McKinsey advice: for better, for worse, for richer, for poorer
The firm has been the go-to strategy consigliere for the globe's top companies and governments for more than half a century.
So why has its advice, at times, turned out to be so bad?
It often goes unmentioned but McKinsey has indeed offered some of the worst advice in the annals of business. Enron? Check. Time Warner's merger with AOL? Check. General Motors' poor strategy against the Japanese auto makers? Check. It told AT&T in 1980 that it expected the market for mobile phones in the US by 2000 would amount to only 900,000 subscribers. It turned out to be 109 million. The list goes on.
A new book, The Firm: The Story of McKinsey and Its Secret Influence on American Business, offers a fascinating look behind the company's success.
The book, by Duff McDonald, chronicles McKinsey's rise but also raises a question that is applicable to the netherworld of consultants, advisers and corporate hangers-on: "Are they worth it or not?"
The answer amounts to hundreds of billions of dollars. Indeed, the army of advisers whispering into the ear of Verizon and Vodafone over the weekend for their work on a $US130 billion ($144 billion) deal stand to make more than $US200 million. And they don't have to give the money back if the deal turns sour.
The book explores the disconnect between the advice McKinsey offers and the ultimate results. McDonald quotes a top McKinsey partner, Larry Kanarek, in a remarkably honest moment: "We are advisers, and it is management's job to take all the advice they receive and make their own decisions, not to say that 'McKinsey told me to do this'."
The reason we don't hear about McKinsey's advice is that the firm prevents clients from disclosing the work that McKinsey does. As a result, it does not take credit for good work or blame for bad work.
McDonald says hiring McKinsey could be the cover needed to make an unpopular decision. "If, as CEO, you felt you needed to cut 10 per cent of costs, but didn't feel you were getting buy-in from your employees, the hiring of McKinsey generally got the point across quite clearly," he wrote.
In fairness, McKinsey's involvement in some corporate catastrophes may simply be the law of big numbers: given it advises the world's biggest companies on some of their most challenging problems, invariably it is going to be involved in some duds.
Still, McDonald, who calls McKinsey executives "de facto industrial spies", asks of the firm's reputation: "Is it a con? Maybe. The young MBAs the firm fields on its engagement teams learn on the job on the client's dime, and it's hard to argue that a McKinsey associate has anything to offer the clientele but long nights."
All of that may be true. But it also does not fully account for the firm's success. Whatever bad advice it has offered over the years, clients keep coming back for more.
"They have follow-on work not just because they're good at what they do but because they are trained in how to manage these kinds of client relationships," former editor of McKinsey Quarterly Alan Kantrow told McDonald. "They understand the core reality is the relationship and conversation."
Frequently Asked Questions about this Article…
McKinsey is a highly influential management consulting firm, but the article and Duff McDonald's book note that some of its advice has led to major missteps (examples cited include Enron, the Time Warner–AOL merger, General Motors' strategy, and an incorrect AT&T mobile-market forecast). Investors should know the firm has been both a trusted adviser and sometimes linked to poor outcomes.
No — the article explains that McKinsey’s involvement is not a guarantee of success. Because it advises many of the world’s largest companies, it will inevitably be associated with some failures (the ‘law of big numbers’), and its advice can sometimes turn out badly despite its reputation.
Yes. The article highlights instances where McKinsey’s recommendations are linked to poor results — for example, strategic mistakes at Enron, the Time Warner–AOL deal, and General Motors — illustrating that consultant advice can affect company performance and shareholder outcomes.
According to the article, clients keep coming back because McKinsey is skilled at managing client relationships and follow-on work, and because its brand can help executives win internal support for difficult or unpopular decisions (such as cost cuts). That relationship management is part of its continued demand.
The article cautions investors not to assume positive outcomes just because McKinsey is involved. Big deals (the article cites a US$130 billion Verizon–Vodafone deal) can generate large advisory fees — advisers might make hundreds of millions regardless of the deal’s long-term success — and McKinsey’s role is not an automatic vote of confidence.
Yes. The article notes McKinsey prevents clients from disclosing the work it does, which means investors often don’t see the full scope of advice given, and the firm doesn’t take public credit or blame — reducing transparency for investors assessing management decisions.
The article quotes criticism that many McKinsey associates are young MBAs who learn on the job and may primarily contribute long hours rather than deep industry expertise. While that is a criticism raised in the book, the article also notes this alone doesn’t fully explain McKinsey’s ongoing success with clients.
Treat McKinsey advice as one input rather than proof of a strategy’s quality. The article suggests being cautious about management using consultants as cover for unpopular moves, looking for independent evidence of projected benefits, and recognizing that confidentiality limits how much investors can verify about consultant-driven plans.
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