McKinsey faces its moment of reckoning

Market Trading EssentialsMarch 27, 2021

4 minutes read

For nearly a century, McKinsey has been the gold standard in management consulting, the nebulous and occasionally controversial billion-dollar industry based on giving advice.

Since its founding in 1926 by James O. McKinsey, the firm has advised the Eisenhower White House, the Vatican, NASA, and 22 of China’s largest state-owned enterprises. The company had a role in inventing the UPC code on packaged goods and in defining modern corporate hiring.

In recent years, however, McKinsey’s shine has begun to tarnish. The company has been embroiled in numerous scandals, from its choice of clients—among them Purdue Pharma and the US Immigration and Customs Enforcement agency—to its secretive internal hedge fund rife with conflicts of interest. It’s been implicated in abetting corruption in South Africa and Mongolia, accused of enabling oppression in Saudi Arabia, and suffered the embarrassment of a partner’s arrest as part of a massive insider trading scandal.

Stung by the criticism, McKinsey has begun to make amends. In December, the company issued a quasi-apology for its role in the opioid crisis, which had included recommending how Purdue could boost sales of OxyContin even as public concerns about the addictive drug grew. On Feb. 4, the company agreed to pay $573 million as part of a settlement with US state attorneys general.

The firm’s senior partners also voted out managing partner Kevin Sneader last month after just one term, a rarity at McKinsey, and elected Bob Sternfels to replace him. That follows the 2019 adoption of a new client selection process that, among other things, prevents McKinsey from working for “defense, intelligence, justice, or police institutions in non-democratic countries.”

For an organization that prides itself on its loyalty, dedication, and principled business practices—in an internal report, McKinsey compared itself to the Jesuits and the US Marine Corps—the waves of scandal are a humiliation. Whether it can recover its halo remains to be seen.

McKinsey by the digits

30,000: McKinsey global employees

130: Cities with McKinsey offices

0: McKinsey headquarters (pdf) (The company claims to have no HQ; its managing partner chooses which office to work out of.)

34,000: McKinsey global alumni

43: University of Chicago MBA students hired by McKinsey in 2020, the most of any employer

$165,000: Median annual base salary for Chicago MBAs hired by management consulting firms

McKinsey’s business model

Companies hire consulting firms like McKinsey or its competitors—its two biggest are Bain and Boston Consulting Group—because they lack the expertise, resources, or independence to solve a business problem on their own. But they also hire McKinsey to say they’ve hired McKinsey.

Having McKinsey vouch for a decision sends a signal to the board and investors that management has done its due diligence, and that the best consultants money can buy have signed off on the move, whether it’s a merger or new product launch.

t’s hard for a client to assess whether McKinsey will do a good job before they’re hired, since they’re being tasked with something the company can’t, or won’t, do itself. Even after all is said and done, it’s hard to know how the firm performed, since there’s nothing to compare it with. So instead of relying on objective measures, companies trust McKinsey because it projects trustworthiness. Price is also a factor: The more McKinsey charges, the more reputable it seems.

McKinsey is famously selective in its hiring: The company gets about 200,000 applicants annually for just 2,000 spots. And once on board, its consultants still can’t relax. Like most consulting firms, McKinsey practices “up-or-out” management, meaning consultants who aren’t promoted are asked to leave. The system ensures a steady flow of new, and cheaper, talent, but also means McKinsey sends thousands of its alumni out into the world, where they become decision makers at their new companies and hire their former firm to consult. It’s a perpetual business-generating machine.

The McKinsey culture

Marvin Bower, the managing partner responsible for McKinsey’s rise in the 1950s and 60s, had strong ideas about how a McKinsey partner should, and should not, dress. Suits were required. Facial hair and bow ties were frowned upon. Socks should be worn high, so a client would never witnesses the bare flesh of a consultant’s leg.

The dress code wasn’t just about Bower’s preferences. “If you have revolutionary ideas, they are much more likely to be listened to if you do not have revolutionary dress,” Bower told his biographer. “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?”

Today McKinsey has loosened up. It boasts of its diversity efforts, has significant philanthropic activities, including its own foundation, and claims to have zero net carbon emissions since 2018. Some things haven’t changed, though. On an online forum for aspiring McKinsey employees, new hires are advised to buy 15-30 dress shirts and three to six suits. And, it goes without saying, plenty of long socks.