Kings of Consulting: McKinsey & Company

Listen to this episode

S1: We had when I was at the firm, a retreat that everyone in our office went to on a private island.

S2: And we were actually on charter planes to get there and we were encouraged to bring our partners and I brought mine.

S3: Seth Green teaches business at Loyola University Chicago. Twelve years ago, Seth was working for the global management consultants McKinsey and Company. Now McKenzie takes his corporate culture very seriously.

S2: We had a last night there, which was a casino night, and everyone came out in their special dress. And we had a speech by a member of the firm who passionately talked about how McKinsey is like being a part of the French Revolution.

S3: Now, that might seem like a strange comparison. I mean, what does McKinsey have to do with the French Revolution? Peirsol, the McKinsey partner, explained it at the time.

S2: He talked about liberty, equality and fraternity. And we had liberty because everyone could speak their minds. We had equality because whether you were a junior consultant or a partner, your view was going to be held as important and equal. And we had fraternity because even once you left the firm, you were always a part of it. You were always a tried and true McKinsey club. And so we were this special community that was fulfilling this revolutionary idea of how to make business better and stronger.

S4: Most people in business worked to make their own companies better and stronger. But McKinsey’s mission is to help other companies survive and thrive.

S1: The idea of the French Revolution was striking because we were in current day form serving the aristocracy.

S4: McKinsey’s basically the ultra high end, five million dollar version of those business books you’ll see on display tables at Hudson News at the airport. It’s the gold standard for what’s known as management consulting. That is going into other organizations, looking at how they do things and making suggestions for almost a century. The firm is at least its analytical powers to help companies cut costs, grow revenues, release new products and most importantly, drive profits up, up and away. In exchange, it charges fees that can stretch into the tens of millions of dollars. Clients pay those fees over and over again. McKinsey clients include 90 of the top hundred companies on Forbes list of the biggest public companies in the world. And while the firm is best known for its corporate practice, it also consults for governments, for nonprofits and other entities that are sufficiently complex to require. Org charts. They are the high priests of global technocracy. That’s why Pete Budig Edge found himself making excuses for his tenure at McKinsey back when he was going for the Democratic presidential nomination.

S5: What I did it, McKinsey, was consult for clients. My specialties included grocery pricing. It’s not like I was running the place. Right. I was it was my first job out of school.

S4: But I think the American people deserve to know. McKinsey works to make big, powerful corporations bigger and more powerful, often at the expense of the middle class people who work there.

S6: As McKinsey has grown over the last several decades, so has income inequality in America. Is that a coincidence or is McKinsey’s approach to business as disseminated through its clients and alumni? Actually changed the way our economy functions and for whom it functions best?

S5: This is thrilling tales of modern capitalism. I’m Justin Peters, filling in for Seth Stevenson on today’s episode, Kings of Consulting, McKinsey and Company.

S4: Seth Green was fresh out of Yale Law when he signed down on McKinsey in 2007.

S1: When I was graduating from law school, the only thing I knew is that I didn’t actually want to become a lawyer.

S4: Yale was at the time the top ranked law school in the United States, according to U.S. News and World Report. That might not matter much to you, but it certainly mattered to McKinsey. The firm recruits heavily from the top tier of the top tier. It looks for the young people who have emerged from the crucible of the meritocracy, triumphant but aimless. What do you do if you’re the kind of person who makes it through Yale Law School but has no specific career goals apart from not being a lawyer? Well, you become a management consultant. What exactly do consultants do? Well, consultants help solve problems for people who run companies and other organizations. The client defines the problem and the consultant helps find a solution. But they’re consultants. And then there’s McKinsey. And the idea that McKinsey hires the best of the best is central to the story that the firm tells about itself. They tackle the hardest problems for the biggest clients and the fees they charge. Those clients reflect all this. They’re the bluest chip management consultants around. And that’s all why over the course of nearly 100 years in business, McKinsey has been able to adapt to changing market conditions and scale through crises with little harm to its bottom line. You know, most companies see periodic dips in demand for their products and services, but there’s rarely been a down market for McKinsey has to offer because McKinsey says solutions to other companies problems. What sorts of problems? Whatever you got.

S7: You know, for all my criticisms and questions about McKinsey, I think it’s one of the most brilliant ideas for a business that anybody’s ever had.

S4: That’s Duff McDonald, who wrote A History of McKinsey, titled The Firm he called Management Consulting, quote, one of the most flexible business models in the history of Western capitalism.

S7: There is a certain brilliant essence to a company which sells what you’re buying as opposed to what they’re selling.

S4: The guy who had that idea back in the 1920s was an accounting professor named James McKinsey.

S8: Now, at the time, accounting basically meant one thing, keeping track of the money that came in and the money that went out. You spend a dollar, you wrote it down, you’re in five dollars. You wrote it down at the end of the month. You added it all up and reconcile the past with the present. What James McKinsey realized was that a smart company could use those same techniques to see the future. You could look at those numbers, numbers that represented costs and revenues and use them as the basis for next year’s budget or to chart a long term corporate strategy. Maybe that seems sort of obvious. Well, it wasn’t obvious in 1926. A few people had similar insights right around that time.

S4: But McKinsey was the only one to build a massive consulting company around it. He positioned his company as elite right from the start. The young firm was very selective about its client list on the notion that you’re judged by the company you keep. How do you become a top tier firm? By working exclusively for top tier clients and thus the McKinsey mythos was born. But though James Mackenzie lent his name to the Enterprise, it was his successor who gave the firm its soul.

S7: If you’re going to be serious about a real history of McKinsey, you have to quickly move to the man who inherited or grabbed leadership of the firm.

S9: Marvin Bower, you became a legend in the consulting business up in the consulting profession profession.

S10: Excuse me. Absolutely right.

S4: Bower, who you hear here in a 1990 interview, was another lawyer who didn’t want to practice law. He wanted a job with all the fun parts of wiring, the prestige, the strategizing, the intellectual challenges, those comfy high back leather chairs and none of the drudgery that ambition informed his vision for McKinsey and Company under Marvin Bower. McKinsey would respect the numbers, but it would refuse to be bound by them. Instead, he would offer advice and counsel of all sorts. As you may have gathered from the clip you just heard, Marvin Bower took this whole professional thing real seriously. If James McKinsey had turned accountants into consultants, then power turned consultants into professionals. To him, a professional was discreet. A professional talked and dressed like those top executives, McKinsey consultants were even required to wear hats right up until the 1960s when John F. Kennedy changed the world by appearing in public with a bare head. Here’s Bauer again describing why he felt all this was so important.

S11: The concept was very simple. We felt that our type of managing advice should be delivered to the top management. That’s the chief executive. And those reporting to him, we called top management approach. And all we wanted to do was to have our people look like the same people they were serving. And most chief executives were half. So we were just as simple as that.

S4: But most importantly, Bauer thought professionals should give clients the good advice they might not get internally and tell him the hard truths that they might not want to hear. A professional, in Bauer’s estimation, would do what was best for the client, not what was most lucrative for the adviser. Here’s Duff McDonald again.

S7: He basically said to their clients, we will put your interests ahead of ours always. And that is the foundation upon which Mackenzie’s entire reputation and business was built.

S3: But consultants work for management. They’re trained to identify with management. And when there’s a conflict between what’s good for people who run the companies and what’s good for everyone else. Well, which side would you expect the consultants to be on?

S4: If, like me, you grew up after the Reagan era. It’s sort of hard to grasp just how different the nature of Middle-Class Work was in America at mid century. Workers had stable incomes and pensions. And the average middle class worker could afford to buy a house.

S12: It was wealthier than any middle class had previously been, and the country was remade in its image.

S4: Daniel Markovits is a professor at Yale Law School, Seth Green’s alma mater. In February, he wrote a piece for The Atlantic titled How McKinsey Destroyed the Middle Class.

S12: Roads were built, suburbs were built, institutions were built that were all based on the idea that the middle of the economic distribution was the dominant force in society. What happened is in the mid 50s, it became clear that executive compensation was growing less quickly than ordinary worker compensation.

S4: In 1951, McKinsey consultant published a study in the Harvard Business Review showing that ordinary worker wages were rising roughly three times as fast as executive wages.

S12: The study made the rounds among elite American executives and the elite executives took the view that they would like their compensation to grow more quickly.

S3: So a bunch of business executives had a problem as usual. McKinsey and Company was only too happy to help them solve that problem. Now, at the time, American business looked very, very different from how it looks today. The idea was that you stay with a company for life and rise through the ranks.

S6: That created a huge cohort of middle managers. People had started on the production line or in the mailroom and ended up in comfortable desk jobs. This arrangement depended on a few specific circumstances. Number one, you couldn’t ship goods around the world as easily as you can today. So most companies didn’t face much competition from outside the U.S.. Number two, the economy as a whole was on a growth streak, especially given that the rest of the developed world was struggling to recover from World War Two. Number three, strong unions made sure the people at the bottom got their share and then quite suddenly, those circumstances changed.

S4: Here’s Duff McDonald again.

S7: What we realized when the American advantage started to wear off once the rest of the world, but in particular Germany and Japan resurfaced on the industrial landscape, was that it’s not so easy to be magnanimous when you’re fighting over a shrinking pie. Suddenly, everybody’s priorities change.

S4: So the executive started bringing new problems to the consultants, foreign competition, increasing costs, declining profits, and what the McKinsey consultant started telling them was broadly, do you really need all those middle managers? Now, of course, most executives don’t enjoy putting people out of work, and they certainly don’t like being seen as heartless. Fortunately, that’s another problem McKinsey can help them with.

S7: You got to fire a bunch of people or you decided that that is the course of action that you should take. It’s a lot easier to say that to your employees with a straight face. The ones who will still be showing up to work that I didn’t want to do this, but we went and asked Mackenzie and this was their advice. McKinsey will willingly be the scapegoat for that story.

S4: What about the McKinsey consultant who gives the manager that advice? Does he or she have to bear this responsibility? Daniel Markovits thinks not.

S12: You know, if I’m working at McKinsey, when I decide to give the best professional advice I can following the principles of integrity that McKinsey insists on for its workers. I don’t characterize myself as having fired 50000 people. What I’ve done is give the best professional advice that I can. And that’s a perfectly apt way to think about your life. But from a systematic or a structural perspective, it insulates everybody from responsibility for terrible outcomes over the course of its history.

S4: And McKinsey has advised downsizing for so many different companies that, according to Duff McDonald, the firm may well be, quote, the single greatest legitimized air of mass layoffs than anyone, anywhere at any time in modern history.

S6: The wave of layoffs that tore through the economy from the 70s through the 90s changed the shape of the American corporation. Afterwards, there were fewer employees in that middle tier coordinating between the production line and the executive suite. Corporate jobs were increasingly divided between replaceable cogs at the bottom and stressed out captains of industry at the top. Of course, losing all those white collar workers in the middle save companies a lot of money. Some of that money went to profits. Some of it went to the consulting firms they brought in to help them in. Some of it went to the salaries of those increasingly important top executives. According to Yale’s Daniel Markovits, this is exactly how the meritocracy looks after its own interests.

S12: It’s not part of my argument that places like McKinsey or Boston Consulting Group or Bain or any of these other elite consulting shops are snake oil salespeople. They are providing real skill and expertise. It’s just that when companies manage themselves using skill and expertise delivered in this way, what ends up happening is that they increase the wages of really elite managers and graduates of fancy universities and decrease everybody else’s wages.

S4: The changes to business practices that began in the 1970s were soon consolidated into an ideology. The idea that a company’s only responsibility is to maximize the value of its shares. Now, this idea was promoted by the conservative economists Milton Friedman and taken up by a variety of CEOs and corporate raiders who saw it as a path to growth and profit in that era stacked an economy. But shareholder value was also a shortcut for those people to become filthy, stinking rich. For consulting firms such as McKinsey, that meant a booming market for costs, controlling value, maximizing advice that was technically sound but morally questionable. Seth Green told me about advice that McKinsey once prepared for all state. The insurance company whose slogan is You’re in good hands.

S1: In the 90s, we had done a project for all states where we had a slide that showed that we were recommending that they move from good hands to boxing gloves with claimants, which basically meant that we wanted to profit the shareholders by not paying out on legitimate claims and stalling.

S4: Some observers said the McKinsey wasn’t just giving increasingly mercenary advice to its clients. It was increasingly mercenary in its own dealings with those clients. The person whom critics have most often blamed for that change is Rajat Gupta, who served as McKinsey and Company’s managing director from 1994 to 2003. Here’s Duff McDonald again.

S7: Rajat Gupta was the man holding the steering wheel when they drove this thing off the road that they had been on for decades.

S6: When Gupta took over, the firm was beginning to face a business problem of its own. It was increasingly difficult to recruit and retain the best and the brightest. For decades, newly minted McKinsey consultants had accepted slightly lower salaries than their peers on Wall Street. In exchange for more consistently interesting work. At a certain point of the 1990s, though, people on Wall Street started making a lot of money and then the first Internet boom came around and people in Silicon Valley started making a lot, lot, lot of money. And then all of a sudden it was no longer sufficient to earn a mere six figures as a philosopher king at McKinsey. So, Gupta, loosen things up. He raised salaries from McKinsey Junior consultants, hired more of them and made it easier for the successful ones to make partner to pay for all that, the firm took on a broader range of clients while lowering its rates in some say, its standards. And in the process, they ended up giving some pretty questionable advice.

S4: McKinsey advised Time Warner on its merger with AOL, one of the largest and most disastrous in history.

S9: Eighty percent of the cash flow, this combined company will come from your company and yet your shareholders, while only forty five percent. Why were you willing to sign off on the deal?

S7: Oh, well, pretty clearly.

S4: You know, if you looked at last Friday, it spent more than a decade consulting for a sleepy Houston energy company named Enron, which under the leadership of former McKinsey partner Jeffrey Skilling, grew into a 100 billion dollar fraud that collapsed in 2001.

S9: The collapse of the deal between Enron and Dynegy has left Enron employees stunned, many of them wondering if they’ll be getting their next paycheck.

S4: Speaking to BusinessWeek soon after Enron’s collapse, Gupta said that McKinsey stood by its work for Enron and that it didn’t do any work that was related to, quote, any of the issues that got them into trouble. But Duff McDonald isn’t willing to let McKinsey off quite so easily.

S7: Mackenzie touted that thing up till the very moment of its collapse. They were helping sell what is in retrospect shown itself to be a complete and utter scam. And Ron was a fraud and Mackenzie helped sell it.

S4: Gupta’s term as managing partner ended in 2003. He retired altogether from McKinsey in 2007. But a few years later, he was back in the news for entirely different reasons.

S13: Corporate corruption. We begin tonight with one of the biggest Wall Street insider trading cases ever at a time when many Americans were losing their faurot one case. Prosecutors say Rajat Gupta was leaking secret corporate information to a hedge fund tycoon. So that that tycoons fund wouldn’t suffer the same fate. Gupta was in a perfect position to do that. Inside the board rooms of some of the country’s biggest corporations.

S4: The result, although the charges stemmed from after he left McKinsey, the firm nevertheless moved quickly to sever ties with him. Gupta was eventually sentenced to two years in federal prison, and in a 2019 interview with CNBC, Andrew Ross Sorkin. Gupta seemed very sad about how quickly McKinsey had kicked him to the curb.

S10: All these judges had nothing to do with McKinsey and nothing to do with any McKinsey clients or any nothing at all. And I had. Thirty seven years of serving Glines before them, and there was never any issue of any kind ever, so I thought it was a little bit, you know, the actions they took a little draconian from my perspective, when they took your e-mail address away. You write about the pain of that. I never had any other e-mail address my life.

S14: The men who took over McKinsey after Gupta made noises about putting the company on a better path. When Ian Davis succeeded Gupta, he talked about keeping the firm focused on its core mission and values. Daviss tenure overlapped with the subprime mortgage crisis that sandbagged the global economy, according to Duff McDonald. While the firm’s fingerprints were, quote, nowhere to be found in the detritus of the real estate collapse, its consultants had been advisers to many of the companies that both inflated the bubble and collapsed as a result of it. Davis stepped aside in 2009. He was replaced by Dominic Barton, who wrote, quote, Business leaders today face a choice. We can reform capitalism or we can let capitalism be reformed for us under Baaden, according to a lawsuit filed by the state of Massachusetts. McKinsey advised Purdue Pharma on how to boost sales of the painkiller OxyContin, even as America was in the grips of an opioid crisis that has led to hundreds of thousands of deaths.

S4: Over the past 20 years, McKinsey has also expanded its work for governments and the public sector and governments all over the world have signed on. This very April, as a matter of fact, Governor Andrew Cuomo of New York hired McKinsey to consult on Corona virus recovery plans. The mission, one source told Reuters, is to make the plan, quote, trump proof. But at the same time, according to New York magazine, McKinsey is also working for the Trump administration. The firm has contracts with the Department of Health and Human Services. The Department of Veterans Affairs. And what’s at one point even involved in Jared Kushner’s Corona virus task force. And it’s not just public health either. According to ProPublica and The New York Times, when the Trump administration in 2017 directed the U.S. Immigration and Customs Enforcement Agency, or ICE, to ramp up detentions, McKinsey consultants allegedly suggested that the agency save money by cutting spending on food and medical care for detainees. These recommendations were a bridge too far, even for ICE. According to ProPublica and the Times, the agency did not pursue them outside the U.S., according to The New York Times. McKinsey has consulted for repressive governments in China, Turkey and Saudi Arabia. They were involved in a massive corruption scandal in South Africa. They worked on behalf of the thoroughly corrupt ex president of Ukraine and four Russian companies under sanctions. They were, quote, horrified to learn that a report they prepared on the public’s reaction to Saudi Arabian government austerity measures may have been used by that regime for the purpose of silencing dissidents. McKinsey has challenged at times its conclusions about its work with ICE and on behalf of governments in Southeast Asia, China, Eastern Europe and the Middle East. Marvin Bower lived to see McKenzie change in arguably from a profession to a business. Before Bauer died in 2003, according to Duff McDonald’s book. He told a friend the firm had become, quote, greedy fucks. Seth Green, the former consultant, has a slightly more nuanced perspective.

S1: You know, I saw people that were highly heightened in their interactions with the people that were around us. I mean, I can’t tell you how many team managers I had who would literally worry if we were leaving the room to dirty because the janitor who is coming shouldn’t have to clean this up or who would be very mindful if anything was happening to the life of someone who was a supportive team member, that they would reach out and they would be really empathetic. But then, you know, you’d walk into another part of their professional life and their understanding of the world was just that they are seeking to be most efficient and that they are not even really an actor. They are a technocrat who is deciding how to solve a problem that someone else has given them. And in those settings, those same people that I think had the capacity for great moral thought and empathy would not see themselves as the agents who should be applying those.

S4: What Seth is describing isn’t greed. It’s systemic, a morality.

S6: McKinsey started as a business that sold candid, dispassionate advice to corporate managers, but selling advice in building a brand around it also sets up a mechanism for diffusing responsibility because the managers can say they’re just following the best available advice and the consultants can say they’re just trying to help their clients boost profits and efficient. You work for anyone. And you’ll serve their interests as best you can. And you defined those interests in the narrowest and most mercenary terms. You’re going to end up with dirty hands.

S4: Seth Green left Mackenzie in 2009. Today, he works to integrate business strategy with social purpose through his work at Loyola University Chicago. The way he talks about consulting firm McKinsey suggests that the problems he sees with the firm are quite literally the problems of American capitalism. Over the past 30 years.

S1: We are accountable to the management. And so when we’re solving these issues, we’re often thinking about how do we solve for this stakeholder, which is ultimately the management and their owners. And I think if we look at capitalism at large and we look at what’s happened over the last four decades, that has led to dramatic acceleration of inequality.

S4: That’s why Mayor Peets tenure at McKinsey became such a flashpoint in his campaign. Twenty years ago, there would have been no reason for a presidential candidate to distance himself from his previous employment at a prestigious consulting firm. Today, though, it’s not just the string of scandal plagued gigs from Enron to OxyContin to ICE, at which McKinsey consultants were racking up big fees. It’s that McKinsey’s bread and butter giving advice to corporate managers on how to maximize shareholder value is inseparable from the economic inequality that undergirds every major political issue of our time. McKenzie is feeling the heat, too, and the firm wants its critics to know that it hears them and that it’s really, really sorry. Here’s managing partner Kevin Snider on the matter.

S15: We saw Faison’s of clouds. And can I just make one obvious point? A lot of what’s been written is actually at work that was done literally decades ago, decades ago. And in that context, if you think about the sheer number of clients we serve, I think perspective is important and context matters, too. But that doesn’t mean I don’t take the mistakes I made seriously. It doesn’t mean we’re not listening and learning. We are. And I’m determined to act to make the most of this, because the one thing I can tell you, because we’ve been around since 1926. We created a profession that didn’t exist.

S16: If we have to give McKinsey credit, the firm knows that it needs to change or at least that it needs to represent that it needs to change.

S6: According to Seth Green, McKinsey has been in contact with its alumni, announcing that it is aware of the scandals and insisting that it plans to make amends. But Green, for one, isn’t entirely sure that the firm is up to the task.

S17: The firm sent an email to us as alumni where it referred to us as the most esteemed group.

S6: The exact quote McKinsey used in the email was, quote, the most esteemed alumni group in any institution by any measure.

S17: And it went on in detail about how amazing we were as a firm. And then it got into how we were going to change. And what was striking to me about that e-mail is it started with the same communication the firm has been putting out for nearly 100 years, which is this is the place where the best and brightest and most elite. And what worries me is that that remains, in my mind, understanding and leadership of the firm that were the best. And I really think that that is a failing, that we should aspire to be good and not just write.

S6: That’s our show for this week. This episode was produced by Haba LR Albanian Just Miller with help from Asha Solutia Technical Direction from Kevin Bendis. Gabriel Roth is Slate’s editorial director for audio. Alicia Montgomery is the executive producer of podcasts is Slate. June Thomas is senior managing producer of the Slate podcast network. If you’d like to be able to listen to this and other Slate podcasts ad free, consider signing up for Slate. Plus, it’s only 35 bucks for the first year and it helps us bring you all the great podcasts you get from Slate. Sign up now at Slate dot com slash thrilling. Plus, Seth Stevenson will be back next week. Until then, I’m Justin Peters. Thanks for listening.