McKinsey & the Upstarts: Part One

After being with the firm 26 years, and serving as its managing director for five, Rajat Gupta has learned a great deal about both the strengths and the weaknesses of his firm's partnership governance model. Sources of initiative have historically been driven from the bottom up at McKinsey, when different groups of consultants, committed by geography, industry practice, or functional area, chose to promote change.
Consequently, any attempt to marshal change from the top down or to gain buy-in of what might be called a "grand strategy" is no easy task. Given the various agendas belonging to the firm's tens of dozens of partnership groups, an overall growth projection for McKinsey is not possible to calculate, according to Gupta, who has on occasion been quoted comparing his directorship challenge to "herding cats."
Asked whether he believes McKinsey's self-governing organization was responding quickly enough to the changing nature of business, Gupta replies: "Well, only history will tell. But I think so. We've been changing faster than we ever have." (See Gupta interview, page 23.) McKinsey's equity stakes are, perhaps, the strongest evidence of the firm's willingness to change to date.

But they are certainly not the only evidence. Smaller, more subtle signs are visible. Look around the offices of any of McKinsey's e-commerce clients, and you'll see that absent from their shelves are McKinsey's trademark blue books — the text-rich project review documents religiously produced by the firm every four to six weeks in order to keep its clients informed on their project's progress. The blue books, a casualty of the firm's battle against time, have been replaced by daily or weekly in-person client briefings. Moreover, no longer does a project's operational phase routinely follow a strategy engagement. To speed up the delivery of its strategy offerings, the firm's e-business practice is adopting what might be called a parallel-processing approach, where the strategic opportunity is still being framed as consultants become focused on its execution or implementation. It's a feat requiring that which McKinsey's data-driven consultants are not known for — intuitive thinking.

As McKinsey enters the next century, it appears that the firm's success will be measured not by how its equity stakes appreciate or by how many institutional precedents it breaks, but by what it discovers as it drills deeper into the new economy. And by how quickly the counterculture's methodologies and values are permitted to permeate its governance initiatives.

The Upstarts

It's a challenge unlike any McKinsey has faced before. In the early 1990s, Big Six accountants stormed the consulting space with a menu of offerings that would put them behind the wheel of corporate America's reengineering fad. Together with CSC Index and Cap Gemini, the Big Six were counted among consulting's new upstarts, a determined new breed of consultancy whose lofty ambitions led them to boast that no firm was beyond the reach of their growing portfolio of offerings — not even McKinsey.
Consulting's bellwether never flinched. Through the 1990s, McKinsey would continue as it had for more than half a century — delivering high-quality data-driven analysis to the highest levels of management.

For Nelson and other top consultants, McKinsey's latest actions indicate what many of them have suspected for a while, that the profession's most admired and influential consultancy is, at last, under attack. Not by Big Five consultancies, or its steady rivals Boston Consulting Group and Bain, but a myriad of fast-growing consultancies that are winning over CEOs by bundling strategic thinking with such skills as Web design and Internet architecture building.

By accepting equity, McKinsey now hopes to draw itself deeper into the dot-com culture, where many of its upstart rivals first cut their teeth and originated a set of values that are now altering the consulting landscape.
"People are not leaving the more established consulting firms just to join a fast-growing new economy — they are also moving to experience a very open and network-based set of cultures that are redefining how business is conducted," says Mark Leiter, chief marketing officer for Viant, of Boston, MA.
"I see this as the Woodstock of our generation, namely that it is as much a cultural revolution as it is an economic revolution," adds the 34-year-old Leiter, who last summer joined Viant from McKinsey — where he was, perhaps, only months away from becoming a partner. For Leiter, partner status and its greater obligations forced him to study more closely McKinsey's governance structure and the values of the new economy. Together they begged the question: Will the title partner carry as much weight five years from now?
Leiter is not the only one asking the question. Growing numbers of consultants are leaving McKinsey to open a new chapter of their careers within e-business consultancies — a disturbing development for the firm, perhaps, since McKinsey's role historically has been as a channel of talent for its most prestigious clients, not for competitors.

Former McKinsey consultant Anthony Tjan last year cofounded Zefer, a start-up e-business consultancy that already has nearly 500 employees.
"The partnership culture by its very nature takes more time to make decisions, and therefore there's a lag before it can fully embrace new concepts," says Tjan, 29, who describes Zefer's organizational model as one that adapts its approach in response to the changing demands of its clients.

A Different World

Viant, Zefer, and the majority of new e-business consultancies share many things in common. Their average project size is no bigger than $1 million to $3 million, and their client portfolios include a large number of high-growth companies residing well outside the Fortune 1000. What's more, some 25 to 50 percent of their clients now pay their fees with equity.

Such invaders would hardly seem a threat to McKinsey, who historically has conducted 90 percent of its business with giant corporate clients and whose dietary requirements more often draw it to projects that are part of extended relationships, where fees may climb upward to $10 million and $20 million. This, as opposed to the new e-consultancies whose client portfolios contain a disproportionately high number of "dot-com attackers" —small digital start-ups that aspire to become the next Amazon.

For McKinsey, the failure to garner more business from "dot-com attackers" represents a large disconnect with the community best able to enrich the knowledge its large corporate clients now crave.

By accepting equity, McKinsey now hopes to repair the disconnect and begin conducting business with smaller companies that ordinarily would not be able to pay its steep fees."We have a strong desire to participate in the new economy, and there were certain requirements to doing so, and we wanted to make sure we remain responsive to those requirements," says Gupta, who estimates the number of McKinsey's consulting-for-equity clients to now be about 100.

To bolster the firm's responsiveness, a year ago McKinsey established what it calls the office of the managing director —a group of about a half-dozen senior partners who today help Gupta champion issues surrounding both people development and knowledge building. More than providing additional shepherds to keep an eye on McKinsey's stray "cats," the new office is focused on speeding up the consultancy's decision-making. Only a handful of practices today report directly to the elite group; among them is the firm's e-business unit now headed by McKinsey partner John Hagel, author of the best selling e-business books Net Worth and Net Gain. Hagel says that the office has recently been working to enhance the firm's people development practices to better attract the talent it needs to compete in the New Economy.
"If you are going to be driven by intuition, as opposed to data and analysis, you need to have a high degree of specialization. … So, we have been modifying our people development and people advancement programs to create these types of tracks where we can encourage people, advance them, and award them for that kind of specialization and intuition," says Hagel, who has recently been involved in the opening of six so-called acceleration sites, where McKinsey now plans to house a number of dot-com spin-offs belonging to some of its largest clients. The sites are yet another first for the firm.

The Product Portfolio

For many who know the consultancy, however, McKinsey's recent maneuvers have laid bare the fact that its highly lauded analytical offerings are just a "set of products" like any other, and, blue books or no blue books, the firm's strategy offerings are just as vulnerable to the ravages of time as such consulting fads as reengineering and enterprise research planning.
"You have to come back to the simple fact that consulting is a fashion business, and there could be significant hard times ahead — not because [McKinsey] is doing anything wrong, but because the type of strategy analysis that it does becomes out of fashion. It's not the kind of stuff that clients want to spend money on, so there is a product portfolio issue here that I'm sure they are worrying deeply about," says Maister.
Believing many large clients are suffering from misguided perceptions of strategy in the age of the Web, Phil Terry, 33, left McKinsey after only six months and is today CEO of e-consultancy Creative Good of New York City.
"Strategy is transforming into a much more dynamic activity, and that really means that the strategy firms themselves need to be much more dynamic and flexible, not only in their recommendations to clients, but in their very own structure," says Terry, who believes the Web will be empowering strategists more, as they engage it to offer different services to their clients.

When it comes to McKinsey's strategy offerings, Gupta doesn't hesitate to mention the work that lies ahead. "We have to adapt how analysis is done and how it can be done using the Web and how the evolution of these approaches needs to be developed, and this we are very much now on the forefront of doing," explains McKinsey's managing director.
But as McKinsey's management knows so well, new approaches have little value unless the firm's partners are ready to adopt them. All eyes now fall upon McKinsey's stout-hearted cats.