By Leah Hochbaum Rosner
When General Electric realized their revenues were up but profits flat, they called them in. When the powers that be at Mellon Bank thought that times might be tough enough to consider selling, they brought them in too. And when the Mexican government was finally ready to admit that it needed help with privatization, they too called them in. And when, this year, Italy’s public broadcaster needed to restructure, they consulted them too.
It seems that for many of the world’s largest multinational corporations — and even governments — the thing to do in times of trouble is not to simply cut costs or begin laying people off. It’s to bring in the consultants at McKinsey for advice.
But just who are these gurus dispensing this company-saving advice? Why are business and world leaders willing to listen? And could they possibly be worth the exorbitant fees they charge?
These are just some of the questions author Duff McDonald seeks to answer in The Firm: The Story of McKinsey and Its Secret Influence on American Business (Simon & Schuster, 387 pages, U.S.$30), a surprisingly immersive look at what is probably the world’s best-known — and most guarded — consultancy.
McDonald, a Brooklyn-based journalist who serves as a contributing editor at Fortune and the New York Observer, somehow managed to gain unparalleled access to the heretofore cagey company, interviewing scores of employees (both past and present) to paint a fair and balanced picture of McKinsey and its culture to discern how exactly it came to be the firm it is today.
It all started in 1926 when James McKinsey, a professor at the University of Chicago, founded James O. McKinsey & Company, a collection of accountants and consultants (or what he termed “management engineers”), who were to be brought in by companies in trouble to provide professional advice on every topic imaginable.
This small firm — an ancestor of sorts to the modern-day McKinsey & Company — was quickly retained by such high-profile clients as department store Marshall Field’s due to its reputation of dispensing high-quality, no-nonsense advice. For instance, in 1935 McKinsey counseled Marshall Field’s — which had lost $12 million over the previous five years — that it needed to make retail its sole focus, sell its wholesale business and its 18 textile mills, and to fire more than 1,200 employees. It was brutal, but the firm did survive for another 70 years until it was acquired by Macy’s in 2005.
The McKinsey name eventually became synonymous with such layoffs. Says McDonald, “The process revealed a flaw that critics continue to see in a preponderance of consultants: While long on ability to intellectualize their way out of a business situation, they often come up short on the human factor. It’s why words like ‘restructure,’ ‘downsize,’ and ‘rationalize’ have found their way into the modern business lexicon, all elegant euphemisms for laying people off.”
Although James McKinsey started the firm, his untimely death from pneumonia in 1937 meant that someone else was going to have to take the reins and lead the consulting firm to glory. That task fell to his protégé, Marvin Bower, who led the company for three decades and is largely credited with making McKinsey into the moneymaker it is today.
As McDonald writes, “Bower was obsessed with making sure he and his peers would not be dismissed as corporate parasites and would enjoy a respect similar to other early twentieth-century professionals like doctors, lawyers, engineers, and ministers.” So he came up with a code of rules that his crew of consultants should follow. “The McKinsey consultant should be selfless, be prepared to sacrifice money and personal glory for the sake of building a stronger firm, never look for public credit, and always be confident and discreet.”
His code worked. Consulting is now a bonafide profession, with scores of MBAs going straight from business school to consulting firms to do the glamorous work of telling others what to do. Which brings us to one of McDonald’s key criticisms: how exactly can young, inexperienced upstarts hope to tell longtime business veterans what it is they need to do to succeed? The short answer is that they can’t…but they do. And as a result, the consultants at McKinsey have a somewhat spotty track record when it comes to their clients (which might also account for their long-held desire for discretion). For every Marshall Field’s that they save, there’s an AT&T that they screw.
In 1980, the telecommunications company brought McKinsey in to consult on an early version of wireless technology. McKinsey advised AT&T to scrap the project, estimating that by the year 2000 the total wireless market would amount to fewer than 1 million subscribers. As McDonald writes, that number was “to say the least, laughably off the mark” and doomed “the company to playing catch-up in wireless” until it was eventually sold to SBC Communications in 2005. “That’s the consultant’s equivalent of a malpractice case, in which the patient dies an awful, avoidable death.”
Other black marks against the company are natural gas trader Enron, which was headed by McKinsey alum Jeffrey Skilling (who would eventually be sentenced to 24 years in federal prison) when it rather spectacularly imploded in 2001; and the more recent Galleon Group insider trading scandal that resulted in the arrests and convictions of McKinsey senior executives Rajat Gupta and Anil Kumar. While McKinsey wasn’t accused of anything illegal, the incidents were nonetheless humiliating for a firm that had long claimed that the privacy of its clients was paramount to all else.
But while the higher-ups at McKinsey would surely prefer that each of these missteps be swiftly forgotten, in truth, they haven’t really affected the company’s bottom line. Although they closely guard what they charge their clients (McDonald notes that at one point in the 1980s General Motors was paying McKinsey as much as $2 million a month), new clients are still jumping on the McKinsey bandwagon…though perhaps not as swiftly as they used to. As McDonald writes: “Few of today’s winners got where they are today because McKinsey told them how to get there — consider Apple or Google. McKinsey’s signature winners are from the old school: American Express, AT&T, Citibank, General Motors, or Merrill Lynch.”
But that slowdown may not matter. As of September 2013, the firm had more than 104 offices in 60 countries, and its alums are everywhere from Facebook (COO Sheryl Sandberg) to Google (CFO Patrick Pichette) to the U.S. government (Bobby Jindal, governor of Louisiana). McKinsey fixes problems, but it also makes individuals. And when out in the world — even years after leaving McKinsey — those individuals will bring the firm in when their companies are suffering.
That’s great for McKinsey, but is it great for the world? Not necessarily. As McDonald says: “When the advice givers start to outnumber the advice takers…the system tilts in the wrong direction.”