The most loathsome practices of U.S. corporations seem to have had their beginnings with consulting giant McKinsey & Co.
From mass layoffs and outsourcing to runaway CEO pay — McKinsey wrote the white papers that sparked these trends, says Duff McDonald, author of newly released book, “The Firm: The Story of McKinsey and Its Secret Influence on American Business.”
A McKinsey spokeswoman said the firm isn’t commenting on McDonald’s book. Traditionally, the firm has always been careful not to take credit for the results of its work, good, bad or otherwise, McDonald said in a telephone interview.
McDonald spent four years researching McKinsey and found its fingerprints all over Corporate America. ”Influence of this degree, by its very nature, is potentially dangerous,” he said.
Over the years, McKinsey’s advice has been blamed for billions’ worth of missteps at companies from General Motors to General Electric. In 1980, it famously told AT&T that mobile phones had a limited future. It also pushed for the disastrous merger of AOL and Time Warner in 2001. And some of its former top executives have committed infamous white-collar crimes.
Anhil Kumar, who had been a senior partner at McKinsey, pleaded guilty in 2010 to piping inside information, obtained from McKinsey clients, to former hedge-fund billionaire Raj Rajaratnam. He received probation after helping prosecutors build their case against Rajaratnam, who is now in prison.
Last year, McKinsey’s former top executive Rajat Gupta received a two-year prison sentence after his conviction on insider-trading charges in the Rajaratnam scandal. Gupta was not running McKinsey at the time of his crimes. But if a guy who used to head McKinsey behaves this brazenly, it’s fair to ask what are the rest are doing.
“The remarkable thing I found that it hasn’t even affected their business,” said McDonald of the Rajaratnam scandal. “They still have those clients — even the ones whose information [Kumar] was selling.”
The law of large numbers posits that a firm this size is going to have at least a few bad actors.
Jeffrey Skilling was once one of the youngest partners in McKinsey’s history before becoming CEO of Enron. A few months before Enron’s collapse, McKinsey published a bullish report that read: “Enron has built a reputation as one of the world’s most innovative companies ...”
Despite such well-known failings, America’s biggest companies are willing to pay millions, even tens of millions, for McKinsey’s advice.
“Eighty-five percent of their business is repeat business, so they’re worth it to someone,” McDonald said.
He compares McKinsey to La Belle Otero, a prostitute who amassed a fortune from Europe’s royalty at the turn of the 20th Century. She became one of the most sought-after courtesans in the world. Kings, princes and dukes would pay anything to sleep with her.
“McKinsey’s fees are so high, they are spiritually related,” McDonald said. “What customer who pays those fees will ever admit that it wasn’t worth it? Do you get up the next day and go, ‘Wow, that was a waste of a million’?”
The CEOs who engage McKinsey aren’t footing these bills, anyway. It’s their shareholders’ money. “They’re a luxury product,” McDonald said. “People hire them just to show that they can afford to hire them.”
Is McKinsey advice good for shareholders? Sometimes, McDonald said, but predicting the future, which is what consultants are often expected to do, is always a risky bet. “When they’re wrong, they can be embarrassingly wrong.”
Is McKinsey advice good for employees? Absolutely not. They’re cost-cutting, efficiency experts. “They’re management consultants. Not labor consultants,” McDonald said. “There’s no secret where their allegiance lies.”
Is McKinsey advice good for society? That’s up for debate. Cost-cutting and efficiency has given the world both cheaper products and higher unemployment.
Mostly what McKinsey does is provide data. How can data be evil? CEOs may use this data to endorse a move they were planning to make anyway, or to help build an argument before the board of directors, or to make a point with entrenched employees.
“This is the perfect business,” McDonald said. “They don’t have a product. They sell advice. And the advice that they sell is the advice that their clients are buying.”
Most McKinsey guys are what the firm itself calls “insecure overachievers,” McDonald said. “They do what they’re supposed to do. They are the Harvard MBA crowd with the perfect resume. They were probably class president in high school. They did everything right.”
The only thing they seem to lack is their own abiding passion. They’re not out to build their own businesses or pursue their own ideas. They’re just plugging their big brains into someone else’s deal.
“They like to think of themselves as risk-takers, but these are risk-averse people,” McDonald said. “They are actually very conservative people.”
In the end, they may advise a CEO to pull the trigger, but they don’t pull any triggers, themselves.
“They are advisers,” McDonald said. “It sounds like a weak defense, but they do not have ultimate responsibility for the things that their clients do. “
Rarely are CEOs surprised by their findings, McDonald said. And if those findings mean bad things for people or society ... well that’s not really their department.
“It’s power without responsibility,” McDonald said. “It’s influence without actually having to make a decision or be responsible for it.”
Does that make them evil? McDonald framed the answer as well as any consultant could:
“I don’t think they’re necessarily divorced from a moral compass,” he said. “But they do have a distance from the realities of implementation, and that can include human realities.”
