In the new book "The Firm: The Story of McKinsey and Its Secret Influence on American Business" (Simon & Schuster), award-winning financial journalist Duff McDonald provides an intimate and incisive behind-the-scenes history and analysis of this influential and enigmatic company, which helped invent what we think of as American—now global—capitalism. With unprecedented access to current and former McKinsey employees, McDonald for the first time tells the whole story of The Firm—a story that is inextricably tied to the dramatic and fluid story of American business itself in the twentieth century. The following is an excerpt from "The Firm":
Two minutes out of business school, Jamie Dimon decided to become a consultant. The experience left him unimpressed, and he has looked down on it since. "It's substitute management," he told me when I was deep into writing his biography. "A Good Housekeeping seal of approval. It's political, so if you make a decision, you can say, 'It's not my fault, it's their fault.' ... I think consultants can become a disease for corporations." Dimon, who went on to become the chairman and CEO of JPMorgan Chase and was hailed as an Olympian financier for steering the bank above Wall Street's 2008 humbling—only to be somewhat humbled himself four years later when its own trading caused more than $5 billion in losses—made one exception to his consultant rule. Most consulting engagements weren't worth the price paid, he said, but McKinsey—well, it was the real thing.
Four years later, the Republican candidate for president, once a consultant himself, was asked how he would reduce the size of government. "So I would have ... at least some structure that McKinsey would guide me to put in place," Mitt Romney told the editorial board of The Wall Street Journal. When his audience seemed surprised, he added, "I'm not kidding. I probably would bring in McKinsey."
After almost a century in business, McKinsey can lay claim to the following incomplete list of accomplishments: Once before, well before Romney was running for the presidency, it remapped the power structure within the White House; it guided postwar Europe through a massive corporate reorganization; it helped invent the bar code; it revolutionized business schools; it even created the idea of budgeting as a management tool.
Above all, McKinsey consultants have helped companies and governments create and maintain many of the corporate behaviors that have shaped the world in which we live. And in becoming an indispensable part of decision making at the highest levels, they have not only emerged as one of the great business success stories of our time but also helped invent what we think of as American capitalism and spread it to every corner of the world. The abstract, white-collar nature of modern business—the fact that the greatest value in our economy is now created by people sitting in air-conditioned skyscrapers and corporate parks who manipulate information—is a reality that McKinsey was instrumental in establishing, championing, and profiting from. The best evidence for McKinsey's expertise is the firm itself. It has followed its own advice into an enviable position of power and prestige.
At the same time, however, the company can also be saddled with a list of striking failures, missteps that would have doomed lesser firms. McKinsey consultants were on the scene when General Motors drove itself into the ground. They were Kmart's advisers when the retailer tumbled into disarray. They pushed Swissair in a direction that led to its collapse. They played a critical role in building the bomb known as Enron and collected massive fees right up until the moment of its spectacular explosion. And these are just the clients unlucky enough to have had their woes splashed across headlines. Many more have paid handsomely for guidance that shortchanged shareholders, led to unnecessary layoffs, and even prompted bankruptcies. And yet the consultants are rarely blamed for their bad advice—at least not publicly so.
Remarkably, that pervasive influence has come even though McKinsey contains more contradictions than the Bible. The firm is well known, but there is almost nothing known about it. Precious few McKinsey employees have ever become acclaimed in the outside world. The employees are trusted and distrusted—and loved and despised—in equal measure. They are a collection of huge egos that are yet content to stay behind the scenes. They are confident but also paranoid. And they are helpful yet manipulative with their clientele—and even their own people. What do they actually do? They are managerial experts, cost cutters, scapegoats, and catalysts for corporate change. They are the businessman's businessmen. They are the corporate Mandarin elite, a private corps, far from prying eyes, doing behind-the-scenes work for the most powerful people in the world. How do they do it? Well, their methods have been compared (by others and by themselves) to the Jesuits, the U.S. Marines, and the Catholic Church. They feel so strongly about themselves that they have insisted on a proper noun where one need not exist. To an outsider, they are a consulting firm.To themselves, simply, The Firm.
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But the McKinsey story is even more than all of that. It's also about the rise and reach of American business in the twentieth century—and its remarkable adaptability to changing times. American capitalism may be under stress now, but modern American management technique—which McKinsey has played a part in both creating and disseminating—has distinguished itself as much by its innovative ability as by its sheer might. Today McKinsey is a global success story. But first it was a distinctly American one.
—Duff McDonald is a contributing editor at Fortune and the New York Observer.