Principal The Firm: The Story of McKinsey and Its Secret Influence on American Business
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The Firm: The Story of McKinsey and Its Secret Influence on American Business

A behind-the-scenes, revelatory history of McKinsey & Co., America’s most influential and controversial business consulting firm, told by one of the nation’s leading financial journalists.

It ranks among the unquestioned laws of American big business over the last half century: If you want to be taken seriously, you hire McKinsey & Company.

FOUNDED IN 1926, McKINSEY CAN LAY CLAIM to the following partial list of accomplishments: its consultants have ushered in waves of structural, financial, and technological change to the nation’s best organizations; they remapped the power structure within the White House; they even revo­lutionized business schools. In this book, star financial journalist Duff McDonald shows just how, in becoming an indispensable part of decision making at the highest levels, McKinsey has done nothing less than set the course of American capitalism.

But he also answers the question that’s on the mind of anyone who has ever heard the word McKinsey: Are they worth it? After all, just as McKinsey can be shown to have helped invent most of the tools of modern management, the company was also involved with a number of striking failures. Its consultants were on the scene when General Motors drove itself into the ground, and they were Kmart’s advisers when the retailer tumbled into disarray. They played a critical role in building the bomb known as Enron.

McDonald is one of the few journalists to have not only parsed the record but also penetrated the culture of McKinsey itself—a corporate mandarin elite whose methods have been compared (by oth­ers and by themselves) to those of the Jesuits or the U.S. Marines. 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. This revealing book uncovers the inner workings of what just might be the most influential private organization in America.
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Simon & Schuster
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CONTENTS

Introduction: The McKinsey Mystique

1. The Ozark Farm Boy

2. The Making of the Firm

3. The Age of Influence

4. The Decade of Doubt

5. A Return to Form

6. The Crucial Question: Are They Worth It or Not?

7. Revenge of the Nerds

8. The Money Grab

9. Bad Advice

10. Retrenchment

11. Breaking the Compact

Epilogue: The Future of McKinsey

Acknowledgments

About Duff McDonald

Notes

Index


For the most wonderful gift any man can receive: a daughter. Thank you, Marguerite, for being mine.

NEW YORK, MARCH 2013


    
INTRODUCTION:

THE MCKINSEY MYSTIQUE

    

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.

•    •    •

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.

One of the secrets of McKinsey is its very similarity to America—it has a solid foundation with an adaptive overlay, all topped off with a bit of old-fashioned luck. Make no mistake: McKinsey is not an enduring institution by accident. It has been built with much purpose. Still, could it be an accident of history, founded in the right place at the right time? Yes, but only in the same way that Google, LEGO, and Toyota are accidents. Other companies stumble into extinction.

McKinsey started in typically American fashion: with self-invention. Although it was technically founded in 1926 by a University of Chicago accounting professor named James O. McKinsey, the mythical leader of the firm is a successor, Marvin Bower, a man whose abiding goal was to invent a new profession committed to preparing clients for the challenges and uncertainties of the onrushing future. Plenty of other firms had the same idea at the same time, some even earlier, but none could match Bower’s discipline and focus. He distinguished McKinsey not just for what it did but for how it went about it, starting with the physical appearance of its employees and moving right on through hiring, training, and the culling of their ranks through a merciless system known as “up-or-out.”

Consultants of one kind or another have existed for centuries. Han Fei Tzu, founder of the so-called legalist school of ancient Chinese philosophy and adviser to the emperor, has been called the first consultant.1 But McKinsey can nevertheless claim a remarkable number of firsts: It was the first consulting firm to realistically apply scientific approaches to management, solving business problems with a method of hypothesis, data, and proof. It was the first to gamble on youth over experience, and the first to take on the challenge of becoming truly global.

McKinsey was a major player in the efficiency boom of the 1920s, the postwar gigantism of the 1940s, the rationalization of government and rise of marketing in the 1950s, the age of corporate influence in the 1960s, the restructuring of America and rise of strategy in the 1970s, the massive growth in information technology in the 1980s, the globalization of the 1990s, and the boom-bust-and-cleanup of the 2000s and beyond. So pervasive is the firm’s influence today that it is hard to imagine the place of business in the world without McKinsey.

•    •    •

So what is the net effect of McKinsey consultants in the world? What has been gained and lost as this relatively small group of like-minded people has consolidated power and spread the gospel of American capitalism? It’s best to take that question from a few different perspectives.

McKinsey’s clients, specifically those in the executive suite and the boardroom, have gotten an extremely intelligent if high-priced sounding board, a beacon in the night of managerial uncertainty. McKinsey offers a kind of industrial espionage couched in the language of “best practices.” Want to know what the competition is up to? Hire McKinsey. After all, it’s working with everyone else as well. The flip side of that argument is that your competitors find out about you too. But most clients have found the tradeoff rewarding.

When IBM wanted to expand into Europe in the 1950s, whom did it call for some hand-holding? McKinsey. So too did scores of other companies, from Heinz to Hoover. And then when Europe started recovering its own confidence? Why, McKinsey was there to tell the likes of Volkswagen and Dunlop Rubber that they could surely bounce back from near devastation with the consultants’ help. With McKinsey’s army of hardworking and youthful overachievers—what one reporter called “a SWAT team of business philosopher-kings”2—clients have surely gotten more effort per dollar spent than you might find anywhere else in the corporate milieu.

They have a remarkable ability to be in the right place at the right time—so many times, in fact, that you have to wonder whether they really can see the future. But the truth is subtler than that. They have created one of the most flexible business models in the history of Western capitalism: They sell what their clients are buying, and where the clients are buying it.

So powerful is the McKinsey name that merely hiring the firm can bring the desired effect—as in 2009, when publishing giant Condé Nast brought in McKinsey to demonstrate its seriousness about reducing expenses by 30 percent. The rank and file got the message. The act of hiring McKinsey can be as symbolic as it is practical.

Of course, criticisms of McKinsey’s contributions to client welfare are not hard to find. For one, once McKinsey is inside a client, its consultants are adept at artfully creating a feedback loop through their work that purports to ease executive anxiety but actually creates more of it, offering and then obscuring what one author has referred to as “an illusion of a sure path to the future.”3 Executives can get so accustomed to McKinsey’s presence that they can’t function without it, leading to situations like the one at AT&T in the early 1990s, when the company paid the firm $96 million over five years for ongoing work.

In situations like this, there is a potential anticlient bias to the consultants’ business, where the long-term result is dependence on, not independence from, the consultants. In other words, once they get the wedge end of a relationship into a company in the form of one engagement, they usually manage to hammer in the rest—becoming the so-called Men Who Came to Dinner. (To wit: They never leave.) McKinsey isn’t actually embarrassed by this notion—the firm calls it the “transformational relationship,” arguing that true change comes only from long-term relationships. But over the years, many McKinsey clients have paid for exorbitant, lengthy engagements with little to show for it.

•    •    •

What the McKinsey consultant himself has gained is a far simpler question to answer. He has gained money, power, and prestige, as well as the pretense of an intellectually minded pursuit within the corporate sphere. He is not a banker, accountant, or lawyer. He is a thinker. He has had the chance to whisper into the ears of power, to exercise influence while being insulated from responsibility. McKinsey was Enron CEO Jeff Skilling’s most favored outside adviser during the Houston natural gas company’s rise and fall. Skilling went to jail for his transgressions; McKinsey emerged from the scandal largely unscathed.

Perhaps best of all, a job at McKinsey is a ticket to almost anywhere in the world. The firm is the best finishing school in business, a launching pad, and a matchless résumé line. A job at McKinsey, regardless of duration, can serve as an enviable listening post for plum corporate roles, particularly at McKinsey’s own clients. The firm has an astonishingly successful network of alumni, occupying corner offices and boardrooms all over the world. Lou Gerstner, the man famous for turning IBM around, worked at McKinsey before decamping for one of his clients, American Express. Morgan Stanley CEO James Gorman spent a decade at McKinsey before jumping ship to his client, Merrill Lynch. It literally happens about once a week.

Of course, not everyone goes on to a distinguished career. Enron’s Skilling came from McKinsey. Two figures convicted in the greatest insider-trading scandal in history—the 2009–12 investigation of convicted hedge fund manager Raj Rajaratnam—are ex–McKinsey: former director Anil Kumar as well as former managing director Rajat Gupta.

You rarely see an old McKinsey consultant—like its symbiotic other, the Harvard Business School, the institution favors youth over experience. McKinsey is like Harvard in other ways. To the Harvard grad, there is Harvard and there is nowhere else. Likewise McKinsey. Indeed, McKinsey alumni almost all wear their sense of specialness for the rest of their lives. This is why the Rajaratnam scandal has shaken the firm to its roots. Even though Anil Kumar sold client secrets and Rajat Gupta trashed the firm’s long-cherished value system in a public and mortifying way, neither event really affected the firm’s business. The damage to its self-image has been much more severe.

•    •    •

Finally, what of society? There is little doubt that McKinsey has made the corporate world more efficient, more rational, more objective, and more fact based. But to what extent have its contributions gone beyond the bottom line?

McKinsey would have the world believe that its consultants are missionaries of the best in business thinking; that by pushing companies fearlessly into the future they are not just boosting profits but aiding the cause of human progress itself. There is more than some merit to this point of view. And if the smartest, most successful companies in the world continue to hire them, that in and of itself is evidence of the value they create.

But as with many of the world’s big firms, it is also hard to overlook the mounting number of instances in which McKinsey advisers have behaved no better than mercenaries, collecting huge fees for work of dubious worth. At their most craven, they can be recruited to provide a high-gloss imprimatur of objectivity that is in reality mere cover for executives. They are, without question, the go-to consultants for managers seeking justification for savage cost cutting as well as a convenient scapegoat on whom to blame it. While this is surely impossible to measure, there is a distinct possibility that McKinsey may be the single greatest legitimizer of mass layoffs than anyone, anywhere, at any time in modern history.

In a sense, McKinsey is the Goldman Sachs of the consulting world. Both occupy the top rung of their respective professions, but both have come to symbolize something else as well—a nagging question of whether all the brainpower and energy devoted to them have truly been worth the opportunity cost. Is this really where America’s best and brightest can make their most meaningful contributions? McKinsey itself has answered that question in part by shifting its sights to a more global clientele, as the U.S. economy faces its starkest challenges in more than fifty years. The country has been thoroughly McKinseyed, and there’s nothing left to do but rebuild it from the bottom up, a task for which McKinsey may be ill suited.

In that, a question for McKinsey is the same one we might pose to American business itself: Is it still coming up with new ways of thinking, or is it merely relying on past accomplishments to stay ahead of the competition? It is surely doing both, but in what measure of each?

•    •    •

Consulting in general—and McKinsey in specific—has always been a difficult phenomenon to pin down. On the one hand, that’s because the ideal client-consultant relationship is one in which the consultant fades into the background almost immediately after the work is done and the checks are cashed. But there’s another reason, and that’s the elusiveness of what is actually being bought and sold in the first place.

In a word, McKinsey sells its own enlightenment, the firm’s ability to see things more clearly than its clients. Doing that once is no great accomplishment—a fresh perspective is the way out of many problems, in business or otherwise. Doing it for nearly a century is a tall order indeed, but it is one that McKinsey has apparently met.

When a CEO hires McKinsey, he knows he is hiring some of the smartest and hardest-working people worth opening the corporate checkbook for. Insight can—and often does—come from extreme analysis, and there is no better army of analysts in the world than McKinsey’s. And they do always seem to be where the action is: In 2012, McKinsey’s China-based business was one of the most rapidly growing areas of the firm.

But the CEO who hires McKinsey is also hiring it for its influence and its power, for the fact that the firm is woven tightly into the fabric of decision making at the very highest levels—corporate, political, or otherwise. It really is no surprise that Rajat Gupta, the former McKinsey managing director, was dealing in inside information from his seat in the boardroom of Goldman Sachs. Sometimes it really is simply about whom you know. And McKinsey knows everybody.

For better or for worse, McKinsey just might be the most influential collection of talent in the world. How the firm managed to gain and hold on to that influence without most of us noticing is only one part of its story. What it has done with that influence since its founding in the 1920s is what this book is about.


    
1. THE OZARK FARM BOY

    

From Gamma to Lake Shore Drive

The history of American business is the story of men who came along with a healthy dose of self-confidence. Henry Ford knew he had found a way to mass-produce cars. Steve Jobs knew there was huge opportunity in taking the computer out of the office and into the home. Jeff Bezos of Amazon.com saw the promise of the Internet early, and he took retailing into the ether.

James O. McKinsey’s confidence wasn’t about something so tangible. Did you have a problem in your business? Let him have a look at it, and he was confident he could help you figure out what to do about it. Not only that, he promised to tell the rich and powerful what they were doing wrong. It was on these two convictions that he founded the company that eventually became the most powerful consulting firm in the world. It was nervy, and it was new, and in that way it was a distinctly American business that helped shape the history of business itself.

“I have spent a considerable amount of my time during the last fifteen years in saying and doing things which should have been said and done by others, but which they hesitated to say and do,” McKinsey wrote in a 1936 letter. “I assume this is due to the fact that because of my philosophical inclinations I have developed some tendency to think in a logical manner and when this thinking indicates a conclusion I think it difficult to resist the temptation of stating it. Furthermore, when such a conclusion indicates definitely the need for action I feel I am rendering a service by trying to secure such action. I suppose I am doomed, therefore, to go through life doing things which make people think I am aggressive and hardboiled.”1

Yes, people thought both those things. But they also thought he was the man to call when the problem seemed insoluble, the one who could set a wayward billion-dollar operation back on the right track. Even though McKinsey’s death at a relatively young age deprived him of the chance to properly reflect on his own career, he had already made it a long way from his days as a barefoot farm boy in the Ozarks,2 and he died as one of the most respected businessmen and innovators of his era. He didn’t just understand the needs of the giant corporations that were reshaping American society in their own image—he anticipated those needs and helped companies solve problems they didn’t even know they had.

It all started with accounting, which McKinsey rescued from the dismal routines of bookkeeping and reimagined as a tool of strategic management. He was a straight talker whose air of assurance inspired others to follow his lead. He defined corporate management away from managing the routines of a bureaucracy and toward imagining the future and preparing a workforce for it. He was an early advocate of downsizing and other means of cost cutting as a way to save struggling firms. And he used all these ideas, and many more, to build what in time became the most powerful consulting firm, and one of the strongest business franchises, on the planet.

McKinsey was born in 1889 to James Madison and Mary Elizabeth McKinsey in Gamma, Missouri, and was raised in a three-room farmhouse. At a young age, he distinguished himself as a wizard with numbers. One early biographer claimed that McKinsey’s high school principal hired him to teach algebra to his own teachers,3 though another said that he merely taught other students, not teachers.4 Whatever the version of the story, teaching was clearly his early passion, and it looked as if it would become his lifelong profession. He graduated from the state teachers college in Warrensburg, Missouri, in 1912 with a bachelor’s degree in pedagogy. He saw himself first—and above all—as a man who had lessons to give.

Those who met him remarked on his “presence”—he was tall, at six feet four—and forthright mien. He was also quite stubborn: Despite suffering temporary blindness while in college, he later ignored his doctor’s advice to quit smoking cigars or risk another loss of eyesight.5 Whether or not the doctor knew what he was talking about is beside the point; McKinsey refused to change his behavior.

Teachers college was just the start of an education odyssey that included a bachelor of law degree from the University of Arkansas at Fayetteville, a stint studying and teaching bookkeeping in St. Louis, and a bachelor of philosophy degree from the University of Chicago. As it did for most of the young men of his era, World War I took him on a detour. In 1917 he was drafted into the army; starting as a private, he was promoted to lieutenant in the Ordnance Department the next year and traveled across the United States, working with suppliers of war matériel.6 He was shocked by what he found: The inefficient and disorganized supply system offended his orderly accountant’s inclinations. Here was a problem that cried out for expert management, but where could it be found?

Following his discharge at the age of twenty-nine, McKinsey continued to add to his list of credentials. In the span of a single decade, he managed to obtain a master’s in accounting from the University of Chicago, was appointed an assistant professor of accounting at the university, and joined fellow professor George Frazer’s accountancy firm of Frazer and Torbet. But that was not all. In 1923 he was named vice president of the American Association of University Instructors in Accounting, and in 1926 he became a professor of business policy at the University of Chicago.

This last appointment was the first hint that the man knew accounting could be more than mere bookkeeping—that numbers could reveal not just profit and loss, assets and liabilities, but the whole story of a business and what it could accomplish. To that point, accounting had been viewed as a record of the past. McKinsey spun it around and aimed it at the future, turning it into a tool of effective management.

Mac met Alice “Polly” Louise Anderson of Sioux City, Iowa, when she took an accounting class taught by McKinsey at the University of Chicago. In just the second session she told him that she was dropping the class, as she had decided there was nothing more she could learn from him.7 With her boldness, she won his heart, and the two were married in 1920. In 1921 she gave birth to twin sons, Robert and Richard.

But McKinsey’s life was defined by ambition more than by family. His son Robert remembers him as an absentee father who bore the scars of his threadbare upbringing. Although he became very rich by his late thirties—he once rented a summer farm that had its own polo fields and eventually moved to one of Chicago’s elite addresses on the 1500 block of Lake Shore Drive—he refused his children toys because he considered them “inessential” purchases.8

He was a workaholic who was rarely at home. He once claimed that he ate all his lunches, half of his breakfasts, and a third of his dinners with prospective clients.9 When he was around, his children were not allowed to bother him while he was “working.” While he had the ability to be warm and affable, he deployed those qualities only for work. He had no interest in literature or culture. While he joined many local clubs, he did it for professional contacts, not for the social or extracurricular pleasures of the clubs themselves.

That’s pretty much all that is known about Mac McKinsey’s personal life. But a few points are worth reinforcing. First, McKinsey saw that a company’s secrets could be found in its accounting. He proudly wrote books about the minutiae of budgeting and forecasting, because he believed it was only through rigorous adherence to such “fact-based” analysis that a company could truly reach its potential. His protégé Marvin Bower, however, later distanced McKinsey & Company from this image of accounting, so much so that it came to define itself in opposition to the field. In Bower’s mind, accountants were drones bound by rules while consultants were free thinkers whose vision and creativity extended far beyond balance sheets. Bower’s McKinsey started with the numbers and then added perspective.

Second: With his own experience as proof of concept, McKinsey attracted a cohort that wanted to achieve in life the same things he did—rising above an often humble upbringing to become rich and important men. McKinsey pursued success by combining an ability to focus relentlessly with a knack for breaking rules. And he decided early on that he would gain power by speaking truth to it. “He was quite poised,” wrote William Newman, who worked with McKinsey in the 1930s. “No trace of Ozark poor farm boy, not the least. He’d had poverty in his childhood and I think that left its mark. He wanted to succeed, but he also wanted to have money, the satisfaction that he did have money and that he was free to spend it.”

The American Century

In 1941 Time Inc. publisher Henry Luce coined the term “American Century” in a Life magazine editorial. He was describing the country’s global economic and political dominance leading up to World War II. But Luce was also correct in the literal sense: The American Century had actually started several decades before.

The building of the railroads and coincident spread of the telegraph in the United States in the middle and second half of the nineteenth century helped create the world’s first truly “mass” markets. If an executive had ambition, his company didn’t have to serve just local customers. It could serve an entire continent and beyond, if it had the wherewithal to get the organization and logistics right.

The economic historian Alfred Chandler documented the momentous changes in what came to be known as the Second Industrial Revolution in his seminal book Scale and Scope—the title of which referred to the simultaneous revolutions in both scale (in manufacture) and scope (in distribution) in American enterprise. Those twin revolutions transformed the United States from an agrarian society to an industrial powerhouse in the span of a single generation. In 1870 the nation accounted for 23 percent of the world’s industrial production. By 1913 that proportion had jumped to 36 percent, exceeding that of Great Britain.10

By 1920, when only a third of homes in the country had electricity and only one in five had a flush toilet,11 the country’s business establishment was embarking on a course of radical, unprecedented expansion. This brought with it a dilemma that has preoccupied business leaders ever since: how to grow big while maintaining control over the enterprise. Moving from a single-product, owner-run enterprise into a complex and large-scale national one is a difficult task. First, you have to build production facilities massive enough to achieve the desired economies of scale. Second, you have to invest in a national marketing and distribution effort to ensure that sales have a chance of matching that scaled-up production. And third, you have to hire, train, and trust people to administer your business. Those people are called managers, and in the first half of the American Century, they were in very short supply.

The benefits to successful first-movers were gigantic. In industries where only one or two companies took the plunge early, they dominated their field for a very long time to come; this group includes well-known names like Heinz, Campbell Soup, and Westinghouse.12 A ten-year merger mania, from 1895 through 1904, also brought the creation of a number of corporate entities the likes of which the world had never seen—1,800 companies were crunched into 157 megacorporations,13 including stalwarts like U.S. Steel, American Cotton, National Biscuit, American Tobacco, General Electric, and AT&T.14

The key business problem identified during this transition—and one that underwrote McKinsey’s success for several decades—was that a single, central office could no longer adequately administer such far-flung empires. Power had to be ceded to the extremities. The question was how. It was a quandary that beguiled some of the great thinkers of the time, including political scientist Max Weber, who argued that a systematic approach to marshaling resources through bureaucracy was a necessary and profound improvement over pure charismatic leadership.

In his book American Business, 1920–2000: How It Worked, Harvard professor Thomas McCraw pinpointed the issue: “In the running of a company of whatever size, the hardest thing to manage is usually this: the delicate balance between the necessity for centralized control and the equally strong need for employees to have enough autonomy to make maximum contributions to the company and derive satisfaction from their work. To put it another way, the problem is exactly where within the company to lodge the power to make different kinds of decisions.”15

Companies such as DuPont, General Motors, and Sears Roebuck were the first to address this problem systematically. According to Chandler, DuPont sent an emissary to four other companies experiencing similar issues—the meatpackers Armour and Wilson and Company, International Harvester, and Westinghouse Electric—to ask what they were doing.16 And the answers were remarkably similar: The innovators moved from the centralized system to a multidivisional structure with product and geographic breakdowns. The concept left operating division chiefs with total control over everything except funding resources. Top managers took a more universal view of the business, monitoring the divisions and allocating capital accordingly.

The most successful companies of the era, such as General Electric, Standard Oil, and U.S. Steel, all employed some variant of this model. But by and large, they had developed these ideas on their own, a process of trial and error that was costly and time consuming. They would have much preferred hiring outside experts to help them with it, if only such experts existed. This was a huge commercial opportunity that called for an entirely new kind of service.

Stepping into the Breach

Unwittingly, the federal government did its part to create the modern consulting business. Starting in the last part of the nineteenth century, Washington made periodic regulatory efforts to curb the power of big business, including the 1890 Sherman Antitrust Act, the Federal Trade Commission Act and Clayton Act of 1914, and the Glass-Steagall Act of 1933. The intended effect of these measures was to prevent corporations from colluding with one another to fix prices and otherwise manipulate the markets. The unintended effect, according to historian Christopher McKenna, was to accelerate the creation of an informal—but legal—way of sharing information among oligopolists. Who could do that? Consultants.17

Regulatory efforts paid another rich benefit to the likes of McKinsey: Restricted from cutting backroom deals with each other, firms were thus obliged to actually compete, which meant they needed to make their operations more efficient. Here again, consultants were the answer.

But perhaps the circumstance that most aided the creation of the consulting industry was the entry of a new, key player into business itself. Empire builders with names like Carnegie, Duke, Ford, and Rockefeller had built huge, vertically integrated companies, but they had neither the time, the talent, nor the inclination to create and carry out management systems for those entities. These were the conquerors of capitalism, not its administrators. And yet, as Chandler pointed out, “their strategies of expansion, consolidation, and integration demanded structural changes and innovations at all levels of administration.”18

Into the breach stepped a new economic actor who was neither capital nor labor: the professional manager. Gradually, he replaced the robber baron as the steward of American business. Alfred P. Sloan, the legendary president of General Motors, was the first nonowner to become truly famous for his managing skills. His decentralized, multidivisional management structure gave GM the agility to outmaneuver the more plodding Ford Motor Company and snatch the industry lead. Ford may have revolutionized manufacturing, but Sloan realized that the car-buying market had become big enough to be segmented into people who bought Buicks, Cadillacs, Chevrolets, Oldsmobiles, and Pontiacs. By the late 1920s, the car market was maturing, and people wanted choice. Sloan also gave them the ability to buy a car on credit—a groundbreaking idea at the time. Before the decade was over, GM had surpassed Ford as the market share leader, a position it didn’t relinquish until the 1980s.

Sloan and his ilk were perfect customers for McKinsey: Lacking the legitimization of actual ownership, professional managers felt great pressure to show they were using cutting-edge practices. And who better to bring those practices to their attention than consultants who were talking to everyone else? This was the beginning of a decades-long separation of ownership from control in corporate America, and the consultant was an able ally to the professional manager in this tug-of-war—an ally who wasn’t gunning for the manager’s job. Thus began the era of managerial capitalism.

For more than two centuries, economists had argued that companies operated in some sense at the mercy of Adam Smith’s “invisible hand” of the market. But the revolution in management thinking in the United States offered up an alternative idea: the “visible hand” of management, which made things happen, as opposed to merely responding to external market forces.

The academy helped move this ideology along. Before 1900, there was only one undergraduate business school in the country, the University of Pennsylvania’s Wharton School of Finance and Economy, founded in 1881 with a $100,000 donation from financier Joseph Wharton. The Tuck School of Business at Dartmouth followed in 1900. Over the next decade, pretty much every major institution started explicitly preparing its students for careers in management.

Although the rise of today’s industrial-farm-style MBA programs is really a postwar phenomenon, Harvard founded its Graduate School of Business Administration in 1908, with a second-year business policy course designed to give the student an integrative approach to addressing business problems, including accounting, operations, and finance.19 The purpose of the course, according to the school, was to give the student an ability to see those problems from the top management point of view. Much of James McKinsey’s academic writing centered on this very issue and later informed the practice of his firm.

McKinsey’s Oeuvre

As a young academic, McKinsey was a prolific writer, if not an especially engaging one. His first four books were dry tomes on the nitty-gritty of accounting and taxes: Federal Incomes and Excess Profits Tax Laws (1918), Principles of Accounting (cowritten with A. C. Hodges, 1920), Bookkeeping and Accounting (1921), and Financial Management (1922). But with his fifth effort, he broadened his horizons significantly. Budgetary Control (1922)—the first definitive work on budgeting—turned accounting on its head, promoting it as an essential tool of managerial decision making. “Budgetary control involves the following,” McKinsey wrote. “1. The statement of the plans of all the departments of the business for a certain period of time in the form of estimates. 2. The coordination of these estimates into a well-balanced program for the business as a whole. 3. The preparation of reports showing a comparison between the actual and the estimated performance, and the revision of the original plans when these reports show that such a revision is necessary.”20

It seems commonsensical, but McKinsey’s new way of looking at the use of the budgeting process sparked nothing short of a revolution. “No other mechanism of management of similar scope and complexity has ever been introduced so rapidly,” wrote one commentator just ten years later. “It is estimated that 80 percent of budgets installed in industry have been put in since 1922.”21

Up to that point, budgeting was a one-way exercise: Accountants added up all of a firm’s expenses and then tossed in a sales projection almost as an afterthought. In McKinsey’s view, companies should start by developing their business plan, figure out how to achieve it, and then estimate the costs of doing so. In this new context, budgeting wasn’t just a ledger activity; it could also be used to identify excellence in performance (i.e., those who outperform their budget), to spot weaknesses (those who underperform), and to take corrective action. “[While] there are many who do not yet plan scientifically . . . ,” he wrote, “there are few who will deny the merits of the system.”

Two subsequent books fleshed out McKinsey’s ideas: 1924’s Managerial Accounting and Business Administration. The former taught students how accounting data could be used to solve business problems. Using the data of traditional recordkeeping, he suggested the possibility for much greater control over a company’s destiny, including the establishment of standard procedures (how things should be done and to whom information should be reported), financial standards (ways to judge operating efficiency), and operating standards (including nonfinancial measures, such as quality). To today’s business student, this kind of comprehensiveness seems obvious. But at the time, the idea of planning, directing, controlling, and improving decision making by means of regular and rigorous reporting of company results was novel. The latter book contained the seeds of McKinsey’s General Survey Outline—a thirty-page system for understanding a company in its entirety, from finances to organization to competitive positioning. It became part of his consultants’ toolkit sometime in the early 1930s.

It is hard to overestimate the impact of the General Survey Outline (GSO). It served as the foundation of his approach to understanding a company and provided novice consultants with a clear road map to do so themselves. The survey also shaped consultants’ thinking: The emphasis in the GSO was more on why managers did things, as opposed to how they did them. Using the GSO, consultants started every engagement by thinking of the outlook for the industry of their client, the place of the client in the industry, the effectiveness of management, the state of its finances, and favorable or unfavorable factors that might affect the future of the firm. No detail was too small to take note of, whether it was a study of all firm policies—including sales, production, purchasing, financial, and personnel—or an analysis of whether the layout of equipment in a company’s plant provided for the most efficient flow of the production operations. By the time the young consultant had completed the survey for his client, he knew the company and its business cold.

“You can see McKinsey’s intellectual development,” says John Neukom, who worked at McKinsey from 1934 to the early 1970s and wrote a brief memoir of his time at the firm. “He had lost interest in the details of accounting. By the time I arrived, he had lost interest in the budgetary procedure and was now excited and interested in analyzing companies and seeing how companies worked. He was clearly diagnosing the total problems of the company.”22 In a 1925 speech at a conference for financial executives in New York, McKinsey offered the kind of pointed insight for which he is remembered: “Usually, I find that the executive who says he does not believe in an organization chart does not want to prepare one because he does not wish other people to know that he had not yet thought through his organization properly. For the same reason many men are opposed to budgets. They are unwilling for anyone to see how little they have thought about what they are going to do in future periods.”

Armed with that insight—and the general philosophy that management can shape a company’s destiny—he decided to set up shop and sell it.

Bastards Require No Diplomacy

In the mid-1920s, McKinsey began doing business under the banner of James O. McKinsey and Company, Accountants and Management Engineers, the progenitor of the modern-day McKinsey & Company. Strangely for a company that prides itself on getting the details right, the actual date of its founding is unknown—a firm training manual from 1937 suggests 1924,23 while John Neukom’s memoir says 1925.24 Whichever it was, McKinsey’s timing was excellent. The economy was booming, and the need for consulting services was seemingly endless.

It is worth noting that the word “consultant” was not in the name of his firm. Rather, the term “management engineers” reflected the prevailing ethos of the time: that science held the answers to most serious questions, and even human commerce could profit from the rigors of this kind of data-driven analysis. McKinsey’s standard working pads have always been crosshatched graph paper, another nod to engineering. The fact that McKinsey himself employed no actual engineers was beside the point.

Intellectual underpinnings aside, the firm’s real-world roots were in red meat. McKinsey’s first client was Armour & Company, one of the country’s largest meatpackers. The treasurer of Armour had read Budgetary Control and wanted McKinsey to help rethink the meatpacker’s approach to budgeting and planning.

The first partner McKinsey brought on board was A. Tom Kearney, who had been director of research at Swift & Company, another Chicago meatpacker. Kearney was a warmer, more congenial complement to McKinsey’s formal and pointed demeanor. Another early partner was William Hemphill, the same treasurer of Armour who had hired McKinsey in the first place.

McKinsey continued to teach at the University of Chicago for a time, but he eventually switched full-time to the firm. One reason he seems to have juggled so many responsibilities is that he didn’t waste time with niceties at the office. In Hal Higdon’s 1970 history of consulting, The Business Healers, one associate recalled him saying: “I have to be diplomatic with our clients. But I don’t have to be diplomatic with you bastards.”25 (Marvin Bower later modeled his own approach to constructive criticism after McKinsey’s tough love approach.)

McKinsey was blunt, but he was also a quick and agile thinker. He once diagnosed a client’s problems just by looking at the company’s letterhead. A Midwestern maker of air conditioners had stationery that announced “Industrial Air Conditioning Installations—Coast to Coast from Canada to Mexico.” In an era before salespeople traveled by airline, McKinsey observed that travel expenses were probably eating up the majority of the company’s profits and that employees should confine themselves to a radius of five hundred miles around Chicago. He was right.26

Even the Depression couldn’t stop the growth of the firm. By 1930, McKinsey’s professional staff totaled fifteen. In 1931 he drafted the General Survey Outline, and the next year he opened a New York outpost in the offices of a defunct investment house at 52 Wall Street—six offices with a reception area. The New York–based consultants busied themselves working not only for local industrial companies but also for investment banks like Kuhn, Loeb & Co. In 1934, the Chicago office moved to the forty-first floor of the new Field Building on 135 South LaSalle. By the mid-1930s, McKinsey’s partners were charging $100 a day for their services—a giant figure, though nothing compared with the founder himself, who was billing five times that, the highest rate for a consultant in the country.

Taking the Pianist Out of the Brothel

Before James McKinsey could be successful, he had to clean up the reputation of management as a concept. In The Management Myth, philosophy-student-turned-consultant-turned-author Matthew Stewart’s highly critical look at the history of management thinking, the author argued that it was flawed from the get-go. And he pinned original sin on Frederick Winslow Taylor, the father of “scientific management.”

Taylor’s famous time-and-motion studies used stopwatch analyses of manual labor with the goal of shaving seconds off rote, repeated activities, thereby enhancing productivity. There was, Taylor argued, just “one best way” to produce anything, and a manager armed with Taylor’s tools could identify it. In Stewart’s account, Taylor was a pseudoscientific proselytizer who promoted the spurious notion that “laborers are bodies without minds, managers are minds without bodies.”27

But Taylor’s ideas about improving the efficiency of labor were very popular and influential in his day; in 1911 he published Principles of Scientific Management, an instant hit that was eventually translated into eight languages. In 1914 he attracted 16,000 people to a New York speech on his theories.28 Edwin Gay, who opened the Harvard Business School, was a Taylor disciple. Henry Ford’s line production system was a pure distillation of Taylor’s thinking. Even Lenin and Trotsky embraced him, envisioning Taylorism as the solution to Russia’s problems.29

As Taylor rocketed to fame, countless firms sprang up to cash in on similar technical-sounding solutions to business problems. Most have vanished, including Harrington Emerson and Bacon & Davis, though some live on more than a century later: The consultancy Arthur D. Little was founded in 1886. ADL’s engineers earned early acclaim for actually making a silk purse from a sow’s ear in 1921 by spinning gelatin from the sow’s ears into artificial silk. Edwin Booz founded his eponymous firm—later Booz Allen Hamilton—in 1914. There was also Charles E. Bedaux, who developed a system called “payment by results” and founded his Bedaux Company in 1919. He was one of the first consultants to expand overseas, planting a flag in Britain, Germany, and France in the 1920s. By 1930 more than a thousand companies were using Bedaux consultants, including Eastman Kodak, DuPont, and General Electric.30

The fact that just about anyone could call himself a consultant meant that shysters and scam artists abounded, tarnishing the entire field’s reputation. E. N. B. Mitton, a mining engineer who joined the British office of Bedaux in the 1930s, joked at the time that he would rather tell his mother that he was working “as a pianist in the local brothel” than admit that he had joined a consulting firm.31

From the very beginning, James McKinsey went to great lengths to distinguish his firm from its less savory predecessors—he and his partners had multiple university degrees and strong connections to the establishment. And just as McKinsey flipped accounting on its head, he and his contemporaries likewise turned Taylorism on its head. Instead of focusing on line workers at the bottom of the organizational chart, they zeroed in on the growing white-collar bureaucracy and top managers.32 But Taylor’s pretensions to scientific rigor were very much part of McKinsey’s sales pitch too. By co-opting the rhetoric of engineering, wrote Harvard professor Rakesh Khurana, McKinsey grounded managerial authority in the realm of the “disinterested expert”—instead of just one side in an increasingly violent struggle between capital and labor—and helped provide justification for management’s ultimate dominance in the relationship.33

As the managerial class grew in size, so too did the demand for consultants. Between 1930 and 1940—while the country was in the grip of the Depression—the number of consulting firms grew from 100 to 400. By 1950 there were more than 1,000 such firms in existence.34 This kind of growth—far in excess of the overall economy—makes sense for an emerging profession. What’s remarkable is that the consulting industry outgrew the economy for pretty much the rest of the twentieth century too.

Critics of the field have long lamented what they consider the fundamental question at the heart of consulting: whether its contributions to corporate growth and innovation justify its own growing piece of the economic pie. Stewart’s argument is that it doesn’t actually matter whether Taylor and his immediate descendants provided genuine value. Consultants saw demand and sought to satisfy it—what else is there to business?

“Their specialty, at the end of the day, [was] not the management of business, but the business of management,” wrote Stewart. “[And] as in any business, what separates the winners from the also-rans isn’t independently verifiable expertise; it is the ability to move product.”35 Over the next four decades, no firm moved this product as well as McKinsey & Company.

The First Ex-Consultant

Given that the early years of the James O. McKinsey & Company coincided with the Depression, it makes sense that the firm built its original reputation helping clients deal with financial difficulties. A good portion of the work was pure restructuring and help in analyzing possible merger and takeover scenarios in the hope of finding efficiencies of scale or relieving competitive pricing pressure. But the firm’s bread and butter was finding more effective—and profitable—organizational structures, and a lot of the demand for that came from bankers. Because banks were prohibited from selling their own consulting services, they brought in firms like McKinsey to analyze potential deals, like a proposed merger in 1934 of corporate rivals Republic Steel and Corrigan-McKinney.

The firm did so much work for bankers in the 1930s that the General Survey Outline, James McKinsey’s proprietary model for analyzing companies, was colloquially termed the Bankers’ Survey. But the firm made inroads in other industries too, particularly in steel. Client work took the consultants from coast to coast: John Neukom wrote in his memoir that he spent 179 nights away from home in 1936, covering 31,000 miles, 33 cities, and 112 Pullman sleeper cars.36 McKinsey himself became chairman of the board of the American Management Association that same year.

James McKinsey’s connections fed the firm’s business. He claimed to have taken “every important banker in Chicago or New York to lunch,” with the result that “nearly every one at one time or another has given me work.”37 But it wasn’t long before the firm found out how to survive without him.

James McKinsey’s career as a consultant came to an end in 1935, when McKinsey was retained by Marshall Field & Company, the largest department store in the Midwest. The retailer was in critical condition; it had lost $12 million over the previous five years and was faced with an impending $18 million loan repayment. McKinsey attacked the problem with overwhelming force, dispatching a team of 12 consultants to interview 752 retailers in 32 states, as well as paying visits to factories and wholesale outlets.

McKinsey’s conclusion was that Marshall Field should specialize: unload its wholesale business, sell its 18 textile mills, focus entirely on retail, and cut, cut, cut. The board members of Marshall Field not only loved this idea but also asked McKinsey if he would carry it out. While many consultants would recoil at such a notion, McKinsey was intrigued—and in October 1935, he accepted the post of chairman and chief executive of Marshall Field.

Over the years, numerous consultants have left the field because they preferred to “do, not tell.” As McKinsey himself found out, it’s harder than it sounds. The cost-cutting measures that McKinsey had recommended were brutal to implement. In what came to be known as McKinsey’s Purge, more than 1,200 employees of Marshall Field were let go,38 and though the moves restored the retailer to solid financial footing—it survived until its acquisition by Macy’s in 2005—management lost the hearts and minds of its employees.

For several years, the retailer grappled with a disenchanted workforce that had suddenly woken up to the fact that their corporate benefactors didn’t actually care about them beyond their ability to punch a clock. The process revealed a flaw that critics continue to see in a preponderance of consultants: While long on ability to intellectualize their way out of a business situation, they often come up short on the human factor. It’s why words like “restructure,” “downsize,” and “rationalize” have found their way into the modern business lexicon, all elegant euphemisms for laying people off. Management consultants may bring value to a company’s bottom line, or to its executives’ bank accounts, but they are rarely accused of adding value to the life of the rank and file.

The job took a serious toll on McKinsey himself. Contending with the day-to-day implications of his harsh prescriptions, he became depressed and physically run down. “Never in my whole life before did I know how much more difficult it is to make business decisions myself than merely advising others what to do,” he famously told a colleague—a stinging indictment of the nascent field he had helped found.39 Not only that, but the effects of the Depression were confounding the problems at Marshall Field. McKinsey soon found himself cutting whole divisions, retiring people early, and firing veteran employees.40 His son Robert later recalled his father receiving between ten and twenty letters threatening his life.41

A Temporary Alliance

While off at Marshall Field, James McKinsey did not abandon his own firm. He was far too controlling for that. In the same month he started his career as a retail executive, he orchestrated the merger of McKinsey & Company with Scovell, Wellington & Company, a rival accountancy/consulting outfit founded in 1910. The deal resulted in a company with two arms—the consulting outfit McKinsey, Wellington & Company and the accounting concern Scovell, Wellington & Company. The firms were supposed to work in close concert. At the time, in 1936, McKinsey, Wellington had twenty-two professionals in Chicago, seventeen in New York, and five in Boston.

Horace “Guy” Crockett of Scovell became the manager of the New York office of McKinsey, Wellington—supplanting the young Marvin Bower, who was mollified by being made a partner in the new entity. McKinsey’s Tom Kearney and C. Oliver Wellington took charge of the firm’s Chicago outpost. Crockett promptly brought in a gigantic consulting project for U.S. Steel—which topped $1.5 million in total billings. (James McKinsey already knew the U.S. Steel people. He had been spending one day a month in Pittsburgh discussing strategy at $500 per diem with U.S. Steel head Myron Taylor.42 This kind of advice-on-retainer became an increasingly valuable part of the firm’s business in the years ahead.)

Despite the hierarchical setback, Marvin Bower’s influence in the firm was actually on the rise. He had convinced McKinsey to eliminate auditing work in New York in 1935 because he considered it at odds with consulting work. Bower had foreseen the conflict between a consultant who openly rooted for his client and an auditor who was supposed to lack prejudice.43 Still, in this regard, Bower’s views were not yet fundamental to the direction of the firm. The Chicago office continued selling accounting services, and McKinsey had actually set his sights on taking control of Scovell, Wellington if he could.

Bower proved to be influential in other ways. Primarily, he didn’t like Oliver Wellington. Bower would later espouse a “one firm” philosophy—all offices were equal, regardless of geographic location—but he did not yet feel this way. He didn’t, for example, like reporting to a boss not of his own choosing, and he was furious with Wellington’s request that Bower provide him with copies of his letters. Perhaps it was because he wrote what can only be described as obsequious letters to McKinsey, such as an excited 1936 missive about his social plans for obtaining new business in New York.

The eventual severing of the union began in an exchange of letters. In July 1936, McKinsey sent a stinging one to Wellington accusing him of trying to control the McKinsey, Wellington partners too much and of stifling their creativity. In August Wellington responded, questioning the commitment of the McKinsey people to mutual cohesion. The differences were apparently smoothed over for a time, but they erupted in full force after a major shock: the death of James McKinsey.

The Adventurous Conservative

McKinsey was just forty-eight years old when he succumbed to pneumonia, leaving behind a firm with just a handful of offices and a few dozen professionals. The task of turning his company into a major fixture of American business fell to Marvin Bower, who is rightly regarded as the real architect and visionary of the firm.

Born in Cincinnati, Ohio, in 1903, to William J. and Carlotta Preston Bower, young Marvin enjoyed an upbringing more comfortable than McKinsey’s. Not that he didn’t try his hand at the hard stuff: During high school, he held jobs as a grinding-machine operator and an ice deliverer, before gaining admittance to Brown University in 1921. After graduating with a dual degree in economics and psychology in 1925, he worked for a Cleveland-based law firm, Thompson, Hine & Flory, as a summer associate. A large part of his work was collecting debt from hardware retailers on behalf of the firm’s wholesale clients.

Unsure of his future, he asked his father, the deputy recorder of Cuyahoga County, Ohio, for advice. His father told him to study law, a remarkably conservative piece of advice considering it was the Roaring Twenties and there were all sorts of exciting new enterprises. But young Bower dutifully complied, enrolling in Harvard Law School in the fall of 1925. When he eventually climbed to the top of McKinsey & Company, he tilted its recruiting toward the kind of bright and ambitious but risk-averse young man he himself had been.

Between his second and third years of law school, Bower married his high school sweetheart, Helen McLaughlin, and after graduating in 1928, he applied for a job at Jones Day—the most prestigious law firm in Cleveland. Bower badly wanted to be part of the Cleveland establishment and Jones Day was the ticket. But his law school grades weren’t high enough and he was turned down. Lacking any further inspiration, he went back to school again, enrolling at the nascent Harvard Business School in the fall. The difficulty in landing the job he wanted apparently chastened the young man; he finished his first year at HBS in the top 5 percent of his class and finally succeeded in getting hired at Jones Day.

With the Depression now in full swing, Bower devoted most of his time at the law firm to serving as secretary to committees of bondholders of eleven separate troubled companies. “No one asked why these companies had failed,” he later observed. He also admitted that his own understanding of business and management problems had been both “amateurish and superficial.”44 But Bower liked the challenge of devising recapitalization structures for struggling or bankrupt companies; he thought it creative. On the other hand, the drafting of the associated legal documents—bond indentures and the like—he found interminably boring. He dreamed of a company that would enable him to focus just on the creative stuff he enjoyed. As fortune would have it, a professor at Harvard Business School told him about James O. McKinsey, a man who had ideas eerily similar to Bower’s.

The younger man wrote to McKinsey in Chicago, asking for a meeting in early 1933, when Bower was needed in the city for a bondholders committee assignment. It was a meeting of minds. McKinsey told Bower of his thirteen-person firm of “accountants and engineers” who were working on the very issues Bower found enjoyable, while leaving the rest to the lawyers. McKinsey suggested that if Bower were to join his firm, he would enjoy himself 100 percent of the time, instead of just half of the time. After discussing it with his wife, Bower returned to Chicago for a round of three more interviews, after which he was offered a job. He took it. “[The] people at Jones Day thought I had lost my mind,” he said later.45

Bower’s first day at work was November 13, 1933. His first assignment was helping the bondholders committee of New York’s Savoy-Plaza Hotel come up with ideas to boost sales and reduce costs, thereby easing considerable financial difficulties.46 Another early study was for Commercial Solvents, a medium-sized chemical company. When Bower had the temerity to tell the company’s president that it was unfair to hold his sales manager responsible for profits when he, the president, retained total control over pricing, the client was furious. “Young man,” he roared, “I retained your firm to investigate our sales activities, not my activities. I am going to call Mr. McKinsey and ask him to remove you from the study!” The president did as threatened, and McKinsey did as he was asked, removing Bower from the account.47

Bower chose to use the experience as a learning opportunity, realizing that it had perhaps been a little brash to expect the client to take such criticism from a man half his age. It wasn’t that he thought his thinking was wrong; it was how he had delivered it, and the fact that he hadn’t consulted with James McKinsey first. Bower translated the lesson into one taught to every McKinsey consultant to this day: Deliver the bad news if you must, but deliver it properly.

He hadn’t lost the confidence of McKinsey, either. When New York office head Walter Vieh left to return to Chicago, Bower was made New York office manager. He hadn’t been with the firm a year, but he had impressed his boss. What’s more, he was the most senior consultant in New York at the time.

McKinsey himself exercised almost complete authority over the firm he founded until his death four years later; but in the decades that followed, Bower molded McKinsey into just the firm he had envisioned as a young lawyer: an organization that enjoyed the same prestige and influence as prominent law firms but didn’t spend time on the boring stuff. In other words, a law firm that didn’t practice law.

Death of a Pioneer

James McKinsey, according to Bower, always intended to return from Marshall Field and run the consulting firm with Bower as his right-hand man. But the stress of retail turnaround led to the case of pneumonia, which, in the age before penicillin, proved fatal. He died on November 30, 1937. The Chicago Tribune announced it on the front page.

A tribute in the publication American Business noted the progress that McKinsey and his ilk had made in legitimizing their profession and in elevating the status of the entire managerial class: “His record with Marshall Field and Company proves, if proof be needed, that the difference between a profit and a loss, is nearly always a matter of management.”48

This was not a universally held view. The consulting firm’s business in Chicago suffered for more than a decade from the fallout of his ruthlessness at Marshall Field. This was a lesson for the future: Association with a failing firm was toxic for a consultancy’s business. From this point forth, McKinsey & Company strove to stay well behind the scenes. It henceforth refused to reveal its client list and at the same time insisted that clients show similar discretion.

Only thirty-four at the time, Bower took Mac’s passing particularly hard. He’d idolized the man so much that he named his third son after him—James McKinsey Bower. Of his mentor, Bower wrote: “He felt that everyone who sought success wanted criticism, and he really gave it. Most of his criticism was negative. Indeed, his praise was so occasional that it made a deep impression when it was given. This approach appealed to me. (I have found that when praise is evenly balanced with criticism, only the praise is remembered.)”49

Throughout his career, Bower constantly paid tribute to the influence of a man with whom he’d worked for only four years. But decades later, he began to occasionally inflate his own role in accounts of the firm’s history. Bower’s biographer Elizabeth Edersheim documented a conversation he later had with a McKinsey director who asked him why he never changed the name of the company to Bower & Co. “My partners and I had to go out and convince clients to keep us on, even though we had lost our principal partner,” he said. “I had to seek out new engagements as the head of the firm, even though my name was not McKinsey. . . . I resolved right then that I would never place my successor in the same position of having to explain why his firm wasn’t named after him. So we kept Mac’s name on the door, and I’ve never regretted it.”50 Bower’s remarks belie an obvious fact at the time. In the wake of Mac’s death, Marvin Bower was not the head of the firm; he didn’t take on that role for another twelve years. So it was not Marvin Bower’s company to do with as he wished. At least not yet.

The Cult of Servitude

Firms don’t always survive the death of their founders, and McKinsey could have easily been one of those that didn’t. The month before Mac died, the U.S. Steel study, which had accounted for 55 percent of New York billings, came to an end. At its peak, the U.S. Steel study employed over forty people from McKinsey,51 an early model of the money to be made if you got your hooks into a big client. It would have been hard, under any circumstances, to make up for such a large drop in earnings. The next year, 1938, was no easier. New York and Boston struggled, and Chicago couldn’t pick up the slack. The firm lost $57,000, which was a lot more than it sounds like today—especially considering that the firm’s total assets were just $256,376, the equivalent of roughly $4 million in 2012.

In April 1938, Bower wrote a memo to Tom Kearney and Guy Crockett in which he suggested they throw Wellington overboard. He envisioned a new firm in which the three men were partners—but in which only Kearney and Crockett contributed significant capital. His senior partners liked him, but they also knew that he didn’t have the cash.

By October, Bower had achieved his goal. McKinsey, Wellington & Company “regretted” to announce the withdrawal of C. Oliver Wellington from the consulting firm. What’s more, the consultancy was to be split in two: in New York and Boston, McKinsey & Company; in Chicago, McKinsey, Kearney & Company. Tom Kearney had suggested that the two consulting offices consolidate in Chicago, but the New York contingent chose to go their own way. Marvin Bower didn’t yet have the power and influence to emerge from the fracas as head of McKinsey & Company, but there is no doubt that he played a critical—if not the critical—role in having Wellington banished from the business and in establishing New York’s independence.

Bower’s own reminiscences of the time are rife with damning critiques of his colleagues. A run-in with partner Walter Vieh on the Savoy-Plaza had resulted in Vieh’s being sent back from New York to Chicago. “I soon discovered that he approached problems like an accountant,”52 Bower later wrote, a damning indictment from the self-styled big thinker. He also stuck a shiv in both Oliver Wellington and Tom Kearney when contemplating just who would take the mantle from James McKinsey: “Oliver could not lead . . . [and] . . . Tom was not a natural leader.”53

Crockett and another partner, Dick Fletcher, each kicked in $28,000, enabling McKinsey & Company to stand on its own feet; Crockett became the managing partner. “I was too young,” explained Bower, as if that were all there was to it. Too young, and too poor: Bower’s ante was a mere $3,700, an amount that clearly made him subordinate to Crockett. Ewing “Zip” Reilly, a friend of Bower’s from the Harvard Business School Club of New York, loaned the fledgling firm $10,000, a favor that Bower never forgot. The firm restated its purpose as “management consulting” as opposed to “management engineering.”

While New York and Chicago were separate legal entities, the plan was for them to be loose affiliates, exchanging pieces of business they might land in the other’s backyard (for a 15 percent finder’s fee) and jointly maintaining the integrity of the McKinsey brand. In the meantime, the partners of the two firms committed to buy McKinsey’s widow out of her 21 percent stake over the next two years, for a total of $141,796—more than $2.2 million in 2012 dollars.

Bower and his contemporaries carried Mac McKinsey’s torch in some ways but not in others. With McKinsey gone, Bower was free to act on his distaste for accounting and banish it from the firm’s offerings. A profile in Consulting magazine after Bower’s death summed it up neatly: “It is perhaps an ironic footnote that what may have been McKinsey’s greatest contribution to business is seemingly at odds with the contribution of the man who has most influenced the makeup of the firm that bears the McKinsey name. For while few people did more to unshackle accounting professionals than James O. McKinsey, few people worked harder than Bower in the coming years to put the shackles back on. Or at least, keep the accountants out of the boardroom.”54 James McKinsey was an accountant; Marvin Bower was not. Under Bower’s direction, McKinsey & Company employees used accounting tools, but they were no mere accountants. They were consultants.

While Guy Crockett nominally led the consultancy over the next decade-plus, it became Marvin Bower’s firm. It is said of some things that they refer to someone “in name only.” By the time Bower was done at McKinsey, it was just the opposite: While the firm did not bear his name, everything else about it screamed Marvin. First and foremost: Everything was sacrificed at the altar of the client. The client, the client, the client. Bower saw himself as little more than a servant to client interests. In building a firm of like-minded individuals, he also built a paradox of remarkable proportions: Marvin Bower and his colleagues were going to become the most successful and influential servants in history.


    
2. THE MAKING OF THE FIRM

    

The Repeater

If James McKinsey invented the idea of strategic planning, his successor, Marvin Bower, perfected it by turning the idea into a profession. Bower was obsessed about making sure he and his peers would not be dismissed as corporate parasites and would enjoy a respect similar to other early twentieth-century professionals like doctors, lawyers, engineers, and ministers. But for that to happen, he needed to come up with the rules, protocols, language, and codes of behavior—the whole culture—of the American consultant. As it happens, this was exactly what Bower was born to do. He had the focus, discipline, and fastidiousness that made it possible for him to give birth to the unique and enduring institution that McKinsey remains today. The military has the Marines; the Catholic Church has the Jesuits. Consulting, thanks to Bower, has McKinsey.

The main reason for his success is a quality often overlooked in the corporate world: a willingness to repeat himself. He spent fifty years of his life saying the same things over and over again. “He never deviated from his message,” said Lou Gerstner, a former McKinsey consultant who went on to acclaim at RJR Nabisco and IBM. “Being a great leader is often less a matter of eloquence and more a matter of repetition and consistency.” Asked about that very trait in 2011, James Gorman, a former McKinsey consultant and current CEO of Morgan Stanley, was blunt. “What a great quality. I wish I had more of it.”1

First, Bower had to invent the McKinsey persona: The McKinsey consultant would be selfless, be prepared to sacrifice money and personal glory for the sake of building a stronger firm, never look for public credit, and always be confident and discreet. British foreign secretary William Hague, a former McKinsey consultant, put it this way: “You are encouraged to believe that you belong to a special club of elite people.”2

When it came to sacrifice, Bower himself set the example. When the firm opened a San Francisco office in 1944 in partnership with Kearney’s Chicago contingent, it was Bower and his wife, Helen, who moved to Palo Alto for the summer of 1945 to stand the office on its feet. But it wasn’t until 1963 that Bower made a decision that, journalist John Huey correctly concluded, “permanently set him—and McKinsey—apart from its competitors.”3

Bower and his partners could have sold their firm at market value at the end of their careers as a way of cashing out, thereby personally reaping the rewards of their efforts. After all, at any successful firm, market value exceeds book value by a significant margin. Their contemporaries did it—the founders of George Fry & Associates and Barrington Associates both cashed out in the 1950s. McKinsey’s competitor Cresap, McCormick and Paget actually managed to sell itself twice in twelve years—first to Citicorp in 1970, and then to Towers Perrin in 1982 after having bought the firm back from Citi in 1977.

Instead, Bower sold his shares back to the firm at book value. In doing so, he demonstrated precisely the kind of allegiance to the cause he expected of anyone wishing to be successful at McKinsey: He forsook considerable riches for the good of the institution, in the process giving young consultants the ability to buy their way into the partnership without mortgaging their houses to do so. His McKinsey would be self-perpetuating, and he gave up a fortune to make it so. But he also sent the message that working for McKinsey was like joining a special order of men willing to put the higher cause of the firm ahead of self-interest.

Bower’s decision came as a surprise to many, including his own family. “Let me just say there was shock on people’s faces when he told us that he was selling his shares back to McKinsey at book value,” said his son Dick Bower. “It felt unbelievable, to tell you the truth. But that was Marvin for you.”4

Before Bower came along, any huckster could call himself a consultant, and many did. So Bower came up with a version of the job that drew from other real twentieth-century professions: The consultant would comport himself as a lawyer, with discretion and integrity; he would bring scientific, fact-based rigor and precision to the task, like an engineer or accountant. Like a doctor, he would dispense advice to unhealthy companies on how to get better and to healthy companies on how to stay that way. And, like a priest, he would serve his clients.

Because Bower had a background in law, his desire to be just like a law firm was perhaps the most explicit of all. Historian Christopher McKenna wrote of a 1940 brochure in which the firm explained: “We serve business concerns on management problems in much the same way that the larger law firms serve them on legal problems.”5 Another way of looking at it: It’s hard to get any business done in the United States without hiring a lawyer. If Bower could achieve a similar result for McKinsey, the firm could entrench itself in the economy.

What’s more, Bower was already trying to move away from the idea of consultants as “business doctors” and to position the firm as a resource used by the best companies more than by the worst. “Those who use us the most, need us the least,” he told Fortune in 1954.6

In his 1997 book The Will to Lead, Bower outlined the five primary responsibilities of the professional consultant; some of them overlap, but as we know, Bower was prone to repeating himself. First, the consultant must put his client’s interests ahead of the firm’s interests. If a McKinsey consultant thinks a study is not in the interests of a client—a waste of money, or a misguided investigation—he must tell the client so. Second, he must adhere to the highest standards of truthfulness, integrity, and trustworthiness. Third, he must keep to himself the client’s private and proprietary information. Fourth, he must maintain an independent position and tell the client the truth as he sees it. And fifth, he must provide only services that have real value.

On the surface, there seems nothing controversial about this set of rules. Do your best for your clients, they say, and try not to screw them over in any way. But Bower’s idea of the professional was more nuanced than that. Part of the reason for his split in 1947 with Tom Kearney, he wrote, was that his partner was satisfied with “ethical” standards instead of “professional” ones.7 To act ethically means acting within the bounds of morality, which any honest person should be able to do. To act professionally means to take on a whole additional set of responsibilities. If that seems like an impossibly fine distinction, well, it was clear as day to Bower. To him, the purpose of the enterprise was to serve clients; profits were a byproduct.

Gibberish

Can an adviser to a business really claim he’s not engaging in a commercial act? It’s practically an absurd notion on its face—helping to increase profits as a selfless exercise—but that’s the line Bower chose to take, and thousands of McKinseyites have absorbed his view. “I still run to work—figuratively of course,” said Ron Daniel, the venerated former managing director of McKinsey, in 2010. “[It] may sound like motherhood, [but this] is a life of service. It’s not the same as being a doctor or part of the clergy, but in our own way, we are here because we serve our clients, and that idea of service just happens to be important to me.”8

Bower carried out this service approach by mandating an all-for-one-and-one-for-all approach to moneymaking. He directed that all consultants share in one big pool of company earnings, not just the earnings of their office. This boosted the entrepreneurial spirit within the firm, spreading risks associated with opening a new office and encouraging talent to move freely throughout the company. The policy also sent a clear signal to potential clients—that when you enlist the services of McKinsey & Company, you have the full resources of the firm at your disposal.

To go along with this philosophy, Bower came up with a new language. McKinsey had clients, not customers. Its consultants played a role rather than worked at a job. It had a practice and firm members, not a business and employees. It didn’t sell, nor did it have products or markets. The firm did not negotiate with clients, that being far too adversarial a term. It merely made arrangements. It didn’t have rules. It had values. And, perhaps most important, McKinsey was not a company; it was The Firm.

There were occasions when Bower’s McKinsey didn’t behave like a secular priesthood. Though he stipulated that the firm never solicit work or advertise its services, McKinsey did produce 2,600 copies of a 42-page booklet titled Supplementing Successful Management, the majority of which ended up in the hands of current and prospective clients. In 1966 the company advertised in Time magazine under the guise of looking for recruits. “What does it take to succeed at McKinsey?” the headline asked in one ad. The answer: “Outstanding mental equipment finely honed by a first-rate education, coupled with the imagination to solve complex problems; the self-confidence, skill in expression, and sensitivity to other people that lead to high personal effectiveness; and, of course, good character and high standards.”

The message was clearly aimed at potential clients as much as potential hires. But the firm denied any advertising motivation once again.9 McKinsey’s insistence that it did not engage in a PR strategy was simply false; in the 1960s, the firm contracted with PR pioneer Pendleton Dudley. It later used the services of Murden and Co., a consulting firm even more behind the scenes than McKinsey. Murden was an early force in the Bilderberg conferences, the secretive annual meeting of Western influencers.

Bower’s insistence that the firm avoid traditional advertising for professional reasons also made a virtue of obvious necessity. For what could McKinsey advertise even if it wanted to? Certainly not its client list. “Management consulting is too complex an art to be explained effectively in the limited space of an advertisement,” wrote journalist Hal Higdon in The Business Healers. “About all a consulting firm can talk about effectively is the extremely high competence of its personnel. The effect might be somewhat similar to the Roman Catholic Church’s taking two pages of Life to advertise God.”10

So what made a McKinsey consultant successful? Bower dedicated his life to defining him. First, said Bower, “the successful consultant has a personality that causes most people to like him.”11 And with that likable personality, the McKinsey consultant should make his way into his community’s establishment: He was expected to join local boards, get involved in charities, and even attend church. This was community relations as business strategy, another manifestation of Bower’s pragmatic idealism. (There was an ugly side to McKinsey’s caste system: Henry Golightly, a New York–based consultant, was run out of the firm when it was discovered that he was homosexual. Truman Capote, a friend who at times stayed over at Golightly’s Hamptons beach house, named his Breakfast at Tiffany’s heroine after the consultant, who was placed on “medical leave” when the details of his private life became known.)

Second, the McKinsey consultant had to inspire confidence with his appearance. Bower’s writings are full of physical descriptions of people he hired in part because of how they looked. “I found that [Harrison Roddick] had an attractive appearance and personality,” he wrote in one instance;12 “Walter Vieh . . . was a fine looking and likable man in his late forties”13 in another. As recently as the 1990s, said one former McKinsey consultant, the notion that one was “clubbable”—the type to be asked to join a high-end social club—remained an explicit characteristic of McKinsey hires.

Bower’s obsession with appearances was of the time. When George MacDonald Fraser began writing his multititled chronicle of the cad Harry Plaget Flashman in 1969, he described his antihero in the precise terms one might think Bower looked for in recruits: “His eyes [were] blue and prominent and unwinking—they looked out on the world with that serenity which marks the nobleman whose uttermost ancestor was born a nobleman, too. It is the look that your parvenu would give half his fortune for, that unrufflable gaze of the spoiled child of fortune who knows with unshakeable certainty that he is right and that the world is exactly ordered for his satisfaction and pleasure.”14

And the McKinsey consultant was usually tall too. One (not-so-tall) rival consultant suggests that McKinsey has long hired taller-than-average people for the sole reason that history has shown people pay more attention to them. And he’s right: In a recent excavation of the mausoleum of Chinese emperor Qin, the average height of an infantryman was five feet nine, the average height of an honor guard was six feet two, and an infantry general was six feet four.

Bower enforced an unyielding dress code: dark suits, hats, and garters. Long socks were required because Bower abhorred the sight of “raw flesh.” Maurice Cunniffe, who worked at the firm from 1963 to 1969, could remember the protocol as if it were yesterday. “Definitely long socks,” he said. “And a feather on your hat only if it was barely peeking over your hat band.”15

“You would wear garters and you would wear a hat,” recalled McKinsey consultant Jack Vance. “You didn’t wear bow ties and Lord knows you didn’t have a mustache.” Or argyle socks. In one heralded piece of McKinsey lore, Bower is said to have attended a client meeting in 1966 with a young associate who had the audacity to reveal a flash of argyle under his pants cuff during the meeting. Upon returning to the office, Bower whipped off one of his signature blue memos on appropriate sock wear, and he even held a Saturday clinic on the right way to dress.16 As recently as the 1990s, consultants were strongly encouraged never to leave their offices without their suit jackets on, although they were allowed to work in shirtsleeves. It wasn’t until 1995 that the firm conceded business casual days to its hardworking minions. Competitors and clients still make fun of McKinsey consultants and their cuff links.

Bower once explained the rationale for his sartorial standards. “If your job is to help a client have the courage to follow the trail indicated by the facts, you need to do everything you can to minimize the distractions and deviations the client is likely to take,” he told his biographer Elizabeth Edersheim. “If you have revolutionary ideas, they are much more likely to be listened to if you do not have revolutionary dress. . . . If you were an airline passenger, and the pilot came aboard the plane and he wore shorts and a flaming scarf, would you have the same confidence as you did when he came on with his four stripes on the shoulder? Basically, the dress code all has to do with what you want to do, when you want to build confidence and an identity.”17 Whatever the argument, Bower was cooking the individuality of his consultants out of them as soon as possible. In 1962 McKinsey staffers gently mocked their workplace by publishing The Consultants’ Coloring Book, in which every color suggested was black or gray. Longtime partner Warren Cannon compared the dress code to that of “moderately well-to-do morticians.”

(Bower wasn’t entirely blind to shifts in fashion. Three years after John F. Kennedy shocked the nation in 1961 by forgoing a hat at his inauguration, Bower turned up at the office without one. Bower’s consultants consulted with one another: Had the decree been lifted? “I’d wait six weeks,” one consultant told another. “It may be a trap.”18 It wasn’t: The hat requirement had gone by the wayside.)

Conformity was enforced too in the way the offices looked and how the memos were written. All offices were made to look the same—and they still do, to this day. And the reports that the company produces for such extravagant fees all adhere to a precise formula—blue covers, the same typeface, sparse use of text, and a common language. Most McKinsey reports begin with a page titled “Today’s Discussion.” It’s a brief of what the consultants hope to get across to the client, presented in outline form, and it shows not just how McKinsey presents but how its consultants are taught to think: in logical, well-structured, and easy-to-follow steps. A McKinsey consultant, according to the Bower way, was never supposed to put his personal stamp on anything.

So Bower substituted himself for the firm; he was its embodiment, and thus every detail deserved and received his attention. He took memo writing to an extreme, delivering his thoughts at excessive length on any subject that crossed his mind. It became a McKinsey tradition: To this day, firm leaders will write fifteen-page memos to the entire staff on a whim, discussing their view on the role of a consultant or how to succeed at McKinsey. Bower once concluded that too many ellipses and dashes had found their way into company reports. He issued a memo banning their use.19

Bower wrote the firm’s first Basic Training Guide in 1937. It included everything from expense protocols to directions on how to write a proper letter to a client. That same year, McKinsey, Wellington inaugurated its reading program for associates, complete with required book reports. Every McKinsey consultant was forced to read what can only have been a page-turner, the two-volume Air Conditioning, as well as more compelling titles such as The Human Problems of an Industrial Civilization, Modern Economic Society, and Automotive Giants of America.

The firm demanded that every consultant read at least fifteen books in the coming year, and submit book reports to partner Harrison Roddick in New York. If that seemed like a lot of reading for already busy consultants, the guide suggested that each man employ what could only be described as a sort of rudimentary speed-reading technique. “It has been well proven that one should practice reading as rapidly as possible, first for short and then for longer periods,” the consultants were told. “It will be found that gradually the general reading pace will be quickened. It is best not to read word for word, but to take in at a glance phrases and sentences.” And a threat: “The names of men who do not send in reviews will be brought to the attention of the partners.”

Bower’s exhaustiveness in producing the guide was typical of the man. Did a consultant need a sample engagement letter? There were two samples included for his perusal. Did he need guidance on how to respond to a potential inquiry regarding the relationship between McKinsey, Wellington & Company and Scovell, Wellington & Company? There were several pages on the matter. There were copies of speeches by James McKinsey, rules for when the use of a Pullman car was allowed on a train trip to see a client (when it was more than 100 miles), and five pages on the creation of time sheets for internal use as well as submission to clients. McKinsey later dispensed with giving clients much more than a single sheet of paper that included its fee, but in 1937 the firm was as enamored as all of American industry with the meticulous gathering and analysis of data. They were management engineers, after all.

Another example of an early philosophy that has since been jettisoned: The guide included an engagement letter that touted the “considerable experience” that all men working for McKinsey had before joining the firm. Later, McKinsey flip-flopped precisely on that point, having come to consider such experience an obstacle to broad-gauged problem solving, but in 1937 it was one of the firm’s most cherished assets.

As with almost everything he wrote about McKinsey to McKinsey people, Bower insisted on an almost ridiculous level of secrecy about the Basic Training Guide, despite the fact that it contained hardly anything of a competitive or proprietary nature. “The Manual should be treated in the strictest confidence,” he wrote. “It is recommended that it not be taken away from the office or from your hotel room when away on long engagements. This will avoid its loss.” Why did it matter? Because unlike other professions—law, medicine—consulting was obviously built on pretense, where dress, manners, and language were meant to present some notion of capability that wasn’t there to see on a diploma.

One reason for his caution might have been that at the end of the guide, Bower let loose with a bit of unbridled ambition that he usually took great pains to keep out of public view. “It is not unreasonable to compare the outlook for the [firm] today with that of the Ford Motor Company at the beginning of the Century,” he wrote. “The [firm] has relatively as satisfactory conditions under which to operate as Ford did in the early days of the automobile industry, and our progress during the next thirty years depends entirely upon the extent to which we develop these possibilities.” Ambitious, perhaps, but also dead-on.

Such expressions, though, were rare for Bower, who preferred to steer pretty much any conversation back to the topic of professionalism. Doug Ayer, a consultant at the firm from 1962 to 1968, recalled telling Bower of his plans for an upcoming ski trip. “He said he regarded skiing as unprofessional,” said Ayer. “I laughed. He didn’t. He said, ‘You’re running the risk of breaking your leg, and having that get in the way of client work.’ I told him I was going anyway, but that I appreciated his opinion.”20

Upgrading the Clientele

As World War II raged in the early 1940s, McKinsey improbably hit its stride. Conflict and corporate confusion proved good for business, as the firm helped American industry convert to war production. It advised ketchup-maker Heinz on making gliders and American Automotive on making tanks. While this wasn’t necessarily the kind of work Bower envisioned for his platonic McKinsey, business was nevertheless booming: By 1945, the firm had eighty-nine clients in New York (up from thirty-five five years earlier), twenty-five in Boston (up from nine), and four in San Francisco.

Revenues climbed from $284,000 in fiscal 1940 to $420,000 in 1942. In 1943, when payments to the McKinsey estate ended, the underlying vitality of the business was revealed: a profit of a quarter-million dollars and a net margin in excess of 40 percent. The firm posted losses in the last two years of the war, but the business was growing. The year after the war, the consulting staff numbered sixty-eight, up from twenty-five in 1942. Numbers like that promised a bright future for consulting.

At every pass, the firm expanded its vision of what consulting could be. Bower made speeches all over the country to professional organizations and composed treatises with paint-peeling titles like Unleashing the Department Store and The Management Viewpoint in Credit Extension. The point was to give the firm the patina of intellectualism, to sell big concepts to big clients.

In 1937 the Boston office hired Paul Cherington, a former marketing professor at Harvard Business School and author of Consumer Wants and How to Satisfy Them. The book was one of the first expressions of the product cycle—the idea that, like humans, products had different life stages (birth, growth, maturity, and decline) and that opportunities and problems changed in each stage. After the 1935 Wagner Act, which mandated collective bargaining with unions, McKinsey created its own specialty in the field. It hired Harold Bergen, former labor-relations manager at Procter & Gamble, and began advising clients on how to deal with their growing masses of employees and the rise of labor unions.

Bergen brought with him a client list that upgraded McKinsey’s roster in one fell swoop: Cluett-Peabody, H.J. Heinz, Johns Manville, Lukens Steel, United Parcel Service, Upjohn Company, Sylvania Electric, and Sunbeam Electric.21 McKinsey was never so foolish as to get labeled anti-union, but to its clients—corporate executives—it was clear which side of this growing struggle the consultants were on.

James McKinsey’s animating idea was that the firm would operate like an exclusive private club admitting only the most prestigious clients. By 1940, it actually started to look that way: In addition to Bergen’s list, the membership included American Airlines, U.S. Steel—and Marshall Field. Despite the serious damage Mac’s brutal layoffs had inflicted on the firm’s image in Chicago, the retailer remained a client.

A Strategy Around Strategy

The firm specialized in turning problems into profits. With banks holding lots of foreclosed property and corporate assets from the Depression, McKinsey pitched its general surveys as essential tools. When the economy began to recover, McKinsey deftly began to pitch more aggressive methods for making businesses grow, all the way down to unraveling the workflow processes for companies like Four Roses Whiskey. “[It was] the most miserable thing I ever did,” recalled Warren Cannon. “[It] involved my traveling with whiskey salesmen to find out how they really sold the stuff which was, by the way, a lot of drinking.”22

The key, though, was to persuade people that McKinsey’s ability to solve problems was just as inspired as the solutions themselves. When the Progressive Era ushered in a cultural acceptance of scientific methods, there was McKinsey, offering scientific evaluation of customer problems. Cutting back because of the Depression? McKinsey offered to help you downsize. When the challenge shifted to managing huge organizations, McKinsey offered advice on the newest thinking in organizational structure.

This was not only satisfying people’s desire to better themselves. It was also preying on the insecurity of keeping up with the Joneses. McKinsey offered the former, but the implicit sell was the latter. In organization theory, they call this “mimetic isomorphism”—the tendency to imitate another organization in the belief that, if others are doing something, it must be worthwhile.

In the first half of the century, the nation’s industrial giants were mostly preoccupied with maximizing economies of scale. The dominant idea had been to organize themselves around function—purchasing, marketing, sales—while executives overseeing those groups had responsibility for all of the company’s products. The insight of GM’s Sloan and his peers at DuPont and Sears was to invert that structure and put executives in charge of single product lines. This dissemination of responsibility—dubbed “multidivisional” or “M-form”—enabled companies to be more responsive to changes in the marketplace, and it allowed managers to make decisions without sending every single one up the executive chain for approval.

By the mid-1940s, General Motors and a few others had embraced the M-form, to their tremendous benefit. But much of corporate America remained in the dark, and this was a great opportunity for the consulting industry—to spread the new corporate gospel, the secrets of the best companies. At this point, McKinsey was not even the market leader; it faced strong competition from the likes of Robert Heller & Associates; Cresap, McCormick and Paget; and Booz Allen Hamilton. Within the span of a decade, though, the firm not only grabbed the lion’s share of organizational work in the United States but also led the way into Europe, where the devastation of World War II had cleared the way for new thinking.

The new corporate structure liberated the people at headquarters from day-to-day problems and allowed them to focus on the big picture. It also created a whole new class of top-tier executives—highly compensated free thinkers with no actual line responsibility. They got to spend their time doing “strategic thinking.” Strategy was not new—the word originated with the Greek strategos, meaning “army leader.” But as Walter Kiechel pointed out in The Lords of Strategy, the word didn’t really enter the corporate lexicon until the mid-twentieth century. One of the earliest mentions of the word was in New Jersey Bell executive Chester Barnard’s 1938 book, The Functions of the Executive, in which he mentioned “strategic factors.”23 Most people don’t strategize alone, however. And you certainly don’t strategize with your competitor. Enter, once again, the disinterested consultant. Consultants didn’t merely solve business problems—they helped this new breed of executives rationalize and protect their own existence.

Business historians regard the emergence of strategic thinking as a big breakthrough. “Management is not just passive, adaptive behavior,” wrote Peter Drucker in his 1955 book, The Practice of Management. “It means taking action to make the desired results come to pass.” In other words, companies did not have to be at the mercy of impersonal forces, says Harvard Business School professor Pankaj Ghemawat. Strategic planning enabled them to control their own destinies.24 As executives of top American firms came to believe this and embrace it, they turned to McKinsey for help. And when those same companies shifted their focus to going abroad in the aftermath of the war to take advantage of momentarily crippled Continental competitors, McKinsey helped them find their way.

One Final Obst