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 & Company is a high-profile global management consulting firm that has advised the world’s biggest companies and governments for more than half a century. Investors watch McKinsey’s involvement because the firm’s strategy advice can influence major corporate decisions, deals and outcomes — for better or worse — and its recommendations often shape management actions that affect shareholder value.
Yes. The article notes several high-profile cases where McKinsey advice is linked to poor outcomes, including Enron, the Time Warner–AOL merger, General Motors’ strategy versus Japanese automakers, and a 1980 estimate for AT&T that wildly underestimated the US mobile market (900,000 subscribers vs about 109 million by 2000).
No. A McKinsey partner quoted in the article, Larry Kanarek, says the firm views itself as an adviser — it’s management’s job to evaluate advice and make decisions, not to blame consultants by saying ‘McKinsey told me to do this.’ Ultimately management is responsible for implementing and owning decisions.
The article points to several reasons: McKinsey has follow-on work because it’s skilled at managing client relationships and conversations; hiring the firm can give CEOs cover for unpopular choices (like cost cuts); and sheer scale means advising the biggest firms on the hardest problems will sometimes coincide with high-profile duds.
According to the article, McKinsey prevents clients from disclosing the work the firm does. That means McKinsey typically doesn’t take public credit for successes or public blame for failures, which limits outside scrutiny of its recommendations and outcomes.
Yes. The article cites an example where advisers working on a roughly US$130 billion deal between Verizon and Vodafone stood to make more than US$200 million — and they wouldn’t have to return fees if the deal turned sour. Large transactions can generate very large consulting fees.
Investors should pay attention but not assume hiring McKinsey is automatically good or bad. The article suggests that McKinsey’s involvement can signal significant strategic moves and can provide management cover for hard decisions, so investors should monitor the proposed changes, governance, and how management takes responsibility for implementation and outcomes.
The article references The Firm: The Story of McKinsey and Its Secret Influence on American Business by Duff McDonald. The book chronicles McKinsey’s rise, examines both its successes and notable failures, and raises the question of whether the firm’s value to clients justifies its influence and fees.
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