The Firm: The Story of McKinsey and Its Secret Influence on American Business (10 page)

McKinsey’s internal history dismissed the controversy as “trivial but well-publicized,” though it certainly did not feel trivial at the time. Walton told a reporter that he’d “suffered and bled with this damn thing,” and Bower called it “excruciatingly painful.”
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In the fallout from the imbroglio, the firm found its “urban practice” overstaffed, and New York office manager Ron Daniel was forced to let go forty consultants.

Despite predictions by industry insiders that he was “finished” at
McKinsey, Bales emerged largely unscathed from the controversy. For many years in the 1980s, he was the firm’s largest biller. A bull of a man bursting with self-confidence, Bales headed several hundred engagements for the likes of Merrill Lynch, Chase Manhattan, and CBS over a thirty-three-year career with the firm. He was a fierce, unapologetic proponent of McKinsey’s methods, including its long, involved relationships with clients. “Difficult problems don’t yield to an ‘aha!’ moment,” he said. “Instead, there is the sandpaper, sandpaper, sandpaper theory of progress. Take the performance management system at Merrill Lynch. Their retail brokers were, in effect, subsidizing their wholesale business. We helped them come up with a new way of evaluating and rewarding performance, but it took us eighteen months of hard work.”
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Bales was also a risk taker. He tried—a little too early for client tastes, it proved—to start an environmental practice at McKinsey, and he ran unsuccessfully for Congress in 1972. Years after the New York City controversy, Bower stood up at a partners conference and decreed Bales to be the most successful consultant in the firm. As one colleague observed, “Marvin acted off a very strong set of principles and had strong opinions. But when his opinion changed, it changed.”

McKinsey eventually moved away from government work almost entirely, ceding federal turf to competitor Booz Allen Hamilton and doing only sporadic work for local administrations. McKinsey veterans claim that this was in response to the ever-growing bureaucratization of the federal consulting process. Over time, the procurement function was separated from the users of consulting services, meaning that the building of relationships with its ultimate customer—McKinsey’s forte—no longer helped in terms of new assignments. Well, there was that, and the more pecuniary fact that margins were coming down. McKinsey was accustomed to charging high fees, and if government wasn’t going to pay them, there were plenty in the private
sector who would. Or, in McKinsey-speak, as Bower himself later wrote, “Congress, the press, and the public at large have a negative attitude toward a
sensible
[emphasis added] level of fees.”
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By the end of the 1960s—before the Bales imbroglio—government work accounted for just 5 percent of billings. Nonprofit assignments added up to just 1 percent.
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For the next forty years or so, McKinsey was content to make its contributions to the world almost entirely through the corporate sector.

As McKinsey established its Washington presence, Marvin Bower began to look beyond national borders. In 1953 he and his wife, Helen, traveled abroad for the first time in their lives—to France and Portugal—and when he returned, he raised the question of establishing a European beachhead in a memo to his partners.
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At the time, McKinsey’s ambitions were still confined to the United States, where its clients came from all across the corporate spectrum. Between 1959 and 1961, the firm worked for clients in twenty industries, with only one—petroleum—accounting for more than 10 percent of billings. Strategic planning was its largest practice area, accounting for nearly one-fifth of revenue, and the firm was still quite small. “When I joined in 1960, the place was only a hundred consultants strong,” said Jon Katzenbach. “I remember the first firm conference I went to at a country club in Sleepy Hollow, New York. We had to room together. The youngest associate and the oldest director shared a room.”
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By the end of the 1950s, though, McKinsey was ready to expand. It so dominated the domestic market that growth opportunities were dwindling, and some of its clients had already opened offices overseas.
Even though the decentralization movement in the United States was still going strong, Europe was virgin territory for deploying the idea. The war had battered most European multinationals, lending their healthy American counterparts a spectacular advantage: There were 93 subsidiaries of American manufacturing firms in Britain in 1948. By 1971 there were 544.
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Broader technological developments also played a part in the firm’s global expansion. In the 1950s jet travel became cost-effective for corporate executives, and the first transatlantic phone cable began operating in 1956. Europe suddenly wasn’t so far away. Booz Allen Hamilton and Arthur D. Little both opened offices in Zurich in 1957. In December of that year,
BusinessWeek
even criticized McKinsey for thinking it could merely send Americans abroad instead of establishing a presence on the ground. It wouldn’t be long until that changed.

In 1955 McKinsey hired Charles Lee, an expert on business in Europe, to work with partner Gil Clee in formulating expansion plans. Clee, who briefly followed Bower as managing director before succumbing to lung cancer, was one of Bower’s right-hand men at the firm, and his expertise in finance served as a complement to Bower’s obsession with values. Clee and Lee spent the next few years making the case for an expanded overseas experience, but it was slow going. By 1956 McKinsey could count only the overseas operations of Heinz, IBM, and ITT as clients. Its work for IBM World Trade in Paris was credited with helping the computer firm make significant European inroads. But the consultants had made scant progress beyond that.

McKinsey’s ultimate push into Europe actually came by way of Venezuela, via a 1956 project that came through a referral from Texaco’s Augustus “Gus” Long to Royal Dutch Shell’s John Loudon. Loudon asked McKinsey to reorganize the giant oil and gas company’s operations in Venezuela as a kind of tryout for further work. The
firm passed with flying colors. Upon becoming Shell’s chairman in July 1957, Loudon immediately cabled McKinsey about a study of the entire company. Marvin Bower himself went to The Hague for a negotiation in which the American company held a pretty sweet position. Shell’s joint Dutch-British ownership had produced a stalemate, as the British side of the firm would not countenance Dutch consultants, nor would the Dutch side countenance British consultants. McKinsey represented a compromise, and it landed a giant new client. A London office became a near necessity.

Still, this being McKinsey, there were memos to write. Clee penned one in March 1958 titled “Proposed London Office.” His previous efforts, in 1956, had been rebuffed, in part because the consultants didn’t believe Europeans would stand for McKinsey’s fees. The Shell contract suggested this was not true. At the April 8, 1958 meeting of McKinsey’s directors, when further study of the matter was proposed, Bower replied that it had been studied enough and asked for a show of hands. The vote was unanimous: McKinsey would open a London office. In April 1959, McKinsey announced the opening of its new office at 4 King Street, St. James, London. Just as it had insinuated itself into the American establishment by way of establishment hiring, McKinsey tapped then-New York–based consultant Hugh Parker, who had rowed at Cambridge, as its first London head. Parker was given a budget of $25,000 to get things going, and in the first year he managed to bill $4,625 to the British subsidiary of Hoover.

“He understood the British,” Bower later wrote.
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More to the point: “To establish a staff equivalent in caliber to our U.S. staff, we first needed honors graduates of Cambridge and Oxford who could attract others.”
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Parker was a McKinsey man, through and through, as evidenced by remarks like the one in which he said McKinsey men should have “the basic habit of success.”
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That, and an “Oxbridge” degree—from one of just two schools. Bower had his own chestnut:
“The successful consultant has a personality that causes most people to like him.”
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Still, Parker was an American. As the bulk of the London office’s business shifted from serving the overseas operation of U.S. companies to major UK companies, its staffing had to change. British managers wanted to talk to British consultants. To that end, McKinsey lured Sir Alcon Copisarow, a veteran of the UK civil service, as its first non-American director in 1966. It was an astute move, as the governor of the Bank of England thereafter personally requested Copisarow on assignments.
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In January 1959, Shell announced that it had adopted McKinsey’s organizational recommendations, some of which remained in effect through the 1990s. This was great press for the firm, but it claimed to be troubled by the publicity. “They go around boasting of hiring the McKinseys,” partner Everett Smith told author Hal Higdon. “Our name hits the
Times
regularly, and quite frankly it scares the devil out of us.”
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Mike Allen, a former McKinsey consultant who went on to found his own successful consulting firm, was another American who helped London get off the ground. “We were like movie stars,” he said. “After General Electric had decentralized in the 1950s, we seized on the idea and exported it.” Allen recalled challenging the most sacred of British cows: the tea break. “When we worked for the British Post, we quantified it. It was supposed to be fifteen minutes, but it was two hours. They actually only worked about three hours out of eight. The head of the union said it was management’s fault. He was right.”
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Business ramped up quite quickly. By 1962 London’s client list included the British subsidiaries of Heinz, Massey Ferguson, and Hoover, as well as local firms like Dunlop Rubber and chemical giant ICI. By 1966 the London office was the second largest at McKinsey, with thirty-seven clients to New York’s ninety-six.
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The product, naturally,
was decentralization: In short order, the firm decentralized twenty-five of the top 100 British companies. “Honestly, though, it was like shooting fish in a barrel,” said former McKinsey consultant Doug Ayer. “It was okay to be a businessman in the U.S. by that point. But in England, it was still civil service, clergy, or the army. Their businesses needed help.”
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It’s been said that McKinsey consultants traveled across Europe with a copy of Alfred Chandler’s
Strategy and Structure
in their briefcases. Chandler’s multidivisional model was the sine qua non of organizational structures, and McKinsey acted as its chief proselytizer. According to historian Christopher McKenna, one European manager told his colleagues to save McKinsey’s $100,000 fee by merely buying a single copy of the book.
Le Monde
coined the term
prêt-à-penser
—an analog to
prêt-à-porter
, or “off-the-rack.” In short, the paper accused McKinsey of selling off-the-rack ideas, tailored only at the cuffs.

If the criticism cut into McKinsey’s growth, it was undetectable. McKinsey’s European excursion was so successful that the firm entered the popular vernacular. The
Sunday Times
defined the verb
McKinsey
as follows: “1. V. To shake up, reorganize, declare redundant, abolish committee rule. Mainly applied to large industrial companies but also to any organization with management problems. See: British Broadcasting Corporation, the General Post Office and Sussex University. 2. N. An international firm of American management consultants.”
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In the view of many, McKinsey reorganized Europe itself.

McKinsey consultants described their expansion with the same benevolent jargon that had worked so well in the United States. “McKinsey . . . did as much as any institution to rebuild European productivity,” said partner John Macomber. “[And] . . . there was never one scintilla of a doubt about what was motivating us. And it wasn’t money. It was trying to help them.”
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Over the next decade, McKinsey “helped” an enviable roster of British clients, including Cadbury Schweppes, Cunard, Rolls-Royce, Imperial Chemical Industries, Tate & Lyle, Unilever, and Vickers. It had even greater success in the public realm, working with the Atomic Energy Commission, the Bank of Ireland, British Rail, the British Broadcasting Corporation, the National Health Service, and, in 1968, the Bank of England. That last one was perceived as an affront by British consultants: “The Post Office was a slap in the face; the BBC was a humiliating blow; but the Bank of England was the crowning disaster,” said the chairman of the British Management Consultants Association. Was British management consulting so bad that they had to bring in the colonials?

The public uproar caused by the Bank of England contract only reinforced the perception of McKinsey’s competitive superiority. As the London correspondent for
Science
magazine wrote, “And then there is McKinsey, projecting an image which suggests that, if God decides to redo creation, He will call in McKinsey.”
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By the end of the 1960s, Europe was in full-fledged panic about the economic invasion from the United States. American direct investment in Europe, which had been $1.7 billion in 1950, reached $24.5 billion in 1970.
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French journalist Jean-Jacques Servan-Schreiber’s 1968 book,
The American Challenge
, argued forcefully that American companies’ ability to manage their operations over vast geographies was crushing European competition, and that the secret to their success was in their organizational structure: in other words, the decentralized form.

This was
Scale and Scope
all over again, except this time on a global playing field. “Fifteen years from now it is quite possible that the world’s third greatest industrial power, just after the United States and Russia, will not be Europe, but American industry in Europe,” wrote Servan-Schreiber.
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But “American industry” was an abstraction.
And at the time McKinsey, more than anyone else, was its concrete manifestation.