Like many partners at elite consultancy McKinsey & Co, George Feiger was offered a prominent position at a financial institution he had once advised - in his case, newly-created SBC Warburg. Feiger, say insiders, had been instrumental in providing the conceptual framework that gave Swiss Bank executives the courage last year to make a successful bid for Warburg. It was thus no big surprise when the man who had been the brains behind the operation was asked to join the firm to help integrate the two institutions.
But controversy has dogged the tactics of 36-year-old Australian-born Feiger, who heads investment banking. Former Warburg bankers have heavily criticized his introduction of a product-led approach at the expense of a traditional corporate advisory one, saying it has led to a downgrading of client relationships. One former director who left says that, under Feiger's direction, bankers had to give up long-term relationships and were put in the awkward position of advising companies which were competitors. Moreover, each client was given revenue targets and bankers were told they'd better meet them. "It isn't very far from this to a confrontational situation with a client if you're desperate to produce revenues - even if it's not in the client's best interest," he explains. Among the severe repercussions of this product-led approach was the loss of some high-profile clients, such as the Halifax Building Society.
Former associates at McKinsey, where Feiger led wholesale banking operations for Europe out of London, consider him an extremely talented, dynamic individual. But the former Warburg bankers see a different side. "He isn't easy to communicate with," says one SBC Warburg banker, who adds that he tried to convince Feiger that his approach was wrongheaded. "I always felt we weren't really talking the same language. He'd already made up his mind what he wanted to do and was extremely sure of his own rightness." Now, Feiger is said to be "rethinking" his blueprint for re-shaping Warburg's investment banking unit which, insiders readily acknowledge, was in some disarray before he arrived. Feiger declined to be interviewed. "He doesn't like the press," says an SBC Warburg spokesperson.
Whatever the alleged flaws in Feiger's approach - "cold" and "insincere" are two charges laid at his door - they attract so much attention precisely because of his association with McKinsey, the premier US-based consultancy which has a revered - and often feared - status in boardrooms everywhere. The intellectual giants at McKinsey are quick to size up trends, from deregulation to globalization, and to offer hard-headed corporate solutions designed to produce higher profitability in a changing world. Its influence through a vast network of former partners in positions of economic and political power around the globe - the McKinsey mafia, as it is often referred to - makes whatever the company thinks or does significant. It also gives it an aura of infallibility. "The main reason people hire McKinsey is the name," says Tom Rodenhauser, the editor of Consultants News, which tracks the industry. "Just bringing in McKinsey is enough to make a lot of people quake."
There is little doubt that the world of finance has been ripe for McKinsey's advice. Over the past 15 years the stupendous growth of Wall Street firms, as well as US, Asian and European banks, into sprawling financial institutions with vast product lines and far-flung geographic commitments has put many managements at sea. Many of the leaders came up through the ranks of trading, brokerage sales or deal-making: they had little or no experience of managing huge, complex organizations. As a result, "McKinsey's role has increased dramatically," says one former partner, now in a senior position at a major Wall Street firm. But even McKinsey partners now acknowledge the firm is struggling to stay on top of a rapidly changing environment. And, as the Warburg controversy perhaps best illustrates, questions remain whether McKinsey's theoretical approach and its by-the-numbers solutions have been the right ones - or if innovation, creativity and relationships have suffered in the process.
The secrecy that shrouds the work which McKinsey performs for its clients means that one of the few ways to see its advice in action is in the companies which have hired its partners on to their staff - usually after engaging the consultancy to help their institutions through crises. Feiger's is only the latest in a long line of such hirings. Others include John Cecil, chief administrative officer at Lehman Brothers; Steven Green, chairman of HSBC Capital Markets; Lukas Mühlemann, chairman of Swiss Re; and Phil Purcell, chairman and CEO of Dean Witter Discover. Another former McKinsey high-flyer in a key executive position is Goldman Sachs partner Larry Linden, who was first taken on as a consultant to work out back-office problems impeding Japanese derivatives trading and then was asked to remain to run the bank's complex systems.
Feiger's appointment is also the most controversial, partly because he is not in a strictly administrative role but heads a high-profile unit full of prima donnas. Many other McKinseyites-cum-executives have been painted in a more favourable light - especially by investors elated by their fastidious approach to the bottom line. Not all appear to be as lacking in people skills as Feiger, either.
HSBC's Green was brought in to reorganize the Hongkong Bank's treasury department in the mid-1980s. Still group treasurer, he now also heads the merged capital markets unit. Green gets high marks from subordinates as well as competitors. "He's a normal sort of bloke who is always extremely supportive and enjoys being involved both with marketing and with customers," says Richard Tickner, managing director of global capital markets at HSBC. In addition, he says, Green has a great analytical strength that allows him to focus "on the important problems deeply and quickly, and come up with a pragmatic solution to what seems like a very complex issue". Although Tickner says he does not know if this attribute stems from Green's consultancy background, the description bears an uncanny resemblance to the McKinsey strong suit.
Since the 1980s McKinsey has made something of a speciality out of consulting to investment banks post-merger. In such con-flict-ridden environments, its consultants not infrequently have been regarded as the only individuals whom top management could trust. That was certainly the case with Lehman's Cecil, a former McKinsey senior partner. One of McKinsey's many Harvard MBAs, he was for years a consultant to Lehman Brothers when it was still owned by American Express. Cecil was present at the meeting of Lehman top executives Richard Fuld and Christopher Petit with American Express CEO Harvey Golub (another ex-McKinseyite) when he told them early in 1994 that he'd decided to spin off Lehman. Former Lehman executives say that Fuld and Petit's bitter battle for control had left them with few people they could trust, while facing new-found responsibilities far beyond their narrow capital markets expertise. The two turned quickly to the 39-year-old Cecil and asked him to join their organization. (McKinsey also convinced Nippon Life Insurance to invest in Lehman at the same time.)
McKinsey's batting average
Cecil is now considered the main strategist inside the firm, although he has taken such a low public profile that many high-ranking employees do not know who he is. He is credited with an ambitious cost-cutting programme that has put Lehman back on track with a McKinsey-like analysis of the profitability of various business units and an obsessive concern for detail, such as prohibiting the purchase of too many expensive brass lamps in executive offices. Even the flowers in the reception area are fake these days.
But Cecil's duties are much grander than these small cost-cutting exercises. "He has the dual challenge of not just doing performance management but redesigning strategy," says McKinsey partner Marshall Lux, who co-heads the consultancy's 150-member US investment banking and wholesale financial services practice. "He's smart as hell and the guy for this job." (Lehman's announcement that president Petit would relinquish his chief operating officer title to devote his time to wooing clients is giving Cecil more day-to-day responsibilities.)
Cecil's successes have been mixed. Even he admits that the restructuring has been so time-consuming that the firm has not been able to build new, potentially profitable businesses as quickly as it would have liked. "Some things are hitting for our competitors that are still not developed for us," he says. Lehman has designs on being one of the global survivors, but many question its ability to bring something unique to the table. Analysts and competitors agree that although Cecil has been unable to breathe new life into an organization whose revenue base has been stagnant even in a bull market, neither has anyone else.
The decision of former McKinsey practitioner Harvey Golub to sell the Shearson retail component is blamed by many for hurting Lehman's turnaround. Competitors note that prior to the split, for example, Lehman had quite a reputation in the preferred stock market which it had created and sold to its retail client base. But the bank missed out on the explosion of corporate issuance that happened after the shedding of the retail business, and the new Lehman has yet to come up with a clever idea to replace it.
In the late 1980s retail did not look as exciting as the wholesale side of the business. But today McKinsey director and senior partner Lowell Bryan (known internally as the god-father of the consultancy's financial institutions group owing to his role in its founding shortly after he joined the company in 1975), considers retail business one of the few bright spots on the horizon, in particular fund management. Equity is another. Fixed-income, however, has become so commoditized by the twin forces of globalization and technology, argues Bryan, that it's hardly worth the effort.
While Lehman concentrated on institutional business, particularly on the then-profitable fixed-income, former McKinsey partner Phil Purcell had the foresight - or luck - to take the opposite approach. Purcell decided to move out of the glamour businesses of investment banking and proprietary trading when he took over Dean Witter - then a brokerage unit of Sears - in a move that was highly controversial at the time. "In hindsight it turned out to be an excellent move for them," says James Hanbury, a brokerage analyst at Schroder Wertheim, who gives the former McKinsey partner high marks for turning the firm into a mutual fund marketing organization with a healthy credit card component. "He strikes me as extremely solid."
But like many of the institutions it serves, McKinsey is not always able to see too far into the future. "This is an industry that's changing," says partner Jim Rosenthal, the other co-head (with Lux) of the US investment banking practice. "Could any consultant to this industry have perfect prediction ability? No one could." McKinsey's batting average is pretty high, however, with both partners and competitors rating the successes higher than 50%.
Nowhere is benefit of hindsight more poignant than at Swiss Re, where Lukas Mühlemann took over in 1994. Swiss Re's profitability was trailing competitors and one of Mühlemann's first actions was to sell its direct insurance unit at the handsome price of Swfr5.5 billion and focus solely on the core re-insurance business. According to UBS insurance analyst Thomas Kalbermatten, the direct insurance division had been built up by another former McKinsey consultant, Werner Seifert, who argued it would provide diversification for the much more volatile re-insurance business. "Mühlemann undid what the previous McKinsey person had done," muses Kalbermatten. (Seifert had left to head the German Stock Exchange in Frankfurt before Mühlemann came on board.)
Of Mühlemann, the UBS analyst says: "He sees the big picture, definitely." The former McKinsey partner had been considered a top contender to succeed managing director Fred Gluck, who retired from the consultancy in 1994, but the position went instead to Indian-born McKinsey careerist Rajat Gupta.
Mühlemann has taken a very un-Swiss, shareholder-friendly approach to running Swiss Re. Perhaps this is due to his US education: he too is a Harvard MBA. Yet Kalbermatten questions whether the huge advances made by Swiss Re will be sustainable. "I do have doubts whether the next couple of years will be as good as the last," he says, noting that price deregulation in Europe is just gearing up.
Competitors love to typecast McKinseyites as arrogant and elitist. "Whenever I've met them I've found there's a huge built-in McKinsey ego," says one of the strategic consultants at Boston-based Bain & Co. Self-confident is how McKinseyites describe themselves. Such an attitude may make it difficult for McKinsey to admit that it has ever been at fault with its advice or approach, but as the world of finance changes so too do the solutions for its problems. That keeps McKinsey employed.
During the 1980s, for example, McKinsey was advising financial institutions expanding their global reach to organize in matrix fashion, which often meant individuals had two reporting lines: for instance, one for product and one for geography. But other consultants say matrix organizations created too many power struggles and began to give way early in this decade to organization along product lines. The matrix organization, McKinsey's Bryan now says, was always seen as "transitional". Today's vogue word is "networks". This system has flattened the organizational structure and given a few key individuals much more power. Institutions must still determine whether clients, products or geography will be the primary "axis" around which the networks will turn.
Product versus client focus
Now product orientation is falling into disfavour. In theory, at least, globalization tends to lend itself to organizing around products sold worldwide for maximum profitability. Yet technology and the globalization that quickly erases arbitrage possibilities have shortened product lifecycles. The derivatives debacles of 1994, followed by their numerous lawsuits, further illustrate the near-sightedness of a rigid adherence to managing by product.
Such realities have made sources close to SBC Warburg argue that former McKinsey partner Feiger was behind the times in his approach. A few top organizations, notably Morgan Stanley, have steered the business back to clients, after believing they veered too far in the other direction. "The axis that is getting more important is the client axis," says Bryan, who admits it is a tough problem for McKinsey clients as there is an inherent con-flict between "maximizing profits" and "total client service". "People are making progress, but it's a continual issue," he says.
McKinsey has brought much-needed rational thinking to the business. But its partners come close to admitting that the technological and geo-political changes sweeping through the industry are outdating its advice as quickly as it is given. Partners acknowledge they are struggling to help their clients fix such perplexing problems as unprofitable geo-graphic expansion and uneconomic compensation levels. They are also suggesting how clients can cope with the rapid commoditization of many product lines and conflicting management imperatives.
Bryan has embarked on a new research project to explore how the banks can adapt to this new, ruthless global environment. "The biggest challenge to the industry is that 50 players are all trying to have the same global position when there's not room for more than eight or 10," he says. "Everyone adopts similar strategies and you get these wars of attrition." Some industry executives joke that this is because everyone has hired McKinsey, though the company insists it has not recommended a global strategy for everyone.
But McKinsey clearly is looking for new approaches. Acting as though the company itself were the client, Bryan is using the much-ballyhooed McKinsey method, a hypothesis-driven approach which reaches conclusions and solutions based on a dispassionate analysis of the facts. It may seem ironic, but the primary hypothesis of Bryan's new research is that many notions of how institutions develop strategies and build organizations have been made obsolete by global expansion and technology. So much for all the millions of dollars banks have doled out to McKinsey for those "notions" in recent years.
The McKinsey methodology is highly praised by its practitioners. Lux says the hypothesis approach allows for "Socratic debate" among members of McKinsey teams as they test it. And he says it tends to focus the discussion on issues that matter: "'So what?' is a classic McKinsey question," he says.
It may sound scientific, clever and precise but critics claim that the method can also lead to too narrow a focus - that it is so abstract and numbers-orientated that it can miss the human dimensions of business success. Former consultant Richard Radkowski is a principal with the venture capital firm New Paradigm Ventures of Connecticut, which has competed against McKinsey. He claims that by following a series of quick steps to solve a problem, the McKinsey solutions all fit into a preconceived notion, resulting in a "canned approach" lacking insight and creativity. Such unquantifiables as innovation and good old-fashioned client hand-holding that drive the best of the investment banking behemoths can fall by the wayside.
Some former partners go so far as to say that the results sometimes can be "a little too theoretical", making them difficult or too expensive to implement. But McKinsey defends its approach. Partners note the importance of bringing rigorous profit analysis to a business that has long been shrouded in mystique. "I believe numbers are very important in this business," says Rosenthal. "The mystery around the profitability often obscures the reality of any specific line of business." In its most simplistic terms, the McKinsey business analysis attempts to tell clients which products and markets make money and why.
Complaints are viewed as sour grapes by some McKinseyites. There's always tremendous resistance when a McKinsey team goes in and "takes a business apart piece by piece and puts it together again", says former partner Larry Skilling, who founded and now heads Enron Capital Trading, a Texas-based company that grew out of mergers between McKinsey clients Internorth and Houston National Gas, and which has become a wholesale banking operation of sorts within the energy business. It is also a company whose profits have sky-rocketed in recent years, he notes. Skilling says that as organizations get big and complex, they tend to lose their way - and that's where McKinsey comes in. "People don't like change and you can't afford McKinsey unless you need them to help you change significantly." A McKinsey project can run easily into millions of dollars.
The company that pioneered the consulting industry was started in 1926 by Chicago accounting professor James Oscar McKinsey who was soon joined in the business by a Harvard law graduate, Marvin Bower. Bower is considered the company's spiritual father for his role in steering it toward a behind-the-scenes influence in the highest corporate reaches and running it somewhat like a law partnership, despite its being incorporated. Nowadays, McKinsey & Co is considered the largest strategic consultant in the world, with revenues totalling $1.5 billion in 1994, 60% of it earned outside the United States, according to estimates by Consultants News.
Unlike some competitors, McKinsey does not base fees on performance or on any quantifiable results. And despite being widely considered as the most expensive consultant in the field, it does not appear to be losing ground. "Clients work with us for long periods of time because they believe they get value," says Bryan. "They're not just doing it because it is fashionable."
McKinsey, which has been growing at about 15% annually, now has 67 offices in 36 countries. It hires the best and the brightest, competing with Wall Street for Harvard MBAs, as well as placing an emphasis on physics and mathematics majors from top universities in the United States and abroad - it likes the problem-solving abilities of such abstract thinkers. Consultants - there are 3,156 - are known for their gruelling hours of work and for enduring constant travel. They are also the most productive in the business, bringing in more than $475,000 each a year.
The tradition of hiring Harvard business school graduates and sending teams of them to dispense advice to chief executive officers dates from the 1950s. "Other consultants hired old men who dispensed wisdom; we decided to hire young people and train them how to be problem solvers," says partner Bill Mattasoni. The approach has always been controversial. Even today, one of the most damning criticisms that any former McKinsey partner seems willing to go on record with is that the youthful lack of experience of its employees sometimes can lead to naive views. But that doesn't stop them.
If a McKinsey employee fails to make partner in five years, he is asked to move on. "It's an up-or-out mentality," says one former employee now working on Wall Street. Yet this fiercely competitive environment conversely seems to breed a bonding spirit and those who leave speak warmly of the company, offering such statements as: "I'm a friend of McKinsey." Says former partner Skilling: "It really is a class act. They know how to get the best out of people. You never get bored."
Informal and formal alumni activities only expand McKinsey's reach into the world at large. Former McKinsey partners can be found in the executive suites of such non-financial companies as IBM, Sotheby's, Westinghouse Electric, Lotus Development, Inchcape, Asda, Groupe Bull and even in the UK government - all places where, unsurprisingly, they often hire their former McKinsey colleagues on consulting projects. As a result, McKinsey never needs to advertise or engage in marketing in the conventional sense.
While the financial industry does not make up a dominant portion of its practice, McKinsey's influence in the realm of finance is unparalleled. As the company does not talk about its clients, it is hard to know precisely how deep is its penetration of the industry. Bryan says, somewhat sheepishly, that "it's not 100%". But some previous and current clients include Merrill Lynch, American Express (when it owned Shearson Lehman Brothers), Hongkong and Shanghai Bank, Salomon Brothers, Goldman Sachs, Dean Witter, Citicorp, CS First Boston, Deutsche Bank, Banque Indosuez, Nippon Life Insurance, Sumitomo Bank - even the Bank of England.
Traditionally, McKinsey has been a big-picture/strategy type of consultancy, but Bryan notes that the company is devoting more time to the thorny problem of compensation. "American companies are tired of being raided because it bids up the price of labour," he says. Labour problems are making firms search for ways to build loyalty to the institution, to build partnership, as opposed to individualism.
One way is to offer equity participation, particularly effective if individuals have to commit capital instead of just receiving stock options that have no downside for the individual, but have the deleterious effect of diluting shareholdings. Many of the boldest attempts, like Salomon's efforts to tie its proprietary traders' earnings to overall performance, have not fared too well. It is an issue that McKinsey does not claim to have figured out. "It's a continuing state-of-the-art problem," sighs Bryan.
Expanding on the theme, partner Rosenthal says the biggest surprise in the global financial world over the past year has been the "the nature of the participation of the European universal bank in the global capital markets. A direction is clear, but the extent of their commitment is still to be fully determined." Translation: the universal banks, with their hefty capital bases, have clearly hurt the economics of the business, at least temporarily. Since their traditional commercial banking business is becoming even more commoditized than global investment banking, they feel they have no choice but to try for the latter strategy. To do so, they've opted to buy American and British know-how by hiring some of the most talented players at such outrageous compensation packages that consultants describe them as uneconomic.
For the future, McKinsey's philosophical view perhaps is best expressed in new book, Market Unbound: Unleashing Global Capitalism, co-authored by Bryan and McKinsey senior engagement manager Diana Farrell. (It truly is an old boys' network: there are few women partners.)
The book considers the break-up of the European Exchange Rate Mechanism (ERM) during 1992-93, which it regards as a telling event: markets had overtaken governments. Bryan and Farrell dismiss the role of the US Federal Reserve in unhinging markets the following year as a symbol of the volatility that occurs as governments continue to try to exert influence.
However, the "global capital revolution" that they describe in mostly glowing terms has untoward effects. Looking at the declining profitability in the most globally-integrated markets, such as foreign exchange and fixed-income, "one of the implications of this work is that the easy profits are over", the authors conclude.
McKinsey has long prided itself on its work as an outside strategist for corporations, for example, advising investment banks on why and how to go after that equity opportunity in Malaysia. Now that the financial institutions have stretched themselves across the globe, McKinsey's work is changing. It is destined to be geared to "helping to make the organization more effective or eliminating drains on profitability", says Bryan.
In fact, says his colleague Rosenthal, over the past year the firm's US practice has been concentrating on such matters because "it's becoming clear to the industry that it's difficult to achieve attractive returns in Europe and Asia. It's much more difficult than anticipated."
As the global investment banking industry in McKinsey's view apparently is set for secular decline, the partners must be grateful that the firm decided not to venture into the investment banking business, an idea that was considered several times. Former partner Skilling, who was at McKinsey at one such time, says it would have created potential conflicts of interest with clients. Anyway, he believes that the work McKinsey does is more substantive. "Given the financial churning many investment banks do, I'm not sure I'd feel real good about it when I went home at night." McKinsey, on the other hand, "has its values in the right place", he says. "You feel like you're doing God's work when you're there." That may be so. But, to quote the proverb, the devil is in the detail. |