Perspective on McKinsey [First ed.]

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Copyright© 1979, McKi11:;ey & Compm,y, lnc. Newed ition: May 2004, All Rigbts Reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of Mc Kinsey & Compnny, Inc.

INTRODUCTION lt is im possible to separate Marvin Bower from the develop-

ment of McKinsey & Company. Marvin wrote Perspective on McKinsey in 1978, when be was 75. Through it we can witness the development of our Firm through the eyes of its chief architect. Marvin wrote the book at the request of associates at training programs who asked him for a "perspective" on the Firm. He carefully pointed out that it is not a history because history would have to be written by "someone who can be objective, which I cannot." Marvin wrote his own unique view on the development of McKinsey & Co., and he used "perspective" in the singular because it was one man's view, not that of a group or a committee. Marvin's continued insistence on the importance of values and principles was instrumental in his gaining the agreement of his colleagues that we should conduct ourselves in a professional manner at all times, and that we do nothing that would compromise the integrity of our work with clients, our colleagues, or the Firm. Reading Perspective on Mc Kinsey- more than two decades after Marvin wrote it-can help us better understand the source of those values and principles and more effectively build on our remarkable legacy. Inn Onvis

May 2004

TABLE OF CONTENTS Preface - The Why and What of This Perspective

vii

1. Years of Shaping Purpose . . . . . . . . . . . . . . . . . . . . . . . .

1

2. The Firm's Early Years . . . . . . . . . . . . . . . . . . . . . . . . . . .

9

3. Merging and Unmerging . . . . . . . . . . . . . . . . . . . . . . . . . .

27

4. Building a Distinctive National Firm . . . . . . . . . . . . . . .

50

5. Becoming an International Firm . . . . . . . . . . . . . . . . . . .

82

6. Building Our Clientele .. . . . . . . . . . . . . . . . . . . . . . . . . . . 119 7. Professionalism: The Firm's "Secret" Strength .... 157 8. Development of Our Consulting Staff Philosophy .. 176 9. Developing Our Managing Philosophy and System

230

10. Perspective from the Sidelines

279

11. Gearing the Firm to a Successful Future

294

Index

310

To Helen

.

PREFACE

THE WHY AND WHAT OF THIS PERSPECTIVE Between March and July 1974, I attended training meetings in four U.S. offices and Mexico City as well as a joint meeting of the Dusseldorf/Zurich offices. I had been asked to lead discussions and answer questions about our guiding principle and their bearing on a career with McKinsey. In preparing for these sessions, I talked with a number of Firm members in each of the seven offices. Independently, associates in three offices said that what they wanted most from me was "perspective' on the Firm; they all used the same word. The broad purpose and title of this book are responsive to those requests. The feeling that an historical perspective would be useful may have been behind Lee Walton's suggestion (when he was managing director) and the separate suggestion of Arch Patton, now a retired director, that I write a history of McKinsey & Company. As I got into the task, however, I realized that I was not qualified to write a "history." That should be done by someone who can be objective, which I cannot. So instead I have given my own view of what happened during my 45 years with the Firm and why we took the actions we did. Since a mere recounting of facts without interpretation seems to have limited value, I decided also to point up lessons that I believe might be learned from our successes, mistakes, and failures, and to give my views on their significance to th Firm. This philosophizing (or preaching as some of it may be perceived) is designed to have relevance for the Firm's present and future decision makers.

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viii

BACKGROUND FOR PERSPECTIVE

If I am to provide the best perspective for readers, they should know the background that I bring to the task. Here is a brief summary: 1. Early in 1935, I became manager of the New York office and later that year a partner in McKinsey, Wellington & Company (a merged firm). From then until 1967, when my term as managing director ended, I have had knowledge of and participated in all significant developments. Even before I became managing partner in 1950, I was close to events, serving as deputy and managing teammate with H. Guy Crockett, who became managing partner after our 1939 reorganization. 2.

Since October 1967, I have had no part in the Firm's management decision making. With fine new leadership in place, I felt that I should stay completely on the sidelines, and I have tried to stick to that policy. Although I have continued an of-counsel association with the Firm that has given me an opportunity to observe and to participate in a peripheral way, I have a smaller firsthand fact base for telling what happened or knowing why-especially outside the United States. Therefore, after 1967, my basis for perspective and insight is limited and the names mentioned few. I discuss only major developments that have come to my attention as a nonparticipant and issues to which I have given current special study. My cutoff date is July 1, 1978, the date of the last election of directors and principals before completion of the book.

3. In view of my lack of balanced knowledge about what has occurred since 1967, I have evaluated only a few Firm managing decisions during the past ten years. I do, however, express concerns and offer suggestions a bout some Firm policies and management actions, especially those to which I have given current study. Although I believe that the suggestions are well founded, I have no way of knowing what priority they should be given even if they are considered.

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ix

The reader should bear in mind that any perspective is inherently personal. Thus the views expressed here are my own, may not reflect the views of others in the Firm, and certainly are not a "Firm viewpoint." At the same time, I have tried to be careful in formulating them and have submitted this perspective to other Firm members for their criticisms and suggestions-which, in true McKinsey fashion, they have given candidly. To help reduce my natural bias and increase my credibility, I have drawn on hard facts to the extent that our files disclose them. Much useful and interesting material, even from the thirties, has come to light-contracts, memorandums, and financial and operating data dealing with significant issues. By quoting this material, I let the record speak for itself whenever

I can. Besides trying to temper the inherent bias of this book, I have also tried to temper the tone. Many of the persons whose roles are discussed are still active in the Firm. It would therefore be divisive-and harmful-to be critical of their past actions or the positions they took. Fortunately, in only a few cases that I know of was any action taken or viewpoint expressed that I believe was motivated by anything other than the best interests of the Firm as the person saw them. Honest differences of opinion are another matter; I have dealt fully and forthrightly with them. In fact, I try to show how they improved the quality of our decisions and are always to be encouraged. Let me emphasize that this perspective is written for McKinsey people only. To have felt that it would be given outside circulation would have been inhibiting and would have produced a different kind of book-one of much less value to Firm members. Another point also bears emphasis: It is impossible, even in a book of this length, to mention all of those who have contributed to the development of the Firm to date. Nor is it possible for me to deal adequately with the contributions of those who are mentioned. Further, in a dynamic firm such as ours, the book will quickly get out of date in terms of people and their roles, positions, and office locations, but the fundamental principles of Firm and individual success never become outdated.

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OTHER PURPOSES OF THE BOOK Another reason for writing this book is to provide a record. There are not many people still alive who have a firsthand knowledge of the early days when the Firm was taking shape in response to the forces of the times, most of which are still operating. In fact, many of the wonderful people who helped build the Firm are dead: James O. McKinsey, H. Guy Crockett, J. Alexander Smith, and Gilbert H. Clee come most poignantly to mind. In addition to providing what I believe is a useful record of the past, and giving perspective on it, this book has a number of other purposes as well: 1. Identify and discuss the reasons for Firm success: in essence, carrying out a strategy geared to human needs and human values. A broad understanding of such a strategy, which changes little over time, will enhance our dedication to purpose and to effectiveness in achieving purpose. 2. Reduce the amount of time our consultants devote to "reinventing the wheel." For example, several of the concepts on which James O. McKinsey founded his firm in 1926 are just as fresh and relevant today as they were then because human nature and the basic nature of the consulting process change little over time. Although re1venting' helps the reinventors gain conviction for themselves, the process is basically wasteful and impedes managing momentum. Of course, concepts should always be subject to challenge, and we are constantly developing ways to broaden the use and improve the application of the consulting process. 3. Define the qualities that we should seek in staff candidates and should require for advancements. Perspective based on past experience has been supplemented with current, fresh fact-finding and study of recent successes and failures. 4. Help individual Firm members to be more successful consultants. By giving perspectives and insights on the

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reasons for outstanding individual successes and for failures, the book provides background and offers suggestions that should have continuing value-again because human nature and the fundamental character of the consulting process change so little. 5. Show our professional staff the real satisfactions that come from serving others and from contributing to the further development of the Firm as an organizationespecially an organization that has the mission of helping institutions of all types improve their performance and thus assist in bettering the human condition in many countries around the wor1d. 6. Persuade our professional staff that McKinsey provides the kind of work that is personally satisfying and fully rewarding as a lifetime career. Certainly our work to strengthen the managing of organizations is of critical importance. Theodore Levitt, professor of business administration at Harvard Business School, puts it this way: "Management is the primary engine of progress, as progress is generally defined."** 7. Demonstrate to Firm members that our success and their own personal satisfactions depend on our following basic managing principles. 8. Convince Firm members that strict adherence to professional standards and high personnel standards is also essential to our continuing success. The effort to achieve all these purposes has resulted in a long book, which was made even longer by: (1) the suggesBy performance, I do not mean just profits, which was the meaning that many people gave the word during the "go-go' years of the sixties in the United States. Rather, I mean achieving the goals and objectives (including the changing of them) of any type of organization in an effective and efficient manner, with profits being one measure of the success of a business firm. Responsible decision makers for governments, foundations, universities, churches, and other not-for-profit organizations all seek to improve the performance of their organizations. ··Management and the Post-Industrial' Society," The Public Interest, summer, 1976.

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tions of many reviewers that I expand on particular subjects; (2) my belief in the value of looking at the reasons for Firm and individual success and Firm strategy and managing principles from different points of view; and (3) quotations from material in our old files. Although I included anecdotes to help keep attention from flagging, at the last moment I became fearful of discouraging the reader by the length of the book. So I cut it substantially with the help of Arch Patton and Thomas D. Steiner, a New York associate. Much of this material from the "cutting room floor'' has been made into a Supplement that is cross-refer. enced in the book. Interested Firm members may obtain a copy from their office libraries.

HELP WITH THE BOOK To benefit from their memories of the facts and perhaps reduce the self-serving content of the book, I asked a number of former management group members to review a draft copy: Howard C. Adams, Phillip S. Babb, Arthur T. Caruso, Ewing W. Reilley, and E. Everett Smith. I also asked Arch Patton, one of our most prolific writers to date, to review the story for readability as well; he suggested ways of improving the structure and provided especially useful criticisms of substance and style. Before he left for government service, Alonzo L. McDonald made a thorough review of most chapters and had many useful suggestions; his insights as a former managing director were particularly helpful. To get their opinions on the accuracy and interpretation of the facts and their suggestions on how the usefulness of the material might be improved, I asked these present directors to review a draft copy: D. Ronald Daniel, C. Lee Walton, Warren M. Cannon, Hasso W. von Falkenhausen, Max Geldens, John

If there are errors in facts, it will not be for lack of time and painstaking effort devoted to achieving accuracy. However, the records of past decades are incomplete, and the movements of people in this fast-growing and dynamic Firm are not easy to track. I regret any errors or omissions that sharp Mckinsey minds may detect

PREFACE

xiii

G. McDonald, J. Roger Morrison, Richard F. Neuschel, Hugh Parker, Charles E. Shaw, J. McLain Stewart, and Howard H. (Terry) Williams III. Mac Stewart also read the galleys of the book, which was doubly generous of him. I am particularly indebted to Ron Daniel, who became managing director after the book was well under way. Despite his heavy workload, Ron generously offered to read the final draft as well and gave me many searching and useful suggestions and criticisms. In the characteristically open style that embellishes his leadership, he usually urged more rather than less candor in dealing with our deficiencies. Warren Cannon also made a final review of the manuscript. He volunteered to do so even though it added to his heavy workload near the end of the Firm's fiscal year. I am indeed grateful to him. And at Ron's suggestion, a final review was made by Robert L. Slane, an associate in the New York office, who had useful comments and suggestions. hroughout the preparation of the manuscript, I had the help of Lillian V. Dombrowski, who joined the Firm in 1945, served as Firm secretary for a number of years, and has been a perceptive observer and participant in many of the developments dealt with. Lillian has had a long-term interest in files bearing on our history and helped search out relevant material. She also reviewed the manuscript. The individuals who spent the most time on the manuscript were Mary Perkins, Barbara A. Sinclair, and my wif Helen. Mary, an outstanding editor, helped greatly with both structure and wording. Barbara, my administrative assistant, not only typed draft after draft cheerfully and skillfully but did fact-finding, checked accuracy, and made suggestions. Helen offered valuable and perceptive criticisms and suggestions as she has done throughout my McKinsey years. I appreciate the help of all these McKinsey people and hav adopted a great many of their suggestions. Of course, none of' them should be perceived as necessarily agreeing with the facts as stated or the perspectives I have drawn from them. As the cliche goes, the responsibility is entirely my own. As any reader will readily sense, for me these have been 45 fascinating and exciting years. I was lucky in coming into the

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field and the Firm during their formative periods. But most of the excitement and fun have come from working with people who arc outstanding in character, intellectual ability, creativity, initiative, drive, and sense of humor, and from enjoying the fellowship of kindred minds dedicated to the common purpose of building a distinctive and perpetual professional firm in a new field. -Marvin Bower

Firm Office, New York November 1, 1978

CHAPTER 1

YEARS OF SHAPING PURPOSE When l reported for work at the New York office of James O. MKinsey and Company on November 13, 1933, I had in mind a program for the Firm that grew out of my prior experience. To give that statement credibility, I begin with brief, relevant autobiographical material before 1933. EARLY YEARS I was born August 1, 1903, in Cincinnati, Ohio. Shortly thereafter, my family moved to Cleveland, where I grew up and went to high school. It was there that l met Helen, my wife to be. Since I came from a family of modest means, I spent my high school summers working in a variety of jobs: surveyor's helper, grinding machine operator at Warner & Swasey, ice deliverer, and assistant camp director. In 1921, I entered Brown University. As graduation approached in 1925, I had no notion of the kind of work I wanted to do. My father suggested that I go to law school. As an appointed official in our county government, he had extensive contacts with lawyers and held them in high regard. So without much conviction, I entered Harvard Law School. To earn the money for law school, my father got me a summer job with a Cleveland law firm, Thompson, Hine and Flory (TH&F), still an important firm in Cleveland. As counsel to a number of large wholesale hardware companies, TH&F became the collector of bad debts from hardware retailers. After repeated letters from the law firm produced no results, someone had to call on the retailers. That became my job. It

2

PERSPECTIVE ON MCKINSEY

was tedious, slogging work even though my meetings with the hardware store owners were interesting. Through pleading, cajoling, and threatening suit, I was able to collect several times my salary. This success carried its penalty: During the summers of 1926, 1927, and 1928, I was again made a collector of hardware retailer bad debts. I did spend some time in the office, however, and the partners of the firm (all of them fine, hightype individuals) gave me plenty of opportunity to learn about other phases of the practice. What I learned seemed pretty dull. As the summers went along, I heard about other Cleveland law firms-chiefly a bout one called Tolles, Hogsett and Ginn (now Jones, Day, Reavis & Pogue; I'II refer to it as Jones, Day). Headed by Frank Ginn, a legal giant in the city, Jones, Day stood out as the leading corporate firm, serving as counsel to many of the area's largest companies and major banks and investment banking houses. Its partners were prominent in Cleveland charitable, social, and cultural organizations. As I came to understand that there was a Cleveland "establishment," l found Jones, Day lawyers active at the core. And the partners of that firm were respected and envied by the partners of TH&F. With graduation coming up in 1928, I applied to Jones, Day for a job. l was interviewed but turned down because my grades were not high enough. This was something of a shock-I had worked hard and my grades were above average. But I found that Jones, Day recruited only from law review members or the top 5 percent of the class. Although I had an offer from TH&F, I didn't take it; for me, that firm's practice lacked interest. Before I was graduated from law school, I decided to go to Harvard Business School (HBS), get good grades, and reapply to Jones, Day. I recall that Roscoe Pound, probably the most famous dean of Harvard Law School, called roe to his office one day to offer me a job with the law department of International Paper Company. When he learned of my plans to go to HBS, he said, "My God, Bower, you are about to graduate

YEARS OF SHAPING PURP OSE

3

from the greatest educational institution in the world and you are going to that place!' HBS YEARS I went to 'that place and enjoyed every minute of it. Helen and I had married in 1927, between my second and third years at law school. A year before our marriage, I was able through good luck to get her a job in Medfield, Massachusetts, where she began teaching after graduation from Westen Reserve University in Cleveland (now Case Western Reserve). Medfield is about 20 miles from Cambridge, and during my last year in law school and my first year at HBS, I commuted to class by ancient Ford car. After one year of teaching, Helen was promoted to principal of the elementary school. With her salary and my earnings and stock market profits, we just managed to finance school and living costs. I finished the first year at HBS in the top 5 percent of the class and was elected to the Harvard Business Review, which then had student editors. Before the end of the first year, I wondered whether the second year would be worth the time and money. During spring vacation, I decided to make a small survey of lawyers and businessmen and try to find out. For early interviews, l went to New York because I wanted to include a J. P. Morgan partner in the survey. Not knowing a partner or anyone who did, I looked up the names and found one called Arthur Marvin Anderson. His middle name became my "scientific" basis of choice. I told the guard at 23 Wall Street my mission, and Mr. Anderson saw me immediately. I recall his response dearly: "If you don't finish your second year, you will spend the rest of your life explaining that you did not flunk out." The sensibleness of this remark was overwhelming. I told him at once that I would give up my survey and return for the econd year. Then I thanked him and rose to go. Mr. Anderson asked whether I had any plans for the summer. When I replied that I had to find a job, he said, "How would you like to work for our law firm?'' (which I knew was Davis, Polk & Ward-

4

PERSPECTIVE ON MCKINSEY

well-then and now one of the leading Wall Street firms). It was located in the adjacent building. Mr. Anderson called one of the partners and I went right up. After two hours of interviews, I had a summer job. So Helen and I spent the summer of 1929 in New York City-a summer of boiling stock markets before the crash and the Great Depression. For us it was an exhilarating experience. Mergers were the primary corporate activity at Davis, Polk and I worked on several, including Standard Brands. I was also a law clerk to a number of later legal greats. Back at HBS, I was able to choose my second year courses and found them exciting. Helen gave up teaching and we lived in Cambridge. I was graduated "with high distinction'' (magna cum laude). During the recruiting season, 1 sought no interviews. I was determined to return to Jones, Day in Cleveland. Even though r got offers from Davis, Polk and other firms, when Jones, Day asked me to come, I quickly accepted and reported for work in June 1930.

JONES, DAV YEARS Jones, Day was everything I had expected. Owing largely to my HBS education, I got interesting assignments and a chance to work for Mr. Ginn, the senior partner. Because I had heard so much about him and the firm he had shaped, I made it an immediate objective to learn why it had been so successful. From observation and analysis during my Jones, Day years began the formulation of the program that I later brought with me to McKinsey. As the year 1930 advanced, the Great Depression deepened. In Cleveland, the industrial companies that the firm's bank and investment banking clients had financed began to default on their bonds. Since we had done the legal work on the underwriting, the bondholders' committees, which got control of the businesses, turned to us for assistance. These assignments were more business than legal and, because of my HBS train-

YEARS OF SHAPING PURPOSE

5

ing, I was made secretary of a number of committees-a total of 11 during my three years with Jones, Day. Since the bondholders' committee superseded the board of directors, the secretary was perceived as having substantial authority. And since the role of the committee was to develop a new capital structure, I made studies of potential earning power and suggested recapitalization structures to the bankers and investment bankers who made up the committee. It was fun. But when the new structure had been negotiated and I had to draw up the legal documents-bond indentures, preferred stock contracts, and many others-it was boring. I realized at the time that my studies of company business and management problems were amateurish and superficial. I saw the need for a professional firm to handle these problems in the independent and professional way that we handled legal pro bl ems. But I knew of no such firm. Nor did any of the committee members. As my observation and analysis of Jones, Day success factors continued, one incident is worth mentioning because of the lesson it taught me. The head of a leading local investment banking firm came to see Mr. Ginn one day to retain the firm in connection with a merger he wanted to bring about between Bethlehem Steel and Youngstown Iron and Steel. H expected antitrust action by the government and wanted the firm's help in defending the action. Mr. Ginn studied the case and declined it, convinced that the merger would violate the antitrust laws. The investment banker pointed out that fees might run to $1 million, that he was prepared to risk losing the case, and that he would take the case to another leading Cleveland firm if Jones, Day turned it down. Mr. Ginn still declined. That news swept through the firm. It made an specially deep impression on us young associates who wer expecting

Actually at that time not only was McKinsey functioning but so were Edwin Booz & Company (now Booz, Allen and Hamilton); Stevenson, Jordan and Harrison (now out of existence); and probably others now defunct.

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our salaries to be cut (and they soon were). Our impression was further deepened when the Jaw firm that took the case and fought it long, lost it. That news spread like wildfire through the business community. If the independence and professional stature of Jones, Day had not been established up to this point, Mr. Ginn's one brilliant and courageous professional decision established it then. This incident provided further evidence of the high standards of professionalism and independence that were important factors in Jones, Day success. Others I observed were rigorous adherence to high standards of ethics, personnel, and performance; candor with clients; a focus on serving leading corporations; a take-charge approach to client assignments; dedication to helping clients in ways they did not expect; and expansion of the clientele through developing the firm's reputation and engaging in public service activities. Skillful use of thew • h ritten document enhanced all of these factors. Because of "s factors, Jones, Day has since grown in number of lawyers unt, r·today it compares with the largest New York and Chicago l aw irms, of i~n_e other Jones, Day incident is also worth noting because the ;. mfluence on the program I had in mind when I joined Cleve;:~- Through our activity together in the HBS Club of emplo . d, I came to know George 5. Dively, who was then an won{',",9a brokerage firm. George recognized that his firm tors-ti ail unless it could effect a "composition" with its crediat is, get e ·very smngle • 4 creditor ·di tion th,' to agree to a reorganizaplan t athscaled down the firm's liabilities. George took his • asked o the part ners in is f:irm, who accepted it. He then relucta~t to do the legal work. Although Mr. Ginn agreed freedo \ he let me handle the matter with considerable fin," ut with close enough supervision to protect the h i

George a d approved b n 1 developed a reorganization plan and got it arduous ,,'," brokerage firm partners. Then 1 undertook the dogged k of getting every creditor to accept it. Owing to Wor and the prestige of Jones, Day, all of them finally

YEARS OF SHAPING PURPOSE

7

did. George became a partner and the firm succeeded while he

stayed. One day not long afterward (it must have been in the fall of 1932), l had luncheon with George and sought his judgment, which I had come to respect and still do, on a matter that had been on my mind for some time: "ln light of our recent experience together, don't you think there is a need for a firm that can work on business and management problems in the same professional and independent way that a law firm works on legal problems?" George was in thorough agreement.

MEETING WITH MR. McKINSEY A few months later, one of my reorganizations took me to Chicago, and there I met James 0. McKinsey. He was an easy person to come to know. During one of our discussions, he asked me how I liked my work. I said that I found half of it exciting (the creative and negotiating activities) and half of it boring (the paper work and legal drafting). Then he told me a bout his firm and I was amazed to learn that its practice, besides accounting, was on the way to becoming the kind of firm I had described to George. Mac asked me whether I would like to explore a position with his firm, which had its principal office in Chicago and a tiny new office in New York. It seemed like the proverbial dream come true and I seized the opportunity. There were more interviews with Mac and with two other partners. The offer was made and accepted within a few weeks. Helen was ready to risk my entering a brand new field and giving up George went on to become treasurer of Harris-Intertype (a Cleveland company now called Harris Corporation), then general manager, president (and CEO), and chairman (and CEO). He is now chairman of the Executive and Finance Committees of Harris. Under his leadership, the company made a number of acquisitions in carrying out a brilliant strategy for changing the character of the business. It has been a longstanding client of the Firm, and George has brought. us into a number of other companies and me into Cleveland activities. He and his wife are close friends of ours.

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PERSPECTIVE ON MKINSEY

what promised to be a successful legal career for which I had spent five years preparing. had accepted the McKinsey position thinking that I would be in the Chicago office. On one trip to Chicago, when Helen was looking for a house Mac asked me what I thought about . . • I joining the New York office. Fortunately, I told him that I had joined the Firm, not an office, and that he knew better than I where I should start. He chose New York, and we have never regretted Mac's decision. On the night of November 12, 1933, I took the train to New York with a definite program in mind and a determination to do as much as I could to help James O. McKinsey and Company develop into the kind of firm that I envisioned. The program had evolved from my reorganization experience; from my thinking about the numerous and complex business problems caused by the Great Depression which needed sophisticated and independent solutions; and from my observations and analysis of why Jones, Day had been successful. I

A LUCKY THING . A lucky thing happened on my way to the Firm. On the tram, I met Aims C. Coney, vice president of the Union Trust Company of Cleveland and chairman of two bondholders' committees of which I had been secretary. Aims said that he was going to New York to talk with Kuhn, Loeb & Company about taking the investment banking leadership for a possible merger of Republic, Corrigan-McKinney, and Otis Steel Companies, all headquartered in Cleveland. I told Aims about the firm 1 was joining and the hopes I had for making really professional studies of business and management problems instead of the amateurish ones he knew 1 tad been making. He said that maybe an independent study 0 th e proposed merger would appeal to Kuhn, Loeb, and that he would suggest it to them. I told him that if they were interested, 1 would ask Mac to come to New York to handle the negotiations. But more of that in the next chapter. ,, I978 this firm merged with Lehman Brothers to become Lehman Brothers uhn Loeb Incorporated.

CHAPTER 2

THE FIRM'S EARLY YEARS Walking into the office at 52 Wall Street the following morning, I entered a world dominated by the personality and mind of James O. McKinsey. Since the past always helps shape the future, a recounting of the Firm's beginnings provides important perspectives. J.C. McKINSEV'S BACKGROUND I heard much of Mac's early background and the Firm's early history soon after I joined; but for the sake of accuracy and completeness, I have reconstructed this historical information from a number of sources, including McKinsey Memoirs: A Personal Perspective, by John G. Neukom, a long-time partner who retired in 1972 and about whom you will hear more later in th is book.* Mac was born in 1889 on a farm in Gamma, Missouri. His father wanted him to stay on the farm, but Mac wanted to get a high school education. So he ran away from home. While he was in high school, the principal hired him to teach algebra to the high school teachers. This experience kindled his interest in teaching and Jed him to the State Teachers College in Warrensburg, Missouri, where he received .: Bachelor of Pedagogy in 1912. One year later he earned a Bachelor of Law at the University of Arkansas in Fayetteville. Mac next studied at the University of Chicago, which awarded him a Bachelor of Philosophy degree in 1916. John's useful memoirs (65 pages), which were privately published in 1975, were distributed inside and outside the Firm. Copies are available in Firm libraries. 9

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With the coming of World War I, Mac interrupted his studies to serve as a lieutenant in the Army Ordnance Department. He said later that it was in dealing with important suppliers of war material that he saw the opportunity to help corporate management improve its performance. As he thought about getting into a consulting practice, he decided that he needed three ingredients: (1) unquestioned respectability; (2) professional exposure; and (3) a reputation for special competence in an area of concern to management. Convinced that more education and a faculty position would establish 'respectability," he continued his studies at the University of Chicago and also became an instructor in accounting in the School of Commerce and Administration (now the Graduate School of Business). In 1919, he received the degree of Master of Arts and became a Certified Public Accountant (CPA) in Illinois. Finally, in 1920, Mac was appointed Assistant Professor of Accounting at the University of Chicago; however, he spent his first academic year in this post as a visiting lecturer in accounting at Columbia University in New York City. Throughout these teaching years, Mac did not forget a bout the second ingredient, professional exposure. In 1920, he published his first textbook, Bookkeeping and Accounting. . He followed it with a second in 1922, Budgetary Control. This book was a major factor in shaping the Firm's approach to problem solving and in developing our early clientele. It was also the first definitive text on budgetary control, which was then in • its • early stages as a control technique. A history of the School of Business of the University of hicago says: The :modem era of management accounting dates from his (McKinsey's) book, Budgetary Control (1922), which was the first """SP' to put the concept of budgetary control into useful terms. Originated the concept of accounting as a tool of management. of so•u.s. terms and abbreviations are initially described or spelled out for the benefit me of our non-American colleagues who may not be familiar with them. a,,_Report on the School of Business of the University of Chicago" by Wallis ory (1957)

HE FIRM'S EARLY YEARS

11

The basic concept of the book is an integrated approach to planning. The book says that budgetary control "... deals with the coordination of the operations of the several departments to the end that a well-formulated program may be made for the business as a whole." Mac simplified the concept orally in this way: "A budget is a statement of policy, expressed in terms of future accounts delegated to units of an organization." Th is concept is the origin of our lop-management approach. It is commented on in The Golden Book of Management, which describes the life and work of pioneers in management. ... Having grasped this unifying principle, he (MKinsey) had one intellectual advantage over the majority of his contemporaries in management who had been trained as engineers; his basic education in law and accountancy had taught him to look at a business as a whole. From this appreciation of every business as a unity, coupled with his practical experience as a management consultant, flowed his special contributions to management thought and practice.

In his third book, Managerial Accounting (1924), Mac explained how accounting was an aid to decision making rather than merely a technique for financial record keeping. Later on he carried this concept into his audit practice, insisting that an audit report is not as useful as it should be unless it includes information that helps executives manage the business more effectively. In 1924, his Business Administration was also published, for use chiefly as a textbook. Here the General Survey Outline began to evolve. While Mac was gaining professional exposure through writing, he was also gaining it through speaking and lecturing. During these years, he spoke frequently before university and business groups, always using an outline, never a full text. This practice improved his communication and brought him close to his audience. To begin acquiring the third ingredient for a consulting practice-a reputation for special competence in an area of This book, published by Neuman Neame Lim ited of London (1956), was edited for the International Committee of Scientific Management by Lynn Urwick of Urwick, Orr & Company. British management consultants.

12

PERSPECTIVE ON MKINSEY

concern to management-Mac supplemented his teaching and writing careers with another: In 1920, he joined the firm of Frazer and Torbet. George E. Frazer, who had been one of Mac's professors at Chicago, had organized the firm in 1917, "... for practice as counsel in business organization, accounting, and industrial management." In the history of his firm, The First Forty Years, Frazer says that Mac was a'... brilliant member of the graduate seminar l conducted at the University of Chicago in 1917." In the section about the partners of the firm, he writes: The first general partner who joined Mr. Torbet and myself was James Oscar McKinsey, a Certified Public Accountant and a member of the faculty of the University of Chicago, who became a junior partner in 1920. Mac had a strong bent toward budgets and management accounting. While in our New York office, he wrote a book on Budgetary Control which pleased me because it followed outlines discussed in my seminar at the University in 1917 and 1918. The book was the first in its field and brought deserved recognition to Mr. McKinsey. And all good, professional writing by a member of the firm does rub off into the general good of the firm. McKinsey did valuable work in budget installations and left us in 1927 to organize his own firm in management engineering a firm which continues to be a leader in its field. We all deeply regretted the death of Mr. McKinsey in 1937 when he was in his prime.

lsewhere in his history, Frazer says: 'Mr. McKinsey was both brilliant and energetic and quite tireless. In public speeches, he could talk faster and more effectively than any man I ever knew '' BEGINNINGS OF THE McKINSEY FIRM Perhaps Mr. Frazer remembered incorrectly the date when Mac left his firm. Although the records are not clear on just when Mac started James O. McKinsey and Company, the firm of A. T. Kearney & Company, Inc. (which also has James 0. "For material about the Frazer and Torbet firm, I am indebted to John Neukom's memoirs. ·Although this is still the legal name for the firm, its letterhead and announcements carry the name Kearney: Management Consultants.

THE FIRM'S EARLY YEARS

McKinsey and Company for an antecedent) advertised it fiftieth anniversary in 1976; so that fixes the start in 1926. In 1926, two other noteworthy events occurred: Ma achieved the rank of Professor of Business Policies at the Uni versity of Chicago; the finance committee of Armour and Com pany, one of the country's largest meat-packers, decided tha the company should establish budgetary control, and it author ized then treasurer William P. Hemphill, who had read Budg etary Control, to retain Mac as a consultant. At this point, Ma knew that he was well on the way to acquiring the thin ingredient for professional success-a reputation for specia ompetence. So Armour became James O. McKinsey and Com pany's first client. Between 1926 and 1933, the Firm grew in an encouraginf way. Mac continued to write prolifically-both books and arti cles and to speak frequently. He also became interested in th Young Men's Christian Association and other community af fairs. He was a founder of the American Management Associa tion and served as its second president. This profess iona exposure pa id off and good work for one prestigious client lee to retention by another. Also during this period, partners were added. In all cases. the individuals were brought in as partners because there wa! no time to advance from within. Mac's first partner was Andrew Thomas Kearney (Tom) who joined in 1929. Tom had been director of market researcl of Swift & Company," another large Chicago meat-packer. Hi brought strength of character and strength in marketing to th growing Firm. Tom was a kindly person who could calm vig orous differences of opinion, and his counsel was frequentlJ sought by young associates. He remained in the fiel throughout his life, later becoming the head of A. T. KearneJ & Company. Another early partner was William P. Hemphill, wh joined the Firm after he retired as treasurer of Armour Hamilton Allport, Rex Reeder, and Walter Vieh, all men witl financial backgrounds, also became partners. By the time Swift, now a division of Esmark, Inc., is currently (1978) a client

of

the Firm.

H4

PERSPECTIVE ON MCKINSEY

joined, the total professional staff had been brought to about 15, including partners, consultants, and accountants. The Firm's first office was in a not-quite-first-class building on Dearborn Street. By 1933, it had been moved to the then first-class Board of Trade Building. In 1932, the Firm opened a New York office at 52 Wall Street, having acquired on favorable terms the lease and furnishings of the New York branch of a defunct Chicago investment firm. Walter Vieh was transferred from Chicago as partner in charge. This, then, is a brief history of the Firm up to the time I joined. I found it a vigorous organization with a substantial clientele and competent, respected partners led by James O. McKinseya brilliant, dynamic, and accomplished individual with an established reputation in finance and budgeting and a growing reputation in organization and general management. FIRST IMPRESSIONS When I first entered the office at 52 Wall Street, I found that in addition to the reception room, there were six separate offices, all tastefully decorated. Walter Vieh, the partner in charge, was a fine looking and likable man in his late forties. He was a CPA. William Donald, another partner, was in the process of leaving. I learned later that Mac had brought him in a year earlier in the hope of capitalizing on the extensive topmanagement contacts that Bill had developed as executive director of the American Management Association; but in a year he had introduced only one small audit client, so Mac decided to let him go. There were two associates in the office, both named Smith-W. Mason who later became a partner of A. T. Kearney & Company, and Rick who left the Firm after a few years. I was also to learn later that two other partners with extensive acquaintanceships among top-management executives were not able to capitalize on them. One had developed his circle of acquaintances as head of the National Association of Cost Accountants; the other, through civic activities. Both were gregarious and friendly, but neither took a problem-solving or analytical approach in conversations with executives. I concluded that since they were not perceived as problem solvers, they were not perceived as consultants to tum to,

TI-IE FIRM'S EARLY YEARS

15

Actually, my first impressions of McKinsey the firm were those of McKinsey the man. Some had been formed at our first meetings and employment interviews; others, when I had gone to Chicago on a Saturday morning for a training meeting. There was a room in the Chicago office large enough for e th entire consulting and accounting staffs. Mac, who was 44 and still a professor at the University of Chicago, ran the training meeting like a class. He was an imposing "teacher" of a lean 6 feet 2 or 3 inches with pleasing features and a 1 pleasant smile. He wore "" rimless glasses through which came a Piercing look. Mac's training "text" was the General Survey Outline, which was an important tool of the Firm for many years (and could become so again). Basically, the Outline was a checklist for making a strategic general survey of a business and a guide to our thinking and problem-solving approach. It began with sections on industry outlook and company competitive PO°' tion, and then had sections on all major functions: marketing, :•nufacturing, facilities, control, finance, personn_ei., etc. In all ctions, the order of consideration was goals, policies, organ' ation structure, facilities, capital, procedures, and personnel 1.e., set study scope, approach, and priorities. Smee the Outline provided the primary working approach to solving I ·· problems, any associate or partner who cou, Id not deal with a case example through the use of the Outline was berated or belittled in front of the "class." Everyone was required to participate at some time during the session. If no one volunteered promptly, Mac called on someone. I realized at once that training really mattered to Mac. As one who believed strongly in education, I was favorably imPressed. Mac put his training stamp on the Firm and I have tried to extend his efforts. Training has been an important tributor to our success. If effectively pursued, it can CO contrib tinue that contribution. After that training session Mac's dedication to the Firm and th e field was more evident to me than ever. I concluded almost immediately that my decision to join the Firm had been a sound one. 1t

6.

'

16

PERSPECTIVE ON MCKINSEY

One attribute that contributed to Mac's success as a trainer and consultant was his splendid mind, which was characterized by a deep analytical approach to everything. This approach, combined with his forthrightness and his understanding of people and their motivations, accounted for his extraordinary ability to gain confidence quickly. But even though he had an analytical approach to corporate problems, he looked at them from the viewpoint of the person with whom he was talking. He discussed things that really mattered to the person, and he did so in a helpful, searching, and independent manner. In client studies, Mac was always sensitive to the situations and viewpoints of the people in the client organization. He realized that recommendations are neither accepted nor implemented on the basis of rational factors alone. Besides having a powerful personality and mind, Mac had a fine sense of humor. He told humorous stories that were usually relevant, and his conversation included Ii ttle small talk. In fact, even in conversation, Mac followed the General Survey Outline. He told me that anyone who knew the Outline thoroughly had a ready-made approach to any business discussion and that the concepts reflected in the Outline even had application in nonprofit organizations and social situations. Although Mac was always sensitive to the situations and viewpoints of people outside the Firm, he was less so with his colleagues. Among us, he was a relentless critic. He felt that veryone who sought success wanted criticism, and he really gave it. Most of his criticism was negative. Indeed, his praise was so occasional that it made a deep impression when it was given. This approach appealed to me. (I have found that when praise is evenly balanced with criticism, only the praise is remembered. When I was told later by one of my partners that I was too critical, I tried to strike a better balance. But I'm convinced that our partners will not discharge their full responsibility to associates unless they really tell them where they are weak and how they can improve.) With so many books to his credit, it is not surprising that Mac was a superb writer-not only of reports but of letters, memorandums, and even short notes to people in the Firm.

THE FIRMS EARLY YEARS

17

Having had training in report writing at HBS and extensive writing experience in the law, I felt that I could quickly impress Mac as a report writer. But Mac's merciless criticism soon onvinced me that I had much to learn and that Mac was the one to learn it from. l decided that I would take every occasion to write-even when I was not expected to. Another trait Mac had was skill in setting priorities on th use of his time. The client study on which he was working got his undivided attention. So did the negotiation with a prospective client when he turned to that. Even in the rush of daily work, I observed that he could quickly evaluate the relative importance to the Firm of how he spent his time from minute to minute. Once he had established a priority, he applied his mind rigorously to it to the exclusion of everything lse. He would dig into the subject, break down the problem, analyze each factor, and come up with a useful answer. But the trait that appealed to me most was Mac's independence with clients. He told them the truth as he saw it, even though it risked continuance of the relationship, and I noticed that clients appreciated his candor. This independence was important to me because it squared with my concept that a onsult ing firm should show the same independence that I had seen exercised at Jones, Day. I had observed how valuable that independence was to Jaw clients, and I knew that it would also be valuable to consulting clients. I had expected Mac to be an independent person, and I was reassured to see that independence in action. FIRST ASSIGNMENT

When l joined the New York office, a study for the bondholders' committee of the Savoy-Plaza Hotel was just getting started. (The hotel, located on Fifth Avenue across from th Plaza, was razed in the mid-1960s to make way for the General Motors Building.) This study became my first assignment. For me it was exciting because it put me exactly where I wanted to be-studying a corporation's business and management problems instead of its legal problems. My excitement was inreased by the fact that while I was with Jones, Day, Aims

1B8

PERSPECTIVE ON MCKINSEY

Coney had been the chairman and l the secretary of the bondholders' protective committee responsible for the reorganization of the Wade Park Manor Hotel in Cleveland. So my switch from legal to business consulting had come full circle. Walter Vieh was the engagement director for the SavoyPlaza study. I soon discovered that he approached problems like an accountant. He gave me instructions on how to go about the work, and I was, of course, armed with the General Survey Outline. As part of the work, Walter asked me to analyze purchase vouchers as dues for cost reductions. After a couple of days I found the clues repetitive and told Walter so. He suggested a third day, and again I reported repetition. When he told me to spend a fourth day on this analysis, I knew he was asserting his authority over a new associate, and I protested that further analysis was a waste of client money. Walter's authoritarian and pedestrian approach evidenced itself again when we met as a team to develop recommendations. Other team members and I had what we felt were imaginative recommendations to build volume and cut costs (and many of them were later adopted). But Walter did not encourage the free discussions that I had been used to in reaching the correct conclusions for a legal client. The confrontation came when we were writing the report. Walter wanted the report written his way and was unwilling to discuss why he disagreed with my way. Finally, we narrowed the issues to matters that I considered of real importance, and I suggested that we let Mac decide after hearing both of us. I sent my draft with a covering memorandum to Mac and a copy to Walter, and Mac came to New York. The three of us discussed the report, and Mac and Walter, quite appropriately, also had some private sessions. Mac was careful not to appear to side with either of us. He ended up rewriting the report. Although l did not agree with all of his draft, it was quite acceptable to me. I felt that I had had my say as part of an open-minded consideration of the facts. I suspect that Walter was also satisfied with the outcome even though he resented my taking issue with him. A couple of years later, when Mac was better satisfied with my report writing, he asked whether I would like to review my

THE FIRM'S EARLY YEARS

19

Savoy-Plaza draft, which he had kept in his desk. When l thought about how poor it would now seem to me, I told Mac that it would be too discouraging. We both had a good laugh. BACK TO CLEVELAND The prospects of a Republic Steel merger study, which had come up on my way to the Firm, finally materialized. Kuhn, oeb agreed that a study was necessary. Following discussions in New York with Mac, the bankers, and Aims Coney, the three companies agreed to a feasibility study. Aims indicated that he wanted me to participate. In March 1934, our family moved back to Cleveland, where we lived in a rented house not far from the street we had left. The study was a major one for the Firm, and my part offered me early responsibility. We concluded that the thr companies were complementary and that merger was desirable for all. Otis declined, but the merger of Republic and Corrigan-McKinney proceeded. (Later Otis was absorbed by another large steel company-in line with the trend toward integrated companies which we had identified.) One of the fine things about the Republic Steel study was the opportunity it gave me to work closely with Mac, to observe him in action, to get his merciless but valuable on-thejob coaching, and to discuss the Firm at dinner and in th evenings. Especially did I try to understand how he gained the confidence of top-management executives. He told me that he always followed the Outline. Before the Republic Steel study was concluded, Aims Coney recommended the Firm for another Cleveland studyreorganization of the Wade Park Manor Hotel, the one for which I had previously done the legal work. That study kept us in Cleveland until September, when we returned to New York. One day more than 25 years later, the then manager of th Wade Park Manor stopped in the New York office and was referred to me. He said that he had just come across our report and simply wanted to say that it had stood up well over th years and that nearly every recommendation had been put into

20

PERSPECTIVE ON MCKINSEY

effect. As we talked, it became clear that he had no other motive than to be complimentary, thus providing one of the real rewards of the professional-satisfaction from client satisfaction. A BITTER LESSON Another study of significance-to me, at least-was one for Commercial Solvents, then and now a medium-sized chemical company. It was a broad marketing study, arranged by Mac, who served as engagement director. I was his chief lieutenant. Since Mac was busy in Chicago and came to New York only when necessary, again I had substantial responsibility. One of the problems in the study was the heavy (and I felt unfair) criticism that the president leveled at the sales manager. Although the president set all prices, he held the sales manager responsible for profits. Finally I decided, without consulting Mac, that I would tell the president that the sales manager could not be fairly held responsible for profits when he lacked authority over prices. The president was furious. "Young man, I retained your firm to investigate our sales activities, not my activities. I am going to call Mr. McKinsey and ask him to remove you from the study." He did, and Mac did remove me. Even though Mac was most understanding, he made it clear that l should have exercised better judgment than to confront the president the way I did; that I should have known that the president would resent my criticism because of my age; and that I hould have consulted Mac first. That was the first of two times that I was removed from a study. The Commercial Solvents incident taught me the importance of judgment in consulting work. As Mac pointed out, my judgment had been hasty and faulty, and I had not taken into account the probable attitude of the president. It was a bitter lesson. From then on I tried always to ask myself what the other person would think about my contemplated action, how it would look to him, how it would affect his position. I 'The second case was similar: I raised too many embarrassing questions about favoritism in a family-owned business.

THE FIRM'S EARLY YEARS

21

learned then and later that weighing the other person's probable reactions is essential to reaching a sound judgment.

CARRY-OVERS FROM THE LAW One of the convictions I brought with me from the law was the need to concentrate in some field. No lawyer of note in any of the firms I had worked for was a general lawyer doing everything; were he to try, he would know so little about so many things that he would end up having no real competence. In fact, it is regarded as a mark of stature for a lawyer to tell a client executive that someone else in the firm who specializes in his particular legal problem should be brought in. I saw that clients respected the lawyer who used this approach. Therefore, even though no one in the Firm told me I should concentrate, I felt that I should. I chose marketing (usually then called sales) for three reasons. First, I had enjoyed my marketing courses at HBS. Second, my special reports for bondholders' committees had a marketing emphasis. Third, during the Great Depression, the long-term outlook indicated that marketing would probably be the function of most concern to management in the period immediately ahead. I did not announce my field of concentration-I just began studying the subject deeply and telling the engagement director that I would handle the marketing phase of a study. Every time I worked on a study that involved a special aspect of marketing, I read texts and articles about it. By combining theory and practice, step by step I developed my marketing knowledge so that I could write about the subject, speak with conviction on it, and hold my own with marketing executives. As my marketing interest and competence became noticeable, I was selected for marketing assignments or for the marketing phase of a general survey. That leverage built up further marketing competence. As I found that I could cope with increasingly difficult problems in the field, my self-confidence increased. In this connection, it is worth noting that in the early 1950s, Professor William H. Newman of Columbia Business School was retained to make a study of the Firm. Of the five or

22

PERSPECTIVE ON MCKINSEY

six problems he identified, only the "specialist versus generalist' question remains unresolved. Another insight I brought from the law was the value of a take-charge-and-write-it-up approach. I had observed that the lawyers I respected most took charge of the client problem and never missed an opportunity to "put it in writing." Whenever a client letter or memorandum was needed, the lawyer volunteered to draft it. That put him further in charge. I found that this approach worked in McKinsey. I either offered to write the report or just did it. I found that willingness lo do so early in the study brought me opportunities to act as engagement manager-although in those days we did not use that term. I also wrote unrequested memorandums about internal Firm matters, addressing them to Walter Vieh with a copy to Mac. Usually Mac responded but Walter did not, even though we were working closely together. ver the years [ have advised this approach and urged associates to put their ideas about the Firm in writing. Not many have done so. Those who did consider it worth whil usually had the other qualities of mind and makeup that fitted them for advancement to positions of responsibility. Unrequested and unexpected initiative, which is essential in doing superior work for clients, also makes a big difference in the Firm. As for the importance of writing reports, let me quote from a letter that Mac wrote to me on March 13, 1936:

my

• • • I think you have heard me say that my worst fear about the future of the Firm was that the reports would decline in quality when I ceased to exercise my cranky attitude on this subject. 1 would like to urge you, therefore, to continue to exercise very close supervision over these reports and to continue to rewrite them whenever necessary to secure proper results.

I think it is important to maintain high standards for reports not only because of the impressions that these will make on those who see them but also because of the effect it will have upon the thinkmg of those who are responsible in writing the report. l have always contended that anyone could write logically and clearly if they thought in that manner. Unless they can write reports that are logical and clear you can be fairly sure that their thinking is murky. I think, therefore, that the report can be used as the most useful Instrument for staff training.

THE FIRM'S EARLY YEARS

23

I share Mac's concern but have another: Because quality reports are difficult to write, we too often omit them entirely or substitute reproductions of visual aids. Sometimes the rising cost of their preparation or the limited need for a record enters into the decision. These factors need to be weighed along with the usefulness of the report as an implementation tool and a documentation of value to us as well as the client. This complex issue should be carefully resolved, not rationalized on the basis of cost and limited need for a record.

PRACTICE MAKEUP One of the disappointments of my first two years was Mac's dedication to an accounting practice. I could understand his interest in the field in which he taught and had written so extensively. But I felt then-as 1 feel now-that consulting and accounting are so different in success factors that one person cannot excel in both. Mac was an exception. Unlike many accountants, he was broad-gauged, imaginative, and perceptive with people. 1 did not believe that we could find enough 'exceptions' to build a staff, however. Also I felt then and feel even more strongly now that there is an inherent conflict of interest in a corporation's retaining its auditors to study its management problems. Even a study of procedural matters is likely to involve conflicts. The most troublesome point for me is the actual or perceived lack of independence of an auditor who seeks other income from a client. This point is troublesome because, to my mind, the tru (and also perceived) independence of the consultant is one of the highest values a consulting firm brings to the client-a factor that can quite unexpectedly and unforeseeably assume great importance. I discussed this po int with Mac on many of the train rides we took together. I could not get him to change his thinking, however. He stressed the favorable economics of an associate' working on both types of assignments, and I had only my opinion that not many people could be good at both types or even interested in both.

24

PERSPECTIVE ON MCKINSEY

We had several small audits in the New York office on which I spent some time. Although I had had considerabl experience with financial statements in my legal reorganization work, I certainly had no formal training beyond an account mg course at HBS. Even assuming an adequate competence for the routine work to which I was assigned, it did not interest me; it was dull and boring. The issue came to a decision point when Walter Vieh was transferred back to Chicago in late 1934. Soon after that, Mac came to town, took me to dinner, and asked me to be manager of the New York office. I accepted immediately. Then 1 outlined to him some of my ideas about the Firm, which had grown out of my legal experience and my brief tenure with McKinsey. Mac was in complete sympathy and gave me a full go-ahead. His encouragement stimulated me to think more deeply about how external forces and the attitudes of client and other executives affect the Firm. Th is continued probing convinced me that Firm strategy, policy, and program should be constantly fashioned to cope with and capitalize on these outside imperatives, as well as the attitudes and motivations of associates. I also convinced Mac that, since we then had no CPA in the New York office, we should give up accounting there. He agreed and we transferred the small audits to another firm. Even so, we kept the original stationery specifying, 'James O. McKinsey and Company, Accountants and Engineers.' I took on the job of managing the New York office early in 1935, at a time when we had a total consulting staff of six or seven. Among the associates was Harrison A. Roddick, a young HBS graduate who had moved ahead rapidly to become the sales manager of a small company before joining us. Rod was later to become a partner and still later manager of the Chicago office At this time, the New York office was quite dependent on Mac for clients, and the partners were disturbed that he did not spend more time in the East. We tried various ways to induce him to come. Finally I gave up and decided that I would do what I could myself to develop our practice. I began writing articles, became active in the HBS Club of New York,

THE FIRM'S EARLY YEARS

25

and took other steps that I had observed Jones, Day lawyers taking to develop acquaintances. It was hard going in those days because few of the people I met knew about the field, let alone the Firm. ''Oh, you're efficiency experts,' was the frequent comment. Another impediment to the development of clientele was the feeling on the part of many managers that because we were viewed as ''business doctors,' retaining us was an admission of "sickness." Thus pride stood in their way of using consultants. I concluded that there was no successful direct attack and that the best strategy was simply to serve clients so well that their executives would recommend us or refer us to a mor successful business. If we concentrated on building a clientele of prestige, it was bound to rub off on us. We therefore kept clawing our way up a steep mountain of resistance. I knew that, for me, the road back to the large law firm was impossible. I had burned my bridges. So I had tremendous incentive to do the things that would build an acquaintance in the business community and some reputation as a marketing consultant and problem solver. A STUDY MILESTONE Soon after I became manager of the New York office, the Firm was retained by Marshall Field and Company, the leading department store in the Middle West, to make a study of the whole business. Besides the State Street store in Chicago, the business included the country's largest wholesale dry-goods business, 18 textile mills in the South, and the Merchandise Mart, then the world's largest office building in square footage The wholesale business and the Mart were losing money as were many of the mills. Mac was in charge of the study, of course, and asked me to come to Chicago and be his lieutenant. Because there was to be much travel in the South and considerable work in the New York buying office, our family did not move even temporarily. The study was the most comprehensive and prestigious the Firm had yet undertaken, and news of it spread rapidly around Chicago, among department stores, and even to the New York

26

PERSPECTIVE ON MKINSEY

business community. It was a milestone in building the Firm's reputation, and we all knew that we had to do a superb Job. I spent weeks at a time in Chicago, working closely-and this time more continuously-with Mac. Again he gave me the critical on-the-job coaching that I appreciated so much; he told me specifically the things I did wrong and the principles involved in improving my performance. This approach made the knowledge transferable to other situations. Our basic report to the board of directors, dated May 28, 1935, was a sweeping one, calling for liquidation of the wholesale business, sate of the mills and the Mart, and concentration on the department store business. This report was followed by several others covering various parts of the business in more detail. Once these reports were in the hands of the board, Mac had several meetings alone with various board members. One day-it must have been in September 1935-Mac called me into his office and said that he wanted to have a confidential talk. He had been offered the job of chairman and chief executive of Marshall Field to carry out our recommendations and sought my judgment about his accepting it. To me it was clear that he had already made up his mind, . Here were Mac's rationale and plan: His taking the posi tion would bring widespread publicity for the Firm; he would hold the job for four or five years, carry out the reorganization, and then return to the Firm. The net result would be a great building of Firm stature, From my discussions with Mac, I really believe that it was his intention to return. At all times he seemed dedicated to a professional career. Moreover, he told me that he could easily put me into a good job at Marshall Field, but instead he wanted me to stay with the Firm and be there when he came back. He said that he would always be ready to help when we had problems-and that promise he kept. Mac joined Marshall Field sometime in October 1935 and (as he had expected) there was a large amount of national publicity. With the publicity, things happened rapidly to end one chapter in the Firm's history and begin a new one.

CHAPTER 3

MERGING AND UNMERGING Following the Marshall Field publicity, Mac received about a dozen letters from other accounting or consulting firms a bout merging his firm with theirs. The writers undoubtedly assumed that the Firm was so dependent on Mac that without him its future was uncertain. Mac must have felt that way too because he quickly entertained the idea. THE URGE TO MERGE

Of the firms seeking a merger or a take-over, Scovell, Wellington & Company stood out as the most substantial, and it became the successful suitor. Although it had a management engineering staff, it was primarily an accounting firm andaga in-its accounting practice appealed to Mac. Established in 1910, the firm was then headed by C. Oliver Wellington (Oliver), following the death of Mr. Scovell. It had 11 accounting offices, including one in Boston (the headquarters), New York, Chicago, and San Francisco. Its management engineering staffs were confined to Boston, New York, and Springfield, with New York having the largest. Horace G. Crockett (Guy), a CPA resident in New York, headed the management engineering (consulting) practice, and F. Richmond Fletcher (Dick) headed the Boston consulting staff. The accounting and consulting staffs were interchangeable, however, and many of the consultants were also accountan ts. It must have been early in October 1935, when Oliver spent a weekend with Mac in his Wheaton, Illinois, home to discuss 27

PERSPECTIVE ON MCKINSEY

the possible merger. Mac's urge to merge was so strong that the concept and even the details of the merger were agreed on during that weekend. Mac was anxious to get the matter settled so that he could devote himself to his new job. Knowing that Mac was a skillful negotiator, I was not surprised to have him tell me later (and with some pride) that the concept of the merger was his. Here is the setup agreed on: 1. There were to be two partnerships: Scovell, Wellington & Company (SW), accountants; and McKinsey, Wellington & Company (MW), management engineers. 2. There would be no formal relationships between the two firms but they would interlock through four common partners: Oliver Wellington, Mac, Guy Crockett, and Dick Fletcher. 3. Oliver was to be managing partner of both firms. 4. The MW partners, in addition to the four who interlocked, included Tom Kearney, two others from Chicago- Allport and Hasselhorn and me. Mac and Oliver agreed on the partnership percentages for each: Mac, 80 shares; Oliver, 60; Crockett, Fletcher, Kearney, and Allport, 30 each; Bower, 20; and Hasselhorn, 10. (The Springfield SW office, which had a significant consulting practice, was offered an opportunity to join MW but the partners there declined.) Since Mac had a controlling share interest in James 0. McKinsey and Company (hereafter referred to as JOM) and since Oliver dominated SW, they were both in a position to make and implement these decisions. But because Mac was busy at Marshall Field, actual implementation fell largely to Oliver. Mac did, however, have a personal talk with each of the proposed MW partners. During these talks, he made it . "Walter Hasselhomn, former controller of Kellogg (the cereal people), ha d the Firm a short time before as a senior associate.

' ed join

MERGING AND UNMERGING

29

quite clear that he wanted the arrangement carried out, which we did. The proposed setup was a disappointment to me in two respects, however. First, it retained a tie-up with accounting, reflecting Mac's continuing belief in a joint practice. Second, I felt that two firms with similar names would confuse clients and prospective clients (and, of course, this proved to be the case). I registered these and other adverse reactions in a memorandum to Mac dated November 4, 1935, which concluded with this statement: "I must admit that the prospect of going our way alone...- without entangling alliances still has considerable appeal for me." But Mac brushed my views aside in his "implementing" talk with me. In fact he said, "With the greater abilities of our partners, we will run Scovel1, Wellington out of gas, and when I return from Marshall Field we will put the two firms together and thus take over their accounting practice." He also made some pretty inspiring comments. I have already noted that he said he could bring me into a good position in Marshall Field but felt it was better that I ", .. stay at McKinsey, Wellington and provide it with leadership. When [ come back, you and I will run the Firm together and you can make it more like the firm you have told me you want it to be." So with this "carrot" and the "big stick" of his control of the Firm, Mac got my wholehearted support for the new setup. Although I was concerned that I was to become a partner of three men I had never met, I had no question a bout their integrity. And since I had great respect for and confidence in Mac-and a great liking for himI never even considered resigning. I was pleased to be one of the partners. But it was a dual shotgun marriage, with Mac holding on gun to the McKinsey people and Oliver the other to his people. Like so many shotgun marriages, it lacked love the essential ingredient for a successful marriage and so contained the seeds of its own destruction. The MW partnership agreement was signed November 18, 1935. The announcement of this new chapter in the Firm's history is shown on the following page.

J AMrs

O.

McKIsEY

and

COMPANY

and

Scovm,L, Wi;;J.LINGton & COMPANY announce that their man-

agement engineering prnctices have been me:rged under the firm name of

McKINSEY, WF.LLINGTON

&

COMPANY.

The new firm

will have offices in New York, Chicago and Boston, and will be composed of all of the partners of James 0. McKinscy and Company and those partners of Scovell, Wellington & Company who have been engaged in engineering work. While the engineering work of both .firms has covered a broad field, James O. McKinsey and Company have dealt largely with general management and sales problems relating to policies, organization and personnel, and Scovell, Wellington & Company have emphasized those services which directly reduce costs and increase profits, such as budgetary control, cost accounting, production planning, improvements in plant layout and manufacturing methods, and incentives for labor, management and sales personnel.

The consolidation will enable McKinsey, Wellington & Company to olfer a complete management engineering service to clients. Scovell, Wellington & Company will carry on the accounting practices of the two firms. The offices of MKinsey, Wellington & Company will be located as follows: Nrw York, 52 Wall Street 135 South LaSalle Street Bosrow, Ito Stat Street

CH1cAG0,

New York, December 2, 1935

30

MERGING AND UNMERGING

31

MERGER MORNING AFTER I did not meet my new partner, Guy Crockett, until after signing the partnership contract. He, Oliver, and I quickly agreed that Guy would be manager of the New York officethe only place where any real merging of staffs took place. Guy was older than I (55 versus 32), more experienced, and the leader of a larger staff. The fact that I ceased to be an office manager after only a few months was of no concern. I was onvinced that I could work well with Guy and would be able to influence the course of the Firm and participate fully in its management. Moreover, I had observed in JOM and three law firms that influence goes with professional competence, leadership ability, and the capacity to attract and maintain professional relations with clients. Tom Kearney became the manager of the Chicago office. Tom was a natural choice because he had always been No. 2 to Mac. A conservative person, he had complemented Mac, the dynamic risk taker. Together they had made a good team. Although the merger itself caused little change, Chicago had lost Mac-its great leader, outstanding engagement director, and premier clientele builder. In Boston, Dick Fletcher continued as manager of the consulting staff. Again, there was no merging to be done. Dick, then 63 years old, was a quiet man with a good character, appearance, and personality. I found him to be more conservative than Guy. C. Oliver Wellington, our new managing partner, was about 60. A handsome man with grey hair and fine features and complexion, he was pleasant to meet and (I was to learn) pleasant to deal with so long as the other person was willing to see it and do it his way. He, too, was a person of integrity and openness. Thus, I had a: favorable initial impression of our new partners, and I was encouraged. Especially was I pleased with Guy. He and I were compatible from the start. Guy was a tall, heavy man with white hair, a fine appearance, a pleasant disposition, an open mind, and great integrity. In all the years we worked together he never did anything sharp or political. Although I pushed him to do many things and we had many

32

PERSPECTIVE ON MKINSEY

differences of opinion, never did either of us make our differences personal ones. We told each other just what we thought, and we reached conclusions in a rational manner. Even though he was old enough to be my father, he treated me as a partner My assessment of the man was given in a statement I made at a training meeting on the occasion of Guy's eighty-fifth birthday; it appears in the Supplement. Another encouraging factor was a major study for the U.S. Steel Corporation that came along with the merger. SW had been selected as a subcontractor to Ford, Bacon and Davis, a true engineering and consulting firm, which U.S. Steel had engaged to handle the overall study. SW's part covered all of the major procedures, including cost accounting, purchasing, and production control. Guy was the engagement director. Since the Steel study was in its early stages and the staff was building up, it formed a fine merging medium. Former JOM consultants were assigned from New York and Chicago; associates were brought in from our Boston office and from SW. In addition, many new people were employed with the understanding that they would be separated if there was no work for them at the conclusion of the study. At its peak, the Steel study staff must have numbered over 40. Although the Steel study brought the Firm prestige, I noticed that the primary contractor got the principal recogni tion. When l learned from Guy the difficulties of being a subcontractor, I concluded that we should avoid this kind of assignment in the future. Guy agreed. I do not believe that we have ever been a subcontractor since and I hope that we never will. ' EARLY PROBLEMS At the time of the merger, the ]OM office was still at 52 Wall Street and the SW office at 115 Broadway. Since neither was large enough to hold the merged staff, Oliver proposed that the Broadway space be expanded and that the two firms have adjacent offices, with side-by-side reception areas. I felt that such an arrangement would merely exacerbate the accounting/consulting problem and compound the client con-

MERGING AND UNMERGING

33

fusion that was already becoming evident. I proposed a separate office for MW on Wall Street, which would be physically close to 115 Broadway and so convenient enough for Oliver. Fortunately, Guy agreed-in fact, I found that he welcomed a physical separation from Oliver. Mac also supported the Wall Street office and so did the Chicago partners. In reaching this decision, Oliver and I had some fairly heated sessions but he carried no grudge. So we moved to the beautiful new First National Bank Building at Two Wall Street, taking on a lease that was later to become a problem. We laid out and decorated the office so that it would be pleasant to work in and would make a favorable impression on clients. I was soon shocked to discover that Oliver assumed that the same working atmosphere that prevailed in the accounting firm would carry over to consulting. In SW, relationships were formal. Associates called Oliver "Mr. Wellington" and partners called each other by their last names. In J0M, it was just the opposite. We all addressed each other by our first names and really enjoyed our work together, with Mac's good sense of humor permeating the whole atmosphere. Wellington was therefore somewhat surprised when, from the outset, I called him Oliver and Mr. Crockett, Guy. But he eventually accepted the practice in MW. And Guy, who quickly came to like an informal working atmosphere, had no trouble converting his whole staff. He confided that for the first time he was having fun at work although he had always got satisfaction from it. This admission brought us still closer together. Another early shock was the authoritarian attitude of Oliver. As managing partner, he took an executive rather than a leadership role, giving orders orally in New York and by memorandum to Chicago. Although Guy was used to it, 1 made it evident that I resented it. I then learned that Guy did too. One small confrontation with Oliver grew out of an incident that occurred when he and I were together on a train. He was thumbing through a pile of tissue carbons, which he told me were copies of recent letters written in all SW and MW

34

PERSPECTIVE ON MeKINSEY

offices-his way of keeping track of things. He asked me whether l would like to see one of my letters. I had never heard of the procedure before and was furious. I told him that as a partner he could, of course, see anything he wanted to, but that I did not want to think of him as a recipient of every letter I wrote-it might distort the appropriateness of the letter to the primary recipient. I said that he would never get another routine copy of one of my letters and that I would urge Guy, Tom, and Dick to discontinue the procedure in their offices. Guy was only too glad to get rid of it. And so was Tom, who was as upset as I when he learned what was going on. Oliver reluctantly agreed. I never heard what Dick Fletcher did. A LEADERSHIP VACUUM Early in 1936, strains began to appear in the shotgun marriage. The Chicago partners became restive under Oliver's direction as opposed to leadership, he took no part in MW studies, and the number of new SW clients resulting from the merger was disappointing. However, income from the Steel study and growth in Chicago resulted in a satisfactory earnings level. Although these results submerged our underlying partner dissatisfactions, they did not bring harmony within the

group.

Apart from the basic concept of the merger, the real trouble was a management and leadership vacuum. Mac was not there. Oliver could not lead. Guy was busy with the Steel study- Tom was not a natural leader and was not in sympathy with the merger anyway. I was too young and would not have been acceptable to Oliver or the Chicago partners. Finally, Oliver appealed to Mac (by memorandum) for help in achieving a meeting of minds. After discussing the subject with Tom and me individually, Mac wrote Oliver a masterful four-page letter (dated July 20, 1936) in which he tried to get Oliver to change his style of managing. He reviewed the reasons for the merger and made this observation about harmony among the partners: "If we cannot come to a meeting of minds on these fundamentals, 1 am doubtful if satisfactory personal

MERGING AND UNMERGING

35

relationships between the partners can be established now or at any future time." He also said that he was taking an active part in suggesting a corrective program " ... because the former partners in James 0. McKinsey and Company were doubtful about the merger at the beginning. and agreed to it on my recommendation. I feel, therefore, that I have some responibility for trying to correct the present unsatisfactory conditions.'' The following introductory paragraph from the letter gives ome of the flavor of McKinsey, the man, and points up the importance of analytical thinking, candor, and initiative to the successful consultant. Although I am sure that you and many others who know me will never believe it, I am, in fact, a meek and simple soul who would rather indulge in philosophical thinking than be engaged in heated controversy. Notwithstanding this natural tendency, I have spent a considerable amount of my time during the last fifteen years in saying and doing things which should have been said and done by others, but which they hesitated to say and do. I assume this is due to the fact that because of my philosophical inclinations I have developed some tendency to th ink in a logical manner and when this thinking clearly indicates a conclusion [ find it difficult to resist the temptation of stating it. Furthermore, when such a conclusion indicates definitely the need for action I feel I am rendering a service by trying to secure such action. I suppose I am doomed, therefore, to go through life cluing things which make people think I am aggressive and hardboiled.

Mac's masterful letter did not do the job, however, and dissension among the partners continued. So I decided to try to get greater harmony by writing down and getting agreement on principles. Not only did I feel a responsibility to the Firm, but I wanted to do everything I could to hold it together until Mac's return. Also, I viewed this codification as a way to shape the Firm into the kind of firm I had in mind when l joined in 1933: a firm serving management on management problems in the same quality, objective, independent, and professional ways that a leading law firm serves its clients on legal problems. In 1937, we issued the Basic Training Guide. Dated October 1937, the statement of Firm objectives (which appears in the

36

PERSPECTIVE ON MCKINSEY

Supplement) contains this introductory paragraph, which defines the approach we followed:

The most successful enterprises-whether professional, _indu5lria~ commercial, political, or social-are those which determine soun basic objectives, plan for their attainment, and then exert all effort toward reaching them, disregarding short-term disadvantages that may accrue in following the charted course.

My hope was that by getting agreement in • t h'is ma inner two we could develop common guidelines for the people from tti· different firms who had different backgrounds, values, /t d tudes, and ways of acting. Draft after dra f t was . c ircu1a e among the partners. Even though the philosophy of James 0t~ Mckinsey was incorporated in the material, the Chica89 P%"" ners were indifferent to the effort and harmony continue elude us. Although written guidelines alone could not fill the "" uum, I firmly believe-and our own experience shows-t a they are a useful (almost essential) way to gain commitment to goals, objectives, policies, and programs among widely scattered people with the same general background and values. such guidelines become even more important when the people are of different nationalities and cultures. But they are effective only if there is a leader who believes in managing in accordance with principles (i.e., in programmed management) who will inspire and require adherence to them. McKinsey, Wellington never had such a leader, so the strains of the shotgun marriage continued beneath the surface. But the codification process was far from a wasted effort. When we reorganized McKinsey, Wellington to form McKinsey & Company in 1939, the principles that our New York and Boston partners had actively helped to develop and had agreed to provided the foundation on which to build. We also used the principles as a basis for the Saturday training meetings that were held in New York and Boston during the years when Saturday morning was a regular work period.

MERGING AND UNMER.GING

37

GROWTH IN CLIENT CALIBER calibe Despite f .th e I ac k o f harmony, the Firm • made progress. The and studies gradually improved in bot New as a b "ld htcago. And the Marshall Field publicity continued Guy b uil ler of Finirm-w1·id e reputation and staff morale. With New yusyk full time on the Steel study, J directed our other or studies In A ~r iJ 1937, at • Mac's suggestion, Harold B. Bergen was brought and im mto the Firm to help us further upgrade our clientele erso prlove our stature. Harold was then vice president for nnelread mmistratmn • • • Pnational at Proct_er and Gamble, which had a tions _ ,PUation as a pioneer in progress"ve employee relaan had avoided unionization. . the M lacAm had c_ ome to know Harold through their • work together mn the g encan Management Association and was aware of porta reat t respe_c t h e commanded. Believing that Harold " s 1m' in N nt and widespread contacts could best be capitalized on and ew [ork, Mac had Guy and me handle the negotiations ate w?r out the arrangements. Harold came in as an associsonal , with . . h'15 earnmgs • tied specifically to introduced and per6 1 11 mgs. Relat. Labor This tim e t h e move was successful. The National • cern ions to A c t h ad been enacted in 1935, bringing a new con1-Iarold' . management about labor and personnel policies orp 5. servtees were immediately in demand from ma1or Orations._- Ar mong the clients he ' Heinz introduced were HJ ••• Peabod United Parcel Service, Upjohn Company, Cluett· Sylva· _y, Johns Manville, Sunbeam Electric, Lukens Steel, and ' Electrnia . Elect+i ec nc tr now part of our client General Telephone an nd onics). c onsu I tmg . • our Lacking a experience, Harold had troub I e I earning relat· pproach to problem solving .and maintaining effective in h ions p, with ' client executives. But he had special know led edge is field, ' an d . others of us served as engagement directors. ' Harold lie b always performed as a specialist-and an effective one. . partner in 1939, and a general partner• in • 1941. ecame a special

",,,","""6

vi.

·lie

;

,,

38

PERSPECTIVE ON MCKINSEY

Until his untimely death from leukemia in 1942, Harold made a significant building contribution to the Firm. Unfortunately we were not successful in using this start to broaden our practice in the executive personnel field chiefly because we did not develop adequate and interested leadership. larold's efforts did, however, lead to substantial billings in wage and salary administration. It was about the time of Harold's arrival that I experienced one of my greatest disappointments. We had an inquiry in New York from Du Pont about a marketing study. I can't remember the origin of it but it was my responsibility to negotiate it. Knowing that Du Pont was considering other firms, and realizing that the study would be a prestige builder comparable to the Steel study, I worked hard on the proposal. I naturally involved Oliver as the managing partner although it was clear that he would not direct the study. Du Pont selected Barrington Associates, now out of existence. I never did learn where I had failed. Perhaps I was too young. Perhaps l should have sought help from Tom Kearney, also a marketing consultant. Perhaps the proposal was not imaginative enough. In any event, this failure made me determined to work harder on proposals and seek more help from other partners. Du Pont became a client on a major marketing study in 1954. I handled the negotiation and directed the study the first in a series. But l have never forgotten the disappointing first effort and the lesson it taught me: to get the cooperation of other partners and to develop imaginative proposals. I am pleased that both of these approaches are current and growing.

GROWTH IN STATURE OF THE PROFESSION The years 1936 and 1937 also brought a further growth in the standing of management engineers. The objectionable term "efficiency expert" was used less and less frequently, and the label "business doctor" began to fade. Knowing how long it took older professions to get established and gain stature, I was encouraged. I urged the staff to be sensitive to the need for eliminating these popular descriptions and to take the time

MERGING AND UNMERGING

39

to correct insiders or outsiders who used them by discussing the real nature and values of the consulting process. It was the prevalence of these terms, combined with the inaccuracy (for us) of the term management engineers, that led me during this period to begin to use-and certainly to prefer-management consultants. This preference bothered Oliver even though he recognized the inaccuracy of the word "engineers.'' He had been one of the founders of the Association of Consulting Management Engineers (ACME), which MW had joined (and from which our Firm withdrew in 1973), and he did not think it made enough difference to go to all the trouble of changing the name and member letterheads. (Many members mentioned the association on their letterheads, but we never did.) Th is is a good place for a digression on the importance of using correct terminology to establish principles and philosophy in people's minds. It grates on my nerves for people to refer to the Firm as a business. Since we are a professional firm, I think it helps us inside and outside to use professional terminology with rigorous consistency-to refer, for example, to our organization as a 'firm'' and to the activity of the Firm as 'our practice,' not 'our business.' We don't sell, nor do we have products or markets. Even today some new associates are amused or irritated when I correct their terminology. They obviously feel that it makes no real difference. I believe that it does. The terms we use reflect the way we th ink, and the careful use of professional and not business language will remind us, as well as others, that we do follow a professional approach (as our Finn Code requires). Our history confirms the validity of this concept, and I hope that our partners will reinforce it. As the Firm grows in numbers of offices, consultants, and nationalities, and as it increases in complexity, the use of common terminology, concepts, principles, and approaches will help us achieve a consistent approach to serving clients in a superior manner and maintain not only a distinctive firm but a reputation for being distinctive. Also, adherence to these common denominators will make our large and growing Firm easier to manage, more cohesive, and more fun.

40

PERSPECTIVE ON MKINSEY

ECONOMIC TRAGEDY STRIKES On May 21, 1937, Oliver sent a memorandum to all MW partners announcing that the Steel study was definitely to terminate on October 1 of that year. This was an economic tragedy indeed. At that time, the Steel study billings were about 55 percent of total MW billings. We had known, of course, that this big income producer would come to an end at some point, but because there was still an enormous amount of work to be done, no one dreamed the end was so near. The news surfaced the differences of opinion between the Chicago and New York partners. Although MW had made steady progress in improving the caliber of clients and the importance of the problems studied, everyone recognized that we could not possibly cope easily with a reduction in billings in excess of 50 percent. As the strains increased and October 1 drew nearer, the Chicago partners became really concerned about the Two Wall Street lease, and grumbling turned to outspoken complaining. Even kindly Tom Kearney made acrimonious comments about the ominous consequences of the billings reduction and the heavy cost of the New York office lease. This reaction was understandable. As partners, we were personally responsible for Firm obligations. One safety valve both SW and MW had was their understanding with the new associates employed to work on the Steel study: that they would be separated if they could not be kept busy after the study ended. As the October 1 date approached and phases of the work were completed, these consultants were laid off. Also, permanent SW accountants assigned to the Steel study were released back to that firm. Thus we did everything we could to offset the major billings reduction. One of the semipermanent employees affected by the layoffs was Howard C. Adams, who had a manufacturing background. When Howard was asked to leave, he told Guy that he liked management consulting and wanted to remain on a noncompensated basis and see whether the demand for our services might soon pick up enough to justify his permanent employment. After two months without pay, Howard was back on the payroll, where he stayed until his retirement in 1973.

MERGING AND UNMERGING

41

His obviously fine character was an important early influence on the staff, and his production and cost control knowledge contributed to the development of our operations practice.

HUMAN TRAGEDY STRIKES In November 1937, James O. McKinsey died unexpectedly. A couple of weeks earlier, he had made an exhausting tour of the Marshall Field mills and returned with a severe cold, which turned into pneumonia. He went to the hospital, but there were then no specific antibiotics for his type of pneumoniaand ten days later he was dead. Everyone was stunned. Certainly I was. My hero was gone. The degree of my admiration and affection for the man is best reflected in the fact that Helen and I named our third son, born the following January, James McKinsey Bower. The personal loss to our partners was also a major loss to the Firm. Indeed, there was an immediate negative impact on ur practice. With Mac's passing, Marshall Field executives were free to unleash their pent-up resentments against the outsider who had come into that great business and stirred it up mightily. The adverse publicity they released and stimulated about Mac of course reflected unfavorably on the Firm. We were so concerned that I got the partners' agreement tu retain a public relations firm, which I was authorized to select. During that search I learned a lesson I have never forgotten. I hope that my recording it here will help others. In looking for a firm, I interviewed all of the leaders, among them Ivy Lee and T. J. Ross, at that time the one with the best reputation. ] was referred to Thomas Casey, one of the younger partners. He stood out from the partners in other firms in two major ways. First, he tried hardest to understand our problem and he succeeded. Second, he was independent and aloof; he did not approach the negotiation as someone anxious to "get the account,'' but rather as someone anxious to determine whether he could really be helpful. His attitude made me all the more eager to retain his firm. In the end Tom Casey turned us down. He said that we did not need public relations counsel and that no one could do

42

PERSPECTIVE ON MCKINSEY

much to help us counter the negative Marsha Field pub"", He gave me some free advice that was useful. We follow and retained no one. During the negotiations, I got close to Torn Casey and ; number of later occasions recommended his firm. l respect~ his searching approach to determining our real needs and t! e true independence reflected in his unwillingness to ser "" when he felt it was not needed. He confirmed the value l1 independence I had observed at Jones, Day and made me a the more determined to build independence into McKinsey as not only the professional way-but the most effective way-to attract clients and to build our practice soundly and profitably over the long term. l emphasize long term because it has always been our purpose to make McKinsey a permanent institution, not just a way of earning a living and accumulating capital for those of us who established it as a successor firm. Down the years that basic purpose-almost never even discussed-has made tremendous differences in our decisions on strategy, policies, program, and ownership. TRAGEDY COMPOUNDED Completion of the Steel study and Mac's death were tra edies that compounded each other. Despite the cutbacks in the New York staff of permanent as well as semipermanent consultan ts, the Firm went into a loss position some time during 1938. Chicago earnings were insufficient to offset New York and Boston losses; the strain between the Chicago and eastern partners increased. It was clear that vigorous corrective action was necessary to cope with the losses and bring harmony back to the partnership. On April 18, 1939, I sent Guy and Tom a confidential memorandum, which I typed myself and addressed to their homes. In it, I proposed a reorganization that called for separating MW from SW, keeping the New York and Chicago offices together as a single firm, and bringing in new personnel and money. When the three of us met to discuss the proposal, Tom said that he was not satisfied with it. It was clear that MW was disintegrating because of internal dissension and fear of continuing losses.

MERGING AND UNMERGING

43

. kOn June 24, 1939, Tom sent a memorandum to Oliver, Guy, 0 • • Totc! ' and m e, witth copies to Mrs. McKmsey and her lawyer. m wrote: ~!~ink we should all face the fact that our firm is confronted with a rnoy rnous problem. Due to the fact that we are losing money the kk,,,"_, certain members of our organization is being seriously co t e · It seems to me that the situation is so serious that the so~ mu;nce of the firm depends on whether or not we can take ," effective action to avoid further loss and to restore the confipr~f of people who are vital to the firm's future. Obviously the the em presents certain complications, but I do not believe any of ," Soplications are insurmountable if we will face the facts in a Istic way and deal with them accordingly.

a,

id that he had ideas for solving the problem (which ' he Tom ing f ot outline in the memorandum) and suggested a meetpas ~ the partners within a week. At that meeting, he protet e that we unmerge the two firms: that Guy and Dick to SW i that at M! W become McKinsey & Company wit·th'its onhurn ~pp:. ,,,"""" in Chicago; and that I move to Chicago and become ner in the new McKinsey firm. rea 1 considered Tom's proposal but did not like it for two hadsons , p·'st, I had confidence that Guy and I and the staff we . • anct hrought together could be successful alone. Second, Tom of a 1 c eld m~ny basically different views about the philosophy Tom bo~sultmg firm, including three specific differences: (1) opp,],""d that a single office in Chicago provided all the national f ty the Chicago partners wanted, whereas I favored a Select· um with multiple offices· (2) Tom's standards for staff d evelopment did not ' square with • • Torn 1on and . mine; and• ( 3 ) was indiff erent to building a firm that coul d contmue • • Perpetuity. m

BIRT

"d

OF NEW PARTNERSHIPS

. Tom's plan, I suggested another plan to Guy WithUnhap the PY with se features: 1. That • & we set up a new partnership to be called McKmsey Company, with Guy as managing partner and Dick Fl etche . • t 'T, me, and others as partners. Ohver woul d reurn full time to SW.

44

PERSPECTIVE ON MCKINSEY

of MW, 2. That our new firm take over the eastern prac tice tc me • and assu operate the New York and Boston o ffices, t ur . ou the Two Wall Street lease. I pointed out to Guy u that Torn risk was not the gross amount of the lease (the way we • afterTwo looked at it) but any net amount remamm sublet to others. With the rental market good an t we Wall Street a new and beautiful building, I felt tha risked little. • own 3. That the Chicago partners organize a firm of th err the and affiliate with as by cortract. The reas9""", [ affiliation contract was to continue the liability Chicago partners to pay their share to the Mckin} Estate and in this way get the Estate to agree to the reorganization. (The MW contract provided that on death of any partner, his estate would receive, f or three years, a percentage of the earnings-in Mac's case, 21 percent.) To my surprise, Guy accepted the plan almost immediately. One reason, he admitted, was that it provided a way for h~ to get out from under Oliver's direction; of course, he also felt that we could make the Firm successful. Then I went to Boston to talk with Dick Fletcher and outline the plan to him. Dick listened with interest. I told him that Guy was agreeable to it and urged him to talk with Guy before deciding. Dick did talk to Guy and agreed to come along. Then I went to Chicago to negotiate with Tom. I found that he was in favor of the plan in general, especially because it shielded the Chicago partners from the Two Wall Street lease. But there were serious areas of difference. One was the name. Tom wanted the names of the two firms to be distinct and I did, too. We reached broad agreement quickly when I sug gested McKinsey, Kearney & Company (MK) for the Chicago firm. I also talked with the attorney for the McKinsey Estate, whom I had known as counsel for JOM, about paying the Estate 21 percent of the joint earnings of the two firms-and he agreed. Guy and I were then ready to discuss the plan with Oliver.

MERGING AND UNMERGING

4°

reorganizal' We held two partne,s' conferences. I find in the files a confirm. th ,on plan dated July 5, !939, which I drew up to earlier . edagreements reached at a conference a few days zat ion P · · 1 1In an O th er memorandum of mine, entitled Reorgan Aa '{",2pp2, "which reseted he agreements reached "" August ' 39, among Guy, Dick, Tom, and me, and on counsel 20, 19)39, among the same individuals plus Oliver and that all 1or the McKinsey Estate. The second document shows earlier. ~tners agreed on the teems that had been negotiated minor ch ese terms were ultimately carried out with only

. th anges in deta ii " by all parties Guy and I took stock of the Wl s. th e plan accepted decided ituaticon and began planning in earnest. Each of us respect f to put all of our MW capital in the new firm- My nearly °r Guy was greatly enhanced by his willingness, at $28,00060 yea,s of age, to give up the security of SW and risk a then losing firm. I risked only $3,700. Dick Wisely 'rat _67 took the same risk as Guy, although he quite partne ~~med some of his MW capital. Since, under U.S. obliga;s 'P law, we were also personally Hable for the Firm's De ions, all of our outside assets were at risk as well. realize:/''~ the investments the three of us were making, we that we I at we would still be short of capital. So I suggested a4,,,$$""cone else to join our partnership. 1 had"" ness Sc: wrth Ewmg W. (Zip) Reilley through Harvard Bus me,, "Ol activities and knew that he had independent their~~ Also, he and Howard Adams had been frien_ds since •cademf5 together at Zip made as brilliant an i ~,,]" "ord he 4i HBs. 'zi ai%%}" in]"""director of Lehman Brothers, a major Ne"" b • ' • hat ent ,""""" fir' 1e ' had had analytical he had b e useful in consulting and-as we learned latera road I found . acquaintance. •• nor ,2"" ""}'ip was interested in the Firm because !"" "hen , " deal" atmosphere of investment banking. But 1 Ing to acce e got down to the final arrangements, he was unw ·u "- unlimited liability involved in becomin "

ea "

Yale,

as

where

had

had

was

then

ee""""

L

In 1979 merged with Oeb I non4],""?},"" this f

e ,

Loeb to ecome Lehman

Konn, I

Brothers """

46

PERSPECTIVE ON McKINSEY

partner. He did agree, however, to join as an associate and to loan the Firm $10,000 as capital, with the understanding that he would participate in Firm management and become a partner later when the risks were more reasonable. At last we were ready to go. I drafted the McKinsey partnership agreement, a reorganization agreement among all of the parties, and an affiliation contract with the new Chicago firm, drawing on my JOM and SW experience and my legal background. Of course, we had the documents reviewed by legal counsel. There were also agreements to be reached with the Estate; with the First National Bank, owner of Two Wall Street; and with SW and MW partners. But since the broad outlines of the plan had been agreed on, we moved ahead without great difficulty because we were making arrangements among people who basically trusted each other even though their interests now were different. On September 2, 1939, the new agreements and contract were signed; the announcement on the following page appeared a month later. Although technically we have had continuity of ownership and management going back through SW to 1910, since that moment in 1939, the continuity has been real and without internal dissension, the only major change being our mncorporation in 1956. The most important lesson of the McKinsey, Wellington period and one for which we paid a high price is that no personal service firm can long endure dissension among the partners; that it is never any stronger than the commitment of the partners to the firm and to each other. Differences of opinion are healthy because their resolution among people of goodwill leads to sounder decisions. But when the guiding principles the fundamental purposes, philosophies, policies, values, and attitudes cannot be reconciled rationally and emotionally, the majority had better force the prompt resignation of the dissenters. THE CONTINUING AFFILIATION Another lesson we had learned from this period of merging and from which we could not profit at the time-is that

McKINSEY, WELLINGTON rtr COMPANY regrets to announce the withdrawal of C. OLrvER WELLINGTON who will devote his full time to SCOVELL, WELLINGTON C COMPANY, accountants and auditors, of which he is senior partner.

The management engineering practice of & COMPANY will be continued, with no ocher changes in personnel, by two affiliated firms: McKrnsEY, WELLINGTON

McKINSEY & COMPANY NEW YORK

•

BOSTON

McKlNSEY, KEARNEY &: COMPANY CHICAGO

These firms will continue the management engineering practice established nearly rhirty years ago-working with management in the solution of problems of sales, manufacturing, cost accounting, office and plant procedmes and labor relations; and making examinations of busincsscs for banks, in vestment-bankers, trustees and others. Two Wa/J Stmr, Nero York October 4, 1939

47

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PERSPECTIVE ON MKINSEY

professional affiliations are usually unsound because the differing objectives, policies, values, and caliber of the people in each firm make effective cooperation impossible. We had to. have an affiliation contract with MK, however. Only through it could the firms be separate, as the Kearney firm wished, and still make commitments for the required joint payments to the McKinsey Estate, as both firms wished. Behind the affiliation was the sincere hope of all McKinsey partners that the two firms would one day be reunited. And there was at least an expressed acceptance of that notion by the Kearney partners. The affiliation contract made it clear that the "new firms wish to cooperate closely" in continuing the MW practice "in substantially the same manner as the offices of MW operated,' and that "each firm will assist the other in obtaining new clients and new engagements, and will make available to the other partners members of their respective staffs to assist the other in the performance of engagements." Tu help carry out these arrangements, each firm agreed to pay the other a finder's fee of 15 percent of the billings for any client that either secured for the other, and to reimburse the other for an interchange of staff. The contract further provided that office doors, letterheads, and reports would show the affiliation; that the firms would exchange client reports and financial statements; and that each would report its new clients and engagements. Then the contract stated: In addition to the foregoing, each firm will make every reasonable effort to promote the success of the other and will refrain from any action that will be detrimental to the interests of the other.

When we remember that the people agreeing to these statements were an former partners, it is difficult to imagine a. better expression of intent that the affiliation should succeed. The answer to the question What actually happened? is: not very much. To the best of my knowledge, neither firm secured a client for the other or exchanged staff until we opened a joint office in San Francisco in 1944. We did exchange financial statements and the names of new clients; showed the

MERGING AND UNMERGING

49

affiliation on our office doors and letterheads; maintained friendly relations; and, so far as I know, never did anything detrimental to the interests of the other. But there were few visits of the partners between firms. Thus we adhered to the letter but not the spirit of the affiliation contract. Each firm competed with the other from the outset. There was no prohibition against that, and it was profitable for each firm to do so since we had no common earnings pool. The other lessons to be learned from this second affiliation will unfold as we deal with subsequent developments.

CHAPTER 4

BUILDING A DISTINCTIVE NATIONAL FIRM With the contracts signed and announcements out, we were ready in the fall of 1939 to begin building a distinctive national firmbut now with complete harmony and renewed vigor. Indeed, our enthusiasm and exhilaration were tempered only by the fact that the reorganized firm was losing money and had limited capital. Even though we were optimistic about the long term, we were frightened for the short term. Clearly, our first priority was to stay alive. Staying alive, we concluded, called first for strengthening the partnership. ADDITIONS TO THE PARTNERSHIP

As we had agreed, Guy Crockett became managing partner of he Firm and also continued as manager of the New York office. I functioned as deputy to Guy in both roles. Dick Fletcher managed the Boston office. Besides the three of us, there was our silent partner Zip Reilley." To strengthen the partnership, the general partners (Guy, Dick, and I) decided to advance two associates to junior partnersJ. Alexander (Alex) Smith (age 40), and Stanley L. Balmer (age 45). Alex had been an independent consultant in manufacturing when he joined the New York office as an associate in 1937. In addition to his knowledge, Alex brought to the Firm fine staff t

'Zip later became a principal (1941) and a partner (1947). 50

BUILDING A DISTINCTIVE NATIONAL FIRM

51

leadership based on his outstanding character and warm human qualities. Stan Balmer had been brought into the Boston office in 1936 as a potential successor to Dick Fletcher. He had had consulting experience as an industrial engineer and had been a partner in a small Boston firm. Like Alex, Stan had proved himself, and we believed that it would be consistent with our policy of promotion from within to bring him into the partnership along with Alex. Harold Bergen, mentioned earlier, was dearly a enior in competence and making progress as a consultant. ven though he had strength and reputation as a personnel specialist, however, we did not feel that he was ready for partnership; he still needed to learn more about consulting and our general problem-solving approach. This knowledge is required to put any specialty into proper perspective and to provide effective leadership for associates. With the addition of Alex and Stan, we had a fine team in place. After four years of working together, Guy and I were very close. Although he went right ahead with day-to-day operating matters-in which he was chiefly interested he seldom made a major decision without consulting me. My primary interests were conceptual and long term, and Guy was always ready to give open-minded consideration to any proposal I made. So the two of us functioned as a team. Dick Fletcher, of course, had worked closely with Guy over many years, and he and I had come to know each other well. Zip quickly developed a partnership spirit even though he wa not a partner. In addition, he added financial and analytical expertness and a fresh and helpful point of view. Alex and Stan were excellent members of the team. The fact that we were in a precarious financial position did nothing to destroy our harmony or sense of purpose or to lessen our ambition to build a distinctive national firm. We decided, however, that further strengthening of the general partnership was needed to gain a stronger and broader cliente!e building base, and that we should keep alert for someone of stature to bring in. A few weeks lat-er, one of our Alex later became manager of the New York office and continued his fine contribution to the Firm until his death from cancer in 1964.

52

PERSPECTIVE ON MCKINSEY

marketing consultants mentioned that he had met Paul T. Cherington, an independent marketing consultant who had set up his own firm after a long career as head of market research for J. Walter Thompson, then and now a large and leading worldwide advertising agency. Paul had indicated that practicing as an individual had limitations and lacked the satisfact ions of association. I had heard of Paul and found him listed in Who's Who. My checks showed that he was noted for his competence and independence. He had written numerous articles and a couple of books, the leading one being Consumer Wants and How lo Satisfy Them, published in 1935. (In this book, Paul developed and diagrammed the concept of the product life cycle, since "discovered" by other writers.) The associate arranged a luncheon at which Paul and I met. I found him to be a warm and likable person. Although older than we would have wished (63), he did have stature and reputation and a small practice. We checked him further and met with him a number of times; he, too, wanted to be careful in reaching a decision. After a brief period of actual work together, Paul became a partner in October 1939. Two years later Paul had a heart attack. He returned to work but died in April 1943. His contribution is difficult to assess. He had fitted in well; we all liked him and sought his judgment; and he had brought us marketing know-how and a few clients. Perhaps the fact that someone of his stature was willing to join the Firm improved our external standing and our internal morale. And we did try to capitalize on his reputation. This was the third time we had tried to strengthen the Firm in some special way by bringing in an outsider at or near the partnership level. Although many subsequent efforts failed, I feel that we should always be willing to explore each possibility carefully. Once in a while we can find an outstandmg contributor, such as Zip Reilley. Moreover, since we may not have developed our own leader in a phase of management that is strategically important (e.g., executive personnel management), it may be wise to gamble on an outsider. At this point in New York, we had (with Zip Reilley) five engagement directors; Harold Bergen, a strong senior special-

BUILDING A DISTINCTIVE NATIONAL FIRM

53

ist; and eleven associates, including Howard Adams, Harrison Roddick (Rod), and Alf E. (Al) Werolin. In Boston we had Dick Fletcher, Stan Balmer, and three associates. Thus the total Firm consulting staff was 22.

SETTING OUR GOAL AND SHAPING OUR STRATEGY Our optimism about the future was based on a solid belief in the need for our type of service and our capacity to deliver it. We ourselves had made general surveys of leading corporations and had helped their top-management executives solve major management problems of their organizations. We had seen the value of our work and had observed that client executives recognized it. During the many and intensive discussions that preceded the formation of our own firm, we had established, at least in our own minds, the goal of becoming the leading management consulting firm in the United States. We agreed that that meant: (1) being a large firm-with multiple offices-but not necessarily the largest, and (2) being known at least as well and as favorably as any other firm in our field for the quality of our work, the prestige of our dientele, our professional standing, and the caliber and competence of our consulting staff. We agreed also that in order to attract, hold, and motivate high-caliber consultants, we must be an economically stable firm. Achieving economic stability required, in turn, charging higher fees than we and other firms were charging at that time.

Although we made no formal declaration of our goal, w did discuss these lofty ambitions almost constantly among ourselves. Indeed, if we had not been ambitious, optimistic, and somewhat visionary, we would never have had the courage to go ahead at all. Moreover, we believed that we had a substantial foundation on which to base our hopes-the heritage from "AI had joined SW in 1933 and had come to the Firm when MW was organized in

1935.

54

PERSPECTIVE ON MCKINSEY

James O. McKinsey and Company and from McKinsey, Wellington & Company, our own experience, and the convictions formed by that experience. Further, we had had a part in developing nearly all of the elements of strategy that we believed were needed to achieve that goal. The concepts provided by James O. McKinsey, combined with the 1936- 1937 effort to articulate and codify principles that might hold MW together, gave us a broad philosophical base for going forward. In fact, our 1937 statement of objectives (which is in the Supplement) included a considerable amount of strategy. So we had a good start . The task of formulating our strategy was unexpectedly assisted and greatly influenced-by another development at that time. Almost immediately after our 1939 reorganization, there grew up among the partners a demand for a printed description of the Firm and our practice which we could giv to prospective clients. Since I viewed anything like that as promotional material, I did not consider it appropriate for the professional firm we wanted to be. Even though most other firms in our field used such material, the older professions did not. But the demand among the partners was so insistent and so virtually unanimous that I finally acceded. Also, with the Firm's risk of failure so great, I had to agree that we should do verything possible to assure success, and I could not honestly maintain that a brochure would not help. As the partner in charge of clientele development, it became my responsibility to get out a brochure that we determined should meet the highest standards. I soon saw a hidden value in this effort-a means for bringing our own thinking together before we published it to others. Since one purpose was to explain our philosophy, we decided that every partner should agree with substantially every word. Although that meant many drafts and took nearly a year, the final product was a true collective effort. It was a hard-cover, 42-page, beautifully printed book entitled Supplementing Successful Management (SSM)a title we selected to help overcome the then current opinion that the primary role of consultants was aiding 'sick" companies. The first edition was distributed to all Firm members on September

BUILDING A DISTINCTIVE NATIONAL FIRM

55

4, 1940. It explained why successful executives use consultants, described the Firm and our approach to studies, and outlined the types of studies we made (including the general survey). The by-product of this rigorous effort proved to be more important than the results achieved by the book itself: We had genuine agreement among ourselves on our philosophy and strategy-on the kind of firm we wanted to be and the strategy for reaching that goal. The major elements of our strategy were these: 1. Continue the practice of our predecessor firms of helping the top-management executives of leading corporations solve their major management problems; avoid serving in any but a consulting role. 2. Make our service distinctive through the application of an overall, integrated approach (the top-management approach). 3. Work toward building a clientele of leading corporations by doing every study in the best way possible, recognizing that outstanding performance leads to additional assignments and builds reputation. 4. Perform all services on a professional basis. 5.

Develop a consulting staff made up of people having the character, intellect, education, and other qualities needed to provide our type of service to the types of clients we want to serve; manage the Firm so as to: (a) attract and hold such consultants, and (b) motivate them to do outstanding work and to make permanent careers with the Firm.

6. Through writing, speaking, and public affairs activities, bring the Firm and its consultants to the attention of top-management executives of leading corporationsbut avoid client sol ici ta tion. 7. Manage the Firm: (a) with resolute adherence to strategy, (b) in accordance with principles that are sound for our type of organization, (c) in such a way that it will be self-perpetuating. (Managing was the least devel-

56

PERSPECTIVE ON MCKINSEY

oped of the strategic elements that were part of our heritage.) 8. So conduct our activities that the Firm will continually increase its stature and enhance its reputation. 9. Expand the Firm nationally. Our 1937 statement of objectives contained references to serving clients on a professional basis, but nothing concrete. Although Mac had personally adhered to professional standards, he had never articulated them. So emphasis on professionalism had been limited. I felt not only that the professional approach would improve the quality of our work, but that a professional reputation would help overcome negative attitudes toward consultants, help us attract high-caliber associates, and give the Firm a more distinctive reputation. I recommended to Guy that we begin emphasizing the professional approach; he agreed. Therefore, through formal and informal training, we sought to instill in our consultants what professional standards are and how we can apply them effectively on the job to strengthen our client performance. SSM, under the heading of Professional Standards, contained this statement: We seek always tu adhere to high professional standards-placing client welfare ahead of our own interest. In our type of practice it is essential that we gain the confidence of th e top-management executives and of personnel at all levels. Tu that end, we select and train our personnel to maintain standards of integrity, responsibility, and performance that will entitle us to professional relationships and client confidence.

. Also in the early forties, largely at the insistence of Zip Reilley, we began giving more emphasis to persuading clients to act on our recommendations so that they would gain greater value from our servkes. We saw that this approach would also make the Firm more distinctive. Once our strategy was dear, we made a determined, extenive, and continuing effort-in memorandums, meetings, and conferences-to instill the guidelines in our consultants

BUILDING A DISTINCTIVE NATIONAL FIRM

57

minds. This effort included restatement, illustration, exhortation, the use of visual material, and the development of a set of guides. One visual aid was the "Diagram of the Firm's Principal Personality Characteristics,'' which was used at the Annual Firm Conference in October 1953 and appears on the following page. As Chapters 6 through 9 explain, we have continued over the years to refine and improve the articulation of each element of strategy as dictated by observation and analysis of external forces and of the attitudes and behavior of client and prospective client executives and of consultants and prospective consultants. And, of course, we later broadened our strategy by becoming an international firm. EARLY GROWTH OF OUR PRACTICE

In 1940, we were full of resolution to apply our strategy to the greatest extent possible. The records show that during the fiscal year (FY) ending August 31, 1940, we served 35 clients in New York and 9 in Boston. Balancing the many small or unknown companies were many prestigious ones such as American Airlines, Armstrong Cork, Cluett-Peabody, Sylvania, National Distillers, United Parcel Service, and Wheeling Steel. For many of the major clients, however, we made only minor tudies. Billings for that year were: New York, $226,000 and Boston, $58,000, for a total of $284,000. Much to our surprise, we had profits of $57,000 after paying 21 percent to the McKinsey Estate. But salaries were modest $10,000 for general partners and $7,500 for junior partners. One encouraging factor was our clientele: It included a growing proportion of leading companies for which we helped solve top-management problems. During FY 1941, we added four associates and several new clients, including Atlantic Refining, Blaw-Knox, Northwestern Mutual Life, and Simplicity Pattern. Most billings to clients were under $5,000 for the year; seven were between $10,000 and $12,000; one was $36,000; and the largest, $54,000. Total At this stage in the Firm's development, our size permitted us to hold Firm-wide

conferences, so the process of communicating our guidelines was easier than today.

OF THE PERSOMA.LITY CHARACTERISTICS•

DIAGRAM

FIRM'S

PRIMCIPA.L

Objectives, Policies and HorkingApproaches Hhich II Used as Guides to Daily Action - Will Control th Firm's lmpcct on Clients and Prospective Clients

,',dhereoce

IO

program - the key

Unity of pturpos