The New York Times published a major story yesterday on how the consulting powerhouse McKinsey got itself eyeball-deep in a corruption scandal in South Africa that has become the focus of a major government investigation. It has led major multinationals operating in South Africa like Coca Cola to cease doing business with McKinsey there.
Among other things, as the Times explains, the firm got about $100 million in performance payments for performance that may not have even occurred from a state-controlled energy company Eksom. It got the assignment in connection with a local partner that was controlled by an Indian family, the Guptas. The Guptas in turn used their connections with then South African president Jacob Zuma to loot various state-owned entities. Oh, and on top of everything else, McKinsey’s contract was illegal.
McKinsey no doubt hoped the scandal would not get that much play outside Africa, despite its size and the fact that there is no way McKinsey can pretend to distance itself from what happened. The Financial Times has run some good pieces on the scandal as it unfolded, and if my recollection is correct, at least one was a lead story, but this is apparently the first account that covers the full terrain of the scandal and focuses hard on what decisions and actions various members of the firm took.
At the end of this post, we’ve reproduced the text of an e-mail McKinsey sent to former partners right before the story went live. You can see how defensive and aggrieved it is. It insinuates that the famously business-friendly Times has an anti-globalist, anti-commerce agenda.
It is also notable what this e-mail does not do: it does not discuss any reforms that McKinsey has put in place to prevent this sort of misconduct from happening again. It instead fixates on the progress the firm has made in “restoring our reputation.” The former partner harrumphed about the tone-deafness of the close, which was hand-wringing that the Times had the bad taste to release their expose “we approach Values Day in many parts of the world.” As he put it, “If you have values one day of the year, you don’t have values.”
McKinsey heretofore has managed to avoid being tainted by scandal even when it had its fingerprints all over the crime scene. McKinsey was the moving force being what may still stand as the biggest value-destroying acquisition of all time, Time Warner’s purchase of AOL. The board turned down McKinsey’s “dare to be great” speech in favor of the deal four times. Unfortunately, it relented on McKinsey’s fifth go. McKinsey was also deeply involved in Enron, to the degree that it was touting Enron as a model. Many alumni have remarked to me that they don’t understand how McKinsey escaped being dragged into investigations. More recently, McKinsey has tried to shrug off important stories by Pulitzer Prize winner Gretchen Morgenson, now at the Wall Street Journal, and Tom Corrigan, on how McKinsey has become heavily involved in advising parties to major corporate bankruptcies, yet has routinely flouted legal requirements to disclose conflicts of interest, including investments by its in-house retirement funds.
Despite doing an impressive job of pulling together the threads of the sordid affair and identifying the responsibility of specific partners in McKinsey for key decisions and actions, the reporters too often give McKinsey the benefit of the doubt based on its successful history of secretiveness and image management. One jaw-dropping example:
Certainly, consulting firms other than McKinsey keep client lists confidential and work for authoritarian governments. And McKinsey has undeniably been a force for good, through its pro bono work and by helping many organizations become more efficient engines of economic growth.
“Force for the good”?
I worked only briefly for McKinsey, in the mid-1980s, and left on good terms (doubling my pay in the process). That was before the firm became mercenary during the tenure of Rajat Gupta as managing partner. Unlike quite a few people early in their career at McKinsey, I worked almost entirely for decent managers and partners. Even then, I can’t imagine anyone calling the firm a “force for the good” with a straight face.
You could say the firm did useful and even important work easily through the 1960s and 1970s. Duff McDonald’s history of McKinsey described how it would effectively take what we would now call best business practices and propagate them across Corporate America. That became less tenable as a core approach as more companies hired MBAs and more consulting firms started to compete with McKinesy.
And even during the brief period I was there, it was not hard to find counterexamples to the pretense of virtue. One report (as in not a client study but a document the firm presented as a major think piece) had clearly fabricated data (as in there was no way it could have been compiled). The partner responsible was not sanctioned. The firm pushed bank deregulation hard, pushing its clients to embrace securitization, and in the late 1980s and early 1990s, taking credit for playing a critical role in getting financial regulators to accept that banks needed to be turned loose so they could make more money (see Lowell Bryan’s Bankrupt as an example).
The Times’ undue deference to McKinsey meant it missed or skipped over key issues.
Failure to make the mine-field of performance-based pay central to the piece. Marvin Bower, the true architect of McKinsey, would be spinning in his grave to learn that McKinsey was entering into performance-based pay deals Bower recognize the paramount importance of being able to give untainted advice and of being able to say things that clients didn’t necessarily want to hear (something the firm does much less than it pretend to, but Bower was a strong advocate of straight talk).1
But a host of small boutiques with ex-McKinsey people started doing cost cutting and taking a percentage of the savings. McKinsey partners apparently couldn’t stand to see what they were leaving on the table and so this sort of arrangement came to be seen as legitimate, to the degree that the firm was able to rationalize not just bad ethical choices, but even an obviously bad commercial risk because the payoff potential was so high. From the Times:
In late 2015, over objections from at least three influential McKinsey partners, the firm decided the risk was worth taking and signed on to what would become its biggest contract ever in Africa, with a potential value of $700 million…
It did not take a Harvard Business School graduate to explain why South Africans might get angry seeing a wealthy American firm cart away so much public money in a country with the worst income inequality in the world and a youth unemployment rate over 50 percent.
And a bitter irony: While McKinsey’s pay was supposed to be based entirely on its results, it is far from clear that the flailing power company is much better off than it was before….
Since the Eskom disclosures, much of McKinsey’s business in South Africa has evaporated…
Indeed, the harm to the McKinsey brand is more profound than the fallout from the epochal Galleon hedge fund case almost a decade ago, in which McKinsey’s former managing director and a senior partner were convicted on charges related to insider trading. Neither man acted on behalf of McKinsey.
Halfway through the story, the article does point out how dangerous performance-based arrangements are, but in a story this long, it winds up getting short shrift by being buried in the middle:
In the late 1980s, an up-and-coming partner in McKinsey’s energy practice, Jeffrey K. Skilling, had been part of a committee considering whether payment should be based on delivered results, such as reduced costs.
As Mr. Skilling told the journalist Anita Raghavan, the panel concluded it would not work, because getting paid based on impact, for example, could give McKinsey an incentive to tell clients to reduce costs even if it was not in their interest. Doing that, Mr. Skilling said, “could destroy” the firm.
Mr. Skilling — who would become Enron’s chief executive and end up in federal prison after its vast accounting fraud was revealed — saw the ethical trap.
Failure to depict this scandal as evidence of poor governance. Again, even as a young person at McKinsey many years ago when the firm was much smaller, the firm was clearly lax about risk, and that was due to its management structure. I had come from Goldman, which was a partnership, and the result was that the partners were very stringent about who they made a partner, since anyone could conceivably bankrupt all, and they had many formal and informal checks, including partners having very narrow spans of control and being expected to be very hands on in the business they operated. By contrast, McKinsey was modeled on a law firm. Once you reached the tenured class, there were no mechanism for partners to ride herd on what other partners were doing.
See how the Times fell for McKinsey’s spin that the South Africa fiasco was the result of lapses, not woefully deficient controls:
But an investigation by The New York Times, including interviews with 16 current and former partners, found that the roots of the problem go deeper — to a changing corporate culture that opened the way for an aggressive push into more government consulting, as well as new methods of compensation. While the changes helped McKinsey nearly double in size over the last decade, they introduced more reputational risk.
The firm also missed warning signs about the possible involvement of the Guptas, and only belatedly realized the insufficiency of its risk management for state-owned companies. Supervisors who might have vetoed or modified the contract were not South African and lacked the local knowledge to sense trouble ahead. And having poorly vetted its subcontractor, McKinsey was less than forthcoming when asked to explain its role in the emerging scandal.
The Times clearly backs McKinsey’s rationalization, that this episode was somehow out of character: “That is why McKinsey’s behavior in South Africa is so startling.”
It does not consider that the South Africa as opposed to a sign that the firm had managed to maintain its brand image while evolving into something significantly different. For instance, the firm has become crass in how it pitches business. I’ve been hearing complaints for over a decade that McKinsey staffer will meet a client or a prospect, and tell them why it would benefit them to have McKinsey do a particular project for them. When the client says, “No, we don’t think we need that and here’s why,” or “Yes, we’ve thought about that, and we only think one part is relevant and we’ve already started on that,” the McKinsey representatives would argue with them, effectively telling them they were wrong and they really needed to hire McKinsey.
The Times account has the smoking gun, which the authors instead twist into a defense of sorts:
Concerns notwithstanding, the prospect of a big payday made the contract popular not only in Johannesburg but throughout McKinsey’s global empire…
In situations like these, risk managers are supposed to serve as corporate lifeguards, ready to whistle back dealmakers if they expose the company to unnecessary legal and reputational peril. Yet the Eskom contract was approved with less scrutiny than regular public contracts. That was because state-owned enterprises were treated as private corporations, where reviews focused on commercial viability, not political risk.
Had McKinsey vetted the Eskom contract properly, it might have spared itself some of the grief to come. The contract, it turned out, was illegal: The power company had failed to get a government waiver from the standard fee-for-service payment, despite assuring McKinsey that it had done so.
“For the scale of the fee, they were prepared to throw caution to the wind, and maybe because they thought they couldn’t be touched,” said David Lewis, executive director of Corruption Watch, a local advocacy group.
Now why does this, “Oh, this was a government contract, and so a different sort of contract than we normally enter into, so our risk controls weren’t fit for purpose” a load of steaming bull?
The very same story had this section earlier:
By the early 2000s, McKinsey re-entered the public sphere in a major way — and now government contracts and work with state-owned companies make up 16 percent of the firm’s revenues.
McKinsey damned well knew, or ought to have known, how to handle the Esksom project. It has a decade and a half of experience and a significant proportion of total firm revenues from this type of client. Either the processes were never any good, which is a major problem in and of itself, or partners in the Jo’burg office lied or hid information from the mother ship. Neither possiblity reflects well on McKinsey.
Failure to recognize how money-driven McKinsey is. Consider this bit:
One very public flap emerged in the summer of 1970, when The Times (also a McKinsey client over many decades) published front-page articles detailing an explosion in consulting fees paid out by New York City. At the center of the controversy was a young McKinsey partner, acting as an unpaid official in the city’s budget bureau even as the city was spending taxpayer dollars on contracts with the firm.
It looked bad. And while McKinsey was cleared of wrongdoing, the experience helped steer the company away from government work, avoiding the publicity, the ethical quandaries and the generally lower fees that came with public contracts.
I was at the firm in its New York office in the mid-1980s and the partner who was at the center of that scandal didn’t appear to have taken a hit for it. And the party line internally wasn’t that government work was too ethically problematic, or that it could lead to bad press.
It was that it was too hard to get paid.
Failure to question lame excuses. Admittedly, the Times is hampered by journalistic conventions, but some of the things the McKinsey folks claim does not stand up to scrutiny. To get the Eskom assignment, they needed to have a local black-owned firm as partner. McKinsey swears up and down they had no idea who they’d teamed up with, much the less that the entity was connected with the Guptas.
We are supposed to believe this:
McKinsey knew little about Trillian — a new company, with no track record, that had broken off from McKinsey’s previous minority partner, Regiments, after a business dispute. What’s more, Trillian had refused McKinsey’s requests to divulge its ownership.
When we are told this staring in the next paragraph:
What McKinsey did not yet know was that Eskom’s chief executive, Mr. Molefe, had placed dozens of phone calls to one of the Gupta brothers during and after contract negotiations.
An influential senior partner in Johannesburg, David Fine, had grown increasingly uneasy about Trillian, according to his testimony to Parliament. One source of concern: Over the objections of two senior partners, McKinsey’s team leader, Mr. [Viksa] Sagar, had been meeting with Eskom and Trillian without any other McKinsey officials present.
So Sagar, a McKinsey partner, who appears to have had more that a bit of a clue about this supposedly mysterious project partner, is not “McKinsey” for the purpose of this story? The Times won’t hold McKinsey accountable for the knowledge of one of the two lead partners on the Eksom assignment?
And the Times curiously fails to comment on this part, say by getting a third party quote:
That conclusion was based in part on a letter obtained by a widely respected human-rights advocate, Geoff Budlender, who had been asked to investigate Trillian…
Mr. Budlender asked to interview McKinsey but was told to put his questions in writing…In response to one question, McKinsey denied working “on any projects” with Trillian, as either a subcontractor or a black-empowerment partner.
With his trap laid, Mr. Budlender pounced. He attached a Feb. 9, 2016, letter from the McKinsey team leader, Mr. Sagar, to Eskom. “As you know,” Mr. Sagar had written, “McKinsey has subcontracted a portion of the services to be performed” to Trillian. The letter went further and authorized Eskom to pay Trillian directly, rather than through McKinsey, as was customary for a subcontractor.
Asked to explain the conflicting answers, a McKinsey lawyer, Benedict Phiri, took weeks to respond, saying he needed to speak with his colleagues. Finally, he wrote that, given ongoing legal disputes, it was “inappropriate” to comment.
Mr. Budlender concluded that McKinsey’s denial was false….
In the interview with The Times, the McKinsey managing partner, Mr. Barton, said the office leadership in Johannesburg had been unaware of Mr. Sagar’s letter….
McKinsey’s lawyers said that the letter should never have been sent.
So get what happened. Sagar and perhaps others knew McKinsey was going to satisfy its black empowerment obligations by getting a contractor involved who had ties to the Guptas, meaning to the then prime minister. Oh, and I forgot to mention that this contract was awarded on a no-competition basis, which also should have set of alarms at head office. Sagar found a way to get Trillian paid and keeping McKinsey looking clean by not having McKinsey in the money flows to Trilian.
And what is McKinsey’s comment when this is exposed? Not that this was wrong, not that they never knew (they could have easily thrown Sagar under the bus; the fact that they didn’t suggests he could show the firm knew plenty well much if not all of what was going on) but that the letter should never have been sent. In other words, Sager hadn’t committed a perfect-enough crime.
Mark Ames’ take on the story: “Looks to me like standard colonialist propaganda. I had no idea McKinsey was so virtuous until now. Am I missing something?”
Or if you want to be more charitable: it’s a shame the Times did such a good job of fact gathering and lost its nerve on reaching conclusions. Thee Grey Lady was apparently unwilling to get into what would have been a milder version of staring down legal threats that the Wall Street Journal did with Theranos. That sort of journalistic courage is almost a relic.
______
From: Dominic Barton and Kevin Sneader
Subject: New York Times story on South Africa
Date: June 26, 2018 at 2:37:04 PM EDT
McKinsey banner
Dear XXX,
As a former Partner of the Firm, we wanted to let you know that we expect The New York Times to publish a lengthy story on McKinsey later today, focused primarily on the challenges we have faced in connection with Eskom, the state-owned power utility in South Africa and a client of McKinsey since 2005.
We tried to cooperate in every way with the journalists working on the article over the last several months, and provided multiple in-depth briefings with senior colleagues (including an on-the-record interview with Dom), alumni, and outside advisors on how we work, our policies for managing risk, and the results of our investigation—and we have been open with them about the lessons we have learned coming out of the issues in South Africa.
That said, throughout the reporting process the journalists demonstrated a somewhat cynical view of the role played by ‘global business’ and our Firm. This was clear from their lines of questioning—for example, challenging whether it was appropriate for us to operate in many parts of the world, including China, the Middle East, and Africa; whether we should serve the public sector at all when we also serve private sector institutions doing business with governments; and whether we should work for any defence clients or any oil and gas clients.
Despite the article’s likely point of view and portrayal of unacceptable individual behavior that falls well short of our values, the reality is we are continuing to make progress in restoring our reputation and standing in South Africa—though we know it will be a long road ahead. We have built relationships with the new government and are engaging in discussions with clients on the results of our investigation (which is now complete and which found no evidence of corruption or bribery)—and are working to finalize the repayment of our fee to Eskom.
None of us likes it when the Firm gets this sort of media attention. There are clearly things we need to learn from the mistakes we made, and we have. We remain focused on what really matters: delivering great impact for our clients and developing and inspiring our people.
Given we have not seen the article, we may well be in touch with further thoughts after publication. Please take this as a sign of our commitment to you as alumni to engage you in events affecting our Firm, and know that – as we approach Values Day in many parts of the world – our commitment to those values remains as strong as ever.
Best regards,
Dominic and Kevin
____
1 This talk was not all bluster. I got McKinsey fired from a project for telling the client something that contradicted his pet preferences. The partner on the study thought it was hysterical. He had agreed to do what amounted to a mini-study as a favor to this guy, who was a mid-level manager at Citi, and he thought the client getting stroopy with me confirmed that he was a time waster.
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Thank you, Yves, especially for highlighting McKinsey’s advisory role in corporate bankruptcies and failure to disclose conflicts of interest.
McKinsey was involved on both sides of the EU mandated restructuring of a Belgian bank that was bailed out in 2008. The firm advised the European Commission and the bank. Bank personnel involved suspected McKinsey of not disclosing its conflicts of interest and failing to keep the team advising the Commission separate from the team advising the bank. It left a bad taste.
The firm was also involved in the acquisition of Korea Exchange Bank by Standard Chartered. The CEO of Standard Chartered was ex McKinsey. KEB was a mess, which somehow escaped the attention of McKinsey, and caused Standard Chartered no end of problems. The bank is slowly recovering.
Former McKinsey staff began to appear at Barclays from 2015. They hired their former colleagues. On my way out over the spring of 2016, I warned colleagues about what McKinsey was suspected of.
McKinsey is one of the go to firms for British neo-liberals. Former Tory politician William Hague worked there.
The new kids on the block in Europe are now Promontory and Alvarez & Marsal.
The third paragraph of the letter reads remarkably like an attempt to brand the journalists as heretics because they dared to question neoliberalism.
I interviewed at McKinsey when I graduated. Part of the sales pitch was presenting a career at McKinsey as a fast track to executive positions at other firms (they ‘casually’ mentioned more than a few times that it was a common career path for people that left the firm). They also hired a lot of graduates with advanced degrees from prestigious institutions, often with minimal or no business training. I actually have a fair amount of sympathy for the latter point and I think the argument that they made (essentially that MBA monocultures limit creativity and constrain thinking) is probably correct. But I think the other parts are telling and suggest that they were hiring for reputation as much as for competency. In a perfect world, your team of very smart and skilled people from diverse backgrounds would succeed in thinking about the problem from new angles and come up with crucial insights that your clients had missed. But if you somehow missed the mark on that, it probably wouldn’t be too difficult to pretend that you had using a well-disguised appeal to authority argument (of the “nobody ever got fired for…” type). I suspect that’s what all the credentialing was for.
I could go further, put my black hat on and suggest that maybe the appeal to authority was the primary business model and the ‘diverse minds coming up with brilliant insights’ story was just the cover. A characteristic of graduates with research degrees is that they are accustomed to being the authority who knows everything, even though in practice their knowledge is incredibly narrow and specialized and won’t necessarily apply outside their field. I have no idea whether they would really be able to come up with unique business insights as a strategy consultant, but I would lay money that they would be convinced that they had done so, and I wouldn’t be surprised if they were able to convince the client of it as well. (Bearing in mind that the client probably wasn’t the sharpest knife in the drawer strategically, or they wouldn’t have needed to hire McKinsey to begin with). Appeal to authority would make for a much more reliable business model, and if they came up with genuinely useful business insights once in a while it would probably provide enough cover. Meanwhile senior execs would not have any incentive to publicize failures, and many of them are very good at burying them, or reframing them as successes by moving the goalposts.
I might be wrong about this, but nothing in the description by Yves above or Hubert below seems to contradict it.
It was McKinsey where Chelsea Clinton started her career in 2003. Sounds like the perfect environment for learning the family trade.
While I was a postdoc in the best medical school in the country (Baltimore, not Boston) I went to a McKinsey recruiting event (1997, I think). My undergraduate institution wasn’t up to their standards,but so what. Well catered and smooth. Given the location, the partner doing the talking was a former neurosurgeon (British accent, naturally) who said that all the lifesaving he had been doing as a surgeon had become boring, so he joined McKinsey and was now in a position to save the world. His current project IIRC was whether a home test for HIV was a good idea. OK that’s interesting, I thought, but the answer at that time as a clear “No!” The food was really good, however, for a bunch of underpaid graduate students and postdocs! So they had that going for them. Which was nice.
How could these words be more ironic?
Jeffrey Skilling, spilling the beans on one of the principal mechanisms, that at scale, succeeded in hollowing out our economy and cast adrift the working class.
My guess, Jeffrey was simply caught thinking out loud, and upon further reflection he decided the writing on the wall said “Just make some money”.
“Drive” by Daniel Pink is a good summary of what really motivates people to do good work and what does not. It clearly lays out the problems with cash-based performance pay. https://www.amazon.com/Drive-Surprising-Truth-About-Motivates/dp/1594484805
However, to get to the top of a corporation today you need to have the “Midas touch” with all of the problems that King Midas had in the end. If the only thing you measure is dollars, then that is what you will get, at least in the short term. I am currently trouble-shooting several projects where people focused on “production” and “cost minimization” to the exclusion of everything else and then were shocked when the outcome became neither. It remains to be seen whether or not senior management understand they were part of the problem when they focused on exhorting the project manager to maximize monthly profits instead of planning for the entire project life-cycle.
Speaking truth to power, always a bridesmaid, never a bride.
A few exceptions, including here. Thank you.
Much like investment banking, the big accounting firms, and big law, management consulting is very much about finding ways to make the partners richer at the expense of all else. The big four accounting firms are also big players in this field as well.
There is a lot of backstabbing in the industry as well. Most people, like Yves, don’t stay for more than a few years in management consulting. The office politics are very bad there from what I have heard among former employees. The type of people that stay are the type that will backstab you over a promotion. When they say “congrats for the promotion”, often they are really saying “you may have been seen as better than me this time, but in the future, I will stick a knife in your back when you least expect to make me look good”. The struggle to become
For those who work there, the hours are long, there is constant travel, and it makes it impossible to plan your life ahead. Needless to say, most quit after a few years, except for those who want the prestige or money.
What is not central to the company, is an ethical culture. You can see this by how they act. Pushing neoliberal reforms. The fees they charge often are not nearly commensurate with their values. Actually often the advice they give when followed leads to short term profits and long term ruin. In many cases, management consultants don’t know nearly as much as they say. David Craig is a pseudonym, but he wrote a book, Rip-Off! The Scandalous Inside Story of the Management Consulting Money Machine, discussing many of these ugly truths.
https://www.independent.co.uk/voices/commentators/johann-hari/johann-hari-the-management-consultancy-scam-2057127.html
In many cases, management consultants are taking recent graduates right out of school who have pretty limited knowledge, charging huge fees, and giving harmful advice. The UK in particular has come under very heavy criticism for spending and indeed wasting large amounts of taxpayer money on management consultants.
Here is a hilarious example of what deliverables can be the end result of all that money spent: https://www.cbsnews.com/news/management-consulting-huge-ripoff/
Often though, management of a corporation, if they want to push through reforms that are unpopular, like pay cuts, benefit cuts, layoffs, etc, will hire McKinsey to give the appearance of objectivity (ex: we are doing this because an independent third party that is considered an industry leader) recommends this.
I wonder about the NYT’s editorial stance. They may have an eye towards future advertising revenues or perhaps as a neoliberal paper, they don’t want to question other neoliberal institutions. It would be very interesting to see the true details behind what really happened with McKinsey and South Africa. The site (http://retheauditors.com/) has some interesting content, but they mostly focus on the big four accounting firms more than the world of consulting.
Behind the scenes though, it is organizations like McKinsey and Goldman Sachs that are very much responsible for the decline of the fortunes of the middle class throughout the Western world. Their greed has done a lot more damage than is commonly acknowledged. Goldman Sachs already has a bad reputation for this, but the world of management consulting needs a lot more scrutiny. I think many would be shocked at how these big consulting firms really are.
Small consulting firms that are specialized can often add real value, but these large consulting firms are parasites, as Michael Hudson once noted.
As a former McKinsey client, the experiences seemed familiar. I found the above quote issue indicative of some sloppy work and failure to follow through on review of junior employee product. Just as journalists should vet the facts, so should consultants, and both should be able to have those vettings stand up to internal and external scrutiny. One approach would be to ask how you would explain the situation to family, and a variation would be to ask who would be on the witness stand addressing the prosecution or plaintiff questions.
One other observation: The McKinsey South Africa experience reminded me way too much of defense contractor and sub-contractor methods. What were once vices have become habits, in no small part due to failure to audit, sometimes by design.
So of course what it all comes down to is this: “Money makes the world go ’round…”
Set to music, sounds like this: https://www.youtube.com/watch?v=I8P80A8vy9I (Joel Grey and Liza Minnelli in “Cabaret.”)
I’m still wedded to a wag’s comment from nearly twenty year ago:
“The difference between tax planning and tax avoidance used to be five to ten in a federal pen. Today it’s what makes a partner.”
McKinsey has had all of these problems for a quarter century. Nothing is new except the number of zeros involved. Here are some observations that reinforce all your criticisms of the Times story, while trying to offer a simpler explanation of the underlying problem.
I was personally involved with multiple examples of McKinsey destructiveness in the airline industry, but the key example is Swissair, where McKinsey was working directly for board chairman Lukas Muhlemann, who also employed McKinsey extensively in his role of chairman of Credit Suisse. McKinsey developed a disastrous alliance policy, involving a variety of small (Austrian, TAP) and economically hopeless (LTU, Air Europa Italia, AOM) carriers because Muhlemann refused to consider alliance options where Swissair wouldn’t be the dominant carrier. This was coupled with a disastrous conglomerate strategy, where the company overpaid for dozens of catering, hotel, maintenance and IT companies. In order to bulk up the aircraft leasing operation, it forced Sabena (Swissair owned) to replace its entire fleet with larger, more expensive aircraft, quickly pushing Sabena from breakeven to bankruptcy.
At no point did McKinsey staff ever work with, or review analysis or findings with the people who actually ran the airline; they only worked with board members and SAir Group holding company staff who had no responsibility for airline performance. When Swissair collapsed, the airline was actually doing better financially than British Airways or KLM. It only collapsed because of the problems caused by the McKinsey driven acquisitions. Swiss (the reorganized Swissair) had done just fine doing exactly what Swissair had been doing before the McKinsey debacle. Even Brussels Airlines (the reorganized Sabena) survived for 20 years under the exact plan developed by Sabena management at the time.
Even though McKinsey’s role in the Swissair collapse had been reported in the Swiss press (comparable to the recent McKinsey coverage in South Africa ) McKinsey suffered almost no adverse effects from destroying one of the icons of Swiss business. As here, there was a near-total refusal to address anything publically, regular attempts to dishonestly misstate what happened (SAir Group didn’t buy shareholdings in airlines consistent with the “strategy” they’d recommended, even though McKinsey had never bothered to identify any specific targets, and in countries like Germany and France, there were no other airlines available). They had extensive private conversations with clients and other “friends of McKinsey” to claim that they had no responsibility for the collapse of a client where they’d billed tens of millions for strategy work over the previous decade. Carefully ensuring that no one in the media (or from Swissair) could challenge their claims.
Consistent with Yves’ historical points, none of these McKinsey problems were hugely significant when I got out of business school in 1980, but by 1990, they had become serious and obvious. McKinsey’s traditional consulting services were lucrative, but following the lead of BCG and Bain, they transformed the basic nature of consulting to drive even more spectacular profits. Instead of working directly with the people responsible for the nuts and bolts of marketing, operations or finance (which is difficult and requires tremendous expertise), they worked exclusively at the CEO/board level. This was part of the broader trend where the gap between CEO pay (and the corporate wealth captured by key investors) and what the rest of “management” made skyrocketed. This was part of the broader trend whereby the C-suite and major investors were no longer focused on long-run competitiveness and profits, but on maximizing what they could extract from the company in the short-term.
The “value” McKinsey added shifted from expertise and project management skills to a slavish, absolute devotion to the private interests of the individual C-suite/investors who exercised control. This is when Marvin Bowers begins spinning in his grave. McKinsey was willing to destroy Swissair rather than show any sign that it was not totally devoted to the interests of Lukas Muhlemann. Its post-collapse private conversations with clients was designed to convince the Swiss business elite that its dedication to their interests would never waver, and to help establish the false claim that the Swiss business elite had no responsibility for the collapse of Swissair. In the South African case, the same pattern holds. McKinsey’s staggering fees were payment for their absolute loyalty to the Guptas, they did nothing to improve the economics of the operating companies involved and did much to make them worse, and damage control consists largely of protecting the “brand image” and ensuring the business elites that hire them know they remain totally devoted to their interests.
Thus while the “performance based fees” issues is certainly relevant to any broader discussion, it is more symptom than cause. McKinsey wasn’t a largely virtuous company that suddenly went bad when it abandoned its previous requirement for flat fees. Its client base had changed—the controlling C-suite/investor folks who were exploiting corporate wealth were increasing using extreme financial engineering and the types of practices described in the Times story. As readers of this site know, the real consulting industry pioneer here was Bain Capital, who enriched their partners through direct economic rape-and-pillage practices, where Bain got a cut of the (potentially huge) upside. Which created pressures among McKinsey partners to abandon “fee-only” type norms that prevented them from making as much money as competitors.
The problem is the complete breakdown of the historical link between the interests of company CEOs/investors and overall economic welfare. More often than not, things companies did in the 1970s and 80s to improve competitiveness and profitability would also benefit consumers, workers and overall economic welfare. Consultants like McKinsey used to contribute to that process, but their partners had maximized what they could earn from that model, and with the widespread dissemination of MBA skills, that potential was declining. More often than not, what C-suite and investor insiders do to maximize personal wealth comes at the direct expense of consumers, workers, long-term corporate viability and overall economic welfare. McKinsey’s entire business model is based on serving the interests of those folks. Internal “reforms” regarding fees or anything else will change nothing.
The Times’ story is driven by a narrative that says that the people who work for firms like McKinsey are the best and the brightest and what they do creates huge economic value. This narrative was manufactured in the 1970s, when (as Yves points out) it wasn’t really true, even if it was based on some valid data points. This narrative was primarily promulgated through business schools, and as the number of MBAs exploded, it became widespread among the “9.9%” who have done very well economically despite the awful results the other 90% experiences. As with the wondrous virtues of the financial and tech industry, the belief in the virtues of firms like McKinsey is an obvious signifier of tribal loyalty to the “9.9%” class, and cannot be shaken by any of the obvious evidence that the world has significantly changed in recent decades, and that actual results have reduced overall economic welfare. The primary objective of the New York Times is to indulge and support the interests of the “9.9%” Even though every factual element of the McKinsey/South Africa story directly contradicts it, the Times would not have published it without devoting half the piece to unsubstantiated assertions assuring its readers that the “virtuous McKinsey” narrative was still completely valid.
As someone who worked the buyside for TBTF’s for a couple of decades, this comment is spot on.
Other firms are very good at working Board and C-level relationships, but McKenzie will only work that way. Engagements are almost always driven at the Board level with some C level exec, preferably the CEO, shepherding it through “the noise” from the people in the organization that have the actual responsibilities to deliver results, but obviously aren’t as smart as the excessively well-paid brain’s on a stick. What’s even worse is when the CEO brings one of them on in some newly invented “strategic role”. I’ve never seen their movies end well, never.
If Goldman is doing God’s work, then McKenzie is St Peter holding the keys to the gates.
This was a thoroughly informed and insightful comment. Thank you.
McKinsey? Where Rajat Gupta worked to offshore millions of American (and other countries) jobs, making Big Bucks?
McKinsey? Where Chelsea Clinton worked to offshore American jobs?
Ho, hum . . .
The reference to “dark continent” aside, great piece and i’ve been wondering when the international press would pick up on this with gusto. Anyhow, a few words penned from ground zero of this scandal (aka local insight ;-) ) : some friends from varsity are/were in senior management at Eskom so in the interest of brevity my tl:dr comment on this post, based on solid inside info from highly placed sources is: take all of Mckinsey’s spin doctoring not just with a pinch of salt, but a mountain (think the Himalayas) of salt. All of it, the feigned self-recrimination about inadequate risk controls, oversight from senior management, renegade partners operating as wayward lone rangers, etc, all of it is bs.
Mckinsey knew full well that procurement procedures were being flouted in broad daylight, but believed that Trillian, through its cosy relationship with the Guptas, could sweep any and everything under the proverbial carpet. When it became clear after the ANC elective conference in December that Jabob Zuma’s days in office were numbered, panic set in for a lot of Gupta linked companies that had been looting the state. Mckinsey, for all its talk about low tolerance for reputational risk, must have known six months ago that they were on a collision course with just such a risk (and if all they could muster by way of damage limitation is such a tepid, unconvincing response, one wonders why they command such high fees).
Mckinsey also suffers from a type of hubris that most multinationals doing business in these parts suffer from, the belief that Africa is an economic backwater and their global standings absolve them from the responsibility to act within the rules. In closing, and with Mkinsey proudly touting its 13 year history consulting for Eskom, one has to wonder whether they’re the “moving force” behind the declining fortunes of the power utility over that time.
Escom’s problems were simple:
They had a strategy of building a new power station every 2 years from north of the Reef, east along the coal region as a growth measure.
When the ANC came to power they decided that had a better use for the money. One would like to believe it was used to alleviate South African inequality.
Escom was starved of Capital, and probably had to contribute to the SA exchequer, and fell into distress, form both deferred maintenance and not enough generation for the demand.
All the rest is doing business in Africa, and was one of the major reasons the US passed the FCPA, the Foreign Corrupt Practices Act, which discourages bribes paid for contract, common outside the US. The US does not like bribes, payments to officials for contracts. The USits own forms of such largess: Campaign Contributions paid for “access,” or, well paying jobs provided to senior official after retiring from Government Service.
For McKinsey or anyone else, there was little need of a consulting, an expensive consulting, contract. A simple examination of ESCOM’s book would have told the tale.
South Africa has excellent and well trained CASAs (Chartered Accountants of South Africa), who could have identified the problem and recommended a solution is less than a week. They’ve got much experience is large industrial systems in South Africa, such as mines.
Another great piece, Yves. I’m an apostate consultant too, fled screaming after 5 years and have watched them wreak havoc globally at Fortune 500s ever since.
McKinsey is the poster child and the boot camp for the global ‘credentialed class’ of corporate courtiers. It is exhibit A for Nassim Taleb’s “Intellectual Yet Idiot” designation (with no skin in the game), selecting staff for a particular blend of:
1. cleverness (‘problem solving’ skills, at least for formulaic ‘case studies’ or brain teasers requiring little domain knowledge or, God forbid, experience to master)
2. personal polish (confidence and unflappability, ability to ‘synthesize’ which is to say, speaking and writing in crisp bullet points. At all costs, convey no FUDs – Fear, Uncertainty or Doubt – which might cloud or delay swift, decisive, feel-like-a-Leader decisions by the client. In the real world we lesser mortals also call that ‘groupthink’, but how dare you argue with our best practices and benchmarks. Look, Everyone is doing It!)
3. deep insecurity, behind the veneer of (2), a relentless drive to prove oneself which becomes a self motivator to compete, to perform, to overcome obstacles and naysayers, and most importantly to work long hours.
All these traits combine to select for corporate predators who can readily surmount the corporate decision-making machinery. These folks vault swiftly up the ladder to C-suite positions, without going through the time consuming drudgery of gaining real experience (paying dues, trial and error) that is the true basis of good judgment.
In fact, the underlings they skipped over who have that experience are annoyances, sticks in the mud, obstructing Change. Perhaps it might be better to replace those Cassandras with someone more flexible. And cheaper. Perhaps in Bangalore. Hmm, I may need some help on that….
Always admired twenty-something consultants who could waltz in, sell a package, tell a CEO and her team what to do to maximize resource extraction and hence their compensation, and walk away with a big purse.
Advice is cheap. Walking the talk is a bit harder. But I have to blame the CEOs and their boards, who enable the whole business.
But when you put yourself in the C-level’s shoes, it’s so tempting. The McKiddies and Bainie Babies are so much clearer, harder working and sure of themselves than the mopes who are your line management. You know, the guys who keep telling you why things can’t be done. Wow, what a relief to do an end run around those losers and join the Winners with some best practices. (you know what they say, nobody ever got fired for hiring McKinsey!)
In contrast, Japanese companies observe a 6 month time limit on consulting engagements: if their internal management team can’t take over by then, it is a shame and a disgrace.
Ken Hopper’s “The Puritan Gift” is a terrific unraveling of this topic, and has little more love for the old JO McKinsey Tayloist model than the modern incarnation.
More typical of a CEO, often with a generic financial background, who knows little about her company and has just as little experience making or doing what it does or makes. She has more in common with the tweeny consultants than her own people.
They come in and tell her what she wants to hear, which will maximize her comp and sell her on the fantasy of a quick, profitable turnaround. But that’s a function of ego and alienation and management failure.
Much of that is planned, as when executives explicitly locate themselves at physical and psychic distance from the places and people that comprise their business. All too common when boards wrongly incentivize their top officers, which encourages them to treat the company as fruit to be plucked, rather than a plant to be nourished.
The best CEO I ever worked for knew and trusted his people: “I have confidence in you until you prove me wrong.” The same CEO went on quarterly cold calls with junior sales staff, to keep a handle on who was on the team, how well they could do their work, and how hard it was to do it.
May I also add my interest and gratitude for this piece. It is fascinating hearing the stories and insights of those who have come through the other side of consulting.
A common theme that seems to be cropping up these days is a failure to manage conflicts of interest: this McKinsey case, Carillion, FTSE auditing in general, the big banks, and so on.
It’s off-topic, but I finally got my hands on that HBoS whistleblowers’ report, and while there isn’t much that shocks me now, it took my breath away. There was a complete failure (assuming the report is totally factual) by almost everyone who had a duty (whether moral, legal, fiduciary!) to manage conflicts of interest in connection with verifying and reporting the health of HBoS (the past events concerning which I am sure has been well trailed in the NC archives).
How quickly is it reasonable to expect the kind of cultural and ethical changes needed in industry?
Heck yes.
Slagging off the “consulting disease” that has turned what’s left of US industrial capital into the lobotomized handmaiden* of financial capital could be its own separate blog. The Vault used to be a decent place for swapping horror stories with insiders, but then it went to heck (signal to noise ratio)
I also recall with great fondness the “Accidenture” cartoon strip that was run by an insider (subsequently doxxed and fired) during the 2000 tech boom. Best sendup since Dogbert (“I like to Con people. I also like to Insult people. Hmm….”)
Cheers
* I really shouldn’t prevaricate so much, and say what i mean lol. Sign of the times
Trillian…
Carillion…
These made up names!
“Never eat at a place called Mom’s….”
Another firm caught doing dirty work with the Guptas in South Africa. Unfortunately for Bell Pottinger, internal strife helped bring them down. McKinsey doesn’t appear to have that problem.
https://www.newyorker.com/magazine/2018/06/25/the-reputation-laundering-firm-that-ruined-its-own-reputation
I’m curious as to the conman mentality. How self aware are these players? They must have an external narrative that they do god’s work, an internal objective narrative and some narrative that integrates the two or excellent compartmentalizion. How do they keep up the constant lie?
oddly elegiacal for the “good corporate governance” consultancies of the 60’s and 70’s, which were, in the end, about disrupting parochial power centers within US industrial conglomerates so that management would be more responsive to “value” extraction requests from the usual interests…
the job of McKinsey has always been to facilitate looting, and it used to require more convincing patsies within the organization. people believably earnest enough to sell it. now, it’s just one part of a whole ecosystem of grifters expanding to fill every niche…
It’s about the failure of industrial profit back in the 60s. Classic Marxist process.