The Firm: The Story of McKinsey and Its Secret Influence on American Business (15 page)

McKinsey even found itself in the wrong town. In the early 1970s, New York City was falling apart and approaching the nadir of its national popularity. Boston, by contrast, was Silicon Valley’s antecedent, a cleaner, safer, and more humane place to start one’s career as a young consultant. Competition for recruiting Harvard’s best and brightest became a multifaceted argument, not the least factor in which was quality of life. New York was fit for the likes of Lew Ranieri, the Salomon Brothers hustler who sold real estate bonds like a used car salesman. If you were refined, Boston was your town.

Bill Bain bolted BCG in 1973. He made two decisions that distinguished his new consulting firm, Bain & Company, from McKinsey and BCG. First, he would work for only one company in an industry, but only if that company agreed to a long-term relationship. Second, he and his colleagues argued that the quality of its consulting boosted the share price of its clients. While this was a refreshing departure from McKinsey’s long-stated claim that it was impossible to measure the consultants’ impact, it took credit for things over which consultants had no influence. On the other hand, Bain was putting real skin in the game.

When the firm established Bain Capital in 1984—headed by Mitt Romney—at least a portion of its investment dollars were targeted for investment in clients of Bain & Company. For Bain Capital, share price
was
a true measure of success, and so the claim that stock appreciation was a good measure of success was arguably as good a yardstick as one might find. Bain & Company was deliberately eschewing the consulting industry’s traditional routine of passing along competitors’
secrets—the economy of knowledge gained by talking to all players—so its consultants were forced to come up with truly company-specific advice and its fortunes could actually rise and fall along with those of its clients.

The idea of taking similar action was discussed, and then rejected, in the corridors of McKinsey. In the face of real innovation in its competitive set, the firm chose to stick to its knitting. Not for the first time, some critics argued that McKinsey had become what it counseled against—hidebound—and was stuck in what
Economist
editor Adrian Wooldridge later described as a “complacent torpor.”
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As late as 1976, then-managing director Al McDonald referred to BCG as a “disconcerting strategic actor of no concern.” A charitable explanation is that he was bluffing.

Still, it was hard to say whether BCG’s emergence marked a genuine revolution in consulting or was merely a triumph of salesmanship. Consultants at Bain & Company referred to “the million-dollar slide”—a single chart or graph that told a company so much about itself that it was worth a million dollars in fees.
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For all the rhetoric about the “strategy revolution,” companies continued to make the same mistakes they’ve always made despite having paid through the nose to chart their bold course into the future. “The most reliable way to make money from strategy,” observed Matthew Stewart, “is to sell it to other people.”
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He’s right. “Strategy,” as it is sold by consulting firms, is essentially a pipe dream. Why? Because you can sit in a boardroom and plot all you’d like, but once the game has started, it’s pretty much improvisation from that point forth. The best companies stay efficient and effective, and they do well because their people are trained to do their jobs. The hardest thing in any big organization is to keep execution discipline in the forefront. There is a huge usefulness to
that
kind of consulting—process improvement—versus the elusive promise of big
breakthrough thinking. The idea that executives need to be smart and heroic is a new invention. The essence of efficient management is hiring and training unheroic, ordinary people to play by certain rules. You need to take care of that before trying to create leaders or heroes.

That said, there’s nothing wrong with looking for big insights—strategy with a capital S—that can take you to where the market opportunities will be. But that wasn’t what McKinsey and its peers were selling. Consultants sell an analytical approach to strategy, argued McGill professor Henry Mintzberg, but that’s never going to give you the big insight into what product or service will make you profitable again. No amount of reductive analysis of customer needs, market sizing, or competitive positioning can do that. For that you need to innovate, and there’s something about the whole analytical mind-set that effectively drives the ability to innovate out of the building.

“McKinsey people are very sharp analysts; there’s no doubt about that,” said Mintzberg. “And that’s what you should look for when you hire them—analytical advice. They may couch it as managerial or strategic advice, but it’s merely analysis. You won’t hear it from them, but strategy is a learning process; you can’t just buy it from someone. Any chief executive who hires a consultant to give them strategy should be fired.”
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And, truth be told, McKinsey had been as guilty of this sleight of hand as anyone—it promised big breakthrough thinking, but what it really delivered was lots of analysis. It made sure its clients didn’t do anything really stupid, but was that really what companies were paying it the big bucks for?

Over time, McKinsey regained some lost ground. Even if Henderson and his ilk were making inroads with some clients, McKinsey was still the consultant of choice, especially for the largest of firms. In 1968, GE CEO Fred Borch asked McKinsey for help in evaluating his corporation’s strategic planning. GE had deemed BCG’s four-box matrix intriguing but inadequate for the real world. A three-month study
produced the GE/McKinsey nine-block matrix. If it seemed a petty response—you have four?
we
have nine!—it still satisfied the client.
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GE’s problem was typical of the conglomerates of the era. Up until that time, the assumption had been that all business units were created equal and that all general managers should grow their own businesses. The result, though, was that GE was growing profitlessly. Revenues were up, but profits were flat. The same thing was happening at Westinghouse. The great insight of the strategy practitioners was that not all businesses are created equal, and it is the job of the CEO to divvy up capital according to which ones could put it to best use. This wasn’t a new idea, but it had been lost in the enthusiasm regarding growth and success of the postwar boom.

Some answers to the complexity served a purpose, but in the end they were like Band-Aids on a broken bone. A lot of CEOs of the era, for example, had gotten to the top by exercising internal control. GE’s Borch, for one, read the profit-and-loss statements of all his departments every year and told them to stop spending on paper clips. Budgeting and control were at least one part of leadership, but such immersion in detail has its obvious limitations. If you’re wearing a green eyeshade, you’re not looking at the battlefield. Suddenly you look up, and—whoops!—Napoleon is coming for you!

With McKinsey’s help, GE created strategic business units, or SBUs, that were organized not for span of control but for businesses around which a cohesive competitive strategy could be developed. BCG talked about market share and growth rates; McKinsey threw industry attractiveness and competitive strength into the mix. GE needed to shift its focus from internal control to external factors, the consultants argued. While it had sold a lot of televisions, for example, the corporation suddenly had no answer to Sony. The problem was that GE was too inward looking, and it wasn’t thinking about its business units in the right way—outwardly, analyzing all manner of factors
beyond just production costs. The sprawling conglomerate—GE had 360 departments before the study—ended with just 50 SBUs. This organizational idea then swept the world, and it helped McKinsey stem the tide of competitors.

Former McKinsey consultant Mike Allen argued that McKinsey’s work at General Electric laid the groundwork for Jack Welch’s acclaimed career. “Without McKinsey, he would have not had an organization that worked,” said Allen. “He would have had no strategic planning or organizational structure to work with. We helped put him on the map. It was the high point of our interaction with GE, from a creative standpoint.”
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Though BCG and Bain took a toll, they didn’t deter McKinsey from its global march. In 1971 the firm opened offices in both Tokyo and Sydney. Early clients in Tokyo included Japan Airlines and Sanwa Bank. In 1972 Copenhagen; 1973 Stamford; 1974 Caracas and Dallas; 1975 São Paulo, Munich, and Houston. (Although Caracas was shuttered that same year due to a lack of business.) McKinsey also worked on a few signature engagements, like the one in 1973 in which the firm, while engaged on an electronic coding project for Heinz, did work that led to the creation of the universal product code—or bar code—for food. McKinsey research correctly predicted that the code would revolutionize the grocery business and improve Americans’ quality of life at the same time. That is exactly what they did, making stores vastly more efficient and dramatically reducing checkout times.

By the mid-1970s, the existential threat posed by the likes of BCG had largely passed. Some of this was McKinsey’s doing, and some of it was because the fad had burned out. Henderson had grown so enamored of his ability to conjure up salable theories that he veered off into folly. In 1976 he wrote an essay titled “The Rules of Three and Four,” in which he claimed that a stable competitive market never has more than three significant competitors, the largest of which has no more
than four times the market share of the smallest.
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The rule was merely a hypothesis, he said, and “not subject to rigorous proof.” Henderson was fat and happy from his decade of success, and this was a casual and careless approach to providing insight to clients—to which McKinsey had successfully defined itself in opposition. “In my view, the best thing that ever happened to the Firm was the onset of BCG,” said Fred Gluck, who succeeded Ron Daniel as managing director of McKinsey in 1988. “I think that the Firm’s market success in the 1960s had developed into a sense of smugness and self-satisfaction that was counterproductive.”
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Not that McKinsey had stopped taking pages out of Henderson’s playbook. In a belated response to
Perspectives
, McKinsey later began sending missives of two thousand words or less out to prospective clients. Called “spill a cup of coffee on that,” the briefs had a threefold goal. First, the McKinsey partner asked the prospects what they thought of the work. This appealed to the client’s vanity. Second, it compelled the client to then read McKinsey’s latest thinking. And third, it gave the firm a chance to follow up. One rival suggested the firm has captured more business through these informal communiqués than through big, important papers on the future of hedge funds or capitalism on which the media so eagerly feed. And this gets at what has been one of McKinsey’s enduring competitive advantages: the firm’s ability to build enduring relationships with its clients’ CEOs and then use those relationships to spin off study after study. This is something that no other consulting firm has been able to do nearly as well.

If there was one thing Bower had unquestionably given the firm, it was certitude. But just a few years after he stepped down, the consultants
were second-guessing almost everything about themselves and what they were doing. A representative moment came in 1974 when consultant Jim Bennett made a presentation to the Chicago office titled “Mismanaging the Change Process: The Best and Brightest at Their Most Brilliant and Their Worst.” In it he spotlighted controversial consulting work that the firm had done for Air Canada, work for which the consultants had been portrayed as “hatchet men” for the airline’s management when it came to light that 135 managers had been let go as part of a reorganization. Bower’s back-channel man Warren Cannon soon reined Bennett in, forbidding him to make the presentation again, but it had struck a chord. McKinsey was wrestling with doubts about its purpose in the world.

In one way or another, the firm had been wondering about its future since the moment Bower had ceded the top post. In 1968 then-managing director Lee Walton set up a task force to rethink how the firm went about its business. Should it, for example, begin making venture investments in companies it advised or form an alliance with—dare it contemplate the thought?—a Wall Street firm?

In October 1969, at their annual meeting in Madrid—the first-ever partners’ meeting in Europe—the directors considered a specific proposal to form a joint venture with boutique investment bank Donaldson, Lufkin & Jenrette. The idea was compelling in theory: DLJ would acquire underachieving companies, reinvigorate them with McKinsey management know-how, and then flip them back into the market. The two firms would share the spoils.

Bower spoke out against the hookup at the meeting, one of just two times he did so in thirty-plus years after his semi-retirement. Being owner/operators was a violation of professional principles, he said, and would compromise McKinsey’s character. Wall Street was a polar opposite, he argued: “promotional” as opposed to “professional.” The idea was voted down. “Marvin broke out of his cage,” Warren
Cannon said later. “He apologized for breaking his vow of silence, but he felt that the whole character of the [firm] was at stake . . . Then he went back into his cage.”
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One other memorable detail about the meeting was the fact that Bower flew coach to Madrid while many of his partners flew first class. It is instances such as this that can carve a man’s reputation for frugality in stone.

Though the partners resisted getting hitched to a Wall Street firm, they still hungered to do a deal of some sort. After all, everybody else was doing it. In 1970 Booz Allen Hamilton sold shares to the public. That same year, another consulting firm, Cresap, McCormick and Paget, sold itself to Citibank. Citi’s first choice for an acquisition had been McKinsey, but the partners rebuffed the inquiry. The firm did consider selling out to both the Systems Development Corporation (an air force spinoff) and the publicly traded systems analysis outfit Planning Research Corporation. But neither idea went very far.