McKinsey comes to town
In Gary Indiana there are remains of a plant run by what was once the world’s biggest, most profitable company, the U.S. Steel Company.
U.S. Steel was McKinsey’s customer from the Great Depression.
In 2014 Mario Longhi, the new CEO hired McKinsey. McKinsey came to U.S. Steel with the goal of restoring the steelmaker to its iconic status.
At Longhi’s direction, McKinsey implemented s “transformational” business plan called “The Carnegie Way”, in honor of U.S. Steel’s co-founder Andrew Carnegie. The plan was a cost-cutting initiative. Measures to reduce maintenance costs affected workers’ safety. Some electrocution deaths occurred. A company adopted a policy of “don’t buy, get by”, whereby managers bought items only when necessary. Some orders were even approved by McKinsey.
In 2018 after Longhi was gone, the company was restructured, and a new value was proposed under S.T.E.E.L. principles. Safety first, trust and respect, environmentally friendly activities, ethical behavior, and lawful business conduct.
McKinsey also served Disney in their cost management efforts and again maintenance was one area where ‘improvement’ was identified. They introduced reliability-centered maintenance. Bob Klostreich Disney’s employee warned them about growing safety risks.
The Columbia accident that resulted in the death and injuries of Dawson’s family rocked the industry. Dawson’s attorney said McKinsey’s cost-saving measures directly contributed to the accident.
Wealth without guilt
McKinsey is offering something to potential candidates: influence and potential to change the world. At least that is what they are saying. They are selling its philosophy of scientific management to the world’s best-known blue-chip companies.
The firm has advised virtually every major pharmaceutical company – and their government regulators. They operate in more than 56 countries.
The firm is named after its founder, but its spiritual leader was Marvin Bower, who joined in 1933. He insisted that McKinsey is a firm, not a company., that it runs a practice, not a business, and that client work be an engagement, not a job. He believed that consultants are best recruited young and trained in-house.
In 2018 media attacked McKinsey heavily. McKinsey’s work was to make shareholders happy. Ethics was a question mark. The New York Times and ProPublica were the media outlets that started doing a deep dive into the firm’s affair in 2018.
McKinsey’s clients included corrupt governments in South Africa, Russia, and Malaysia. The most shocking revelation was McKinsey’s engagement with companies that sell opioids, and they even helped them sell more of it.
In February 2018 Kevin Sneader became global managing partner of McKinsey. He was just the twelfth. He only lasted three years, he was the first partner who was voted out.
Winners and losers
The Treaty of Detroit was an agreement between the United Auto Workers and GM. It gave workers for the first time their ticket to the middle class. In exchange, they agree not to strike.
On the other hand, GM executives started to wonder if they were being paid enough. GM used McKinsey to answer that question. Arch Patton was a McKinsey consultant who directed the study.
Executives at railroads, public utilities, and banks were dismayed to learn they were paid less than those in the automotive, textile, and steel industries.
Patton made it easier for corporate directors to approve higher compensation by linking high pay to bigger company profits.
Patton’s work wasn’t universally admired in the firm. Peter Walker, who joined McKinsey in 1972, questioned Patton’s conclusions.
The 1950s and the 1960s were stable years in the corporate life of America. But by the end of the 60s, the protest in the US was growing. McKinsey steps up and moves from market research only, to business strategy, organizational design, and solving difficult analytical problems. GM and McKinsey embarked on massive corporate reorganization. It included massive downsizing in the 1980s and that broke the traditional covenant that traded job security for loyalty.
There was no bigger cheerleader of offshoring than McKinsey. They initially focused on India. McKinsey’s success in India was due to largely two senior leaders in the firm Rajat Gupta and Anil Kumar.
Walmart may be different from some other big companies, but some business practices are shared with them. If something can be bought cheaper in low-wage countries, Walmart will do that.
Playing both sides
Gary MacDougal from McKinsey persuaded Illinois’s governor, Jim Edgar, to let his task force work on the poverty program. First work was pro-bono, but once they had learned the system, they started to work for fees for others.
With lifesaving services starving for money, Illinois officials were quietly shoveling millions of dollars out the door to McKinsey.
In recent years, McKinsey billed companies that provide managed care more than 200 million, making it one of the firm’s most lucrative sectors.
McKinsey’s success in Illinois, Missouri, and Arkansas is more than luck and regional knowledge. The firm’s long reach extends well beyond the borders of those states and includes a formidable list of clients spanning the entire healthcare supply chain.
McKinsey insists that advising companies and their regulators does not compromise its objectivity because consultants don’t share client information.
For a company that expends so much effort presenting itself as a voice for health-care reform, McKinsey had remained silent on some of the most important health issues of our time. McKinsey did not speak out forcefully against the high cost of drugs or the tsunami of direct-to-consumer drug company advertisements. Not has the firm publicly raised alarms about the consolidation of health-care services.
McKinsey at ICE
In June 2018 articles began appearing in the media that questioned McKinsey’s judgment and ethics. There was work for a South Africa power company, and uproar over the firm’s work with opioid manufacturers, autocrats, and kleptocrats.
There was also work for ICE, where McKinsey defended their contract, saying it was mainly administrative and organizational work. But documents emerge showing that their cost-cutting efforts recommended also spending less on food, medical care, and supervision of detainees. ICE cooperation was documented with McKinsey’s slides that were also published.
Inside McKinsey there was unrest. People demanded that McKinsey stop using legality as the barometer for ethicality.
Befriending China’s government
China Communications is no ordinary company. It is one of the ninety-six state-owned enterprises that, because of their importance to China’s national security and economic vitality, are managed by the central government in Beijing.
McKinsey has advised at least twenty-six of the ninety-six companies.
China needed McKinsey’s business know-how. McKinsey’s early work in China focused on helping its global clients set up operations there.
McKinsey had hired a top graduate of Harvard’s MBA program, Liu Chunhang, the son-in-law of China’s soon-to-be-premier, Wen Jiabao.
The Belt and Road Initiative was an alarm for Washington. But McKinsey managing partner Barton made BRI a theme of his keynote address in Beijing in March 2015. For McKinsey, BRI was good business.
They also provided reports on Made in China 2015 initiative.
When McKinsey decided to have its employee meeting in the ancient Silk Road city of Kashgar (in the land of Uyghur), this wasn’t the most acceptable for the West.
Guarding the gates of Hades
The reckoning was a long time in coming for the tobacco industry. In the televised hearing in April 2014, tobacco executives were under pressure. McKinsey was also watching since they have been serving the industry for decades.
McKinsey stuck with cigarette clients even as internal industry documents surfaced in legal proceedings that cast Big Tobacco as a predator bent on fooling the public about the safety of its products.
McKinsey is also a teammate of the FDA, which since 2000 has had the authority to regulate tobacco products. They play both the defense and offense.
Juul was a company that was known for their vaping product. In 2018 their sales of e-cigarettes totaled 1 billion USD. However vaping devices were not pre-approved by the FDA until 2019.
Turbocharging opioid sales
McKinsey was chasing pharma clients in the new century. Martin Elling was the main driving force for McKinsey Pharma. McKinsey wrote that drug companies could fix the problem of leaving money on the table by simply doing a better job of analyzing prescription data.
One of their clients was Purdue. Their OxyContin drug turned out to be very addictive.
When under pressure, Purdue turned to McKinsey. They knew the opioid business. They consult Johnson & Johnson. J&J was also responsible for two companies producing starting material for opioids.
McKinsey began consulting for Purdue when J. Michael Pearson led the firm’s pharmaceutical practice. Pearson also became Valeant’s CEO.
On August 23, 2021, a bipartisan group of six senators wrote to FDA, asking about the agency’s extensive contracts with McKinsey.
Turning a coal mine into a diamond
McKinsey views Aspen and Davos as opportunities for its consultants to meet potential clients.
McKinsey is very public about their support for climate change. It is good for recruiting.
But McKinsey is also consulting the other side – big fossil companies. They took pride in helping coal companies become more profitable. They say that if they don’t serve coal clients, BCG will.
Toxic debt
Since the 1930s the firm had worked closely with some of the most consequential leaders in finance; men like Walter Wriston of Citibank and David Rockefeller of Chase Manhattan. They supported less regulation not more.
City Bank hired McKinsey in 1967. The consultants recommended reorganizing the bank around business sectors, like corporate or retail banking. The idea was to decentralize decision making, much as GE and GM had already done with help from McKinsey. In banking that meant enabling lower-level bankers to make bigger loans.
Other banks across the country followed. The McKinsey-ization of Wall Street was afoot.
Lowell Bryan from McKinsey had a great idea, he called it “technology”, the securitization of credit. In theory, securitization would enable banks to avoid that fate by off-loading the loans, and the risks, to investors. In 1988 McKinsey publish his book Breaking Up the Bank.
Securitization’s potential is great because it removes capital and balance sheets as constraints on growth.
One of McKinsey’s former consultants, Jeffrey K. Skilling, was putting Bryan’s ideas of securitization into practice in Houston, where he was transforming a staid natural gas distributor into an energy trading company called Enron.
Allstate’s secret slides
Since 1950, “You’re in good hands with Allstate” has been the slogan of the Allstate Corporation.
That changed when McKinsey started engagement with Allstate in 1992. McKinsey said that they were paying too much for claims.
When Allstate profit soar, all other insurance companies wanted to work with McKinsey. In 1987, Allstate paid 70.9 cents per dollar it took in. In 1997 58.2. By 2006 it was 47.6.
The Enron Astros
It was not only Enron that was a black sheep of Houston. Houston Astors a baseball club was also star one day and cheater the next. And they both trust McKinsey.
McKinsey was praising both Enron and Astros in their publications.
McKinsey work with data in sports was a reason that company invest in Quantum Black by buying it. They helped Jeff Luhnow and Sig Meidal at Astros.
Clubbing seals
McKinsey values athletes for their ability to endure long hours of work, travel, and lack of sleep. Vikas Sagar was a great athlete.
In South Africa McKinsey got involved with public sector. The time there was led by David Fine.
They partnered with Guptas company Regiment. Rajesh, Ajay and Arul were three Guptas brothers and friend with President Zuma.
One client was Transnet. The next big client was Eskom. They changed local partners and used Trillian. The company was connected with Salim Essa, the Guptas family associate.
This was the first time McKinsey’s partner decided to answer publicly to some questions from politics.
Serving the Saudi State
Saudi was booming in 1970s. McKinsey consultant there was Sandy Apgat.
In 1996 McKinsey set up a company in Dubai. In 2009 they also opened it in Riyhad. They worked with the Saudi Binladin Group. And with Aramco.
They were also involved with NEOM and with the transformation of the country from being dependent on oil. But here they were beaten by BCG with their Vision 2030.
To get stronger in Saudi they bought local consulting company Elixir.
Saudi and China’s work was a pattern. McKinsey also worked for Russia. For VTB bank and even Gazprom.
Chumocracy
Before NHS British worker was left alone. Until 1948 the NHS served Britain well.
McKinsey was growing strong in Britain from 1970s. they helped restructure twenty-five of Britain’s top one hundred companies.
They prepared plan for NHS in 123 slides. The proposal outlined 20 billion pounds of savings. The Labour party reject it, but in 2009 the new attempt was made. This time by Conservatives.
The British old boys’ network now included also women and was called: the chumocracy.
McKinsey
McKinsey desires to do good, but they should also find a way to do less harm. They don’t have any problem working for competing clients.
