Book Review: The Firm – The Story of McKinsey and Its Secret Influence on American Business (2014)
MCKINSEY. EVERY B-SCHOOL BRO KNOWS THE NAME. Many more Americans learned the name after facing the presidential prospects of a young, charming, and sometimes naïve political upstart from South Bend– former mayor Pete Buttigieg, who was recently named transportation secretary for the incoming Biden Administration, was a McKinsey alumnus, as they are called. The consulting company is famous for– well, for what, exactly? Duff McDonald unpacks this question in his book, The Firm – The Story of McKinsey and Its Secret Influence on American Business (2014). It’s a portrait of the company and, though it leaves us wanting a bit more sordid detail in many cases, this is mostly forgivable for an overall fairly fast and enjoyable read.
The book goes back to the beginning of the firm by way of its founding by James Oscar McKinsey in the 1930’s. The O.G. McKinsey, who, oddly, given the enduring name, was both the first and the last McKinsey to run the firm, was an accountant by trade. This sets up some expectations for how we see the 20th century play out in corporate history: James McKinsey was focused on managerial accounting and referred to the firm’s business as “management engineering.” It’s not surprising given the 20th century’s legacy of industrial might and relentless capitalist expansion, as punctuated by both World Wars.
We also should remember that both business and management theory were pretty immature in these days. McDonald importantly explains the young firm’s attention to this push and pull between centralized control and decentralized, lateral hierarchies, that dominates business debate to this day. This is well-illustrated– mentioned here- in the contrast between Ford and General Motors. The former was a vertically integrated and centralized firm, while the latter was decentralized and horizontal. Both firms were successful, but the latter was new. This is the kind of thing that McDonald does well– explaining the context
So, uh, what does the firm actually do?
But after a strong introductory chapter, McDonald struggles for a few chapters to find a footing in telling us stuff that’s both relevant but engaging. Do we really need a play-by-play of the firm’s breakneck growth in the 1960’s and its struggles into the 1970’s that tells us very little about what it’s actually doing in functional business terms? Not really. Perhaps most interesting is juxtaposing McKinsey’s growth as a company alongside the corporate trends in the Western economy at large. McDonald shows us a Britain of the 1950’s and 1960’s that is psychologically struggling to dismantle the strong tendency toward centralized control that helped win the second World War, for example. The trends in the United States in the latter half of the 20th century, meanwhile, involved the growth of super-conglomerates like General Electric. McKinsey, McDonald points out, was standing by and watching it happen. And, of course, they were getting paid to make it happen.
But there’s not a whole lot of really direct evidence of what McKinsey was actually doing for these companies. There are certainly dozens of examples throughout the text. But not, in my opinion, enough– for how long the book is. Much of McDonald’s analysis focuses less on primary sources or even anecdotes gathered from primary players but rather on the effects that came out of the consulting contracts. In short, McKinsey has many fans, but it also has created many discontents.
Detractors argue that McKinsey throws young, inexperienced clients at projects, essentially forcing them to learn on the job. This is great for them, but a giant waste of time for the hiring firm. This is especially true given that McKinsey doesn’t bill on a rigid hourly model but rather bills uniquely for every client based on what it thinks its delivered value is.
So, again, what is that value?
In short, we don’t really get to the answer of this question. Maybe that’s the point? Fans, however, argue– as one private equity manager did- that the firm provides vital technical assistance for things that a lot of firms simply lack the interest, if not the competency, to do. The private equity manager said that his firm routinely outsourced tedious spreadsheet work to McKinsey. Seemingly banal, but the manager was firm in his belief in the value provided there. It was just stuff they didn’t want to do internally. This firm said they were paying McKinsey $100,000 a week for the work. McDonald has a nice tie-in connecting this same rate of pay for federal contracting, too. He cites a time when Mitt Romney said he’d hire management consultants to fix the federal government. (Narrator voice: The federal government had already hired management consultants. And, well, it didn’t seem to be working).
Still, there are some fascinating tidbits that appeal to my need for anecdotes and evidence at the human level of experience. Take this example from the 1990’s in a section about how the company attempted to build affinity internally among staff:
“When former senior partner George Feiger was put in charge of the professional portion of a partners conference in 1995 in Portugal, he split the assembled partners (and their spouses) into three groups and made each of them perform an opera. He’d had ex-opera singer David Pearl help him write a libretto, and also hired Barry Manilow’s producer to help out, but the three groups were responsible for everything from assembling the stage to making costumes, learning the music, and performing. The mere transport of all the required materials across the English Channel and down to Portugal cost McKinsey 1.5 million pounds.”
McDonald sort of brushes this off, but I thought it was a bit of a record-scratch moment. This company hired Barry Manilow’s producer to help produce an opera? Performed by staff? As part of, essentially, a team-building exercise? And they built a stage and shipped it across the English Channel? It just seems too idiosyncratic to not talk about in greater detail. Like, was Boy George involved? Or David Bowie? How much cocaine?! Who has an original BetaMax recording?! We demand answers, Duff!
McKinsey– as Private Equity Shark?
Perhaps the most interesting critique McDonald levels at the firm is its role– oft-understated in broader society, in my opinion- in consulting companies that spiraled toward inevitable bankruptcy. It really reminds me of Eileen Appelbaum’s book. How is McKinsey charging management fees to a failing company– that inevitably fails- really that different from corporate raiders pilfering a cashflow positive firm for management fees and dividend recapitalizations? It’s really not that different. If McKinsey were doing this in every company it consulted for, certainly it would be even more reviled than it is today (whether deserved or not). But, as I mentioned previously, there are plenty of success stories, too. If the success stories outweigh the failures, the firm stays afloat easily.
Spectacular failures mentioned included General Motors (2008-2009), Enron (2001), and *checks notes* the entire Swedish banking sector.
The Devil’s Arbitrage
McDonald also points out this diabolical arbitrage that the company engages in, sometimes consulting for multiple clients in the same industry and, in doing, being able to pit interests against one another while indirectly relaying intelligence. In other words, McKinsey is able to tell one company what it’s doing wrong while it’s consulting for that company’s rival, and vice versa. It’s unclear how often this happens, but the fact that it can happen should raise eyebrows to anyone considering the firm. McDonald appropriately points out that indeed, avoiding this– and avoiding any conflict of interest- was a firm tenet of OG McKinsey’s corporate ethos.
The run-up to the spectacular collapse of Enron and, later, the housing market collapse– in which McKinsey apparently explicitly advised a number of banking firms to reduce their audit and risk management staff as a cost-cutting measure- was marked by wary speculation among insiders that the firm was becoming too greedy and was straying from its fundamental mission. These examples should raise some eyebrows. Amid this debate, the firm also fielded what should have probably been a far more disastrous scandal than it ended up being. Hedge fund manager Raj Rajaratnam as well as McKinseyites Rajat Gupta and Anil Kumar were charged in a massive investigation. Interestingly, Rajaratnam is one of the only names that frequently comes up in conversations about fallout from the housing bubble. While this isn’t entirely accurate– the insider trading investigation centered on information involving the diverse likes of Intel, IBM, and Berkshire Hathaway- it does fit chronologically within the time frame of the implosion of the housing bubble in 2009.
No, it’s not enough to conclude from Rajat Gupta and Anil Kumar that McKinsey is a bad company. McDonald does a good job of illustrating the complexity of the firm by how decentralized its management is. Rather than a vertical hierarchy that has one CEO and a few people below him or her, McKinsey has a bazillion principals and then partners below them. This is perhaps somewhat unusual even among partnerships, but it’s a structure that companies of rival renown have adopted, especially in the finance world. McDonald cites numerous times the value McKinsey has been abel to bring to consulting contracts in various countries by employing this unique balance of local knowledge and American ingenuity.
McDonald dances around what seems to me to be the most important conclusions that one should draw from an in-depth examination of McKinsey. But he nails it in this section in the book’s epilogue (p497-498):
“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. McKinsey didn’t work for Microsoft until the software company was already huge. McKinsey, in a way, is the Microsoft of its own industry—never out ahead but with the resources to play catch-up occasionally when others advance first.”
In other words, the author argues– with a solid base of evidence, frankly- that McKinsey, in general, hasn’t actually transformed companies to be more profitable. Rather, it has been in the right place at the right time. There’s some chicken-and-the-egg teleology going on here. One might argue that it doesn’t matter whether industries hire management consultants, because economies are gonna economy and markets are gonna market. The mean reversion! You can zig and zag, but in the end, you’re going to come back to the averaged middle. I don’t know. This sounds like some chartist bull chatter.
There is certainly value in gaining outside perspective, and that’s, I think, why management consultants exist. I don’t think there’s value in assuming, however, that management consultants are all experts, wizards, and worth the money they are paid. And this seems to be the real thesis of McDonald’s book. He hints at this in the beginning and raises the question throughout.
The book isn’t necessarily going to teach you any wild secrets of the business universe. As I’ve said before, I would appreciate more hard-and-fast numbers about where McKinsey consulted a company, what they did, and how badly the company failed or succeeded. Eileen Appelbaum did a stellar job of chronicling this in her book. But it is a good read and one you can get through relatively quickly. And the historical background alone– of adjacent goings-on in the business world during the tumultuous economic cycles of the latter half of the 20th century- is probably worth the read.
(★★★½) McDonald also wrote this book, a critique of The Golden Passport, a.k.a. a Harvard Business School degree.