The Firm: The Story of McKinsey and Its Secret Influence on American Business (5 page)

The job took a serious toll on McKinsey himself. Contending with the day-to-day implications of his harsh prescriptions, he became depressed and physically run down. “Never in my whole life before did I know how much more difficult it is to make business decisions myself than merely advising others what to do,” he famously told a colleague—a stinging indictment of the nascent field he had helped found.
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Not only that, but the effects of the Depression were confounding the problems at Marshall Field. McKinsey soon found himself cutting whole divisions, retiring people early, and firing veteran employees.
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His son Robert later recalled his father receiving between ten and twenty letters threatening his life.
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While off at Marshall Field, James McKinsey did not abandon his own firm. He was far too controlling for that. In the same month he
started his career as a retail executive, he orchestrated the merger of McKinsey & Company with Scovell, Wellington & Company, a rival accountancy/consulting outfit founded in 1910. The deal resulted in a company with two arms—the consulting outfit McKinsey, Wellington & Company and the accounting concern Scovell, Wellington & Company. The firms were supposed to work in close concert. At the time, in 1936, McKinsey, Wellington had twenty-two professionals in Chicago, seventeen in New York, and five in Boston.

Horace “Guy” Crockett of Scovell became the manager of the New York office of McKinsey, Wellington—supplanting the young Marvin Bower, who was mollified by being made a partner in the new entity. McKinsey’s Tom Kearney and C. Oliver Wellington took charge of the firm’s Chicago outpost. Crockett promptly brought in a gigantic consulting project for U.S. Steel—which topped $1.5 million in total billings. (James McKinsey already knew the U.S. Steel people. He had been spending one day a month in Pittsburgh discussing strategy at $500 per diem with U.S. Steel head Myron Taylor.
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This kind of advice-on-retainer became an increasingly valuable part of the firm’s business in the years ahead.)

Despite the hierarchical setback, Marvin Bower’s influence in the firm was actually on the rise. He had convinced McKinsey to eliminate auditing work in New York in 1935 because he considered it at odds with consulting work. Bower had foreseen the conflict between a consultant who openly rooted for his client and an auditor who was supposed to lack prejudice.
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Still, in this regard, Bower’s views were not yet fundamental to the direction of the firm. The Chicago office continued selling accounting services, and McKinsey had actually set his sights on taking control of Scovell, Wellington if he could.

Bower proved to be influential in other ways. Primarily, he didn’t like Oliver Wellington. Bower would later espouse a “one firm” philosophy—all offices were equal, regardless of geographic location—but
he did not yet feel this way. He didn’t, for example, like reporting to a boss not of his own choosing, and he was furious with Wellington’s request that Bower provide him with copies of his letters. Perhaps it was because he wrote what can only be described as obsequious letters to McKinsey, such as an excited 1936 missive about his social plans for obtaining new business in New York.

The eventual severing of the union began in an exchange of letters. In July 1936, McKinsey sent a stinging one to Wellington accusing him of trying to control the McKinsey, Wellington partners too much and of stifling their creativity. In August Wellington responded, questioning the commitment of the McKinsey people to mutual cohesion. The differences were apparently smoothed over for a time, but they erupted in full force after a major shock: the death of James McKinsey.

McKinsey was just forty-eight years old when he succumbed to pneumonia, leaving behind a firm with just a handful of offices and a few dozen professionals. The task of turning his company into a major fixture of American business fell to Marvin Bower, who is rightly regarded as the real architect and visionary of the firm.

Born in Cincinnati, Ohio, in 1903, to William J. and Carlotta Preston Bower, young Marvin enjoyed an upbringing more comfortable than McKinsey’s. Not that he didn’t try his hand at the hard stuff: During high school, he held jobs as a grinding-machine operator and an ice deliverer, before gaining admittance to Brown University in 1921. After graduating with a dual degree in economics and psychology in 1925, he worked for a Cleveland-based law firm, Thompson, Hine & Flory, as a summer associate. A large part of his work was
collecting debt from hardware retailers on behalf of the firm’s wholesale clients.

Unsure of his future, he asked his father, the deputy recorder of Cuyahoga County, Ohio, for advice. His father told him to study law, a remarkably conservative piece of advice considering it was the Roaring Twenties and there were all sorts of exciting new enterprises. But young Bower dutifully complied, enrolling in Harvard Law School in the fall of 1925. When he eventually climbed to the top of McKinsey & Company, he tilted its recruiting toward the kind of bright and ambitious but risk-averse young man he himself had been.

Between his second and third years of law school, Bower married his high school sweetheart, Helen McLaughlin, and after graduating in 1928, he applied for a job at Jones Day—the most prestigious law firm in Cleveland. Bower badly wanted to be part of the Cleveland establishment and Jones Day was the ticket. But his law school grades weren’t high enough and he was turned down. Lacking any further inspiration, he went back to school again, enrolling at the nascent Harvard Business School in the fall. The difficulty in landing the job he wanted apparently chastened the young man; he finished his first year at HBS in the top 5 percent of his class and finally succeeded in getting hired at Jones Day.

With the Depression now in full swing, Bower devoted most of his time at the law firm to serving as secretary to committees of bondholders of eleven separate troubled companies. “No one asked why these companies had failed,” he later observed. He also admitted that his own understanding of business and management problems had been both “amateurish and superficial.”
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But Bower liked the challenge of devising recapitalization structures for struggling or bankrupt companies; he thought it creative. On the other hand, the drafting of the associated legal documents—bond indentures and the like—he found interminably boring. He dreamed of a company that would enable
him to focus just on the creative stuff he enjoyed. As fortune would have it, a professor at Harvard Business School told him about James O. McKinsey, a man who had ideas eerily similar to Bower’s.

The younger man wrote to McKinsey in Chicago, asking for a meeting in early 1933, when Bower was needed in the city for a bondholders committee assignment. It was a meeting of minds. McKinsey told Bower of his thirteen-person firm of “accountants and engineers” who were working on the very issues Bower found enjoyable, while leaving the rest to the lawyers. McKinsey suggested that if Bower were to join his firm, he would enjoy himself 100 percent of the time, instead of just half of the time. After discussing it with his wife, Bower returned to Chicago for a round of three more interviews, after which he was offered a job. He took it. “[The] people at Jones Day thought I had lost my mind,” he said later.
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Bower’s first day at work was November 13, 1933. His first assignment was helping the bondholders committee of New York’s Savoy-Plaza Hotel come up with ideas to boost sales and reduce costs, thereby easing considerable financial difficulties.
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Another early study was for Commercial Solvents, a medium-sized chemical company. When Bower had the temerity to tell the company’s president that it was unfair to hold his sales manager responsible for profits when he, the president, retained total control over pricing, the client was furious. “Young man,” he roared, “I retained your firm to investigate our sales activities, not my activities. I am going to call Mr. McKinsey and ask him to remove you from the study!” The president did as threatened, and McKinsey did as he was asked, removing Bower from the account.
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Bower chose to use the experience as a learning opportunity, realizing that it had perhaps been a little brash to expect the client to take such criticism from a man half his age. It wasn’t that he thought his thinking was wrong; it was how he had delivered it, and the fact that
he hadn’t consulted with James McKinsey first. Bower translated the lesson into one taught to every McKinsey consultant to this day: Deliver the bad news if you must, but deliver it properly.

He hadn’t lost the confidence of McKinsey, either. When New York office head Walter Vieh left to return to Chicago, Bower was made New York office manager. He hadn’t been with the firm a year, but he had impressed his boss. What’s more, he was the most senior consultant in New York at the time.

McKinsey himself exercised almost complete authority over the firm he founded until his death four years later; but in the decades that followed, Bower molded 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.

James McKinsey, according to Bower, always intended to return from Marshall Field and run the consulting firm with Bower as his right-hand man. But the stress of retail turnaround led to the case of pneumonia, which, in the age before penicillin, proved fatal. He died on November 30, 1937. The
Chicago Tribune
announced it on the front page.

A tribute in the publication
American Business
noted the progress that McKinsey and his ilk had made in legitimizing their profession and in elevating the status of the entire managerial class: “His record with Marshall Field and Company proves, if proof be needed, that the difference between a profit and a loss, is nearly always a matter of management.”
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This was not a universally held view. The consulting firm’s business
in Chicago suffered for more than a decade from the fallout of his ruthlessness at Marshall Field. This was a lesson for the future: Association with a failing firm was toxic for a consultancy’s business. From this point forth, McKinsey & Company strove to stay well behind the scenes. It henceforth refused to reveal its client list and at the same time insisted that clients show similar discretion.

Only thirty-four at the time, Bower took Mac’s passing particularly hard. He’d idolized the man so much that he named his third son after him—James McKinsey Bower. Of his mentor, Bower wrote: “He felt that everyone who sought success wanted criticism, and he really gave it. Most of his criticism was negative. Indeed, his praise was so occasional that it made a deep impression when it was given. This approach appealed to me. (I have found that when praise is evenly balanced with criticism, only the praise is remembered.)”
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Throughout his career, Bower constantly paid tribute to the influence of a man with whom he’d worked for only four years. But decades later, he began to occasionally inflate his own role in accounts of the firm’s history. Bower’s biographer Elizabeth Edersheim documented a conversation he later had with a McKinsey director who asked him why he never changed the name of the company to Bower & Co. “My partners and I had to go out and convince clients to keep us on, even though we had lost our principal partner,” he said. “I had to seek out new engagements as the head of the firm, even though my name was not McKinsey. . . . I resolved right then that I would never place my successor in the same position of having to explain why his firm wasn’t named after him. So we kept Mac’s name on the door, and I’ve never regretted it.”
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Bower’s remarks belie an obvious fact at the time. In the wake of Mac’s death, Marvin Bower was
not
the head of the firm; he didn’t take on that role for another twelve years. So it was not Marvin Bower’s company to do with as he wished. At least not yet.

Firms don’t always survive the death of their founders, and McKinsey could have easily been one of those that didn’t. The month before Mac died, the U.S. Steel study, which had accounted for 55 percent of New York billings, came to an end. At its peak, the U.S. Steel study employed over forty people from McKinsey,
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an early model of the money to be made if you got your hooks into a big client. It would have been hard, under any circumstances, to make up for such a large drop in earnings. The next year, 1938, was no easier. New York and Boston struggled, and Chicago couldn’t pick up the slack. The firm lost $57,000, which was a lot more than it sounds like today—especially considering that the firm’s total assets were just $256,376, the equivalent of roughly $4 million in 2012.

In April 1938, Bower wrote a memo to Tom Kearney and Guy Crockett in which he suggested they throw Wellington overboard. He envisioned a new firm in which the three men were partners—but in which only Kearney and Crockett contributed significant capital. His senior partners liked him, but they also knew that he didn’t have the cash.

By October, Bower had achieved his goal. McKinsey, Wellington & Company “regretted” to announce the withdrawal of C. Oliver Wellington from the consulting firm. What’s more, the consultancy was to be split in two: in New York and Boston, McKinsey & Company; in Chicago, McKinsey, Kearney & Company. Tom Kearney had suggested that the two consulting offices consolidate in Chicago, but the New York contingent chose to go their own way. Marvin Bower didn’t yet have the power and influence to emerge from the fracas as head of McKinsey & Company, but there is no doubt that he played a critical—if not
the
critical—role in having Wellington banished from the business and in establishing New York’s independence.