“The Firm,” by Duff McDonald, chronicles the rise of McKinsey, the world’s most influential management consulting firm, but also cites its many failures.

SEPTEMBER 2, 2013, 9:14 PM

In a New Book, McKinsey & Co. Isn’t All Roses


“You can’t get fired for hiring McKinsey & Company.”

It is a refrain that has been whispered in the corner offices and halls of corporate America for years as a justification — or, at least, a rationalization — for hiring McKinsey, the world’s most influential management consulting firm. The secretive firm has been the go-to strategy consigliere for the globe’s top companies — from Procter & Gamble to American Express — as well as governments for more than a half century. Its influence is staggering. Consider this: More current and former Fortune 500 C.E.O.’s are alumni of McKinsey than of any other company. So why has its advice, at times, turned out to be so bad?It often goes unmentioned, but McKinsey has indeed offered some of the worst advice in the annals of business. Enron? Check. Time Warner’s merger with AOL? Check. General Motors’s poor strategy against the Japanese automakers? Check. It told AT&T in 1980 that it expected the market for cellphones in the United States in 2000 would amount to only 900,000 subscribers. It turned out to be 109 million. The list goes on.

A thought-provoking new book called “The Firm: The Story of McKinsey and Its Secret Influence on American Business,” which comes out next Tuesday, offers a fascinating look behind the company’s success.

The book, by Duff McDonald, chronicles McKinsey’s rise but also raises an important question about it that is applicable to the entire netherworld of consultants, advisers and other corporate hangers-on: “Are they worth it or not?”

The answer amounts to hundreds of billions of dollars annually. Indeed, the army of advisers whispering into the ear of Verizon and Vodafone (its C.E.O. is a former McKinsey partner) over the weekend for their work on the $130 billion deal stand to make over $200 million alone. And, perhaps most important, they don’t have to give the money back if the deal turns sour.

Mr. McDonald’s book explores the remarkable and intriguing disconnect between the advice McKinsey offers and the ultimate results.

Stunningly, Mr. McDonald quotes a top McKinsey partner, Larry Kanarek, in a remarkably honest moment: “We are advisers, and it is management’s job to take all the advice they receive and make their own decisions. Not to say that McKinsey told me to do this.” He continued: “Whenever someone in McKinsey tells me they think they know how to run a company, I tell them to go do it. Because that’s not what we’re doing here.”

Really? I wonder if that is part of the sales pitch.

McKinsey has done a relatively good job of staying out of the press over its more than 80 years in business. (Perhaps the most notable recent attention was the criminal case against the firm’s former head, Rajat K. Gupta, who was convicted of insider trading.)

The main reason we don’t hear about McKinsey’s advice is that the firm prevents clients from disclosing the work that McKinsey does. According to Mr. McDonald’s book, the firm’s standard contract says, “The client agrees that it will not use McKinsey’s name, refer to McKinsey work, or make the Deliverables or the existence or terms of this agreement available outside its organization without McKinsey’s prior written permission.”

As a result, the firm doesn’t take credit for good work and it doesn’t take blame for bad work.

While Mr. McDonald spends considerable time in his book noting the firm’s successes, he also examines the firm’s failures, many of which have largely gone unreported. Barry Ritholtz, the analyst and commentator, once asked, “Is McKinsey & Co. the Root of All Evil?”

Despite McKinsey’s image of being the Good Housekeeping Seal of Approval, it has worked on these doozies: McKinsey provided advice that some experts say led to the first too-big-to-fail bank failure in the 1980s, that of Continental Illinois Bank. McKinsey’s work for the National Health Service “failed to move the stultified British bureaucracy an inch,” Mr. McDonald wrote. It led General Motors to pursue a strategy in the 1980s that made it harder to compete with Japanese imports. It was on the scene after John Scully took over Apple from Steve Jobs to remake the company and it took Mr. Jobs’s return to turn the company back around.

And it worked with GE Capital just before the financial crisis, helping the unit become even more exposed to problems that ultimately nearly collapsed the financial system.

Mr. McDonald suggested that sometimes hiring McKinsey could be the cover needed to make an unpopular decision. “If, as C.E.O., you felt you needed to cut 10 percent of costs, but didn’t feel you were getting buy-in from your employees, the hiring of McKinsey generally got the point across quite clearly,” he wrote.

(It should be noted that The New York Times Company recently commissioned McKinsey to help with its strategy.)

In fairness, McKinsey’s involvement in some of the more memorable corporate catastrophes may simply be the law of big numbers: given that it advises the world’s biggest companies on some of their most challenging problems, invariably it is going to be involved in some duds.

Still, Mr. McDonald, who calls McKinsey executives “de facto industrial spies,” raises the specter that the work the firm does for one client may also help its rivals. Mr. McDonald wrote, “The firm would surely take umbrage at the suggestion, but the whole notion of ‘competitive benchmarking’ is just a fancy way of telling one client what the other clients are up to, with the implicit — and somewhat dubious — promise that their most sensitive secrets will not be revealed.”

Mr. McDonald, who spent several years writing the book, asks of the firm’s reputation: “Is it a con? Maybe. The young M.B.A.’s the firm fields on its engagement teams learn on the job on the client’s dime, and it’s hard to argue that a McKinsey associate has anything to offer the clientele but long nights.”

All of that may be true. But it also doesn’t fully account for the firm’s success. Whatever bad advice it has offered over the years, clients keep coming back for more. “They have follow-on work not just because they’re good at what they do, but because they are trained in how to manage these kinds of client relationships,” Alan Kantrow, former editor of McKinsey Quarterly, told Mr. McDonald. “They understand the core reality is the relationship and conversation.”

I once asked Felix G. Rohatyn, the investment banker and merger specialist, how to measure the value an adviser’s counsel. “How can you judge advice?” he said. “You should ask the people who got advice to tell you how they feel.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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