Origins

McKinsey & Company, founded in the 1920s, has consistently been seen as the world's most respected, coveted, prestigious, and expensive consulting firm. Despite its strong reputation, it remains mysterious and secretive. While its public image exudes confidence, some doubt the value of McKinsey's advice, especially in light of recent scandals, leading to questions about the firm's future.

In 1926, James McKinsey, a math professor at the University of Chicago, authored pioneering books on using budgeting for strategic advantage in businesses. He recognized the need for organizations to improve performance by making better decisions about expenses, revenues, and profits.

McKinsey launched McKinsey & Company with a national meat packing company as his first client. He resigned from the university and opened offices in Chicago and New York. By the late 1920s, McKinsey was the highest-paid consultant in America, with clients in banking, steel, and retail. In 1935, he officially left the firm to become the chairman and CEO of Marshall Fields. His efforts to rescue the retailer involved mass layoffs and struggles. McKinsey died in 1937 from pneumonia at age 48.

Marvin Bower

After its founder's departure and death, the firm went through mergers, splits, and reorganizations before becoming McKinsey & Company again in 1947. Marvin Bower, a key figure in creating the McKinsey reputation, led the firm for 20 years. He took over as managing director in 1950, greatly shaping McKinsey™s culture, values, and growth.

Bower made consulting a prestigious career, emphasizing traits like intelligence, education, likability, social skills, good attire, and being ideally attractive and above-average in height. He established a strict code of conduct, focusing on integrity, values, and impeccable character. At McKinsey, the client always came first, even before profits or the firm's interests. Clients were always credited with success, and consultants kept client identities confidential. McKinsey took on projects only when the client was a CEO or divisional president, and when the work was deemed significant.

Marvin Bower's Talent Development Strategy at McKinsey

Marvin Bower believed in cultivating talent rather than hiring experienced professionals. McKinsey recruited young MBAs, especially from Harvard, and senior consultants mentored them, assigning readings. However, most learning occurred on the job, thanks to client interactions. Despite their limited experience, new graduates often advised seasoned executives on business operations.

This approach, cost-effective and impactful, became a model for consulting firms worldwide. Under Bower's leadership in the 1950s and 1960s, McKinsey gained renown for its prestige and influence, serving over half of the Fortune 500 companies.

Surf Life's Ups and Downs

In the 1920s, McKinsey thrived, finding lots of work helping organizations be more efficient. They did this by often laying off many employees during the Great Depression. During World War II, they helped companies change their operations to support the war effort. After the war, they helped big American and European companies restructure to manage their huge operations better. In the 1960s, McKinsey benefited from the trend of companies merging or buying each other.

They also helped reorganize Europe and, during the Eisenhower presidency, played a big role in making the federal government much bigger. This started a trend of the government hiring outside companies to do work for them. When McKinsey got big contracts, they often hired their own clients to do some of the work.

By the late 1960s, McKinsey had grown to over 400 consultants and had become an international company. Although they opened their first office outside the US in London in the 1950s, by 1969, more than half of their earnings came from other countries.

McKinsey's Strategy and Influence

McKinsey primarily served prestigious clients and government leaders, taking on projects it found interesting and worthy of its talent. By 1970, McKinsey was known for having some of the smartest business thinkers globally.

Similar to IBM, McKinsey became known as the firm that companies felt secure in hiring. Executives often hired McKinsey and other strategy-consulting firms not just for their expertise, but also to shift blame, send messages to their workforce, or gain insights into competitors. Despite not offering industry exclusivity, McKinsey's ability to learn from one client and apply that knowledge to others, even competitors, was widely accepted. This allowed firms to share information while avoiding accusations of collusion. Due to its high-profile clients and critical projects, McKinsey became highly sought after for gathering intelligence and learning best practices, benefiting from its reputation for excellence.

The CEO Factory

McKinsey is widely known for producing many CEOs and top executives. They have a strong focus on talent management, which has been a key part of their approach for a long time. The company is very selective in hiring and spends a lot of time assessing, developing, and reviewing each new employee. This sets McKinsey apart from other companies, even though the industry as a whole places a high value on talent.

Young employees who do well at McKinsey can rise to become principals and then partners. However, McKinsey has a policy where employees either move up in the company or leave. This means that most people eventually leave, even those at higher levels like partners and managing directors. Despite this, almost everyone who leaves McKinsey does so on good terms. This is partly because having McKinsey on their resume helps them land good jobs elsewhere. Former employees often speak highly of McKinsey, and when they reach senior positions in their new companies, they often hire McKinsey for consultancy work.

Many Fortune 500 CEOs are McKinsey alumni, including Lou Gerstner of IBM and James McNerney of Boeing. However, McKinsey doesn't always handle having superstar employees well. When it has employees who become famous, like Tom Peters and Ken Ohmae, they often struggle to fit in and end up leaving. McKinsey's success is based on valuing the company more than any individual. Even if an employee is extremely successful, like Ohmae in Japan or Peters after leaving the firm, McKinsey doesn't have much patience for those who don't fit in.

Times of distress.

The consulting industry faced challenges in the 1970s, marking the end of its prosperous era. After reaching $2 billion, it saw no growth from 1970 to 1976. Marvin Bower's retirement in 1967 added to the turmoil for McKinsey, which had seen its revenues grow tenfold under his leadership. However, by the end of 1972, a sharp decline in contracts led to the first-ever drop in annual revenues for the company. This, coupled with global office obligations, began to strain the firm. Additionally, a sense of complacency and arrogance crept into the organization. Both clients and the media began questioning McKinsey's quality and value, wondering if its rapid expansion in the 1960s had compromised its services. Meanwhile, rivals like the Boston Consulting Group and Bain Consulting gained attention with innovative management concepts. McKinsey's client base viewed it as a conservative firm, out of touch with the modern era.

Revival and transformation of McKinsey

In the early 1970s, McKinsey faced threats from competitors and the economy, prompting a wake-up call. Failures with high-profile clients like Volkswagen in Germany and the loss of key accounts in London added to the challenges. However, strict austerity, downsizing, and adapting to the situation, along with competitors' missteps, helped the firm bounce back quickly. By the late 1970s, McKinsey was back on track, albeit smaller, but with more overseas offices. It secured new, prestigious clients such as Japan Airlines and Heinz, leading to the development of the bar code.

The turnaround came with painful changes. McKinsey shifted from fielding "generalist" consultants to becoming "specialists," allowing consultants, principals, and partners to deepen their knowledge in specialty areas. The firm also relaxed its previous stance that consultants must report directly to the CEO or president of client firms. These trends continued throughout the century, diminishing some of McKinsey's prestige and mystique.

Public Mishaps

McKinsey grew significantly in the 1980s and 1990s, becoming dominant in large organizations worldwide. However, its value was often questioned. In the 1980s, there were several failures: McKinsey's advice on competing with Japan nearly ruined General Motors, contributed to a financial crisis in Sweden, advised JP Morgan to stop making loans (leading to its downfall), and was involved in the failed AOL-Time Warner merger and Hewlett-Packard's damaging purchase of Compaq. In the 2000s, McKinsey was complicit in even worse disasters. Most notably, it was deeply involved with Enron, a major contributor to its collapse and subsequent bankruptcy, which was the largest in American history at the time. McKinsey also played a significant role in advising banks to take risky positions that contributed to the 2008 global financial crisis. Additionally, a senior partner and former managing director were convicted of insider trading at the end of the decade.

The Bottom Line

During the dot-com boom and after the turn of the 21st century, McKinsey moved away from its original values. They started taking stakes in start-ups instead of fees and focused more on partners' wealth than the firm's interests. Though they've recently returned to their old principles after the excesses of the last decade, the McKinsey of Marvin Bower's era is gone.

Despite these missteps, McKinsey adapted and survived. Today, it concentrates on its Asian business, where there's high demand for its advice. Most of the world's largest organizations and many Fortune 1000 companies still hire McKinsey. Over the decades, amidst scandals and achievements, the firm has remained a top choice for MBA graduates. McKinsey's success is undeniable, but only its clients can decide if its advice is worth the cost. Given that 85% of its revenues come from repeat business, it's clear that its clients find value in its services.