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Book Review: ‘The Firm: The Story of McKinsey And Its Secret Influence on American Business’ by Duff McDonald

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The business world is a high stakes game: make the right choices at the right moments — read the market and find the right value proposition to anticipate the customer — and you will be richly rewarded. Make the wrong moves and you perish. But making the right choices is hard.

thefirmduffConsider Blackberry, once a key player in the mobile world, now on life support because its leadership failed to read the market and make the right choices in response. Such reversals of fortune are common — it is a rare enterprise that manages to make the right decisions at the right time with any consistency over time.

Because of the immense incentives associated with making the right choices and the bitter costs of failure, the business world has seen the rise of consultancy groups offering the promise of helping CEOs make the right decisions.

Consulting in America has a long history, beginning in the second decade of the 20th century, when changing nature of business demanded more that titans of the Robber Baron era could muster — professional managerial skill to oversee vast enterprises. Many consulting groups came into being and many failed. Few were as successful as McKinsey.

In his highly readable and thoughtful history of consulting word’s most storied player McKinsey, Fortune editor Duff McDonald offers a lucid and engrossing narrative as he considers the question of the effects and value of McKinsey.

McKinsey began as the product of the ideas about business developed by a University of Chicago accounting professor James O. McKinsey. His value proposition was simple: he would analyze your business and tell you what you were doing wrong and how you could improve it. He based his analysis on a reimagined role of accounting from a mere bureaucratic task to a foundation of making strategic business decisions. Until McKinsey, accounting had never been used as a window into the future of a business. But McKinsey developed a method of using accounting as a planning tool.

He put forth his ideas in two books, Managerial Accounting and Business Administration, and set the template for all subsequent consulting efforts: consultants of high regard always developed some new idea about how business ought to operate in order to meet challenges of the ever changing marketplace, put these these into book form and sparked a evolution in business thinking. Nearly six decades later, when McKinsey was facing a changed business world and losing ground to Boston Consulting Group’s chart methodology, it responded with In Search of Excellence.

Like most innovators, McKisney was responding to a personal experience with a problem. As a lieutenant in the Ordnance Department during World War I, he witnessed first hand the inefficient supply system. Unfortunately, there was at the time no source of expert management to call on to fix such inefficiencies.

There were more opportunities for expert managers who could number crunch in the years ahead: American business was undergoing epochal transformation as large companies grew and grew again, straining in the process the ability of their leaders to manage them effectively. Because it could provide a system for business management, McKinsey grew through the Depression years, offering ways of turning problem companies into profitable ones. One of its key piece of advice was downsizing, which has since gave the firm a dark reputation among employees who got the ax shortly after a McKinsey rep visit.

But McKinsey bore such a reputation almost from its beginning: it was McKinsey himself who experienced the wrath of downsized when he proposed and implemented the idea at Marshall Field in 1935, costing 1,200 people their jobs. While the retailer became profitable again, management has lost the hearts and minds of the employees and McKinsey himself soon grew exasperated — it was much harder to implement the advice he himself had so easily given. McKinsey’s system had a flaw — it was divorced from the human and political realities, even if it made sense on the spreadsheets.

But the Firm’s days of glory began in the post World War Two era. McKinsey was, for more than two decades after the end of the war, the connective tissue of American capitalism. The Firm’s young, Harvard educated minions were everywhere the action was. The firm also fed at the government through as the Cold War began, creating the contractor state. Even the Eisenhower White House made use of its services as it tried to identify the key positions in government in order to staff these with Eisenhower loyalists. And because McKinsey men were everywhere, the firm helped to establish the Harvard MBA as the gold standard in business education.

McKinsey’s impact is indisputable; the firm remade American business into an enterprise based on calculation, data and objectivity of quantitative analysis. The Firm has, indeed, defined American capitalism and helped to spread it around the word after the end of the Second World War.

How McKinsey could achieve such an effect is also clear: many of its graduates moved into executive positions in American business and then became clients. Over time, McKinsey created an unbeatable network of friends through American business.

But the question of value is much harder to answer. McKinsey did innovate business insights, but it also resold the ideas of others. This recycling is something of a tradition in the consulting world. Because McKinsey was everywhere, it was also in a unique position to gather business intelligence and then repackage it. But how much of this intellectual work was actually sound is anybody’s guess. McKinsey’s strength lies in selling the right ideas at the right time. Whether these insights are in some scientific fashion justifiable is less of an issue.

In fact, being too scientific could be a handicap in consulting. Often McKinsey’s insights were cover for executives — CEOs need convincing arguments to justify their actions as much as they are interested in real business insight. McKinsey provides both. Cost cutting and layoffs are a familiar story. Less known is McKinsey’s role in helping CEOs increase their pay. It was McKinsey which discovered that executives were underpaid, launching the era of skyrocketing executive compensation packages. When the decentralization frenzy left management without a role, it was McKinsey that ushered in the era of strategy, giving the CEOs a new purpose and justification. Whatever value McKinsey creates, it is value to the executive. The CEO is, after all, the client.

McKinsey faces new challenges as it did in the late 1960s and early 1970s, when the organizational consulting boom was coming to an end, a new era of challenges. The new Internet economy companies such as Google and Apple have not called on McKinsey. The Firm also struggles in competition for talent. Finally, its size has lead to a number of internal management challenges.

But perhaps the greatest challenge is the fact that McKinsey has no legendary successes though it has been successful in many business circumstances. Indeed, the firm has been associated with spectacular failures. It could not save GM despite years of interaction and many millions in fees. According to critics, McKinsey could not even understand the problem GM faced and applied instead its stale formulas of reorganization, a process that destroyed GM’s talent base. It was on the scene of the Enron meltdown. And it did not foresee the massive financial crisis in 2007 despite its deep links throughout the banking world and warning signs from its failed advice to Sweeden’s banks in the 1990s, which caused a similar meltdown.

One could argue that McKinsey could not be responsible for these failures — it is, after all up to the executives whether to listen to the firm’s advice — but McKinsey could have walked away from these disasters in the making. It could have made a public statement about the immense dangers of housing finances. Did it not see the invevitible end or did it not wish to see it in order to collect fees till the bitter end? There is another albeit Machiavellian possibility, which McDonald does not mention but which suggests itself nevertheless when it comes to significant failures: McKinsey could be used by stealth consultants to dispense bad advice in order to ruin companies competing with those they really work for. If one assumes that McKinsey knows what its doing, and having the best talent in the world certainly supports this assumption, how can it be so spectacularly wrong in so many instances?

Consider the 1995 story of JP Morgan.  McKinsey consultants advised the bank to dial back its lending activities. Incredibly, JP Moran followed this bizarre advice. Who benefited? Chase, which was able to capture more market share in lending, profit, and ultimately ended up buying Morgan. Coincidence or something more? If McKinsey is everywhere and thus is sometimes used by CEOs to learn what their competition is up to, it is not inconceivable that it could also be used to destroy the competition.

Besides such failures and other challenges, there is the experience of companies such as Apple that shows that you don’t need consultants to run a highly successful business. Steve Jobs did not and could not discover the next big thing through quantitative analysis. He created the next big thing thanks to his ability to imagine products that would delight the consumer.

That creative faculty is something that McKinsey has not been able to provide and perhaps a core of creative types, design thinkers and other out of the box ideators is what McKinsey needs to become relevant again in the new changed business landscape where innovation is of such immense importance.

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About A. Jurek

A. Jurek is one of the editors at Blogcritics. Contact me at: a.jurek@blogcritics.org
  • bliffle

    Consultants are chosen to confirm the ideas and methods of the Hiring Authority. How else could it be? The HA OKs the consultants contract and pays his bills. It’s rare that a consultant can really change a working paradigm, at best he can make it work, or, more likely, look like it works. But it’s all gravy for the consultant because, whether the company/project succeeds or fails, he walks away with his money, which includes generous margin for finding future contracts.

    I loved being a consultant. Freelance consultant is the best because there’s no overhead cut for a ‘Firm’.

    Innovation room is usually restricted and the wise consultant chooses only an innovation that will assure future employment. The consultant is a parasite on the customer and it never will happen that you share in the customers success, so why share in their failure?

    Sometimes I was an employee of a big company in a position to hire consultants and the company always asked for my expertise, so I’d hire a consultant that I knew would kick back work for me in the future.

    The naive might consider all this immoral and ‘inefficient’ (efficiency being the cheap buyout of poor managers), but it works. Most business is dreadfully inefficient anyway, and enormous amounts of resource are regularly wasted.