How McKinsey Helps Companies Avoid Responsibility

Photo illustration by Slate. Photo by George Marks/Getty Images.

The following article is a written adaptation of an episode of Thrilling Tales of Modern Capitalism, Slate’s new podcast about companies in the news and how they got there.

What exactly do management consultants do? Well, consultants help solve problems for people who run companies and other organizations. The client defines the problem, and the consultant helps find a solution. But there are consultants … and then there’s McKinsey & Company.

The idea that McKinsey hires the best of the best is central to the story that the firm tells about itself. It tackles the hardest problems for the biggest clients—and the fees it charges those clients reflect all this. They’re the bluest-chip management consultants around. And that’s why, over the course of nearly 100 years in business, McKinsey has been able to adapt to changing market conditions and skate through crises with little harm to its bottom line. Most companies see periodic dips in demand for their products and services, but there’s rarely been a down market for what McKinsey has to offer—because McKinsey sells solutions to other companies’ problems. What sorts of problems? Whatever you got.

“For all my criticisms and questions about McKinsey, I think it’s one of the most brilliant ideas for a business that anybody’s ever had,” says Duff McDonald, who wrote a history of McKinsey titled The Firm: The Story of McKinsey and Its Secret Influence on American Business. He called management consulting “one of the most flexible business models in the history of Western capitalism.” “There is a certain brilliant essence to a company which sells what you’re buying, as opposed to what they’re selling,” McDonald says.

The guy who had that idea, back in the 1920s, was an accounting professor named James McKinsey. At the time, accounting basically meant one thing: keeping track of the money that came in and the money that went out. You spend a dollar, you wrote it down. You earned $5, you wrote it down. At the end of the month, you added it all up and reconciled the past with the present. But what James McKinsey realized was that a smart company could use those same techniques to see the future. You could look at those numbers—numbers that represented costs and revenues—and use them as the basis for next year’s budget, or to chart a long-term corporate strategy. Maybe that seems sort of obvious? Well, it wasn’t obvious in 1926. And while a few people had similar insights right around that time, James McKinsey was the only one to build a massive consulting company around it.

He positioned his company as elite right from the start. The young firm was very selective about its client list, on the notion that you’re judged by the company you keep. How do you become a top-tier firm? By working exclusively for top-tier clients—and thus the McKinsey mythos was born. But though James McKinsey lent his name to the enterprise, it was his successor who gave the firm its soul. “If you’re going to be serious about a real history of McKinsey, you have to quickly move to the man who inherited or grabbed leadership of the firm, Marvin Bower,” says McDonald.

Under Marvin Bower, McKinsey would respect the numbers, but it would refuse to be bound by them. Instead, the firm would offer advice and counsel of all sorts. If James McKinsey had turned accountants into consultants, then Bower turned consultants into professionals. To Bower, a professional was discreet; a professional talked and dressed like those top executives. McKinsey consultants were even required to wear hats right up until the 1960s, when John F. Kennedy changed the world by appearing in public with a bare head. But most importantly, Bower thought a professional should give clients the good advice they might not get internally and tell them the hard truths they might not want to hear. A professional, in Bower’s estimation, would do what was best for the client, not what was most lucrative for the adviser. “He basically said to their clients, ‘We will put your interests ahead of ours always,’ ” says McDonald. “And that is the foundation upon which McKinsey’s entire reputation and business was built.”

“It’s a lot easier to say to your employees … ‘I didn’t want to do this, but we went and asked McKinsey, and this is their advice.’ McKinsey will willingly be the scapegoat.” — Duff McDonald

So, OK, consultants work for management. They’re trained to identify with management. And when there’s a conflict between what’s good for people who run the companies and what’s good for everyone else, which side would you expect the consultants to be on?

In 1951, a McKinsey consultant published a study in Harvard Business Review showing that ordinary worker wages were rising roughly three times as fast as executive wages. “This study made the rounds among elite American executives,” says Daniel Markovits, a Yale law professor and author of The Meritocracy Trap. “The elite executives took the view that they would like their compensation to grow more quickly.”

So the executives started bringing new problems to the consultants: foreign competition, increasing costs, declining profits. And what the McKinsey consultants started telling them was, broadly, “Do you really need all those middle managers?” Of course, most executives don’t enjoy putting people out of work, and they certainly don’t like being seen as heartless. Fortunately, that’s another problem McKinsey can help them with. Once a company has decided to fire a bunch of people, McDonald says, “it’s a lot easier to say to your employees … the ones who will still be showing up to work, that ‘I didn’t want to do this, but we went and asked McKinsey, and this is their advice.’ McKinsey will willingly be the scapegoat for that story.”

And the McKinsey consultant who gives the manager that advice also gets to avoid having to feel responsible for putting people out of work. “If I’m working at McKinsey, when I decide to give the best professional advice I can, following the principles of integrity that McKinsey insists on for its workers, I don’t characterize myself as having fired 50,000 people,” Markovits explains. “What I’ve done is give the best professional advice that I can. And that’s a perfectly apt way to think about your life, but from a systematic or a structural perspective, it insulates everybody from responsibility for terrible outcomes.”

Over the course of its history, McKinsey has advised downsizing for so many different companies that, according to Duff McDonald, the firm may well be “the single greatest legitimizer of mass layoffs [of] anyone, anywhere, at any time in modern history.” The wave of layoffs that tore through the economy from the ’70s through the ’90s changed the shape of the American corporation. Afterward, there were fewer employees in that middle tier coordinating between the production line and the executive suite. Corporate jobs were increasingly divided between replaceable cogs at the bottom and stressed-out captains of industry at the top.

Of course, losing all those white-collar workers in the middle saved companies a lot of money. Some of that money went to profits. Some of it went to the consulting firms they brought in to help them. And some of it went to the salaries of those increasingly important top executives. According to Markovits, this is exactly how the meritocracy looks after its own interests. “It’s not part of my argument that places like McKinsey or Boston Consulting Group or Bain or any of these other elite consulting shops are snake oil salespeople,” he says. “They are providing real skill and expertise. It’s just that when companies manage themselves using skill and expertise delivered in this way, what ends up happening is that they increase the wages of really elite managers and graduates of fancy universities and decrease everybody else’s wages.”

The changes to business practices that began in the 1970s were soon consolidated into an ideology: the idea that a company’s only responsibility is to maximize the value of its shares. This idea, known as “shareholder value,” was promoted by the conservative economist Milton Friedman and taken up by a variety of CEOs and corporate raiders who saw it as a path to growth and profit in that era’s stagnant economy. For consulting firms such as McKinsey, that meant a booming market for cost-controlling, value-maximizing advice—and sometimes this advice went wrong. McKinsey advised Time Warner on its merger with AOL, one of the largest and most disastrous mergers in history. It spent more than a decade consulting for a sleepy Houston energy company named Enron, which, under the leadership of former McKinsey partner Jeffrey Skilling, grew into a $100 billion fraud that collapsed in 2001.

Over the past 20 years, McKinsey has also expanded its work for governments and the public sector, and governments all over the world have signed on. This very April, as a matter of fact, Gov. Andrew Cuomo of New York hired McKinsey to consult on coronavirus recovery plans. The mission, one source told Reuters, is to make the plan “Trump-proof.”

But at the same time, according to New York magazine, McKinsey is also working for the Trump administration. The firm has contracts with the Department of Health and Human Services and the Department of Veterans Affairs, and was at one point even involved in Jared Kushner’s coronavirus task force. And it’s not just for public health, either. According to ProPublica and the New York Times, when the Trump administration in 2017 directed U.S. Immigration and Customs Enforcement to ramp up detentions, McKinsey consultants allegedly suggested that the agency save money by cutting spending on food and medical care for detainees. These recommendations were a bridge too far even for ICE, according to ProPublica and the Times, and the agency did not pursue them.

Outside the U.S., according to the New York Times, McKinsey has consulted for repressive governments in China, Turkey, and Saudi Arabia. It was involved in a massive corruption scandal in South Africa. It worked on behalf of the thoroughly corrupt ex-president of Ukraine and for Russian companies under sanctions. It was “horrified to learn that a report they prepared on the public’s reaction to Saudi Arabian government austerity measures may have been used by that regime for the purpose of silencing dissidents.” McKinsey has challenged the Times’ conclusions about its work with ICE and on behalf of governments in Southeast Asia, China, Eastern Europe, and the Middle East.

Marvin Bower lived to see McKinsey change inarguably from a profession to a business. Before Bower died in 2003, according to Duff McDonald’s book, he told a friend the firm had become “greedy fucks.” McKinsey started as a business that sold candid, dispassionate advice to corporate managers, but selling advice and building a brand around it also sets up a mechanism for diffusing responsibility. The managers can say they’re just following the best available advice, and the consultants can say they’re just trying to help their clients boost profits and efficiency. But if you work for anyone, and you serve their interests as best you can, and you define those interests in the narrowest and most mercenary terms, you’re going to end up with dirty hands.

To listen to the full episode, click the player below or subscribe wherever you get your podcasts.

from Slate Magazine https://ift.tt/319a2pO
via IFTTT