What is so fascinating and maddening about the storied consulting firm McKinsey? Twenty years ago in Fortune, John Huey summed up the conundrum:
For all that has been said over the years about McKinsey & Co. - the most well-known, most secretive, most high-priced, most prestigious, most consistently successful, most envied, most trusted, most disliked management consulting firm on earth - perhaps the only statement that would spark immediate agreement from all camps, friend or foe, is this: These fellows from McKinsey sincerely do believe they are better than everyone else. ... [But] several more prosaic questions still bear asking: Do they have a lick of sense? Are they any better than the competition? Can you trust them? Can they really help your company? And finally, are they worth what they charge?
Two decades, several books and magazine articles, and multiple recent, high-profile corporate and financial debacles later, the same questions about McKinsey remain unanswered. And although Duff McDonald's new book, The Firm: The Story of McKinsey and its Secret Influence on American Business (Simon & Schuster), doesn't explicitly answer them, it's nonetheless a fascinating, historical view of McKinsey's birth and evolution, delivered with ample name-dropping and schadenfreude to satisfy most readers interested in management consulting and the rise of the modern corporation.
Although the firm's founder, James McKinsey, started his professional and academic career in accounting, his fundamental interest was in data-driven corporate decision-making. When he formed James O. McKinsey and Company in the mid-1920s to provide "management engineering", his vision was to help CEOs and the emerging class of professional managers make business decisions by understanding how the various parts of their companies were functioning. Hard as it may be to believe today, at that time leaders of companies with multiple discrete units typically lacked even a rudimentary understanding of how the different units performed against their competitors and relative to one another. McKinsey's approach was to bring an accountant's analytic rigor and level of detailed analysis not just to a company's financial ledgers, but to its entire industry, including the competitive landscape, the customers and suppliers, and all aspects of operations. McKinsey's concept was not completely unique, but in developing their ideas in the wake of Frederick Winslow Taylor's detailed analysis of line workers' productivity, he and others were able to capitalize on the burgeoning interest in using primary data to inform company operations and management.
It was not McKinsey, though, but his successor, Marvin Bower, who anchored the modern-day McKinsey & Co. culturally and intellectually. Bower trained at Harvard's law and business schools, and took a job at a prestigious Cleveland law firm providing legal support to struggling and bankrupt companies. In McDonald's telling, Bower enjoyed the intellectual aspects of these business cases, but found the nitty-gritty work of drafting legal documents "interminably boring". When he was introduced to McKinsey, "it was a meeting of the minds" - after all, McKinsey too was focused on helping companies solve what he saw as their most intellectually challenging issues - and in 1933 Bower joined the nascent firm of just over a dozen employees.
Bower successfully grew his credibility and influence within the firm, and in the wake of James McKinsey's sudden death in 1937 and a protracted, internecine split between the New York and Chicago offices, he emerged in 1947 as the head of McKinsey & Co. Bower's vision, reports McDonald, was clear and unwavering: to mold McKinsey "into just the firm he had envisioned as a young lawyer: an organization that enjoyed the same prestige and influence as prominent law firms but didn't spend time on the boring stuff. In other words, a law firm that didn't practice law." To realize this vision, over the next 20 years Bower established what many would consider the defining cultural aspects of the firm: its focus on serving only the CEO, its strictly professional dress code (hats were absolutely required until 1961), its intellectual elitism and intimate association with Harvard Business School, and its "all-for-one-and-one-for-all approach to moneymaking" - consultants would all share in the company's pooled profits and, by extension, no individual's star would shine brighter than that of the firm.
Most importantly, however, Bower also established the philosophical underpinning for McKinsey & Co.'s corporate identity. This was embodied in the five rules Bower outlined in his 1997 book The Will to Lead, summarized here by McDonald:
First, the consultant must put his client's interests ahead of the firm's interests. If a McKinsey consultant thinks a study is not in the interests of a client - a waste of money, or a misguided investigation - he must tell the client so. Second, he must adhere to the highest standards of truthfulness, integrity and trustworthiness. Third, he must keep to himself the client's private and proprietary information. Fourth, he must maintain an independent position and tell the client the truth as he sees it. And fifth, he must provide only services that have real value.
But what "services that have real value", exactly, was the firm actually selling to clients? In these formative early decades, McKinsey continued to leverage the approach first pioneered by James McKinsey himself: using deep analytics to help CEOs navigate past the "information bottleneck" in their organizations and industries. At least one area in which McKinsey apparently excelled was in helping corporate leaders cut costs and people - so much so, in fact, that the term "to be McKinseyed" was born (thanks to British journalist Stephen Aris, according to McDonald) to refer to being a victim of downsizing that was led or influenced by the firm. Whether it's true, as McDonald proposes, that "[i]t may not be too far off the mark to suggest that McKinsey has been the impetus for more layoffs than any other entity in corporate history" remains unclear, as there's scant data in the book beyond anecdotal evidence to support the claim, and McKinsey and its clients remain notoriously tight-lipped about the nature of the services rendered. Nonetheless, McDonald certainly leaves us with the impression that decisions about the size, scope and ambitions of business units were classic examples of the data-driven, CEO-level decisions that McKinsey strove to inform and for which clients hired the firm.
Whatever the reason for McKinsey's success, though - high-quality analytics, "air cover" for downsizing efforts, deep relationships with senior executives, relentless professionalism imposed by Bower - the firm was largely unrivaled in the emerging management consulting industry during much of Bower's tenure. It was only in the 1960s that McKinsey faced serious external challenges to its dominance, when other firms such as Boston Consulting Group and its offshoot, Bain & Co., introduced tools, matrices and frameworks that captured the imagination and interest of CEOs and the broader business community, and redefined "strategy". (For an account more explicitly focused on management consulting's intellectual history , see Walter Kiechel's The Lords of Strategy, a sophisticated and thorough work perhaps best appreciated by current and former consultants.) McKinsey was caught flat-footed - in McDonald's telling, "BCG and Bain were the Apple to McKinsey's Microsoft" - and the firm needed to adapt to a new business by developing its own high-concept strategic frameworks and branding its services and differentiation in a way that it had never had to before. McKinsey's success had spawned credible competitors who now threatened its ability to thrive and grow.
As the firm faced business competition from other consultancies, McKinsey also experienced existential competition from another quarter - Wall Street. Bower believed that "if the firm focused on serving clients, the finances would take care of themselves", but soon after Bower's retirement as managing director in 1967, as McDonald notes, "the rise of Wall Street and the era of the modern CEO also threatened the self-image of a group of people who had previously luxuriated in their self-confidence. Consultants had long worn their IQ on their sleeves; bankers their W2. But things were starting to get out of hand." This combined threat to McKinsey's corporate survival and its consultants' egos began a shift in thinking about the firm and its mission. Under Bower, consulting had been for clients' sake; now the business needed to grow for McKinsey's sake, and partners were increasingly motivated to succeed for their own (financial) sakes. The recent downfall of McKinsey managing director Rajat Gupta in the Galleon scandal has been well-documented elsewhere, and although McDonald's book does not add any critical new information, it provides an historical context that makes the entire affair feel like an inevitable chapter in McKinsey's evolution: from "for the client" to "for McKinsey" and, ultimately, "for the consultant".
There's obviously more to the McKinsey narrative than what's been presented here - and it's all covered by McDonald in great detail - but in the end, it's hard to avoid returning to the essence of Huey's original questions about McKinsey: are they worth it? Like other authors before him, McDonald finds that his exhaustive review of the company's history still fails to yield a satisfactory answer. On the inside flap of the book, he makes a series of broad claims on McKinsey's behalf: "its consultants have ushered in waves of structural, financial and technological change to the nation's best organizations; they remapped the power structure within the White House; they even revolutionized business schools .. in becoming an indispensable part of decision making at the highest levels, McKinsey has done nothing less than set the course of American capitalism." And yet, in the book's epilogue McDonald argues the opposite point, relegating the firm to an almost Forrest Gump-like, bystander status:
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.
After reading McDonald's book, I'm not even convinced any more that "Are they worth it?" is even the right question to ask. In a dot-com era of stratospheric valuations for companies devoid of business models, it might suffice to conclude that McKinsey has created value for ... McKinsey. For its first 90 years, The Firm has been its own greatest client, and by taking its own advice it has successfully dominated its competitors and industry - far more successfully, in fact, than many of its clients. The "value" McKinsey delivers - data-heavy analysis, strategic insights, wise counsel or merely external justification for restructurings and layoffs - may have morphed over time, but the perception of value, and the desire to pay the firm for that value, have remained intact.
The key question about McKinsey, then, may not be retrospective, but instead prospective: Can McKinsey continue to be "worth it" in the 21st century? In his epilogue, McDonald argues both sides, as if hoping that by the end he will have convinced himself one way or the other. On the one hand, he makes a point that will resonate with many business and consulting professionals: that McKinsey's core "product" of C-suite strategic insight has become at best commoditized, and at worst possibly irrelevant, in an era dominated by corporate leaders' need for action, not strategy, and the inability of business generalists to deliver relevant advice grounded in deep specialist expertise in complex industries like technology and healthcare:
McKinsey's greatest challenge is finding things to tell its clients that they don't already know. The business world is overflowing with MBAs these days, and McKinsey-like advice can be easily bought at low, un-McKinsey-like rates. What's more ... [e]ven the most trusting client can lose enthusiasm for his consultants if they're not helping him solve his immediate problems. Many companies today don't have the luxury of indulging in long-term strategizing. They need to win right now. That's never been McKinsey's strength.
But on the other hand, there's no denying the growth, success and adaptation that McKinsey has demonstrated over the course of almost a century, ably documented in McDonald's book. All threats to the firm's future notwithstanding, in his final assessment it's hard for McDonald to imagine a business universe without McKinsey at its center, continuing to accommodate the needs, aspirations, insecurities and checkbooks of CEOs of the world's largest firms:
"In a large organization ... the value of most decisions doesn't necessarily reside in the actual choice being 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."
If McDonald's book is any guide, The Firm will continue to provide that service, in one form or another, for many years to come.