62 Business The EconomistNovember 23rd 2019
W
hen businessmentalk 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 confes-
sional. But McKinsey, too, has some soul-searching to do. Its in-
dustry, estimated to be worth $300bn, is, like those of its clients,
being transformed. And as its most revered—and hermetic—stan-
dard 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 securi-
ties-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 rela-
tion 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 inter-
est, because its $12.7bn investment affiliate, McKinsey Investment
Office (mio), may invest in securities related to the bankruptcies. It
denies the allegations, saying that miois 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 pre-
clude it from working on bankruptcies. Judges have so far dis-
missed 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 bankrupt-
cy of Westmoreland Coal, a judge in Texas has set a trial date in Feb-
ruary to rule on the dispute.
McKinsey says Mr Alix is engaged in a vendetta that aims to sti-
fle 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 de-
fend the integrity of the bankruptcy system. But the saga is a re-
grettable one for McKinsey, even if it is fully vindicated. The bank-
ruptcy 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 busi-
ness 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. McKin-
sey may win the remaining bankruptcy judgments. The two scan-
dals 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 Busi-
ness School warned that it was an industry “on the cusp of disrup-
tion”. Now that disruption is in full swing. According to Tom Ro-
denhauser 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 pro-
ducts, 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. McKin-
sey’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 exter-
nally”. 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 ana-
lytics issues last year. It creates and sells tools for companies to use
in their businesses, which generates new sources of recurring rev-
enues. And it has bought a dozen companies since 2011, including
QuantumBlack, a British startup that developed advanced data an-
alytics 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 ditch-
ing 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. 7Schumpeter Rethinking McKinsey
Disrupting the management priesthood