided: in New York, in the hands of true-blue American men. That partly changed in 1994 when the partnership elected its first non-Westerner as managing director: Indian-born Rajat Kumar Gupta. He was a naturalized U.S. citizen and had run the Chicago office for four years, but most of his experience had been overseas, including a nine-year stint running Scandinavia. Gupta symbolized how the new McKinsey ethos had finally found its way to the very top—the one that measured its employees not on race, sex, or nationality, but on intellect, achievement, and ambition. (The change was only partial because New York still reigned supreme. Gupta didn’t want to move from Chicago but ultimately brought his family east and began working out of 55 East 52nd Street in New York City.)

  Gupta also stood for something else: continued expansion. When Fred Gluck handed over the reins, the firm was in twenty-four countries. Over the next nine years, Gupta planted the McKinsey flag in twenty more, including the vital emerging economies of India and mainland China. The firm had fifty-eight offices in 1993. By 2001, nearly the end of Gupta’s third term, it was up to eighty-one. Staffing more than doubled, from 3,300 consultants and 425 partners in 1994 to 7,700 consultants and 891 partners in 2001. Revenues nearly tripled, from $1.2 billion to $3.4 billion. The alumni rolls swelled to 8,000 names. ‘ ”It’s a less personal place than it used to be,” Nancy Killefer, a senior partner in Washington, D.C., said in 2002. “In the old days, you knew everybody. That’s not possible anymore.”1

  McKinsey’s growth strategy was dictated, in part, by the diffusion of corporate power. In 1974 the top hundred industrial companies in the United States accounted for 35.8 percent of GDP. By 1998 that figure had fallen to 17.3 percent.2 It’s hard to be in a thousand boardrooms unless you have thousands of consultants. So the push was on to grow.

  Gupta stood for one more thing: the end of the firm’s ambivalence about making money. One result of that shift was an unrest in the ranks despite the good times. It’s not that the firm’s finances weren’t strong when he took over. The problem, as far as some McKinsey partners were concerned, was that growth had leveled off. After nearly doubling between 1988 and 1992—from $620 million to $1.2 billion—revenues stalled in 1993, while costs continued to rise. For more than a decade, McKinsey’s expenses had risen faster than revenues. This was tolerable so long as the latter kept rising. But when revenue growth stalled, something had to be done.

  “Because of that flattening, there was a sense that we needed to rein in all the spending on ‘knowledge building,’ ” said a former partner of the firm. A growing minority wondered whether the firm’s voluminous databases would prove valuable to anyone in the end save the database companies themselves. And Gupta was clearly the man to put a halt to what he considered to be money-wasting research. In his twenty-one years at the firm, he had contributed a sum total of zero articles to McKinsey’s knowledge-management system. “He may have said he respected our knowledge building,” continued the partner, “but actions speak louder than words.” So do the actions of others: Soon after Gupta’s election, Alan Kantrow left the firm to join competitor Monitor as its chief knowledge officer. One by one, others involved in Gluck’s knowledge-management push left the firm as the Gupta regime went into full swing by turning back the knowledge focus—Partha Bose, Tom Copeland, Roger Ferguson, Nathaniel Foote, Brook Manville, and Bill Matassoni. With what they had achieved, and McKinsey’s now-recognized reputation in “knowledge,” all were aggressively pursued by competitors, academia, and even government. Ferguson became deputy chairman of the Federal Reserve under Alan Greenspan.

  “Normally to get elected, you have to write articles, develop an intellectual capital portfolio, and serve clients,” said another former partner. “Gupta didn’t do that. He was a bean counter. When it came time to reverse Gluck’s $100 million investment in knowledge, he was the easy choice.”

  In a revealing 1993 piece called “The McKinsey Mystique,” BusinessWeek writer John Byrne had predicted that the firm would elect its first non-American director, and then he suggested four possible victors: Christian Caspar in Scandinavia, Lukas Muhlemann in Switzerland, Norman Sanson in London, and Herb Henzler in Germany.3 Don Waite, the godfather of the firm’s financial institutions practice in the United States, also threw his hat in the ring. None made the final cut. “Everyone stayed except Sanson, who was one of the most ‘values-focused’ partners at McKinsey,” recalled a former partner of the firm. “He was edged out by Gupta. The firm should have seen at which end of the values spectrum he sat from that move alone.” (In a side job, Sanson refereed international rugby matches on BBC TV on the weekends. He is credited with helping put an end to bad behavior on the rugby field.)

  “Unfortunately for Don, everyone knew it was time for a non-American,” said another McKinsey partner. “And Gupta had the advantage of being both foreign and American. Sure, he was an Indian, but he’d been running Chicago. And he was very much like Barack Obama, in a sense. He’d had a lot of ‘present’ votes in his past—he was there, but not always there, and in that way didn’t offend too many p
eople. Did we vote for Gupta? It’s more like we voted for the idea of Gupta. He also had the advantage of not being Herb Henzler.”

  Rajat Kumar Gupta was born December 2, 1948, in Calcutta, the second of four children. He and his family moved to Delhi in 1953. His father, a journalist fighting for Indian independence, had served time in prison under the British. His mother was the principal of a Montessori school. But both parents had died by the time Gupta was nineteen years old.

  After studying mechanical engineering at the famed Indian Institute of Technology Delhi, he was accepted at Harvard Business School and graduated in 1973. Like many HBS graduates, he interviewed for a job at McKinsey—and was summarily rejected. But the resourceful Gupta prevailed on a Harvard professor with McKinsey connections to put in a good word. After a full day of further interviews, Gupta was invited to join McKinsey’s New York office as an associate. In 1981 Ron Daniel made him head of the Scandinavia office. Nine years later Gluck made him head of Chicago. Considered by his peers a paragon of humility, Gupta typified the McKinsey ideal during much of his career with the firm—he was content to operate behind the scenes on behalf of clients that ranged from Kraft and Sara Lee to Procter & Gamble. Even though he was one of the most prominent Indian-born executives in the United States, he stayed largely out of public view.

  In gaining the top job, Gupta had successfully nurtured an image of himself as a lead-from-behind, quiet type, more Ron Daniel than Fred Gluck. He told a reporter from the Chicago Tribune that the two people he most admired were a nineteenth-century Hindu reformer, Swami Vivekenanda, and Mother Teresa.4 He sprinkled his speeches with well-known verses from the Bhagavad Gita, the ancient Hindu text. The real differences were less prosaic: Ron Daniel was a well-read intellectual. Fred Gluck was just massive horsepower. Rajat Gupta had a cultivated anti-intellectualism about him that was neither Daniel nor Gluck.

  Descriptions of him from partners were rife with cultural clichés. “Rajat has a very Eastern orientation,” the late Chicago director Joel Bleeke told the Tribune. “He puts a very strong emphasis on wisdom, rather than pure intellect. He understands that wisdom includes intellect as well as other aspects of life. With his Asian background, he understands the softer, emotional sides of people better than Western leaders do.”

  Richard Ashley, a member of the shareholders committee at the time who followed Gupta as Chicago office head, compared him to the great man himself, at least in part due to what was widely viewed as Gupta’s personal leadership style: nonconfrontational yet still grounded in conviction. “Rajat Gupta is the closest person in the firm, by reputation and deed, to Marvin Bower,” he said. “Bower brought a steadfast approach that pushed belief in the values of James O. McKinsey. Rajat is the embodiment of the philosophy of Marvin Bower.”5

  That’s not exactly how the story went.

  Cubic Consulting

  In his heyday, Marvin Bower liked to talk of how many of the top 100 companies in the United States McKinsey counted as clients. By the turn of the twenty-first century, the focus had shifted to the entire globe. In 2003 McKinsey claimed 100 of the largest 150 companies on the planet as clients.6

  After a Firm Strategy Initiative in 1995, Rajat Gupta rolled out a new gimmick: “100 percent cubed.” From that point forth, McKinsey endeavored to bring 100 percent of the firm, 100 percent of the time, to 100 percent of the world. It sounds like a vapid marketing spiel, but at the time it served as a useful competitive differentiator for the firm. The competition—be it Boston Consulting Group, Bain, or Monitor—could not make such a claim with a straight face. And clients were clamoring for it.

  “The fact is, no company has as many of these smart people as McKinsey does,” said Jim Fisher, who worked in the firm’s Toronto office from 1968 to 1970. “And even if they did, they couldn’t pull them out of the line and assemble them and have them work on this one problem. And even if they could do that, they could never separate the politics of the organization from the work done. The client would never feel like they have a totally dispassionate view. That’s worth it. And even if McKinsey isn’t always right, they will always be sure that they are right. Sometimes, even that is useful.”7

  By fits and starts, the firm had somehow found its way into an internationality all its own. “Its nerve center sits in New York,” the Sunday Times wrote in 1997. “Its managing partner works in Chicago. Its Global Institute is in Washington. But its truest address is in the world’s capital and industrial centers. It is a United Nations of consulting, with one crucial difference: It works.”8

  “McKinsey always had great conceptual frameworks for analyzing problems,” added Fisher. “But what was better was that you could go to a place like Argentina and have market analysis done by people with familiarity with the market—Argentinians—but that had been American-trained. It’s astounding to me that they can run a global firm the way that they do. All management consultants are prima donnas who want to solve things their own way with their own conclusions. But McKinsey has an impressive discipline across the globe around how they approach problems, as well as the rigor that they use.”9

  This is a sentiment repeated by many McKinsey consultants with a heritage in the recent past: The fruits of rigorous training and indoctrination meant that McKinsey could gather eight different consultants from eight different cities across the globe, and it would take them just five minutes to get organized around the needs of any project. “It’s the equivalent of making machine parts that need no further finishing,” explained former partner George Feiger, who went on to run global investment banking at SBC Warburg as well as onshore private banking for UBS. “It was really a miracle, and it took decades to get to that point.”10

  McKinsey was not the largest consulting firm on the planet. Andersen Consulting’s nearly $5 billion in 1995 revenues was three times larger than McKinsey’s. But McKinsey still occupied the high ground.

  Enter the Dragon

  No country provides a better showcase for the modern ambition of McKinsey than China. And no consultant better exemplifies that ambition than Gordon Orr. A slim, studious-looking Brit, Orr joined McKinsey in 1986 and was elected to the partnership in 1993. In search of a new challenge, he asked the firm for a transfer to Hong Kong. “My wife and I weren’t there for much more than a year when we said, ‘This is actually pretty exciting, but if we’re serious about this, the great big thing is up there to the north of us. Why don’t we think about moving to Beijing and opening the office up there?’ ”11

  It’s at this point that the admirable efficiency of McKinsey’s form of governance came into play. All Orr needed to do was present a brief to the firm’s shareholders committee: “Here’s what we want to do, here’s what we think the opportunity is, and here’s how we would go about making it happen.” McKinsey’s overlords approved the idea, and Orr, along with colleagues Tony Perkins and Josh Cheng, started laying the groundwork for McKinsey’s second China outpost. (Consultants Jonathan Woetzel, Ulrich Roeder, and Olivier Kayser had opened an office in Shanghai in 1994.)

  As with most new country initiatives, McKinsey was patient with Orr as he went in search of clients. McKinsey purposely doesn’t set financial targets for new offices, preferring to let the reason for doing something take precedence over short-term expense issues. The push into China was no exception. In 1993, the firm opened offices in Bombay, Cologne, New Delhi, Prague, St. Petersburg, and Warsaw. In 1994, Budapest, Dublin, and Shanghai. In 1995, Jakarta, Johannesburg, and Moscow. In Moscow, the firm used its usual modus operandi to gin up goodwill in the country, doing pro bono work for the Bolshoi Theater as well as the St. Petersburg Hermitage Museum.

  By 1996 McKinsey was ready to begin recruiting local Chinese in Beijing. The firm scheduled a recruiting seminar at Tsinghua University. Orr expected twenty or thirty people to show up. The turnout was eight hundred. True to form, McKinsey hired just two of them, one of whom stayed with the firm for almost a decade before becoming CEO of South Beauty, the l
argest Chinese “restaurant entertainment” company. The other is still with McKinsey and might soon be the firm’s first female mainland Chinese director.

  Finding new clients wasn’t as easy as it had been when the London office was being opened. Orr and his colleagues had to figure out not only which companies had issues that McKinsey could solve, but also those that were willing to be helped. The Chinese business culture wasn’t accustomed to paying for anything that wasn’t 100 percent tangible.

  McKinsey had to make other adjustments in China. Throwing young Harvard MBAs into the fire by making them present to CEOs so soon after being hired wasn’t prudent in a hierarchical society that values age and experience over youthful promise. This wasn’t a new issue for the firm: In the 1980s, when he was managing director, Ron Daniel had one meeting with the parents of a prospective Japanese recruit in which he had to reassure them that their young son was not being sold into some sort of modern slavery. “Asians venerate age,” he explained. “We tend not to.”12

  “Gordon called me up one day and said he wanted to publish the McKinsey Quarterly in Chinese,” recalled Partha Bose, who was editor in chief of the publication at the time. “We didn’t have any foreign-language editions, and I wondered if he was going to be able to sustain a pipeline of new articles. He told me he wanted to use past articles that explained the basics of management, so that he could build the practice on a strong foundation. Part of that foundation was going to be translating and making available the best management thinking in Chinese.”13 The conversation led to the launch of the Chinese Quarterly.