The Teflon Dons

Duff Mcdonald, a financial journalist from New York, has written a 336 page book called The Firm. Controversy sells. Perhaps that is why he has borrowed the title from a John Grisham novel. Grisham’s best-seller thriller was about a law firm which was a front for organised crime. McDonald’s non-fiction, on the other hand, is about a venerated global consulting firm: McKinsey. The author has done insightful research and collected little-known facts and anecdotes about the firm that make the book a rather gripping read.

McKinsey was founded by an accounting professor, James O McKinsey, in 1926. The Firm started its journey by helping clients with budgeting and financial analysis. McKinsey wrote, “Many men are opposed to budgets. They are unwilling for anyone to see how little they have thought about what they are going to do in future periods”.

At birth, the firm was James O McKinsey & Co, Accountants and Management Engineers. Its main clients were in the red meat industry. The biggest was Swift & Co, a Chicago meatpacker. The first partner that James brought in was A Tom Kearney. Sounds familiar? Not surprising, because this partner broke away later and formed his own consulting outfit, now known as AT Kearney & Co.

Early on, McKinsey adopted the principle of “up or out”. Either you were promoted or else you were expected to leave. This Darwinian mantra has guided the firm ostensibly to preserve its meritocratic philosophy.

When James O McKinsey started, the profession of consulting was full of conmen and scam artists. In the book, a new recruit said that he would rather tell his mother that he was working as a pianist in the local brothel than admit that he had joined a consulting firm.

If James O McKinsey was the founder, the firm’s soul was created by Marvin Bower. Bower lived for nearly a hundred years. He established the core values and guiding principles of the Firm. When he died, Rajat Gupta, then the Managing Director of McKinsey, delivered an eulogy: “ He had a vision of a profession that did not exist. He sensed the opportunity in our profession, formulated our values and led our firm. In many ways, certainly in spirit and soul, Marvin continued to lead it after he retired, and he leads it still.”

Bower was an MBA from Harvard Business School (HBS). In 1935, he convinced McKinsey to cease providing auditing services. He also started the romance with HBS. The author describes the close links in a chapter amusingly called McHarvard. At the heart of HBS pedagogy is the case method, which sets a problem and calls upon students to be decision-makers. In 1979, Harvard president Derek Bok wanted to jettison the case method. Bower was furious. He wrote a 52-page memo arguing against it and the idea was dropped. Such was the influence of the Firm on HBS.

Bower exhorted his partners to work only on the most pressing problems faced by CEOs. Under Bower, the Firm remained quintessentially American. It was not until 1959 that McKinsey opened its first London office. As it grew, it had to transform from a clubby partnership into a structured organisation that ran a global business. The author quotes an unnamed McKinsey veteran who summarises the contribution of successive managing directors: “Ron Daniel gave it class, Fred Gluck gave it intellectualism. And Rajat? Don’t ask me, because I haven’t a clue, except maybe Kremlinesque politics”.

Perhaps the author has been unduly harsh on Rajat Gupta. Under him, the firm’s revenues grew from $3 billion to $6 billion. Its profitability soared, its China and India practices expanded and he weathered the Enron storm successfully. What happened to him later has no doubt impacted the McKinsey brand. But current Managing Director Dominic Barton, described as the “calm Canadian”, has handled the crisis well.

The author has raised a pertinent question: why shouldn’t McKinsey be held accountable for the spectacular failure of its clients? He has called the McKinsey directors “Teflon dons”. But the media tends to ascribe more credit or greater blame to advisers than they deserve. The clients they serve are more balanced in their assessments. Finally, clients take the decisions and implement them.

McDonald asks a big question at the very end: what next? He notes that McKinsey is now a large and ageing company like the clients it advised in the 1960s and 1970s. One of the greatest challenges for the Firm will be to navigate the cross-currents of a “rising Chinese economic power in the face of a stubbornly persistent American one”.

“One of the stated goals of McKinsey is to help solve the world’s great problems,” McDonald concludes, “but if it wants to achieve this, it’s going to have to continue solving its own.” The key to McKinsey’s success in the past was its uncanny ability to adapt to change and reinvent itself. Like many of its clients, the Firm now must voyage into an uncharted and turbulent sea of rapid technological and disruptive changes.

Will it reinvent itself yet again?

The author is MD of Deloitte Consulting, India.