How McKinsey Got Greedy

Dear patient readers, I had gotten most of the way through this post on how McKinsey fell from grace and scheduled it, uncompleted. It auto-launched due to my inattentiveness. But that did impel me to finish it for your delectation. So apologies for the confusion.

* * *

Why has McKinsey, once the ne plus ultra of management consulting, become mired in scandal after scandal? It’s a sign of the times that cracks in McKinsey & Company’s teflon haven’t dented the consulting firm’s allure to clients. A partial list of recent scandals: repaying $74 million in fees on an illegal contract with the South African government to settle criminal charges; identifying key Twitter critics of the Saudi government, leading to their arrest; helping Purdue Pharma combat addiction concerns and focus on high-prescribing doctors so as to boost sales of OxyContin.

McKinsey has also been caught out repeatedly and significantly failing to report conflicts of interest to bankruptcy courts as required, including making recommendations to the court when its own in-house investment arm had a position in some of the securities. McKinsey paid a $15 million settlement to the US Trustee, the largest ever…and chump change to the global firm. And even though McKinsey lost some marquee African clients in the wake of its South Africa criminal charges, McKinsey has sailed on in the face of unflattering in-depth reports at the New York Times and the Financial Times.

Scandals like this aren’t typical of the consulting industry, unlike, say, abuses among big banks, like mortgage securitization frauds and market-rigging. McKinsey’s biggest competitors, Bain and BCG, haven’t had anything dimly resembling McKinsey’s level of well-deserved bad press. And the recent wave of dodgy dealings follows other signs of trouble, such as McKinsey’s deep involvement in Enron, which felled Arthur Andersen yet left McKinsey unscathed, and an insider trading scandal which led to the successful prosecution of the former firm managing director Rajat Gupta as well as a current partner, Anil Kumar.

An article in Current Affairs by an anonymous employee that attempts to explain the firm’s moral decline, McKinsey & Company: Capital’s Willing Executioners, while giving a feel for what it’s like to work for McKinsey now, misses the mark in key respects. The author, who naively thought he was joining the firm to make the world better, seems to feel the need to paint McKinsey, and thus what he was doing, in overly bold colors. He exaggerates McKinsey’s power, particularly historically, which badly skews the entire piece.

The real story is much simpler than the one he tells. McKinsey does not begin to have the clout the author attributes to it. It has done damage, not just as it did sometimes in the past, by doing crappy work and giving clients terrible recommendations, but also by not saying no to clients and studies that were clearly trouble in the making. As one colleague from my era put it: “I remember a time when acquisitions were as verboten as operating in dodgy countries.”

But why did the firm start embracing work it formerly would have turned down? The firm got greedy. And as we’ll explain, the immediate impetus was the rise in financialization that took hold the Reagan era. But it might have happened regardless, just on a slower timetable. As the aforementioned colleague observed, “I see it as simply the consequence of the problem of all organiziatons (including non-proifts such as Mayo). They have to grow or die and eventually they die of growth.”

The Current Affairs piece lacks historical perspective and treats things that are true now as if they were always true. As I’ll discuss in more detail below, McKinsey’s misconduct stems from a combination of factors: prevalent and open corruption in business and politics, which no doubt allowed some partners to rationalize questionable behavior; placing much greater emphasis on revenues and profits starting in the late 1980s, which appears to have intensified after I left; and weak governance, which means these bad tendencies weren’t checked. Remember, McKinsey’s main competitors aren’t all that different, yet they haven’t gotten themselves in anywhere near as much hot water.1

The piece makes too many sweeping statements and has a grandiose view of the firm’s influence. These two bits are all wet and typify how an otherwise insightful piece gets caught up in its own melodrama:

As missionaries for capital, it has helped spread the Good Word far and wide, making the world more productive and efficient as a result.

It has acted as a catalyst and accelerant to every trend in the world economy: firm consolidation, the rise of advertising, runaway executive compensation, globalization, automation, and corporate restructuring and strategy.

The first statement is just unhinged. The writer appears to be confusing McKinsey with Milton Friedman, who was the most effective proselytizer for the internally inconsistent “free markets” ideology. Friedman not only wrote many op-eds, but did mass promotion of his strong-form libertarian ideology, most notably, his best-seller “Free to Choose” and follow-on ten part TV series.

This grandiosity about McKinsey seems to reflect the propensity of the top 10% to hype any activity that could be depicted as an accomplishment, as Thomas Frank described at length in Listen, Liberal. The author has swallowed the Kool-Aid of McKinsey’s sense of self importance. He wrote:

I came into my job as a McKinsey consultant hoping to change the world from the inside, believing that the best way to make progress is through influencing those who control the levers of power.

Having now found out that McKinsey has become too willing to do whatever the client wants in the name of the growth and profit, he is still wedded to the idea that McKinsey is changing the world, just not in a particularly good direction. You can still believe the firm is guilty of serious ethical lapses and has done harm without leaping to a sweeping and inaccurate indictment, that the firm is responsible for every bad trend that ever came out of the business world. That’s simply false because no individual or company has anything approaching that level of sway. And as we’ll discuss later, there are many important business developments that are ethically dodgy or hurt society at large to the benefit of managerial classes, where McKinsey was at best a marginal player.

I’m not defending McKinsey. I left in 1987 due to its deficient governance, with the Current Affairs author confirms in passing but fails to give sufficient weight in his diatribe.

The real issue is that the author appears to have grown up with and never questioned the idea that markets and capitalism are virtuous, or at least not harmful, and had his awakening as to how the world really works at McKinsey. I hate sounding mean-spirited, but it does not take much in the way of powers of observation to see that commerce is often Not Nice, even if you only read orthodox outlets like the Wall Street Journal. Did he miss that, for instance, payday loans are predatory and that some big banks (as in McKinsey client) are in that business? How about mandatory arbitration for just about every consumer contract, like cell phones and credit cards? The arbitration process is stacked against the consumer and the agreements bar consumers from going to court. That prevents class action lawyers from combatting small-dollar, large scale grifting and allows these companies to illegitimately fatten their bottom lines.

In other words, it’s hard to comprehend how when he was dopey enough to think that McKinsey was a “force for good”. No one in my MBA graduating class (1981) would have seen any high prestige, high pay job as having as a significant do gooderism component.

It appears that the prevalence of helicopter parenting and the fixation on making sure children do well means that children of the elite have been intellectually inoculated against the idea that doing well economically, particularly in our era of widespread corruption, is seldom consistent with good conduct. Our Clive wrote a classic essay on how simply having middle class aspirations now typically requires participating in bad behavior:

I’ve spent almost 30 years working in the FIRE (Finance, Insurance, Real Estate) sector, my entire adult life. When I first started, it was viewed as a most suitable career choice for middle class not particularly aspirational sorts who wanted security, respectability and a recognisable position in the community. It was never supposed to be a passport to significant wealth or even much more than very modest wealth. It was certainly never supposed to be anything which oppressed or harmed anyone.

By the early 1990’s the rot, which had started to set in during the mid-1980’s, had begun to accelerate…

Increasingly, if you want to get and hang on to a middle class job, that job will involve dishonesty or exploitation of others in some way…The same disproportionate growth can be seen in financialised healthcare and finacialised education.

Similarly, in my youth, there was enough concern about reputation and bad PR that it was assumed that these employers did harm only at the margin and/or by accident.

We’ll quickly dismiss another wildly overstated claim the author makes, that McKinsey was a missionary for capitalism. McKinsey’s client base, until its recent practice of seeking out government clients, was the C-suite of companies big enough to swallow the firm’s hefty fees. Pray tell how seeking assignments from the Fortune 500 and similar sized private companies could possibly be confused with evangelizing for private enterprise. If you’ve gotten way up on the greasy corporate pole, you can hardly be an apostate.

Even McKinsey’s prolific publishing machine’s most popular offerings, In Search of Excellence, which helped McKinsey pull ahead of Bain, BCG, and Booz Allen in the 1980s, and Valuation: Measuring and Managing the Value of Companies, clearly target businessmen, not the general public.

How McKinsey Changed for the Worse

At danger of oversimplifying, McKinsey, and the modern consulting industry, was built by Marvin Bower, a Harvard Law School and Business School graduate who worked for a few years at Jones Day before James McKinsey recruited him to oversee a newly-acquired New York office. Bower managed to resurrect the New York operation after McKinsey died, and to keep the use of the McKinsey name.

Bower can claim to have professionalized consulting. Before then, business consultants were most often Taylorite time and motion study experts. James McKinsey, an accounting professor who published two seminal texts on business accounting, aspired to give broader business advice but his practice was still based on his accounting expertise.

Bower took his model for a professional firm from law firms. He wanted McKinsey consultants to be seen as senior members of their business community. Like law firms, McKinsey didn’t solicit assignments; even in my day, they responded to inquiries which they got via marketing. A device in the firm’s early days was to host dinners where local notables would mix with McKinsey consultants, with a short presentation on an interesting business issue to help demonstrate the firm’s intellectual sheen. The firm also did pro-bono work for important not-for-profits. McKinsey later published a “McKinsey Quarterly” for clients and prospects and built a substantial publishing operation, with employees helping partners conduct research and edit books, and on occasion ghost writing them.2

Bower also focused on the idea that the consulting advice needed to have an impact on client. Bower would often sell studies by telling clients that if he sent a bill and they though the work wasn’t worth it, they shouldn’t pay anything.

The anonymous writer recounts as an offense that, in 2016, idealistic overwhelmingly Hillary-voting young McKinsey consultants were subject to the indignity of being expected to continue to work for a Federal agency after the “direction of our client…had markedly but predictably shifted” under Trump.

Mind you, that does not mean that McKinsey, despite its carefully cultivated shiny image, hasn’t revealed itself to have lost its moral compass (or more accurately, as we’ll explain, have such weak governance that it can’t supervise and rein in reckless partners) and given some fabulously bad advice.

The real story is simpler than the Current Affairs piece would have you believe: over time, McKinsey got greedy, and it even had a strategic rationalization: needing to respond to the famed “war for talent”.

But to make sense of what happened to McKinsey, you need to go back to its earlier days.

Keeping Up With the Joneses, Um, Wall Street

I joined McKinsey the downwardly-mobile way, by having left Goldman Sachs in 1983. I didn’t take a pay cut but there was clearly more upside to staying on Wall Street.

As the 1980s progressed, investment bank profits soared. McKinsey, which saw itself as an elite recruiter, in a blow to its institutional self-esteem, found it was losing out on campuses.

In the early 1980s, the top consulting firms, McKinsey, Bain, and BCG, offered higher first year compensation to new MBAs than the top investment banks; investment bank remuneration typically pulled ahead after the second year. The consulting firms felt they had as good a success rate with landing top graduates as the most tony Wall Street firms, and they also felt they were looking for a somewhat different type: more cerebral, more interested in influence and stature than maximizing their pay. And at Goldman, partners retained most of their wealth in the firm; the joke was that Goldman partners lived poor and died rich.

But that all changed. Not only was McKinsey having fewer of its MBA offers accepted, with it losing out not to other consulting firms but to finance, but it was also having more and more well-regarded engagement managers poached by a booming Wall Street.3

I had determined I was not going to stay at McKinsey as a result of a seeing a partner on a project in the London office engage in behavior Goldman never would have tolerated. I didn’t want to become a partner in a firm with partners like that. But unlike my departure from Goldman, I wasn’t about to leave just to leave, I wanted to find the right time.

Two years later, I managed a very splashy study, the one ironically when McKinsey recommended that its client Sumitomo Bank invest in Goldman. I was far enough away from the window where I would have been up for consideration for partner that it would be clear I was leaving at a high point and not because I was worried about not making partner. So I marched in the day after my pension vested to announce I was leaving.

Leaving the firm then was one of its biggest perks. McKinsey alumni are its biggest source of new business, so it wanted them to leave happy and gave departing staffers ample time to search. As long as you were at least 50% billed out, the firm was very tolerant of leisurely searches.4

During my exit period, I was put on an odd and revealing assignment.

The election for the managing partner of the firm was coming up in a few months. Three of the top contenders, Carter Bales (a big producer in the New York office, whose clients were mainly media and communications companies, but he had also snagged Merrill Lynch), Fred Gluck (who won the contest; Fred was an electrical engineer whose clients were largely industrial concerns) and Don Waite (then head of the New York office and a member of the banking practice) had apparently decided they needed for the good of the firm to agree on what the firms’ response to the loss of talent to Wall Street should be. Purnendu (“PC”) Chatterjee, a principal who was also leaving the firm (he landed at Soros Fund Management) and I were assigned as their minions.

It was clear the three of them had never been in a room together with no one in charge; there was quite a lot of sparring. It was also clear that they knew shockingly little about Wall Street economics. I decided to write them a paper on the main profit centers of major investment banks.

What came out of this was a decision to modify the selling pitch to new MBAs and to considerably raise the pay level of newly-minted principals, which of course would entail increasing the compensation of all principals.

To do that, McKinsey could either have the tenured partners (the “directors,” who were usually anointed after twelve years to the firm) cut their compensation level, or start charging clients more. They started charing clients more, with no real change in the work product. So McKinsey was explicitly starting to run on brand fumes.

Most observers attribute McKinsey’s mercenary turn to Rajat Gupta, the managing director after Fred Gluck, who served two four year terms. But just as deregulation started under Carter and then became doctrine under Reagan, so to did McKinsey commit itself to paying its top people more without taking any steps to improve what MBAs would call their value proposition. Gupta clearly took the firm much further in this direction, for instance, by increasing leverage across the firm (the ratio of non-partners to partner) and by having the firm engage in selling.

But even so, McKinsey was losing the war on talent. It was hiring from the top 30% of elite MBA programs, as opposed to from the top 10%. It started recruiting non-traditional hires, like scientists, who even though very smart, would still need training to hew to the oxymoron of thinking like an MBA.

Starting in the 1990s, I’d hear a lot of complaints from search firms about McKinsey. It was always the same issues: that the studies were expensive and too often not very good, and that the firm was very pushy. The prototypical scene: McKinsey calls on corporate exec. Partners give pitch about what they think the company needs and how McKinsey can help. Exec says thank you but we think we have that handled. McKinsey tells exec he’s wrong and he really does need McKinsey.

McKinsey’s Poor Governance

This part of the Current Affairs piece is spot on:

The best explanation is structural. McKinsey’s governing model, when compared to other firms of its size and age, is anarchy. The Managing Director (CEO equivalent) has surprisingly little ability to control who the firm serves (said a partner about the Managing Director, “you are definitely not in charge”). McKinsey remains the world’s largest partnership, and partners rule. The general rule of thumb is that if a partner can staff a team, the firm will do the work. If associates don’t want to work with a tobacco company or a defense contractor, they don’t have to. As a result, only a small portion of the consultants need to buy into a client relationship for McKinsey to do work with them. What this means in practice is that the firm doesn’t work with North Korea, but that’s about it.

McKinsey has grown to the point that it is taking on work that prior incarnations of the firm would have turned down due to the political risk involved. To keep lavishing its partners with multimillion dollar annual compensation packages, the firm needs to sustain double digits year over year growth. In a world that’s been thoroughly McKinseyfied, this requires a loosening of standards.

The firm does have a few rules: unlike the Lehman Brothers of the 1980s, different partners don’t compete for the business of the same client. And at least in my day, the person in charge of staffing studies did have a lot of clout and took consultants’ development needs and preferences into consideration when deciding who would work on what.

However, there’s no quality control, save at the level of the look and feel of client documents (they follow “firm format”). When I was at McKinsey, a partner co-authored a study (nicely bound and distributed widely) that went out with McKinsey as the lead author. It had several tables in it that were clearly fabricated, as they relied on data that did not exist and could not be developed.5 These were key to the thesis of the study and experts regarded the document as ludicrous, but somehow that didn’t dent the firm’s reputation (like economic forecasts, McKinsey cranks out so many pieces that its howlers are readily forgotten). I know of other instances of unethical conduct on client projects. And I was hardly in a position to see much.

* * *

I had met Marvin Bower during my first year at McKinsey. He spoke to first year associated about firm values. And it might not all have been for show, or to indulge the man who’d built the firm in his old age.

After I left the firm, one partner I’d enjoyed working with proved to be a big backer. He’d was exceptionally astute about horses for courses and was willing to let me have my head. The work across his client teams was also at least good and regularly very good. I had often said that if everyone at McKinsey was like this partner, I’d still be at the firm.

After I left, he unexpectedly proved to be a big backer when I established my consulting firm. He would regularly refer projects too small for the firm to me. He’d even remark during our infrequent meetings that he’d tried getting his fellow partners to do the same but they weren’t commercially sophisticated enough to understand my use (as in someone who would not screw up but also was not aspiring to compete with McKinsey; better I get the work than a boutique that would use a mini-project to worm its way in to bigger assignments).

This was very unusual; non-partners almost never get referrals, let alone over a period of more than 15 years after leaving the firm.

We never had lunch or a drink; that was reserved for peers or prospects. But the last time I saw him, he let his hair down. He called Paul Krugman a communist and made it clear he thought a big part of his job was to help executives earn more. I was gratified at his unexpected shift into informality yet stunned to see what he was really about. At his funeral, his cardiologist, who had become a good friend, discussed how my former boss had said he thought everyone should make a lot of money and gave the doctor a lot of coaching on how to do that.

Maybe I never understood McKinsey. Or maybe Marvin and the ethos of a different era kept these sentiments in check.

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1 Bain’s near death experience as a result of the Guiness scandal likely has a lasting effect, but I know virtually nothing about how Bain and BCG manage themselves.

2 I know of one case where a book that was perceived to be in trouble was almost entirely re-written by a colleague who was not given an author credit; there were reports of other books getting substantial help from the editing team.

3 Engagement managers and senior engagement managers (three to six years of tenure at the firm) are the working oars. The window for becoming a “principal,” a non-tenured partner, was five and a half to seven years at the firm.

4 I personally know of one associate, who was asked to leave as opposed to chose to leave, who took eighteen months before the firm cleared its throat and told him to hurry up.

5 The normal way McKinsey makes a point it is convinced is true but can’t prove is not to present phony data, but to present a chart and label it “illustrative”. I called that “McKinsey intuition”.

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36 comments

    1. Jeremy Grimm

      In all fairness to this Jeremy — huh!? Are you referring to the article in Current Affairs or to Yves when you comment that “50% too many words is the CA house style”? You might have used a few more words. I assume you are referring to “anonymous” the author of the Current Affairs article. The CA style? Huh? And what did the article use 50% too many words to express/explain?

      Having worked for a consulting firm somewhat like McKinsey — though not so well regarded [the Booz Allen DoD supporting arm] I watched my firm’s moral compass point to profits. I was ‘retired’ … a little early … which continuance I attribute to my technical ability and expertise … which I do not question [though perhaps I might — it profits me to little question it in my retirement]. I believed in the firm when I joined it. I should have left the firm before I retired but had no other viable options and was constrained by many obligations I could not avoid. The transition of the firm I spent so many years working for saddened and saddens me greatly.

      Reply
      1. Jeremy

        CA = current affairs, the magazine as a whole. They have a particular style they edit toward, and they make some… strange choices imho

        Reply
      2. Bsoder

        Yves, is way cool, plain to see & read. Yves and I have some things in common, I did have an interview with McKinsey for a big time job. Early 90’s I just had to say, “get bent”, they thought I was being wonderfully tough and coy. God help me. Then Goldman, I may be a STEM guy but I was raised by very successful Hollywood/NYC writers/producers. So I could walk and chew gum. In other words I knew how to sell, me or anything. As Yves points out but then mid 90s it was always about the money – oh and don’t get caught. Goldman was an insane place to be, but I was protected from it by those on high and as far as I know what I did was legal. After a few years I learned what I wanted and met who I needed and that was that. So many people think they want they jobs and they are easily used and used up. All I can suggest is, you really have to have your own game your running, get what you want and get out. I’d say plenty of more sane ways to be useful and make money, even a lot of money. But then, maybe before 2006. Now, since 2004 I own/run a hedge fund. I do try to keep the oil in the ground as lambert would say. Some days I think I’ve done something good others seem like episodes out of Billions. But here we all are @NC.

        Reply
  1. Tomonthebeach

    Until Buttigieg, I had never paid attention to McKinsey. Several writers asked me about the guy’s Navy creds. I’m a retired Navy Capt among other things and oversaw Navy manpower, personnel, and training research for awhile. Normally, poof-doink appointments at advanced rank (usually Officer grade 3 – Navy Lieutenant) is reserved for licensed physicians and lawyers because if activated they would do the same jobs in uniform.

    So how did young Pete after working only 3 years after school (for McKinsey) get a direct commission at advanced rank with an officer billet code as an intelligence officer, then get sent into combat without even attending OCS? It would seem that McKinsey may have a spooky dimension as well as a greedy one.

    Reply
      1. Jim A.

        ISTR reading a memoir from WWII that pointed out that everybody thinks that the rear echelon begins just behind them. So the riflemen think that the company HQ is in “The Rear” and the divisional staff think that they are on the “Front Lines.”

        Reply
  2. flora

    We’ll quickly dismiss another wildly overstated claim the author makes, that McKinsey was a missionary for capitalism.

    I wonder how much MBA programs’ philosophy and coursework changed between, say, 1978 and 1995 or 2000. Did MBA programs shift from what they had once been, the prosaic study of business finance management, to the newly fashionable Friedman-ite unquestioning Market worship? If so, that might explain some some of the ‘missionary for capitalism’ outlook. Not enough skepticism in the classroom.

    Reply
    1. Bsoder

      Got something along those lines. My wife’s dad and brother went to Harvard BZ in the early fifties. My wife after being a successful CEO of a management consultant firm got her MBA in the early 1990’s. Her Dad had built a company into a tier 1 automotive supplier, a classical Rotary Club Republican. Her uncle was a Goldman Partner that was spent his entire career getting Honda into business in the US and building it up. From a distance just what you’d expect an investment banker to do. My wife, Elizabeth on the other and my own observation, was she was taught largely to for lack of better words to “beat people up” with this or that technique, kinda like mixed Marshall Arts. Her dad was baffled by this, her uncle was well “better you to have gotten that degree in 1978”. Me it just confirmed everything that I thought was true was true. Personally, I have found Master’s level Industrial Engineers to be far more useful in operating a company then MBAs. In matters of finance, maybe.

      Reply
  3. EarlyGray

    > the problem of all organiziatons (including non-proifts such as Mayo). They have to grow or die

    I’ve seen this stated before but I don’t think I’ve ever come across a satisfactory explanation for why. Are there fundamental reasons why organizations cannot maintain a steady-state?
    Does anyone have any recommended reading on this subject?

    Reply
    1. Jim A.

      Personally, I think that the grow-or-die fetish is the result of stock prices based on ever greater future profits. And that thinking has infested non-profits as well since they are to a great degree managed by people from MBS programs.

      Reply
      1. HotFlash

        Personally, I think that the grow-or-die fetish is the result of stock prices

        But, but, non-profits don’t have stocks, do they?

        Reply
    2. Desai

      The book “The New Industrial State” by John Kenneth Galbraith gives a detailed explanation this which in my opinion is quite satisfactory. Though this is not the sole focus of the book so you will have read on certain other topics, too.

      Reply
    3. Pinhead

      It’s not the organization that dies if it fails to grow rapidly. It’s the remuneration or power (or both) of the leaders that flattens or, often, declines when growth slows or ends.

      I have been a consultant all my life. I cannot remember the CEO or law/accounting firm honcho ot not-for-profit president who said “we have to moderate our growth to maintain standards”.

      Reply
  4. John Zelnicker

    Yves – Good overview of the descent of McKinsey into the “profit at any cost” attitude of our current PMC class, as well as a fine debunking of the CA article.

    However, it appears that you might not have posted the last part of your essay. In the third to last paragraph you write “(or more accurately, as we’ll explain, have such weak governance that it can’t supervise and rein in reckless partners)”, which led me to believe that you had more to say.

    Your last sentence about going back to McKinsey’s early days leaves the same impression.

    Reply
      1. John Zelnicker

        LOL, ambrit.

        Hope all is well with you and yours. Stay away from crowds and wash your hands a lot. :-)

        Reply
      2. Susan the other

        It certainly reads like a novel. A good one with a lot of detail. And it left me almost bereft thinking about the 50s and early 60s before all hell broke loose. And I got sidetracked in my own imagination wondering how does a good capitalist “compete” when the future is shutting down; when the end of the road is in sight? Do a song and dance that keeps prices going up up up? Is that greed or desperation? I’m thinking maintenance is very difficult for us humans. The last part about Yves associate who passed on small consulting jobs to her and whom she liked but only knew on a professional basis from McKinsey – it reminded me of Dick Fuld when he crashed and started sounding like an insane commie hater. And to carry that beyond evidence, I’m wondering if the fallback position to commie-hater is symbolic of winning all the battles but losing the war. It’s the story that needs to be told so we can move on and create a strong society without the necessity to hate commies.

        Reply
  5. Mikerw0

    I have few perspectives on McK. One is as a competitor. I spent several years in a very senior position at Arthur D. Little in the 80s / early 90s. I can say my team never lost a competitive bid to them. (ADL had its own issues and admittedly its work was very inconsistent.) What I found from McK was they sold the same bland answer to everyone. They listened poorly to clients, direct feedback from clients, and were resented within client organizations other than the C-suite that they new how to cultivate. Every job they did was viewed as the precursor to the next job, not to what a client needed.

    I also have first hand knowledge of real damage they did to companies through my father, who at the time was a C-suite executive in one of the five largest health insurers in the US. During the period of high interest rates in the US McK was advising life insurers to aggressively market policy loans at the lower rate in the contract. This got Northwestern to push this and result in a serious cash crunch. It was an ill thought through idea. Quietly, the major players in the business put together the cash required to get Northwestern through the jam so it would not become public. Enough said.

    Reply
    1. SteveB

      Mikerw0,

      Do you remember ADL’s feasability study for the GM/ New Departure- Hyatt plant in Clark NJ which was sold to it’s employees as an ESOP? (circa 1980/81)

      Reply
  6. Zamfir

    Serious question: how do they survive and prosper?

    The article above says that the rot started already in the 80s. For me, that’s almost a lifetime go. Your remarks sound familar to me, and presumably tomany others. Cookie-cutter solutions, resentment at the lower levels, damage after they are gone. This also is the same for decades. The widely-published scandals are enwer, but also going for quite time time by now.

    And yet, there they are. They’re big, and everywhere. How does it work?

    Reply
    1. John Wright

      I remember a conversation with a senior executive of an insurance company, in the 1970’s.

      He suggested that consultants are sometimes hired to provide cover for something upper management wants to do.

      Reply
      1. Zamfir

        Yeah, obviously. I have seen multiple McKinsey lay-off rounds in neighbouring businesses, which were fairly transparent ways to fire people that were gong to be fired anyway.. it looked rather humiliating. People with long experience had to talk for half an hour to a fresh-from-school guy in a suit, about what they did on a typical day. And then, through some opaque process, the kid in the suit would apparently write down that their work was useful or not.

        But that can’t be the enitre story, or can it? Scapegoat-for-hire? Especially as the ruse is not that good – people do realize what’s going on.

        I’ll take Yves’ word that the report are not cookie-cutter copy-paste, but they sure can look that way. Lots of buzzwords, and abstract concepts that could apply to any organization. I guess that might have a function, managers want to know what is popular elsewhere, and the gloss helps to sell it internally.

        Or higher ups get to see better reports than I – that’s completely possible, but seems to defeat the scapegoat part. The report is supposed to sell the decisions, right?

        Speaking of gloss, I once encountered a McKinsey team who were set up in some pressure-tank project to analyze cashflow or whatever. They were demanding all kinds of data across the business, the stuff that the regular analysts had to wait for. By the end of every day, they would pointedly not share the results. Everything would be send to some overseas office, who would overnight turn the raw results into very glossy powerpoints. Only then would the results be shared. I thought it ws telling- even under time pressure, the gloss was worth waiting for.

        In this case, i think the business learned. I didn;t see McKinsey again, but the regular analysis group got beefed up, and got easier access to information. I suppose this was genuinely useful, McKinsey “sold” an example of analysis project that would have been difficult to get buy-in for internally. It might have been even better if high management had listened to their own people from the start, but second-best is still better than nothing.

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    2. lordkoos

      An international consulting firm with offices all over the world, that would seem a no-brainer for intelligence agency recruitment.

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    3. Yves Smith Post author

      McKinsey does not do cookiecutter. If you had two McKinsey teams and gave them the same client assignment, you;d be lucky if the recommendations came within sixty degrees of each other.

      But since I was there, my impression is they lay on buzz phrases way more heavily than before, which is a turn-off to anyone discerning. And they were generally in the business of selling leading edge conventional wisdom, so if you had a common problem, the answer would be unlikely to diverge much from that sort of thinking. Hence I can see where this view would come from.

      I had one vivid example. We were tasked by Citibank (then Citibank) to come up with an idea for an information business in trade that could make XXX in earnings. Most teams would have told them there was no such business. Letters of credit are low margin and complicated.

      We came up with a way to team up with shippers so you’d have end to end control of the shipment and then could simplify and computerize a lot of the documentation.

      The manager of our team had been very ill and she had been promised she’d only work on the study a month. She was cycled off and all of us on the team said we didn’t want to work with a new manager.

      So a new team came in to do implementation.

      They promptly killed the idea. Citi was not happy. And I understood they were unhappy with the second team, the execs thought the idea could work and would hit the targets, but with a McKinsey team saying no, they could not take it forward.

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  7. Colonel Smithers

    Thank you, Yves.

    I came across one of them on my way out of Barclays. He was cut from the same cloth as Gupta and Kumar. That particular network is wreaking havoc in the City and sowing the seeds of the next bout of value destruction, sometimes in tandem with their kith at SoftBank.

    McKinsey alumni are also thick on the ground at the Treasury. The number two civil servant, Charles Roxburgh, is one. His wife, Karen Pierce, is the new UK ambassador to the US. Mr Laura Kuenssberg, aka James Kelly, advises numbers 10 and 11 Downing Street, but has stayed with McKinsey.

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  8. Hubert Horan

    A couple supporting observations. I have a 1980 MBA, so same time frame, and many years dealing with McKinsey as a direct competitor for airline consulting work and seeing damage they’d done from inside airlines.

    The “use high salaries to compete for MBAs” had emerged by the mid-70s, and explains how smaller, newer firms like BCG and Bain were able to suddenly able to create the image of being direct McK competitors. In 1980 a top McKinsey/BCG/Bain hire would start at $50k+ versus $35k at other well known firms (such as Booz Allen) and median starting slaries of $25k. At Yale, we actually had a case study on the marketing power of inflated MBA starting salaries (creating the perception that those firms were the absolutely best and brightest) and even friends who’d done that case study were easily seduced by those salary offers.

    But the MBA arms race kept growing. Green MBAs weren’t worth $50k to clients in 1980 (when every big company already has a lot of people with solid MBA type skills) and certainly weren’t worth $100k+ in 1990 when MBAs were a dime a dozen. The “massively overpay MBAs” strategy did succeed in wiping out non-big 3 firms (forced to focus on specific industries or sell out to the accounting or HR consulting firms).

    But in the early 80s Bain and BCG (facing the same “value proposition” problem but lacking any Marvin Bowers type cultural standards) shifted from a product focus (“strategy studies”) to becoming a (very well paid) Praetorian Guard for C-suite folks who had become increasingly isolated from the rest of management (not to mention customers or workers) increasing focused on financialization, and increasingly believed that their exceptional brilliance justified their power, status and pay packages. BCG would only work for a single company in an industry (and thus had no meaningful industry expertise) but would demand complete control of all company consulting projects. Bain (via Romney’s Bain Capital) was the first to do merger/takeover studies on an equity contingency basis. This probably matches the timing of the internal McK “how do we keep up with Bain/BCG” studies Yves describes.

    Solving difficult, cutting edge business problems is difficult, and might justify 1980 consulting fees but not 1995 fees. The only CEOs who would pay the much higher fees were ones demanding slavish devotion to protecting his power and increasing his personal wealth.

    When I started doing airline consulting in the early 80s, there were two serious players, Cresap (my firm) and Booz Allen, who had each done lots of a wide range of specific studies (maintenance efficiencies, marketing organization, etc) and knew the inside of lots of airlines. McKinsey was a distant 3rd player, but would only get hired by Boards who knew the brand name but nothing about the industry. So McK would get hired by the Indonesian Government suddenly facing a crisis at Garuda, or famously at Swissair because the Chairman used McK at Credit Suisse. “Normal” airlines only commissioned big studies when massive cost cutting was needed or when outsiders were needed to work through merger economics. They wouldn’t call McK because none of their staff had the detailed relevant expertise.

    But by 2000, McK had taken over the airline consulting market, and the more expert firms were gone. CEOs increasingly assumed everyone in management was stupid, and McK (like the CEO) was part of the exalted elite who could solve any problem, and thus their exalted fees/salaries could not be questioned.

    In fact every McK airline study I saw was hackery that would have been quickly rejected by executives in the 80s. Northwest was told it needed a West Coast hub to feed Asia, but the study had no data on the actual traffic potential, the cost of building this hub, didn’t say where the hub would best be located, and didn’t explain how Northwest could possibly compete with eight existing West Coast Hubs that were all hemorrhaging cash. McKinsey did all the studies proposing “airlines within an airline” (TED at United, Song at Delta, Jazz at Air Canada) often directly copy/pasting slides from one airline presentation to another (everyone one of these ventures failed miserably). McKinsey’s work was the direct cause of the collapse of Swissair and Sabena. But given the strong cultural affinity between these CEOs and McKinsey consultants there was never any recognition (or reckoning) for the awful work.

    In the recent American bankruptcy case, USAir’s merger plan supplanted McKinsey’s standalone plan that kept existing AA execs in power by the 4th month of the case, but AA dragged out the case another 15 months and insisted that the McKinsey plan was the “official” reorganization plan even though it was in the trash can the day after emergence. Former AA execs pocketed tens of million in “bonuses” and McK pocketed tens of millions in fees, all taken from the pockets of the creditors.

    All of my classmates who went to McKinsey in 1980 thought they were doing so to make the world a better place. That possibility was clearly eroding by 1985 and was probably totally unrealistic by 1995. But they all have (mostly) positive memories because of the Bowers-era cultural practices that actively supported things like Yves’ departure. This wasn’t magnanimity. Consulting firms knew the partnership could only absorb a small percentage of MBA hires. Just as the high starting salaries created a general “McKinsey people must be the best” perception, happy alumni became powerful ambassadors and provided lots of sales leads and introductions. McKinsey became the most prestigious club in the upper class/big business world. As you see with Ivy League alums, a certain percentage become rabid true believers since the connection enhances their own perceived status. In each of the airlines I mentioned, McKinsey alums gave McKinsey huge, exclusive contracts, even though the new McK consultants weren’t bringing any skills or experience the alumni executives didn’t already have. But they were “one of us” and McKinsey knew their outrageous fees depended on their slavish loyalty.

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    1. Yves Smith Post author

      Maybe it’s the difference between the Harvard and Yale MBA programs, or New York City, but no one in my graduating class at HBS who went to a consulting firm nor anyone I met during my time at McKinsey thought they were going to make the world a better place. The one Yale MBA I did know went to the World Bank to push capital markets onto emerging economies, and I do know that she thought her work at the World Bank was virtuous (gah).

      McKinsey types in my day only made the claim they were “adding value” to clients, which is conveniently vague but is also clearly an economic notion, not a general societal good notion.

      Also, in the project I did on my way out on the “What do we do about losing out on MBA hires and mid-career losses?” there was zero concern about competition from other consulting firms. This was entirely about losing people to Wall Street. I doubled my pay when I went to Sumitomo Bank, which by the standards of the day was third world investment banking (but I had a very splashy role and Japan was hot, so it looked better on paper than it might otherwise appear). I could have gone to Lazard and would have made more but that place was ruthlessly political and I wasn’t sure I could position myself there well enough to survive. Sumitomo was the “There are those who would rather rule in hell than serve in heaven” choice.

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  9. Craig H.

    This was well worth the wait!

    > Even McKinsey’s prolific publishing machine’s most popular offerings, In Search of Excellence, which helped McKinsey pull ahead of Bain, BCG, and Booz Allen in the 1980s, and Valuation: Measuring and Managing the Value of Companies, clearly target businessmen, not the general public.

    Read the _In Search of Excellence_ many years ago. Never thought it was worthy of my bookshelf space but definitely worth reading. I read a review a couple of years ago which I cannot retrieve where the author of the review had this tabulation of how well the illustrations of excellence managed after the book was printed and it was an overall dismal result.

    Did find this though and I thought it was pretty good:

    Tom Peters’ True Confessions; Tom Peters; Nov 30 2001; Fast Company

    https://www.fastcompany.com/44077/tom-peterss-true-confessions

    Reply
  10. Thuto

    A senior Mckinsey staffer in the Johannesburg office was caught writing MBA class assignments for the CEO of a large state owned enterprise as a way to keep large consulting gigs flowing (and this is not the SOE that successfully clawed back $75m as mentioned by Yves). And just today Delloitte agreed to pay back ZAR 150m in fees to the same company that clawed back $75m from Mckinsey, enough said. The rot runs deep.

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  11. KLG

    1996 or 1997. Postdoctoral Fellow at one of our best medical schools, not Ivy League but the equivalent, and ranked much higher than HMS on the NIH funding list. McKinsey shows up for a recruiting visit. The 20-somethings were totally impressed. Being older than the traditional age, I thought the whole presentation was pure bullshit. The food was good, though. The partner/speaker was a former neurosurgeon IIRC who told the audience of mostly graduate students and postdocs that neurosurgery had become boring, so he became a McKinsey Partner, which was a more effective way to save the world.

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  12. anon y'mouse

    so this is a class reproduction and legitimization scheme.

    a lot of people charging each other for bogus reports and cache’, and providing cover for BS and looting is what it all sounds like.

    and all patting each other on the back and going home to their significantly-larger-than-average salaries to smirk at their Ivy diplomas on the wall.

    what it reads like is that we could potentially lose the top 20% “managerial” (image only, from this read) class and not be worse off.

    of course, that’s just Madame Defarge in me talking.

    Reply
  13. Sound of the Suburbs

    The Americans pay top dollar for management consultants and bankers.
    The Chinese value technology and develop things like 5G.

    China runs a trade surplus and the US a trade deficit.

    The US President isn’t happy, but always places the blame elsewhere.

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  14. HH

    I used to believe that pragmatism was a fundamental and enduring principle of American society, but the ethos of F.W. Taylor slowly vanished during the long stretch of post-WWII prosperity. Soft times and easy money led to the steady growth of destructive simplifications and perverse incentives. McKinsey succumbed to these, just as most other US institutions did. I worked for a much less distinguished consulting firm that blew up a decade ago after an ill-considered IPO motivated by partner greed.

    Unfortunately the health of nations and the institutions within them appears to be cyclic, and the US is in a declining phase. Once enough leaders and managers are infected by perverse incentives, institutional failure becomes widespread. The health of US society is likely to recover, but most of us will not live to see it.

    Reply

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