August 31, 2014

Book Review: The Firm by Duff McDonald

 By Adam Sternbergh    September 05, 2013

In the popular imagination, McKinsey, the global consulting firm, is a cross between the Pinkertons, the Men in Black, and Harvey Keitel's "cleaner," Mr. Wolf, in Pulp Fiction. They arrive in suits and cuff links and make your problems disappear. They promise to teach you how to do whatever you do better than you do it—and certainly better than your competition does it. Who could deny the appeal?

Duff McDonald's book, The Firm: The Story of McKinsey and Its Secret Influence on American Business, shares its name with a famous novel about another seemingly bulletproof, imposing corporate entity. While McDonald may be giving a nod to John Grisham, his title is taken directly from McKinsey's shorthand for itself, and the author, a longtime reporter for Fortune, hasn't written an anti-McKinsey screed. Instead, through an expert accretion of damning detail, McDonald builds a convincing case that, for better and (mostly) worse, McKinsey became the quintessential American business of the 20th century. Which is bad news for America in the 21st century, because McKinsey doesn't actually make anything. The greatest product ever sold by McKinsey is McKinsey.

The firm was started in 1926 by James McKinsey, an accountant who not only could read a ledger, but who also understood that a ledger tells a story. His first great insight came four years earlier, in 1922, with his book Budgetary Control, in which he advocated that, instead of setting a budget based on projected expenses, you should craft a business plan first, then set the budget that will allow you to achieve it. At the time, this was a revolutionary notion. It also led to McKinsey's second great insight: that the American business community was ready, even eager, to pay outsiders to come in and tell it what to do.

The McKinsey Man wasn't an expert in any one industry, but a generalist valuing rational thinking and blunt talk. McKinsey fostered a reputation for attracting fresh minds that weren't hampered by entrenched ways of thinking. Another way of looking at this is that it hired inexperienced kids and forced them to learn on the job at the client's expense. This rarely became a problem, however, because the decision to hire McKinsey was typically made by a company's chief executive officer, the last person to admit that he'd made a rotten decision by hiring McKinsey.

As American business changed, from the top-down management of the Fifties to the disruptive innovation of the Aughts, so did the firm. By 2008, McKinsey was a global force pulling in $6 billion in revenue. McDonald in a chapter titled "The Crucial Question: Are They Worth It or Not?" includes the subheadings "Yes, They Are," "No, They're Not," and "It Depends." In many cases, McKinsey's expensive advice boiled down to simply laying off a bunch of people. "There is a distinct possibility that McKinsey may be the single greatest legitimizer of mass layoffs of anyone, anywhere, at any time in modern history," McDonald writes.

For every positive McKinsey achievement—its consultants urged the newly elected President Eisenhower to create the position of White House chief of staff—there are at least as many failures. McKinsey's work with General Motors (GM) in the early 1980s led to a massive reorganization that's widely judged as disastrous. The firm was riding shotgun when Enron went off a cliff. McKinsey lobbied vigorously for the Time Warner (TWX) merger with AOL (AOL). Yet the firm remains insulated by its own brand of circular self-defense. As managing director Rajat Gupta said after the Enron bankruptcy, "We stand by the work we did. … They are responsible for what action they take." When it works, it's to McKinsey's credit. When it fails, it's the client's fault.

McDonald ends his book with a long look at Gupta's legal troubles (he was recently convicted of insider trading and is currently free on appeal) and a doubtful note about the company's long-term prospects. McKinsey is besieged by rivals such as Boston Consulting Group and Bain Capital, and it's played no discernible role in the success of emerging titans such as Apple (AAPL) and Google (GOOG). But maybe its future lies in running the country instead. Mayor Michael Bloomberg hired McKinsey to consult on New York projects. (Bloomberg is founder and majority owner of Bloomberg LP, which owns Bloomberg Businessweek.) President Obama had two McKinsey alums on his transition team. In 2012 both Obama and Mitt Romney positioned themselves within their presidential campaigns as rational problem solvers; in some sense, it was an election between McKinsey and Bain. McKinsey won. Thanks to the world the firm helped create, we now routinely put our faith in the idea of fixers, even when nothing seems to get fixed.

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