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

by Duff McDonald

  It can never be argued that McKinsey has not served its own people quite well. Those who leave the firm have what remains one of the business world’s most admired names on their résumé. Those who make a career of it have gotten extraordinarily wealthy and have found entrée into the halls of power around the world.

  In the end, though, the value of a professional institution might be more appropriately measured by what it has done for others. On that count, the verdict is less clear.

  It does remain an open question whether McKinsey has really transformed the way businesses are managed. Did it save General Motors, the great American icon, despite study after study for millions upon millions over the years? No. Did it foresee and push its clients to the front of the era of Internet-based business? No. Did it stop the wayward drift of the banking industry that led to the global financial crisis? Again, no.

  Which raises another question: Just what have the consultants done? Ask McKinsey about the greatest piece of advice the firm ever gave—Did it tell Coca-Cola to green-light Diet Coke? Did it assure McDonald’s that serving breakfast could work out? Or tell Chrysler to go for it with the Jeep?—and the answer will be wholly unsatisfying. There are no legendary consulting engagements at the firm. There are only legendary client relationships, the kind that keep money pouring in the door. One need not look further than this to realize that it’s all been about selling from the start. In short, it’s not what McKinsey sold, it’s that it sold. What’s more, despite its emphatic insistence on its culture of “values,” those values have often shown themselves to be conditional. They are applied when they are helpful. And they are not when they are not.

  That said, through its objectivist, skeptical, fact-based, integrative, and analytical approach to solving its clients’ problems, McKinsey has certainly made the world a more efficient, rational, and objective place than it might otherwise have been. In a world full of talkers and blowhards, the firm is supremely capable of bringing the focus back to the data and research, and usually to efficient effect. Management guru Gary Hamel referred to the “machinery of management” as “one of humanity’s greatest inventions” in his 2007 book, The Future of Management.6 If McKinsey hasn’t actually invented many of the bold ideas of management since the death of James O. McKinsey himself, it has certainly helped clients understand them and carry them out.

  The firm has also served as a powerful talisman for the terrified executive, a corporate shrink for the insecure CEO, and a rubber stamp for the domineering boss who wants to ram a decision down his company’s throat. In other words, it plays the role its clients have scripted. That’s why the focus on personal relationships has worked for so long. What executive wouldn’t want a high-quality rapid-response team of well-dressed worker ants to satisfy his every need?

  McKinsey has also been instrumental in enforcing the rules and customs of modern business—the modern company is no one’s nanny, it is not a permanent employer, and it is playing in a ruthless game of winners and losers. In that regard, McKinsey has also contributed to the effects of modern business on the rest of society. By serving the interests of the corporate suite, the firm has played a part in the growth of income inequality—the chasm between compensation of the heads of companies and their employees is the widest in history.

  McKinsey’s continued focus on the problem to be solved, as opposed to all the ramifications of the proposed answer, remains perhaps its greatest weakness. The focus on the purity of that answer, as opposed to how easy or difficult it will be to get to where one wants to be, has never been the firm’s strong suit. Laying off 10 percent of the people might cut 10 percent of the costs, but it also might make the remaining employees 50 percent angrier about their increased workload.

  In their worst moments, McKinsey consultants congratulate each other on being what more than a few have referred to as the greatest collection of talent the world has ever seen. And in a way, they may be right—it’s difficult to think of a comparable group of such smart, driven people working for the same organization anywhere in the world. But you can also look at it as McKinsey claiming to have won a game that no one else is playing. Most organizations—be they large multinational banks or entities like Facebook—don’t actually need everyone on the payroll to be a smart overachiever.

  • • •

  Charlie Munger, Warren Buffett’s longtime partner at Berkshire Hathaway, wrote in his book Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger that he had never met a corporate leader who’d actually read a consulting report.

  Pin executives down, and they will surely be able to tell you about the most important decisions of their career. In a large organization, though—the kind for which McKinsey works—the value of most decisions doesn’t necessarily reside in the actual choice made; it resides in the very fact that the choice is being made in the first place. Leadership is about getting people to follow you, but before they can do that you need to choose the direction in which you’re heading. There will always be demand for such a service, and that’s precisely what McKinsey provides.

  At the moment, McKinsey is looking east. Its early successes in Asia offer an opportunity to get as strong a grip on the corporate imagination there as it once had in the days of the preeminence of the old-boy WASP culture of America’s northeast. Again: It is no coincidence that Dominic Barton, the current managing director of the firm, spent his formative years navigating the back rooms of corporate Asia. One of the greatest challenges facing any global business in the early twenty-first century will be understanding how to navigate the cross-currents of a rising Chinese economic power in the face of a stubbornly persistent American one. If McKinsey can manage to be seen as the holder of that key, the firm’s continued prosperity is assured, at least in the short term.

  Marvin Bower wanted McKinsey to be considered in the same light as the trusted local banker. But the firm of today resembles much more closely a national or global banking conglomerate than the friendly face from down the block. McKinsey is now a large—and aging—company, much like the giants it advised in the 1960s and 1970s. Its clients—whether they are corporations or executives—are far bigger. The consultants push for and help bring about change on a massive scale. At the same time, though, McKinsey now spends more and more time navigating the same bureaucracies it once disdained, and the firm is inside those systems more than it is outside them.

  McKinsey’s greatest challenge going forward—the true test of its genius—is no longer finding inspired solutions to its clients’ problems. The test is managing the complications that have resulted from its own stupendous success. One of the firm’s recently stated goals is helping to “[solve] the world’s great problems.”7 But if it wants to achieve this, it’s going to have to continue solving its own.

  ACKNOWLEDGMENTS

  When you finally put the pen down (figuratively speaking) after a project of this magnitude, the experience is an unusual one. Just a few months before, it felt like a boulder on your shoulders. And suddenly you feel as if you could fly. For that reason, it’s a good idea to keep a running list of the people you need to thank for helping you get over the finish line. Because if you went by your emotions alone, you might just suffer from the delusion that you managed to get there all on your own. Maybe some people do. I am not one of those people.

  Let me start by thanking my publisher, Simon & Schuster. This is the second book with which these good people have entrusted me, and I greatly appreciate the repeat endorsement. First among equals at S&S: my editor, Priscilla Painton. I could not have hoped for a better hand-holder along the way. Thanks, Priscilla. Next, of course, is the man who signs the checks, publisher Jonathan Karp. Thanks for taking a chance on this one, Jonathan. Thank you too, Colin Fox, for your championing of the project. Thanks also to Victoria Meyer, Tracey Guest, and the S&S marketing team, as well as Michael Szczerban and Sydney Tanigawa.

  Thanks also to the man on my side of the negotiating table, my agent, Da
vid Kuhn, and all the good people at Kuhn Projects: Casey Baird, Jessie Borkan, Becky Sweren, Nicole Tourtelot, and Billy Kingsland.

  Another person owed a serious debt of gratitude: my old friend and mentor, Hugo Lindgren, who took time out of one of the toughest jobs in town to touch this book with his magic. Thanks, Hugo, for your help on this project and much else.

  And now, to McKinsey. I didn’t expect the firm to cooperate with this book. The firm had never done so before, it didn’t know me from Adam, and, well, this is not exactly the most forthcoming bunch when journalists come poking around. Thanks to Michael Stewart, who shepherded me through to approval. I hope you will still speak to me, Michael.

  Thanks to the current and former managing directors who spoke to me: Dominic Barton, Ian Davis, Fred Gluck, Ron Daniel, and Al McDonald. (It seems Rajat Gupta was indisposed, but I thank him for enriching the narrative in any case.) While Marvin Bower passed away a while back, his sons, Dick and Jim, both did me the favor of reminiscing about the remarkable man.

  And then there’s a long list of current and former McKinsey people who took time to try and help me understand an institution that’s not that easy to pin down. In alphabetical order: Mike Allen, Carter Bales, Partha Bose, Sylvia Mathews Burwell, Dominic Casserley, Logan Cheek, Yolande Daeninck, Clay Deutsch, Diana Farrell, Jim Fisher, Peter Foy, James Gorman, Ted Hall, Juan Hoyos, Michelle Jarrard, Larry Kanarek, Alan Kantrow, Jon Katzenbach, Nancy Killefer, Matt Kramer, James Kwak, Eric Labaye, Michael Lanning, Bill Matassoni, Frank Mattern, Stefan Matzinger, Jodie Neve, Gordon Orr, Tom Peters, Jeff Pundyk, David Robertson, Elizabeth Riordan, Will Riordan, Yves Smith, Tom Steiner, and Bob Waterman.

  There are numerous others who will go unnamed. Most of them said something not so nice about McKinsey and didn’t want to suffer the firm’s wrath. Others said very nice things and . . . still didn’t want to suffer the firm’s wrath. In writing this book, I’m sure I’m going to suffer a little bit of it myself, but I do hope that current and former McKinseyites do not regret the time spent. I do think I painted a balanced portrait of the place.

  Thanks to the handful of McKinsey clients and competitors who agreed to speak publicly about things they normally keep private: Frank Cahouet, Jim Coulter, Robert Dell, Tim Flynn, Joe Fuller, Peter Grauer, Chuck Neul, Richard Rakowski, Frederick Sturdivant, and Bill Weldon.

  Outside McKinsey, I am grateful to the work of a number of academics who have spent far more time than I have studying this remarkable institution, whether I spoke to them in person or not: Amar Bhide, Robert David, Lars Engwall, Pankaj Ghemawhat, Matthias Kipping, Rakesh Khurana, Christopher McKenna, Henry Mintzberg, and Andrew Sturdy.

  And then there are the journalists and authors who informed my work. First place: longtime Bloomberg BusinessWeek scribe John Byrne, who has written more magazine pages on McKinsey than any other. Others who enriched the story: David Berardinelli, William Cohan, Stuart Crainer, Peter Elkind, Malcolm Gladwell, Daniel Guttman, John Huey, Maryann Keller, Walter Kiechel, Martin Kihn, Nicholas Lemann, Bethany McLean, Kevin Mellyn, John Micklethwait, Dana Milbank, Lewis Pinault, Stefan Stern, Matthew Stewart, Barry Willner, and Adrian Wooldridge.

  I am grateful to those who kept the money coming in the door during the project as well (the nanny needed to be paid, after all): Andy Serwer and Stephanie Mehta of Fortune, Graydon Carter and Dana Brown of Vanity Fair, Ryan D’Agostino of Esquire, Brad Wieners and Julian Sancton of Bloomberg BusinessWeek, Michael Hogan of Huffington Post, and my old pal Jeanhee Kim.

  Special mention goes to Mo Cunniffe, an almost relative-by-former-marriage who convened a summit of vintage McKinsey men (and bought the lobster sandwiches) in Greenwich a few years back. Thanks to those who came that day: Doug Ayer, Bill MacCormack, Edward Massey, and Peter von Braun. Thanks too to Bill Stromsem, for being a dedicated copy editor.

  Last, my family and friends.

  Thanks, Mom, for all the notes you send me telling me I’m a wonderful writer. They make for bright lights on dark days. Thanks, Dad, for all that you were. I still think of you nearly every day. While you never met your granddaughter, I see echoes of your sly smile whenever I look at her happy face. I think she’s got your sense of humor too, which will serve her well.

  To my siblings, Steve McDonald and Jackie Pye, and Julie and Gareth Carter: Thanks for putting up with more Duff over these past few years than should reasonably have been expected. I have another sibling, but he comes with an interesting wrinkle. No matter who may have written this book, there would be a conflict of some sort, as McKinsey touches so many people in so many places. My own sin of connection is my brother Scott, who heads Oliver Wyman, a competitor of the firm. In the end, he didn’t spend much time talking to me about McKinsey. But he made up for that crime in other ways. Thanks, brother.

  Thanks, Chris Wahl, for your camera and your friendship. And finally, thanks to a very special group of people who provided invaluable support during this long endeavor: Will Arnett, Alan Baldachin, Lindsey Braun, Malcolm Fitch, David Foster, Peter Giles, Brendan Golden, John and Megan Grugan, Mike Guy, Michael Hawkins, Adolphus Holden, Peter and Karen Keating, Chris Kerr, Caroline McDonald, Matt McPherson, Christie Nicholson, Owen Osborne, Gilda Riccardi, Maer Roshan, and especially Susan Duffy and Joe Schrank. Your friendship means the world to me. Thank you for being there when I needed you.

  As always, to all who helped, I hope the results prove worth the time spent.

  Duff McDonald

  New York, March 2013

  ABOUT THE AUTHOR

  © CHRISTOPHER WAHL

  Duff McDonald is a New York–based journalist. A contributing editor at Fortune and the New York Observer, he has also written for Vanity Fair, New York, Esquire, GQ, WIRED, and Condé Nast Portfolio, among other publications. McDonald is a regular and frequent guest commentator on both television and radio, including CNN, CNBC, Fox News, NPR, and Charlie Rose. A dual citizen of Canada and the United States, he lives in Brooklyn, New York, with his daughter, Marguerite.

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  NOTES

  INTRODUCTION: THE McKINSEY MYSTIQUE

  1. Hal Higdon, The Business Healers (New York: Random House, 1970), 113.

  2. Nicholas Lemann, “The Kids in the Conference Room,” New Yorker, October 18, 1999.

  3. Matthew Stewart, The Management Myth: Why the Experts Keep Getting It Wrong (New York: W.W. Norton, 2009), 178.

  1. THE OZARK FARM BOY

  1. William B. Wolf, Management and Consulting: An Introduction to James O. McKinsey (Ithaca, NY: Cornell University Press, 1978), 16.

  2. Ibid., 1.

  3. Marvin Bower, Perspective on McKinsey (New York: McKinsey & Company, Inc., 1979), 9.

  4. George David Smith, John T. Seaman Jr., and Morgan Witzel, A History of The Firm (New York: McKinsey & Company, 2010), 18.

  5. Hal Higdon, The Business Healers (New York: Random House, 1970), 13.

  6. Ashish Nanda and Kelley Morrell, “McKinsey & Company: An Institution at a Crossroads,” Harvard Business School, December 4, 2002.

  7. Smith, Seaman, and Witzel, A History of The Firm, 35.

  8. Wolf, Management and Consulting, 13.

  9. Ibid., 42.

  10. Alfred D. Chandler Jr., Scale and Scope: The Dynamics of Industrial Capitalism (Boston: Harvard University Press, 1994), 4.

  11. Thomas K. McGraw, American Business, 1920–2000: How It Worked (Wheeling, IL: Harlan Da
vidson, 2000), 1.

  12. Chandler, Scale and Scope, 71.

  13. Jack Beatty, Colossus: How the Corporation Changed America (New York: Broadway Books, 2001), 178.

  14. John Micklethwait and Adrian Wooldridge, The Company: A Short History of a Revolutionary Idea (New York: Modern Library, 2003), 66.

  15. McGraw, American Business, 7.

  16. Alfred D. Chandler Jr., Strategy and Structure: Chapters in the History of the American Industrial Enterprise (Cambridge, MA: MIT Press, 1962), 6.

  17. Christopher D. McKenna, The World’s Newest Profession: Management Consulting in the Twentieth Century (New York: Cambridge University Press, 2006), 20.

  18. Chandler, Strategy and Structure, 36.

  19. Pankaj Ghemawat, “Competition and Business Strategy in Historical Perspective,” Business History Review, volume 76 (Spring 2002), 40.

  20. James O. McKinsey, Budgetary Control (New York: Roland Press, 1922), 8.

  21. Wolf, Management and Consulting, 5.

  22. McKinsey: A Scrapbook (McKinsey & Company, 1997), 7.

  23. Firm Training Manual (1937), 4.

  24. John G. Neukom, McKinsey Memoirs: A Personal Perspective (Self-Published, 1975), 4.

  25. Higdon, The Business Healers, 137.

  26. Wolf, Management and Consulting, 45.

  27. Matthew Stewart, The Management Myth: Why the Experts Keep Getting It Wrong (New York: W.W. Norton, 2009), 35.

  28. Andrew Billen, “From Man Management to Mad Management,” Times, March 9, 2009.

  29. McKenna, The World’s Newest Profession, 59.

  30. Mathias Kipping, “Trapped in Their Wave: The Evolution of Management Consultancies,” in Timothy Clark and Robin Fincham (eds.), Critical Consulting: New Perspectives on the Management Advice Industry (Oxford: Blackwell, 2002), 28–49.