When you pick up a book called The Firm, the first thought that strikes you is one of intrigue. Much like the story told by John Grisham, which is fiction, Duff McDonald unveils the real tale of leading consultancy firm McKinsey in a dispassionate manner. We have all read about how McKinsey has grown to become a leading management consultant and is held in awe in corporate circles. In fact, a large number of them swear by the name. But that is the view from outside. McDonald gives us, almost literally, a 3D version of the firm and shows how, at the end of the day, the brand makes a big difference to all users of its services, irrespective of its follies.
While there are those like Jamie Dimon of JP Morgan or Mitt Romney who swear by the firm, there are several cases of failure like GM, Kmart, Swissair, Enron and their likes, which tell us that management consultants are not infallible. But still, the firm is considered to be a major foundation of modern US capitalism. McKinsey’s rise has been quite remarkable. Started by James McKinsey in 1926, it was nurtured to become what it is today by Marvin Bower. While the firm commenced operations analysing accounts of companies, it evolved its consultancy services by looking through all these numbers closely. The firm began scrutinising budgets across departments and then wove them all in a story for client companies through a series of recommendations. McKinsey referred to it as management engineering, and not consultancy. But how is this perceived by the public?The firm, as a rule, does not advertise its clients or business. It lets the companies take credit for what goes well, but also distances itself from failure. After all, they only advice clients on what should be done and is appropriate; and it is for the latter to successfully implement the strategy. McKinsey follows the highest code of secrecy and trust, and believes in recruiting the best. The firm is more important than the employees and, while everyone has a large ego, no one is bigger than the firm. Thus, it is not surprising that their staff is rarely well known, and it was only after Rajat Gupta displayed his aggressive persona that things changed. The terminology of the firm differentiates it from others. The firm has clients, not customers. Everyone plays a role and does not work on a job. Theirs is a practice, not business. And McKinsey is not a company, but a firm. They have values and no rules, and have members, not employees. On the other side, McKinsey is responsible for the maximum number of layoffs across organisations as it seems to be embedded into their solutions of cost-cutting. They prefer a constant rollover of employees and believe that the McKinsey brand name will help anyone go anywhere as there is a lot of respect bestowed on anyone associated with the firm. But clients have not always been too happy. When Conde Nast was told to cut cost through right-sizing, they threw a fit and the analogy drawn was whether you can have a football coach who never played football. Some of their more blatant blunders were: asking JP Morgan to get out of lending, the merger of Time Warner and AOL, Kmart’s foray into groceries, Hewlett-Packard’s acquisition of Compaq (the CEO later lost her job on this score) and Wachovia’s purchase of Golden West Financial, etc. But yet, the fact that companies have been hiring the firm means they add value somewhere. In fact, around 85% of their business comes from the existing set of clients, which is a clear indication of their efficacy. The journey of McKinsey has not been without its set of trials. The firm faced competition for the first time when The Boston Consulting Group came in and spoke of strategy and the ‘four square matrix’. More importantly, while McKinsey worked with all firms in an industry, which gave a feeling that they could pass on secrets, Henderson of BCG stuck to exclusivity. The firm proactively changed its approach subsequently and brought in its own ‘nine box matrix’ and exclusive clients. Now, it was a case of saying that while BCG marketed products, McKinsey sold brilliance. McDonald also adds two other important episodes in the story of the firm that are quite revealing. The first is the contribution of Tom Peters and his book, In Search of Excellence, which came out after he left the firm. His focus was on execution and he dismissed strategy, and felt that what mattered were customers, low cost, productivity, innovation and risk-taking. The second is about Rajat Gupta. The overall ethos of the firm changed when Gupta came in, and while it became more aggressive in the market, it compromised on a number of core principles. But no one bothered as long as the firm made money. He brought in growth of around 20% per annum, while the firm aimed for a normal 10%. He hired from more B-schools and recruited PhDs too, but never sold shares to the public. And then the author unfolds the darker side to his regime. The firm started taking equity stake in clients, which, though it was 2% of revenue, was against the core principles. Similarly, the firm would work for anyone who had a fat cheque book, and the culture of dissent in the firm was smothered. Simultaneously, the compensation to directors was increased and what was earlier access to exclusive clubs got transformed to gifting of ranches. As he took a pay of $5 million, the ratio of salaries of the highest to lowest worker was 40:1. This is a common feature of capitalism where similar rewards are given to the professionals in companies by professionals! Did the firm always work fair? Yes, as no laws were broken even though the firm worked closely with Wall Street. The only smear was, once again, an Indian, Anil Kumar, who was held for insider trading. The author devotes quite a number of pages to Rajat Gupta and his indictment, and points out, quite curiously, that some of the who’s who in India Inc who supported him were the likes of Adi Godrej, Sabeer Bhatia, Mukesh Ambani and Deepak Chopra. McDonald’s book is definitely very engaging and thought-provoking for the reader and goes beyond the narrative. McKinsey could be representative of the entire fraternity of management consultants, and the stories would be similar everywhere, especially in terms of the awe they command in the market as well as the scorn when it comes to failures. He has taken a very balanced view of the way in which McKinsey has worked and while one may get a feeling that he is a bit critical, he has rightly pointed out that if firms are paying the firm for services repeatedly, there must be value in their work. That sort of sums up the view on management consultants because while critics say they only tell you what you want with the right words and graphs, if you are still paying them, then it must be well worth it. A good way of summarising these emotions can be captured by the author’s major grouse against the firm—Enron. The firm has endorsed Enron and advised them on following a loose-tight culture, where executive decisions can be taken without constant approval. They encouraged off-balance sheet financing and atomisation. He poses three questions with answers: First, did McKinsey hype Enron’s fraudulent rise? Yes. Was McKinsey liable for Enron’s misdeeds? No. Would other clients care? No. That’s why the firm still rules.
While there are those like Jamie Dimon of JP Morgan or Mitt Romney who swear by the firm, there are several cases of failure like GM, Kmart, Swissair, Enron and their likes, which tell us that management consultants are not infallible. But still, the firm is considered to be a major foundation of modern US capitalism. McKinsey’s rise has been quite remarkable. Started by James McKinsey in 1926, it was nurtured to become what it is today by Marvin Bower. While the firm commenced operations analysing accounts of companies, it evolved its consultancy services by looking through all these numbers closely. The firm began scrutinising budgets across departments and then wove them all in a story for client companies through a series of recommendations. McKinsey referred to it as management engineering, and not consultancy. But how is this perceived by the public?The firm, as a rule, does not advertise its clients or business. It lets the companies take credit for what goes well, but also distances itself from failure. After all, they only advice clients on what should be done and is appropriate; and it is for the latter to successfully implement the strategy. McKinsey follows the highest code of secrecy and trust, and believes in recruiting the best. The firm is more important than the employees and, while everyone has a large ego, no one is bigger than the firm. Thus, it is not surprising that their staff is rarely well known, and it was only after Rajat Gupta displayed his aggressive persona that things changed. The terminology of the firm differentiates it from others. The firm has clients, not customers. Everyone plays a role and does not work on a job. Theirs is a practice, not business. And McKinsey is not a company, but a firm. They have values and no rules, and have members, not employees. On the other side, McKinsey is responsible for the maximum number of layoffs across organisations as it seems to be embedded into their solutions of cost-cutting. They prefer a constant rollover of employees and believe that the McKinsey brand name will help anyone go anywhere as there is a lot of respect bestowed on anyone associated with the firm. But clients have not always been too happy. When Conde Nast was told to cut cost through right-sizing, they threw a fit and the analogy drawn was whether you can have a football coach who never played football. Some of their more blatant blunders were: asking JP Morgan to get out of lending, the merger of Time Warner and AOL, Kmart’s foray into groceries, Hewlett-Packard’s acquisition of Compaq (the CEO later lost her job on this score) and Wachovia’s purchase of Golden West Financial, etc. But yet, the fact that companies have been hiring the firm means they add value somewhere. In fact, around 85% of their business comes from the existing set of clients, which is a clear indication of their efficacy. The journey of McKinsey has not been without its set of trials. The firm faced competition for the first time when The Boston Consulting Group came in and spoke of strategy and the ‘four square matrix’. More importantly, while McKinsey worked with all firms in an industry, which gave a feeling that they could pass on secrets, Henderson of BCG stuck to exclusivity. The firm proactively changed its approach subsequently and brought in its own ‘nine box matrix’ and exclusive clients. Now, it was a case of saying that while BCG marketed products, McKinsey sold brilliance. McDonald also adds two other important episodes in the story of the firm that are quite revealing. The first is the contribution of Tom Peters and his book, In Search of Excellence, which came out after he left the firm. His focus was on execution and he dismissed strategy, and felt that what mattered were customers, low cost, productivity, innovation and risk-taking. The second is about Rajat Gupta. The overall ethos of the firm changed when Gupta came in, and while it became more aggressive in the market, it compromised on a number of core principles. But no one bothered as long as the firm made money. He brought in growth of around 20% per annum, while the firm aimed for a normal 10%. He hired from more B-schools and recruited PhDs too, but never sold shares to the public. And then the author unfolds the darker side to his regime. The firm started taking equity stake in clients, which, though it was 2% of revenue, was against the core principles. Similarly, the firm would work for anyone who had a fat cheque book, and the culture of dissent in the firm was smothered. Simultaneously, the compensation to directors was increased and what was earlier access to exclusive clubs got transformed to gifting of ranches. As he took a pay of $5 million, the ratio of salaries of the highest to lowest worker was 40:1. This is a common feature of capitalism where similar rewards are given to the professionals in companies by professionals! Did the firm always work fair? Yes, as no laws were broken even though the firm worked closely with Wall Street. The only smear was, once again, an Indian, Anil Kumar, who was held for insider trading. The author devotes quite a number of pages to Rajat Gupta and his indictment, and points out, quite curiously, that some of the who’s who in India Inc who supported him were the likes of Adi Godrej, Sabeer Bhatia, Mukesh Ambani and Deepak Chopra. McDonald’s book is definitely very engaging and thought-provoking for the reader and goes beyond the narrative. McKinsey could be representative of the entire fraternity of management consultants, and the stories would be similar everywhere, especially in terms of the awe they command in the market as well as the scorn when it comes to failures. He has taken a very balanced view of the way in which McKinsey has worked and while one may get a feeling that he is a bit critical, he has rightly pointed out that if firms are paying the firm for services repeatedly, there must be value in their work. That sort of sums up the view on management consultants because while critics say they only tell you what you want with the right words and graphs, if you are still paying them, then it must be well worth it. A good way of summarising these emotions can be captured by the author’s major grouse against the firm—Enron. The firm has endorsed Enron and advised them on following a loose-tight culture, where executive decisions can be taken without constant approval. They encouraged off-balance sheet financing and atomisation. He poses three questions with answers: First, did McKinsey hype Enron’s fraudulent rise? Yes. Was McKinsey liable for Enron’s misdeeds? No. Would other clients care? No. That’s why the firm still rules.
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