James McKinsey founded McKinsey & Company in 1926, but his successor, Marvin Bower, shaped its personality.
Published: 2013
Genres: Business, Management Consulting
Pages: 555
Rating: 4.5/5
Author: Duff McDonald is a New York-based journalist. A contributing editor at The New York Observer, he has also written for Vanity Fair, The New Yorker, New York, Esquire, Fortune, Business Week, Conde Nast Portfolio, GQ, WIRED, Time, Newsweek, and others. In 2004, he was the recipient of two Canadian National Magazine Awards – Best Business Story (gold) and Best Investigative Reporting (silver) for Conrad's Fall in National Post Business. Besides The Firm, the two famous books of McDonald are Last Man Standing, published in 2009 and The CEO, co-authored with Owen Burke in 2005.
In the world of management consulting, McKinsey sits at the top of the mountain. Yes, there are others, notably Boston Consultant Group (BCG) as it is inevitably called in the trade, but McKinsey remains the marquee firm of the industry.
As the oldest consulting firms in the US, McKinsey has a significant list of successes – and debacles – to its credit. In this book, McDonald examines how the firm has become a crucial part of the decision making processes at the highest levels, and in the process, had a deep impact on the course of American capitalism. Alongside, he tackles the often unasked question on everyone’s minds – whether they are truly worth it. McDonald is one of the few journalists to have not only parsed the record but also penetrated the culture of McKinsey itself. He traces the firms early days and how it grew to its current position of power.
Luck and Ambition
McKinsey launched his firm on its journey, but Marvin Bower, who built the firm up through much of the 20th century, is responsible for its leadership position in the field. With the departure and death of its founder, the firm experienced several mergers, splits and reorganizations before becoming McKinsey & Company once again in 1947. Bower became managing director in 1950, and exerted more influence on McKinsey’s culture, values and development than anyone else before or since.
Under his guidance, consulting became a prestigious and influent occupation. Bower described the successful consultant as intelligent, educated, socially skilled, well-dressed and above-average in height. He articulated and published a rigid code of conduct, emphasizing integrity, values and unassailable character. At McKinsey, the client came first, before profits or interests of the firm. Clients always got the credit for success; consultants exercised discretion − even regarding the identity of their clients. And it is Bower who expanded the company into government and across the globe. By the 1950s, it was the world’s most successful and admired consulting firm. McKinsey’s clients included more than half the firms of the Fortune 500.
During World War II, it helped organizations retool and organize for war production. After the war, it rode the waves of decentralization as American and European conglomerates restructured to better manage their massive operations. When that ran its course, McKinsey capitalized on the mergers and acquisitions boom of the 1960s. By the end of the 1960s, McKinsey had grown to more than 400 consultants and become a genuinely international company. Though it opened its first overseas office in the 1950s in London, by 1969 slightly more than half of its earnings came from outside the US.
“McKinsey might be the most influential collection of talent in the world.”
McKinsey worked only for select clients − the most prestigious and successful in their industries − or for government leaders. It would take on only what it deemed interesting projects worthy of its talent. By 1970, McKinsey might have had the smartest business thinkers on the planet.
The CEO Factory
McKinsey is by far the world’s most prolific supplier of CEOs and executive talent in the world. Talent management has been a hallmark of the firm since long before the term was coined. From its selective hiring practices to the time it spends assessing, developing and reviewing each associate, McKinsey stands out − even in an industry obsessed with talent.
Young associates who succeed and stay with McKinsey became principals and eventually partners. But the firm follows an “up-or-out” policy, so most leave. Others exit at higher levels, including partners and even managing directors who garner senior executive positions throughout industry and government. McKinsey alumni tend to land well, in large part because of the McKinsey brand on their resumes.
McKinsey alumni include more than 70 Fortune 500 CEOs. When it has produced superstars, such as Tom Peters and Kenichi Ohmae - I did review his famous management consulting book "The mind of the strategist", they soon have difficulty fitting in and almost always leave. A great deal of McKinsey’s success rests on its philosophy of the firm over the individual. Even if the star is “the God of Management,” as Ohmae was called in Japan, or “the world’s most successful management guru,” as Peters became not long after leaving the firm, McKinsey has little room or patience for those who do not blend in.
Troubled Times and Public Failures
By the end of 1972, combined with its obligations to multiple offices worldwide, the revenue loss began to wear on the firm. Clients and the media questioned whether McKinsey had sacrificed quality when it expanded so quickly in the 1960s, and whether its services were really worth the premiums clients paid. Worse, its rivals including BCG and Bain grabbed the spotlight by introducing innovative management concepts that were seemingly more suited to the times. Its client base was starting to perceive McKinsey as a staid consulting firm, too conservative for the modern era.
The threats posed by its competitors and by the economy during the early 1970s were a wake-up call for the firm. Moreover, its failures with high-profile clients such as Volkswagen in Germany and the loss of key accounts in London sent a chill through the ranks. Strict austerity, downsizing, adaptation and its competitors’ missteps helped the firm bounce back quickly. By the late 1970s, McKinsey was again on track, smaller but with more overseas offices. It won a host of new, blue-chip clients, including Japan Airlines and Heinz, an assignment that would lead to the development of the bar code.
McKinsey enjoyed significant growth and success throughout the 1980s and 1990s and achieved near-complete penetration of the world’s largest organizations. Still, many continued to question its value. The 1980s brought a string of failures: McKinsey’s advice on how to compete with Japan nearly destroyed General Motors; it helped create a disastrous financial crisis in Sweden; it advised JP Morgan to stop making loans, leading to the bank’s demise; and was instrumental in the failed merger of AOL and Time Warner as well as Hewlett-Packard’s near-ruinous purchase of Compaq.
In the 2000s, the firm was complicit in even worse catastrophes. Perhaps most notoriously, McKinsey was neck-deep in Enron, both as a consultant and as its biggest cheerleader just as the company imploded into the then-largest bankruptcy in American history. McKinsey was a key player in advising banks to take increasingly risky positions leading to the 2008 global financial meltdown. Most embarrassingly, an active senior partner and an ex-managing director were charged and convicted of insider trading at the end of the decade.
The Bottom Line
Even with these flaws and failures, McKinsey survived through adaptation. Today, it emphasizes its business in Asia, where demand for its advice flourishes. Ninety percent of the world’s 100 largest organizations and two-thirds of the Fortune 1000 still retain McKinsey. For decades, through highs and lows, scandals and successes, the firm has ranked among the most desired employers for MBA graduates. By any reasonable measure, McKinsey is a remarkable success story as 85% of its revenue from repeat customers.
The Firm is a good overview of the history of the company, which benefitted not only from the ambition of its leaders and hard work of its consultants but also the luck of its timing. A little more detail on some of the successful advice given to clients would have been welcomed, but that is probably a function of the company's secrecy. The biggest takeaway is a peek into the corporate culture at Mckinsey, which over the years has assured that its consultants lose their individuality as early as possible. And as to the question as to whether they are worth it, McDonald answers, with conditions attached, is a yes.
Thanks for your reading,
LbL