McKinsey & Company, Inc.

views updated

McKinsey & Company, Inc.

55 E. 52nd Street
New York, New York 10022
U.S.A.
(212) 446-7000
Fax: (212) 446-8575

Private Company
Incorporated: 1925
Employees: 4,700
Revenues: $1.2 billion
SICs: 8742 Management Consulting Services

McKinsey & Company, Inc. is an international management consulting firm with more than fifty offices in twenty-five countries. One of the five largest consulting services in the United States, it specializes in problem solving and program implementation, primarily for corporate clients. As the top consulting firm offering general management guidance, it works with upper-level management to improve company performance and develop and implement strategies for growth and change. McKinsey has advised many of the Fortune 500 companies in the United States and top corporations in other countries. Its list of clients includes General Motors, PepsiCo, Ford Motor Company, and American Express. Many former McKinsey consultants have gone on to hold high management positions in major companies around the world.

McKinsey and Company was founded in 1925 by James O. McKinsey, an accounting professor at the University of Chicago whose accounting and management writings brought him many consulting jobs on the side. As McKinsey acquired more work, he hired consultants to work for him. For the most part, he hired industrial managers in their mid-forties whom he thought his clients would find credible because of their age and experience. After McKinsey died in 1937, the company continued the hiring practices the founder had instituted.

McKinsey & Company shifted direction in 1950, however, when Marvin Bower became managing director. Bower is credited with molding McKinsey into the successful and world-class company it has become. McKinsey’s billings increased from $2 million in 1950 to more than $200 million when Bower stepped down in 1967.

Bower joined the company in 1933, when management consulting was called management engineering. He was a graduate of Harvard Law School and had been working for a prestigious Ohio law firm. As managing director, Bower introduced a radically different approach to hiring consultants: he recruited recent graduates of the country’s top business schools. His view clashed with the prevailing view that experience counted far more than education. To Bower, consulting was a “thinking activity,” so it required education and smarts even more than experience. Although it took several years for clients to fully accept McKinsey’s young M.B.A.s, the firm became the most respected and well known consulting company in the country and, later, in the world. The company continued to hire under the Bower philosophy, even after Bower resigned as managing director in 1967. In recent years, the majority of McKinsey’s new consultants have been M.B.A.s with degrees from Wharton, Harvard, Northwestern, and Stanford.

Bower, considered a founder of modern management consulting, considered consulting a profession, not a business, and said he emphasized improving the client’s performance rather than making money for McKinsey. To Bower, the client always came first. Bower had a keen eye for recognizing the needs and weaknesses of a company—and its top executives.

By the late 1950s, McKinsey & Company had five offices in the United States. In 1959, it opened its first overseas office in London, at a time when foreign firms were eager to learn American business practices. Hugh Parker, an American educated at Cambridge, was the director of the first overseas office. McKinsey soon opened more offices overseas. While these offices were headed by Americans, they were staffed mostly by local people. During the 1960s and 1970s, McKinsey opened offices in France, Germany, Switzerland, Belgium, Italy, the Netherlands, and Scandinavia, and worked with major European clients such as KLM and Royal Dutch/Shell. More recently, it has opened offices in Japan and Australia.

Over the years, the management of foreign offices shifted; by the late 1980s, a majority of the company’s senior partners were foreign, even though many had been educated at American schools. Kenici Ohmae, who headed the Japan office, held a Ph.D. in nuclear engineering from the Massachusetts Institute of Technology (M.I.T.). The Chicago office was headed by Indian Rajat Gupta, who had earned an M.B.A. from Harvard. R. Ronald Daniel led the firm for 12 years, from 1976 to 1988. According to Alonzo McDonald, who served as managing director from 1973 to 1976, the company had grown so large that Daniel was “the last managing director to personally know everyone in the partnership.” Daniel had joined the firm in 1957; eleven years later, he was a senior partner managing the company’s recruiting program. In 1970, he became the manager of the New York office. In 1976, he was elected managing director by the other partners. While he was managing director, the professional staff grew from 600 to 1,800, and revenues grew to $510 million. Although other firms, such as Bain & Co. and Boston Consulting Group, challenged McKinsey’s domination of the general consulting profession, McKinsey remained the firm that many of the Fortune 500 companies turned to for management expertise.

Although McKinsey had helped many businesses become successful, it also took part in business failures; it was impossible to tell, however, if the failures were due to advice from McKinsey consultants or poor implementation of their advice. In the mid-1980s, General Motors Corp. called in McKinsey for reorganization help. McKinsey’s plan called for the company to be divided into two divisions, instead of the five divisions into which it was then divided. However, the move resulted in great inefficiency, according to critics, and the company failed to realize any savings in costs or increase in productivity.

In 1988, Ron Daniel stepped down as managing director, and Fred Gluck took his place. Gluck had made a name for himself in the company partly for his work as a McKinsey consultant to giant American Telephone & Telegraph. Gluck was a different breed for the firm, and to some observers, Gluck’s election to the post signalled the possibility that it was a new era for the company. According to Business Week, the election of Gluck was a reflection of how much McKinsey & Company had changed. “Blue-blooded Harvard M.B.A.s” had dominated the company for decades. But Gluck was an engineer who had been born to a German Catholic family in Brooklyn. Although Gluck did not fit the McKinsey mold, he promised that the company would maintain its traditions of client service and the importance of the company over the individual consultant. Under Gluck, McKinsey, in the tradition of Marvin Bower, continued to hire the “best and the brightest” from the country’s top business schools.

Gluck was largely responsible for efforts to disseminate the information that consultants around the world had gathered, making it available to everyone in the firm. Gluck started the company’s fifteen “centers of competence,” ranging from corporate finance to manufacturing logistics. Each group was urged to issue periodic bulletins concerning the work it was doing. Gluck was also an advocate of increased use of computers to track the more than 1,400 studies the company conducted yearly all over the world, research for which the company had been highly regarded for many years. McKinsey claimed to publish more academic review articles than any competitor company.

McKinsey also continued to conduct many notable pro bono projects for organizations such as the Jeffrey Ballet, Pittsburgh Theater, and the University of Texas business school. Its 1992 study of the University of Texas involved a team of fourteen consultants who spent nearly 4,000 hours determining how to overhaul the M.B.A. program to make it more competitive with the leading business schools in the country and more relevant to the real world business environment. This study would have cost the school as much as $1.5 million.

McKinsey was not without its critics, whose comments were directed at the lofty attitudes that McKinsey seemed to claim were its greatest strengths. Forbes magazine likened the McKinsey style to that of “an upright old family lawyer or doctor … always stressing pride of workmanship,” but that its “lofty attitudes” may have been out of sync with the new demand for specialized, technical expertise. The company, however, was determined to continue to provide a “top management prospective.”

While other consulting firms had gone public or were sold during the 1980s, McKinsey remained a private and discreet organization. It revealed little about itself and protected the confidentiality of its very powerful clients. The company discouraged cultivating any “stars” in the organization, emphasizing that the firm and its expertise were what the company was selling and individual consultants were members of a McKinsey team.

Although top graduates from the top business schools may not have considered consulting the answer to their dreams, few candidates for jobs at McKinsey ever turned down a job there. For decades it has been an effective stepping stone to management positions in the country’s largest corporations. Squads of former McKinsey consultants hold top positions at PepsiCo and American Express. Former McKinsey consultants included Michael L. Ainslie, CEO and president of Sotheby’s Holdings, Paul W. Chellgren, president and chief operating officer of Ashland Oil, William B. Ellis, chairman and CEO of Northeast Utilities, Louis V. Gerstner, Jr., chairman and CEO of IBM, Harvey Golub, chairman and CEO of American Express, Michael H. Jordan, chairman and CEO of Westinghouse Electric Corp., C. Robert Kidder, chairman and CEO of Duracell International, Jim P. Manzi, chairman and CEO of Lotus Development, and Robert D. Haas, chairman and CEO of Levi Strauss. Other McKinsey alumni held top positions at General Electric, PepsiCo, Merrill Lynch, and Raychem. The ranks of McKinsey alumni have formed a powerful network of top executives around the world. They call on other McKinsey alumni when they are hiring or when they need information, and they call on McKinsey when they need the services of a consulting firm.

McKinsey’s revenues more than doubled between 1987 and 1992, from about $510 million to $1.2 billion, with about 60 percent of those earnings coming from outside the United States. Revenues for McKinsey increased by 14 percent between 1991 and 1992, and outbilled all other management consulting firms in the world except Andersen Consulting, according to Consultants News, a newsletter for the consulting industry. But even that second place finish was deceiving because McKinsey’s average earnings per professional were $387,000, triple Andersen’s average, largely because McKinsey worked mostly with top management and thus commanded more lucrative fees.

By the mid-1990s, the company continued to be run as a loose democracy. The managing partner had no real power over colleagues other than that of persuasion and the responsibility of naming members of the firm to various committees. If a majority of partners did not approve of someone’s actions, they would not reelect him. Ownership of the firm has remained in the hands of the partners since Bower started selling some of his shares to younger partners decades ago. Shares have never been traded outside the organization. According to company literature, by maintaining internal ownership, the independence and objectivity of the company has never been compromised because it remained answerable only to its clients, its partners, and its staff.

The organization suffered some problems in the early 1990s when several top partners left the firm, along with teams of consultants, to work for rivals or establish rival firms. It also found itself being left behind in the fast growing area of information technology, and in order to acquire the necessary expertise, it purchased Information Consulting Group in late 1989 from a British firm. Gluck had advocated strongly for the purchase of Information Consulting Group, a 250-person information technology firm based in Washington, D.C. McKinsey said it made the acquisition so that it could better respond to the needs of its clients for whom information technology was becoming very important. By 1993, however, half of the nineteen partners and more than half of the staff left Information Consulting Group for other jobs.

Although McKinsey signaled a change with its appointment of Gluck, it still came under fire from women and minorities for its lack of black partners and its small percentage of women partners worldwide. It was forced to reevaluate a company policy on reimbursement for partners’ club memberships when a group of African-American Harvard business school students criticized the company for reimbursing partners for memberships in clubs that discriminated on the basis of race, religion, or gender. McKinsey partners, however, said that the company was committed to employing a diversified work force.

Gluck was expected to step down as managing director in 1994, and insiders speculated that the company might elect its first non-American partner to replace him. However, the main goals and objectives of the company were not expected to change. It would continue to provide nearly half of its work in the fields of strategy, overall organization, and related policy areas, as well as provide advice on improving short-term performance by helping clients turn around profit declines, reorient their product/market strategies, cut costs, and increase productivity. It also would continue to do extensive work in areas important to top management of client companies, such as research and development, finance, sales and marketing, manufacturing and distribution, planning and control, management information, and information technology. McKinsey continued to pride itself on its ability to solve clients’ problems in a collaborative effort to integrate new strategies with the existing culture and traditions of the client company.