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

by Duff McDonald

  McKinsey also suddenly found itself overstaffed: MBA acceptance rates had been steadily dropping due to competing opportunities, but in 2000 the trend reversed itself. McKinsey had made 3,100 offers that year, expecting 2,000 acceptances. More than 2,700 people accepted. As dot-com ventures suddenly appeared risky again, the firm found itself in the middle of a flight to quality by MBAs now looking for stability again. Attrition at the same time plummeted to a mere 5 percent. As these factors were combined with falling demand, the result was that McKinsey was carrying too many employees—the firm calculated at one point that it was overstaffed to the tune of about two thousand consultants—and consultant utilization fell to its lowest level in thirty-two years: just 52 percent, versus some 64 percent a few years earlier.56 In other words, half of the consultants were getting paid to do nothing.

  “We honored every offer and didn’t push people out,” Gupta told BusinessWeek. “And we had no professional layoffs other than our traditional up-or-out stuff.” That just wasn’t true: In 2001, 9 percent of associates and analysts were “counseled out” of the firm, versus just 3 percent in 2000.57 McKinsey shrunk considerably over the next few years, with the number of consultants falling from 7,631 in 2001 to 5,638 in 2004. The firm’s North American staff declined by 40 percent, while Europe and Asia each fell 15 percent.

  The experience revealed the downside of McKinsey’s cherished ethos of hiring good people and just letting them do their thing. When you employ ten thousand people around the world, and you let local offices take care of their own hiring without any centralized oversight—or, equally important, without centralized financial planning—the entire institution can be put at real economic risk by a sudden external change. And that’s what happened. The firm got ahead of itself, grew too quickly, and chased some clients it shouldn’t have. At one point, associates were leaving with just a week’s notice in the middle of studies. Partners were furious with them for not honoring their professional obligations. And then, when the downturn came, associates were angry about getting neither bonuses nor the kind of exposure to CEOs that McKinsey promises. If the contract between associates and partners wasn’t broken, it was at least cracked.

  Still, for all the consternation over the Gupta era at McKinsey, the downturn proved just a blip in the top line. Even before Gupta turned over the reins to Ian Davis, the business had turned a corner and begun to accelerate. From a trough of $3 billion in 2002 billings, the consultants doubled revenues, to $6 billion by 2008. Even in the immediate wake of Enron, clients were still lining up for advice. The British Ministry of Defense hired McKinsey in May 2002 to help streamline “performance” of its $6 billion Defense Logistics Organization.58

  Last Rites—For the Man, and the Myth

  Marvin Bower died on January 22, 2003, at the age of ninety-nine and a half. “I told him he’d lived to his hundredth year, and that it was time to let go,” said his son Dick.59 Bower had outlived by four years his second wife, Clothilde de Veze Stewart, whom he’d married three years after his first wife, Helen, had passed away.

  Rajat Gupta delivered the last of five eulogies in the Reformed Church of Bronxville, New York. “[Marvin had] a vision of a profession that did not exist,” he said. “[He] sensed the opportunity in our profession, defined our aspirations, formulated our values and led our firm. . . . In many ways, certainly in spirit and soul, Marvin continued to lead it after he retired, and he leads it still.”

  While obviously heartfelt, the words were laced with irony—because the McKinsey of 2003 was no longer Marvin Bower’s McKinsey. It was Rajat Gupta’s. “Bower gave the firm its principles,” said one McKinsey veteran. “Ron Daniel gave it class. Fred Gluck gave it intellectualism. And Rajat? Don’t ask me, because I haven’t a clue, except maybe Kremlinesque politics.”

  Bower had turned consulting from a business into a profession, and McKinsey into its standard-bearer. His final reward? He got to see Rajat Gupta and Gupta’s cohort turn it back into a business. The institution survived, but the cherished values fell by the wayside. Rajat Gupta’s McKinsey was a business—not a profession—and that’s all there was to it. It was, of course, a remarkably successful business, and the charitable view of Gupta’s tenure can hardly ignore the firm’s continued growth and deepening influence across the globe, as well as the exponential change in the partnership’s wealth.

  Of course, half a decade later—when he’d already quietly left through the side door—Rajat Gupta did more damage to McKinsey than he’d ever done sitting in the corner office. In 2012 he was convicted of insider trading—at least some of which activity had taken place while he still had an office at McKinsey.

  10. RETRENCHMENT

  Doing a 180

  In the 2000 election for managing partner of McKinsey, Rajat Gupta put back a surge—from Ian Davis, then head of the London office; and Michael Patsolos-Fox, who was head of New York—in order to win his third and final term. An affable, polite Brit who had been at McKinsey since 1979, Davis had stood—unequivocally—for a return to Boweresque values and a pullback from the more commercial tilt of the past decade. But Gupta won the challenge. It was 2000, after all, and the full report on the dot-com mirage had not yet been filed.

  Three years later, with Gupta unable to run for a fourth term, Davis and Patsolos-Fox faced off again. On Friday, February 27, 2003, the Economist ran a story on the coming election that Sunday. “Do not be fooled by the polite, low-key tone,” the magazine wrote. “Next week’s announcement will mark a critical moment in the [firm’s] history.”

  The magazine wrote that Davis “wears his ambition lightly but is deeply committed to the firm’s traditional values, in particular the need to invest in long-term relationships with clients and to nurture the associates who represent the firm’s future.”1 This was a gift-wrapped endorsement that had obviously been helped along by loose lips within the firm. The magazine didn’t criticize Patsolos-Fox; it merely positioned him as more of a continuation of the Gupta era. At a time when the firm’s 280 senior partners no longer knew each and every one of their colleagues, the article surely helped tilt the election in Davis’s favor.

  Patsolos-Fox didn’t come out too badly: Davis made him head of the firm’s American practice as a consolation. Likewise, when Don Waite lost out to Gupta, he’d been made the firm’s chief financial officer. The majority of people who lose in McKinsey elections don’t leave the firm in a fit of pique. “Where would they go, anyway?” asked a former partner. “If you’ve been at McKinsey for twenty-five years, you’re making $3 million to $5 million a year. There are not a lot of places you are going to go to, unless someone is going to make you CEO of a major company.”

  Davis was touted as the “values partner.” He was widely regarded for his forthrightness, as well as his ability to ground most conversations about McKinsey in an expression of some core value of the firm: client first; the need to take on sensitive issues directly; and the importance of keeping the firm’s most valuable asset—its people—focused on the highest standards of truth, integrity, and trust. More concerned with shoring up the firm’s internal morale than with challenges to its public image, he didn’t give his first interview to the press until a year and a half had passed.

  In electing Davis, McKinsey partners had signaled that they wanted a return to the leadership style of Ron Daniel—a steadying hand instead of one that was merely reaching for more. Not that Davis was a Daniel replica: While Daniel could appear aloof and a bit imperious, Davis was engaging. He could make people feel comfortable, taking a genuine personal interest in everyone around him. And while Davis was more sharp-edged than Daniel, he could also draw upon deep reservoirs of empathy. He was the living and breathing example of his own philosophy: that having a high IQ isn’t enough—one must also develop one’s CQ (capability quotient) and RQ (relationship quotient). As evidence of the RQ, Davis freely admitted that the firm had turned a corner even before he was elected, that Gupta had guided the firm through the wo
rst. He told Gupta as much himself. Still, one of his first moves was to reissue Marvin Bower’s book Perspective on McKinsey in 2004, as a clear repudiation of the excesses of the previous decade.

  What Davis did in his six years as managing director was rebuild the firm’s confidence. The partnership is an incredibly self-critical one, and McKinsey consultants don’t like to get things wrong. “I spent time with partners talking about values,” Davis explained. “Just trying to reaffirm our basic mission and purpose. I told them not to get too excited that client activity was picking up again, that we had to learn from the previous four years.”2 The main thrust of his message: McKinsey was supposed to focus on benefiting its clients above all else, without putting its own needs on par with those of the clientele. The subtle distinction had been a hard one to delineate since the days of Marvin Bower himself, but in the Gupta era this fundamental priority had clearly become inverted, and at great cost to the firm’s culture, if not necessarily its pocketbook.

  “Ian took the chair of managing director at a very difficult time,” said Juan Hoyos, head of the firm’s Spanish office from 1997 to 2003. “He focused us on values, innovation, and distinctiveness, and kept hammering away on all three. That percolated and helped us to regain the higher ground we had somehow lost.”3 Internally, Davis pushed the consultants to get to know each other again. Specifically, he encouraged partners—who had become faceless to their underlings—to reintroduce themselves to their associates and staff. He called this “personalizing” the firm.

  Exerting Control

  In professional services firms, especially those full of self-starters like McKinsey, the organization is always moving in one direction or another on the spectrum of central control versus self-governance. In good times, the reins are loosened, and consultants are left free to build their own business under the McKinsey aegis. In tougher times, the reins are yanked back in. When Ian Davis was elected, one of his first tasks was to yank.

  The issues were obvious. The firm needed to centralize its balance-sheet control, cost control, communications, press relations, recruiting, and risk management. In the late 1990s, while McKinsey played catch-up with its more aggressive peers, especially regarding consulting about the Internet and general technology space, the firm had basically abdicated any notion of central planning. “McKinsey doesn’t really make decisions as an institution,” admitted former partner Carter Bales. “It’s kind of like the crawling peg system of currency exchange rates. It adjusts as it goes along without making abrupt changes.”4

  There is a reason for that, rooted in the firm’s cherished philosophy of the self-governing partnership. McKinsey has always been a decentralized organization held together by the one-firm focus on assimilation, norms, how people are elected, how they are paid, and how work is actually done. But the actual business of consulting had tended to be left to the consultants themselves. So too were local decisions like recruiting. And that’s where it went wrong—a generally bullish mood about hiring was compounded by supercharged recruiting at the local level, and there were no internal controls that might flag an overall excess of enthusiasm.

  The question, then: If new controls were needed, who would exercise them? “We spent the first few months trying to figure out who had decision rights,” said Michelle Jarrard, Davis’s longtime right hand. “Which we learned in fine McKinsey fashion by looking back with one of our own engagement teams.”5 One result of the introspection: a scaling back of growth from the near 20 percent of Gupta to a mere 6 to 8 percent under Davis.

  It’s not that McKinsey hadn’t had its own politburo. Bower had his “executive group.” Ron Daniel had his “executive committee.” Rajat Gupta created “the office of the managing director.” McKinsey has always had bureaucracy, salted with a certain amount of Kremlinesque intrigue in its centers of power. Whereas Warren Cannon had exercised power behind the scenes for both Bower and Daniel, and Jerome Vascellaro behind Gluck and Gupta, Davis had Michelle Jarrard.

  From then on, Jarrard was a point person in enforcing the Davis regime. She described their objectives in the context of age-old McKinsey precepts. “We have our own language,” she said. “Which includes firm values, mission, and guiding principles. These are not religious principles; they’re not moral or good or bad. They are decision-making guideposts that merely reflect our intentions.” One thing Jarrard helped carry out was an even further broadening of the firm’s hiring preferences, which by mid-decade ran about 40 percent to 45 percent MBAs, 40 percent to 45 percent advanced degrees (JD, MD, PhD), and about 10 percent to 20 percent experienced hires. In 2011 the firm had two priests on the payroll.

  Davis wasn’t entirely successful in wresting control from local interests. The financial institutions group (FIG) in New York has been a long-term thorn in the side of McKinsey managing directors. The group brings in so much money that it tends to ignore the concerns of the rest of the firm. Davis put a senior partner in charge of “breaking the back” of FIG in New York, according to one consultant. Younger consultants also thought a handful of older partners, including Lowell Bryan and Pete Walker, were staying on in violation of one of the firm’s key tenets—older partners agree to leave around the normal retirement age in order to make room for younger ones. “These guys flourished under Gupta,” said one partner. “But they’ve been using the McKinsey brand as their own annuity. They are totally anti-Bower in that regard.” But the effort failed: Davis’s man left McKinsey after four months, and Bryan and Walker were both still with the firm in 2012.

  Davis, like Gupta, wasn’t prisoner to the notion of analytic glory that seduces so many McKinsey consultants. But he did value “knowledge” more than his predecessor. Gupta had eliminated Gluck’s cherished practice bulletins in his drive for profits. Davis reinstituted them. By 2008, McKinsey was arguing that the ability to “efficiently create, share, retain and transfer knowledge assets is the only sustainable competitive advantage of a twenty-first-century firm.” In a sense, this was McKinsey selling its own snake oil; the firm sold nothing but knowledge. On the other hand, it represented a recommitment to the Gluck era over that of Gupta.

  Mercenaries, Not Missionaries

  By 2004 or so, McKinsey had become that which it had always intended to be, even if it never admitted as much: a high-end mercenary force for high-impact corporate engagements. “They’re great at tactical stuff for us,” explained one partner at a major private equity firm. “We don’t need them for strategy. But they will do anything you want them to do, including filling out spreadsheets. I use them at twenty cents on the dollar so I don’t have to hire more associates. They generally cost me about a hundred thousand dollars a week.”

  By the mid-2000s, many of those spreadsheets were once again focused on helping executives make the case for one of McKinsey’s bestselling products: a justification for corporate downsizing.

  In 2003 the consultants advised Madison Square Garden (owned by Cablevision) to cut 3.5 percent of its workforce.6

  In 2005 McKinsey recommended to financial sponsors Texas Pacific Group and Credit Suisse First Boston that they slash 3,000 of the 4,300 hundred employees at German bathroom-fixture maker Grohe, in response to the idea that with 80 percent of sales outside Germany, the company shouldn’t be making 80 percent of its products in its high-cost homeland. The advice put McKinsey deeper in the hole it had already been digging for years with Germany’s unions.7

  In 2007 the firm advised Walmart that the cost of an “associate” with seven years of tenure was almost 55 percent more than the cost of one with just a single year of tenure, but there was no difference in their productivity.8 Beyond the obvious offensiveness of suggesting Walmart lay off its experienced and loyal staff in favor of cheap new labor, this was up-or-out all over again. McKinsey could push its system even in a place like Walmart. (Although on the other hand, McKinsey seems to have met its paranoid match in the giant retailer. According to a former Walmart employee, the retailer at one point suspecte
d the consultants of leaking confidential company memos and monitored their Internet activities as a result.)9

  Glitzy magazine company Condé Nast hired McKinsey in 2009 to help the publisher of the New Yorker, Vanity Fair, and Vogue resize itself for a new post-real-estate-bubble advertising climate. Media outlets like nothing more than to write about themselves, and this was as juicy as it comes: When the idea leaked of buttoned-up McKinsey MBAs telling the likes of Vogue’s Anna Wintour or Vanity Fair’s Graydon Carter to cut down on their $250 lunches, journalists (including the author of this book) gave McKinsey a level of exposure it hadn’t seen since Enron.

  While the firm claims it detests such coverage, an article titled “The Gilded Age of Condé Nast Is Over” in the New York Observer included remarks from Condé Nast CEO Charles Townsend that could only be music to McKinsey’s ears: “I asked them to . . . take a top-down look at the way we do business,” he said. “Our processes. The way we do business. The use of technology. The way we deploy our resources in the pursuit of revenues. The way we communicate. The way we market to the consumer.”10

  It sounded just like what McKinsey would say. “The purpose is to deliver impact,” explained partner Dominic Casserley. “That’s a generic phrase, but it covers cost cutting, revenue growth, strategy, and more. We change the way people in a company make decisions or act. That’s what this profession is about—helping other people do some things differently.”11

  Of course, the main goal at Condé Nast was mere cost cutting. On McKinsey’s recommendation, the company shuttered four titles: Cookie, Elegant Bride, Gourmet, and Modern Bride. Some 180 employees were axed. “McKinsey is going to look over our shoulder as we sort out . . . financial controls [and] expense controls,” Townsend later told Ad Age. “Their support of this process has been invaluable.”12