WHEN BUSINESSMEN talk to partners of McKinsey, the high priests of management consultancy, it is like Catholics going to confession. They reveal all. They expect confidentiality. And whether or not it changes behaviour, the act itself is good for the soul. In this era of corporate unease, over everything from the next recession to climate change, executives are lining up at the confessional. But McKinsey, too, has some soul-searching to do. Its industry, estimated to be worth $300bn, is, like those of its clients, being transformed. And as its most revered—and hermetic—standard bearer, it is under more scrutiny than ever before.
Kevin Sneader, who took over as global managing partner last year, has lots on his plate. Recent years have been uncomfortable. Until a decade ago no McKinseyite had ever been sued for securities-law violations. In 2012 its former managing partner, Rajat Gupta, was convicted of insider-trading committed after he left the firm. Then in 2016 McKinsey was embroiled in a scandal in South Africa after it worked with Trillian, a local consulting firm owned by an associate of the controversial Gupta family (no relation to Mr Gupta). Mr Sneader has repeatedly apologised.
More recently it has faced allegations that its work on behalf of companies in bankruptcy in America represents a conflict of interest, because its $12.7bn investment affiliate, McKinsey Investment Office (MIO), may invest in securities related to the bankruptcies. It denies the allegations, saying that MIO is a separate entity whose investments are controlled almost entirely by outside investment managers. Jay Alix, the founder of AlixPartners, a veteran of the bankruptcy business, has sought to drag McKinsey through the courts. He claims that its alleged lack of disclosure should preclude it from working on bankruptcies. Judges have so far dismissed four out of five cases on the grounds that Mr Alix lacked standing to pursue them in the first place. In August a federal judge threw out another charge from Mr Alix that McKinsey had violated racketeering laws. In one remaining case involving the bankruptcy of Westmoreland Coal, a judge in Texas has set a trial date in February to rule on the dispute.
McKinsey says Mr Alix is engaged in a vendetta that aims to stifle competition. Mr Alix, whose litigious investment firm, Mar-Bow Value Partners, is mischievously named after Marvin Bower, one of McKinsey’s founding fathers, claims to be fighting to defend the integrity of the bankruptcy system. But the saga is a regrettable one for McKinsey, even if it is fully vindicated. The bankruptcy business is not lucrative. McKinsey says it gets involved in bankruptcies only because its clients ask it to. It has worked on barely 15 cases since it started its restructurings practice in 2001. But it is understandably loth to be strong-armed out of the business by Mr Alix. That has made this an unusually public feud for a company that stands out for its discretion.
It is possible to think of these controversies as one-offs. McKinsey may win the remaining bankruptcy judgments. The two scandals can be explained as the work of rogue operators. But they speak to bigger questions about the firm’s scope and mission, which Mr Sneader must grapple with. McKinsey has grown fast. Partners now number 2,200, up from 1,250 about a decade ago and it employs 30,000 people worldwide, up from 17,000 in 2009. Many of these are different from the buttoned-down business graduates of yesteryear. It has diversified into new business lines and some of its most valuable work is now outside America. As the firm has got bigger and more complex, it has got harder to manage.
Complicating things further, management consultancy itself is changing, too. Six years ago, Clayton Christensen of Harvard Business School warned that it was an industry “on the cusp of disruption”. Now that disruption is in full swing. According to Tom Rodenhauser of ALM Intelligence, which analyses the industry, clients no longer just want to hire legions of people, however brainy they are. They want consultants to provide and install products, including new technologies, that transform them from top to bottom and keep disrupters at bay. Advice on strategy, which used to be meat and potatoes for firms like McKinsey and its peers, Bain and the Boston Consulting Group (BCG), is now a side dish; it accounts for about a tenth of revenues.
Mr Sneader could keep things ticking over as they are, at least for a while. Clients have shrugged off the media attention. McKinsey’s revenue has grown in recent years, to roughly $10bn. And the firm still attracts armies of aspiring candidates—last year 800,000 applied for 8,000 jobs. But he is making changes. McKinsey says it is “addressing the changing panorama both internally and externally”. Partly in response to the South Africa debacle, its standards and processes for selecting clients have been beefed up. Partners are discouraged from doing work for undemocratic governments.
McKinsey has also made advising on technology more integral to its business. It worked with 1,200 companies on digital and analytics issues last year. It creates and sells tools for companies to use in their businesses, which generates new sources of recurring revenues. And it has bought a dozen companies since 2011, including QuantumBlack, a British startup that developed advanced data analytics for Formula One. Nonetheless, industry-watchers say McKinsey is often outspent by the technology offerings of the Big Four, as well as by firms like Accenture.
Downsizing consultants
Mr Sneader should go further: that means getting leaner by ditching activities, clients and teams that bring in more headaches than cash, and investing in technology. It is here that McKinsey may have a secret weapon—its partnership, honed over 93 years. It is not a listed firm, so faces less pressure to raise short-term profits. And, with luck, the priesthood has not yet become so sprawling that it has lost a sense of its values. Whisper it in the confession box: McKinsey needs to shrink its way to further greatness. ■
This article appeared in the Business section of the print edition under the headline "Rethinking McKinsey"
