A new story by Suzanna Andrews for BusinessWeek on Rajat Gupta, the former McKinsey managing director alleged to have fed tips to convicted insider trader Raj Rajaratnam, is mainly about Rajat, but it does have a damning tidbit about McKinsey:
McKinsey had a culture of superiority, says one longtime client, who declined to be identified, adding that consultants at the firm really seemed to think they were better than anyone else in the business world. This CEO is still shocked recalling an incident in the late 1980s, when a McKinsey team offered to provide him with a road map of what his competitors were doing. When asked how they could produce such information, he was told that McKinsey also worked with his competitors, but he could trust McKinsey to know what was confidential information and what was to be kept private. He says arrogance permeated the firm.
Felix Salmon deems this revelation to be of what a “presumably-representative McKinsey team would do in the course of normal business.” Having been at the firm at around that time (the mid 1980s), the reality was more complicated, but in the end points to the same troubling conclusion: a lack of adequate (one might say any) meaningful controls on client work.
I was more aggressive in doing competitor research in my day than pretty much anyone else there. I’d call them up and get interviews. I never lied. I made it clear I was working for McKinsey and would say I was working for another firm in their field (a polite way of saying they were a competitor). I’d then give some accurate factoids about the client to make them seem a non-threat (“ranked below number 25 in the Eurobond league table” when doing a Eurobond study). I’d also say (again true) that I was not asking for sensitive information (I was looking for market intelligence that top firms would have but second tier players wouldn’t), that most interviewees found these chats useful because it would give them a sense of how other players were thinking about the market, and that if I asked anything they thought was out of line, I recognized it might wind up being a two minute meeting.
They’d always say yes, except for Salomon and Normura, which were sensibly disciplined about wasting time with outsiders. I never could understand why they’d talk to me but they always did. And they’d typically say more than they should.
So I’m a bit of a loss as to why you’d root around within the firm; it was riskier and unnecessary, and I don’t know of any teams in my day that did that (particularly since you could also justify charging more for doing fieldwork to get answers).
But I saw enough ethical lapses of other sorts (some recounted in this post) that I’m sure the account from Andrews is accurate. And that relates to something that bothered me from my very first day at the firm: the utter lack of quality control. It was assumed that directors (the tenured partners) would uphold standards, much like law firm partners.
But the practice of law is a more structured and predictable activity than consulting, where each study (at least at McKinsey) is very much customized (it’s understood that it you put two different teams on the same client problem, they would not be expected to go about doing the study the same way and would also not be expected to come up with similar recommendations, although they hopefully would not be wildly divergent). But the only mechanism I was aware of, which was to bring concerns to the head of the firm, was so rarely employed as to make it virtually useless (I do know of one manager who went to Ron Daniel to complain about bad work on a particular study, namely a completely indefensible valuation, which she also though was putting the firm at legal risk. Daniel did come down on the partner in question, but I am pretty certain the woman who brought the matter up suffered as well).
So various partners could indeed come close to or go over the margin, and who might know? Only the team members, and if they were loyal to the partner, or not terribly concerned about ethics, it could be very easy for misconduct to occur. And Felix’s headline (“How Rajat Gupta corrupted McKinsey“) misses the second big point: that it wasn’t Rajat that led the firm down a slippery slope of being more focused on director compensation than doing good work. The causality runs the other way: his election was the visible manifestation of the fact that a significant number of partners wanting to go in that direction.
I was the working oar on a 1986 study that to me represented the end of McKinsey. The firm was in a bit of a panic; it was no longer getting the cream of the crop from business schools and losing mid-career people to investment (I doubled my pay going to Sumitomo, which was third-world banking by Wall Street standards). The three directors on the study, which was on what the firm should do to respond to the investment banking threat, were the top candidates to be the new head of the firm (the sparring among them was highly amusing). They clearly did not understand investment banking, so I wrote them a primer about the industry and discussed its economics.
It was very clear on some level that they had already decided what the answer would be, even if they could never implement it. McKinsey people had always been somewhat jealous of Wall Street pay, but their hours were so much worse and partners had to keep so much of their earnings in the firm that they two careers for the most part appealed to different types of people. Now that financial firm compensation was pulling so decisively ahead of McKinsey rewards, the firm decided it had to compete head to head. It could never to that, but it would seek the best approximation it could, which was to make being a director as lucrative as possible while also expanding the firm’s reach (note McKinsey could conceivably have chosen to become small and super-elite, but at my remove, that option did not seem to get serious consideration).
I’d only get snippets of intelligence over the years, but the lack of McKinsey soul-searching over some of its worst lapses are still stunning. McKinsey was the moving force behind the biggest value destroying deal of all time, the Time Warner-AOL merger. McKinsey was deeply involved in Enron, and seemed to be relieved that it wasn’t sued or pilloried in the press. Why were there no post mortems and new measures implemented when a lot of senior people seemed to recognize it had barely dodged a bullet? And even more important, why wasn’t there real remorse?
The unnamed executive Andrews quotes also accuses the firm of arrogance. That’s striking because the rest of the piece discusses how unassuming Gupta was, and the partner I worked most closely with was also very low key. From the inside, the firm was insecure by design. It hired people who were academically successful but were unsure of how smart they were, and suspected they had gotten ahead by being hard worked rather than particularly clever (yes I can name some noteworthy exceptions of people who were confident intellectually with justification, and some who were confident with no justification, but we are discussing norms). And consulting is a very ambiguous undertaking. Except in obvious cases like deal recommendations, it isn’t clear whether you had any impact on client performance. And the reality is most clients don’t get better, which means you as consultant have to be cynical or deluded. So what looks like arrogance is in many cases a cover for deep seated doubt.
The sad part is that I have heard from several former partners that the firm is in deep denial and is not dealing in a serious way with the underlying issues. Ironically, because the Guinness scandal at Bain involved a partner working for a major client, that firm hit the wall harder, making it obvious that major change was needed if the firm was to salvage its reputation. Here, we have three senior people (one dead) involved, each knowing of the others’ participation. That certainly suggests a culture tolerant of corruption.
Felix’s headline is thus a badly needed wake up call.