McKinsey & Co.: The man behind the curtain

McKinsey & Co. wants to reshape government the way it changed corporate America. But first, Dominic Barton must figure out how to reshape McKinsey

 
McKinsey & Co. managing director Dominic Barton

McKinsey & Co. managing director Dominic Barton. (Jason Alden/Bloomberg/Getty)

On Oct. 16, Dominic Barton, the freshly installed head of McKinsey & Co., was in Madrid for client meetings. It was a Friday, and he was looking forward to one of the monthly reunions with his dispersed family — his wife was flying in from Shanghai and his teenage kids from their boarding school in Singapore. (Barton himself is based in London.) He was in the car when he got the call: Anil Kumar, one of the firm’s most eminent senior partners, had been arrested. Kumar fainted and was hospitalized after the authorities showed up at his Silicon Valley home, so it took a few hours to emerge that he’d been charged with fraud and conspiracy for tipping off a Wall Street hedge fund manager.

Let’s all join in a group shrug: another suit doing the perp walk, a cliche by now. But, oh, not for McKinsey. The world’s pre-eminent management consulting firm, whose employees whisper in the ears of government leaders, international regulators and chief executives of 95% of the world’s largest corporations, is renowned for its pristine image, its earnest emphasis on values, and its intense aversion to publicity. Last week, Kumar pleaded guilty to fraud, admitting that he accepted more than US$1.75 million for revealing client secrets to hedge fund manager Raj Rajaratnam, capping what is easily the worst chapter in the firm’s 84-year history. Never before had a partner been charged with securities violations. And Kumar’s transgression wasn’t just about greed — he betrayed client confidentiality, the ultimate mortal sin at McKinsey.

Recalling those first frantic hours following Kumar’s arrest, Barton winces and looks physically pained. “It’s like in the Catholic Church, like someone has done something fundamentally wrong,” he says as he perches on a sofa on the top floor of Toronto’s Four Seasons hotel. “To see a partner of yours in handcuffs, it’s a shock you can’t imagine.” But, he adds with a grim smile, “It’s the reality. What matters is how we react to it.”

That reaction may surprise longtime McKinsey watchers. The firm’s traditional approach is to ignore bad publicity, counting on its reputation to lift it above the fray. But this scandal comes at a time when the 46-year-old Canadian is quietly shaking up the place. Since he took over as worldwide managing director in July, he’s launched a dozen internal initiatives, ranging from cost-cutting measures (at a firm notorious for not taking its own efficiency medicine) to a new focus on marketing (a word that, by Barton’s own account, draws gasps of horror at McKinsey). Most unusually, he wants to open the door a little to public eyes, long curious about what really happens in the halls of the “McKinsey mafia,” and the Kumar debacle is his first testing ground. In the run-up to his election to the firm’s top spot, Germany’s Manager magazine compared Barton to Barack Obama — the agent of change.

Now McKinsey may be all about change and innovation, but not when it comes to the firm itself. Even as it’s grown into a US$6-billion juggernaut operating in 50 countries, McKinsey has remained the embodiment of the august institution where things are done just so, and always have been. When Chicago lawyer Marvin Bower rescued what was then an accounting and engineering firm from near bankruptcy in 1939 and proceeded to invent the discipline of management consulting, he enshrined a set of commandments that guides McKinsey to this day: put client interest above firm profits; speak truth to power no matter the consequences; our work must have real impact on the client’s business; take client secrets to the grave. It’s no exaggeration to say these values are a corporate religion. When a journalist once asked Bower if McKinsey might go public, he replied, “Would the Vatican go public?”

Nothing grates more on the firm’s rivals and detractors than this arrogant self-regard, but they can’t deny McKinsey’s clout. Over the decades, its consultants have shaped the world of business in profound, if little seen, ways. The company helped Germany rebuild its economy after the Wall fell, and assisted the Asian tigers in the wake of their late-’90s wipeout. It reorganized General Electric, saved Russia’s biggest airline and helped develop the bar code. It has produced more corporate chiefs than any other organization, including such celebrities as Louis Gerstner and (this haunts it still) Jeffrey Skilling. Tom Peters and Robert Waterman wrote their giant bestseller, In Search of Excellence, while serving in the San Francisco office. Even as it occasionally stumbled — no partner likes to hear mention of bankrupt former clients Swissair or Enron — McKinsey’s mystique grew because it attracted the world’s smartest people to help the most prestigious clients with their most complex problems.

Barton has no intention of messing with that. He’s convinced, however, that as the spheres of public policy and private enterprise increasingly collide in efforts to address climate change, water shortages and other international emergencies, complexity will skyrocket. “We have a lot of global issues that don’t have global institutions to deal with them,” he says. Who better to step in than a brainy consultancy? Barton’s mantra at internal meetings has been “our time is now.” But before McKinsey can help shape this new era, it needs to reshape itself.

The man hoping to modernize McKinsey almost got kicked out of the firm before he really got started. The company operates on an up-or-out system, which means that if you haven’t made partner within five or six years, you’re shown the door. The partners in Toronto, where Barton began in 1986, put him up for election early, and a member of the global personnel committee conducted an evaluation. The outcome wasn’t good. “It wasn’t just a no,” Barton recalls, “it was the sense that ‘he doesn’t have a chance.'” The office chief told him there were concerns about his problem-solving, which is like telling a mathematician there are worries about his arithmetic. Because Barton’s approach was to bring the client along as he formulated his solutions, he was seen as not direct or confident enough, and too slow. On his second failed attempt at partner, when the verdict came in, a McKinsey mentor of Barton’s called him and “he started quoting these biblical verses to me. And I swore at him and hung up the phone.”

It was humiliating. Everyone knew he’d been rejected. Barton’s wife advised him to take another job offer. “She said, ‘You’ve gone crazy. You care more about this than you do your family.'” But he couldn’t just quit. Other than a stint as a currency analyst at a London investment bank, McKinsey was all he knew. “I believed in the fit,” he says. “I was obsessed. In my heart, I felt ‘I have to go to the end: I have to be fired.'” When Stephen Bear, who joined McKinsey a year after Barton and now runs the Toronto office, made partner, he asked Barton, his close friend, to give a speech at the party. “It was one of the hardest things,” Barton recalls. “People were looking at me like, ‘Jesus, this guy is a masochist!'”

Barton finally made partner on the third try — “I’m sure there were splinters on my back going across the bar, because that was close” — and today he says he’s grateful for the experience. “I said to myself then, ‘My bar will be higher than McKinsey’s.'”

From the start, Barton loved consulting — breaking big problems down into their smallest components, then peering at them closely, first-hand, before building back up to a solution. In the early 1990s, he and Bear were helping a major gasoline retailer improve its customer offerings. Barton, the project manager, did the usual interviews and data analysis, but he went further: for a few hours before and after work, on his own time, he pumped gas. “He learned a huge amount about the nuances of how this works, what customers want, what they could and couldn’t do,” recalls Bear. The client, naturally, was disarmed.

One of Barton’s biggest assets as an adviser is his likability. A tall, prematurely grey man who looks like Bob Rae’s younger brother, he has that patented Canadian self-deprecating niceness: polite to a fault, he instinctively apologizes for things utterly out of his control. Yet he’s dogged, willing to face embarrassment or client wrath with an impolitic suggestion. He once asked the brass of a bus company why they didn’t carry mail (eyes rolled, but the CEO was intrigued). Another time, he told the head of a Korean conglomerate that sales growth was dandy but what it needed was profitable growth (the first time he got kicked out of a meeting). “He’s great at getting [clients] to do things, because you just immediately trust Dominic,” says Bob Felton, a semi-retired McKinsey director who met Barton early in his career. “That’s vital, since it’s really personal career advice you’re giving CEOs, because if we say go do something and he does it and it’s wrong, he’ll quite likely get fired.”

So when Felton took over the Korean office in the mid-1990s, his first call was to Barton. A finance specialist, Barton knew next-to-nothing about Asia. “I don’t think I could have located Korea on a map,” he says. He had two young kids and his wife Sheila Labatt — of those Labatts — was dead set against the move. Nevertheless, he dove in. As it turned out, Barton’s banking expertise proved crucial in Seoul, because within three months of his arrival, the Asian crisis hit. In short order, the young Canadian emerged as the leading banking adviser in the country, and he didn’t mince words: Korea had 34 banks, most of them bankrupt; he recommended no more than four. McKinsey pretty much redesigned Korea’s banking system, shutting down and merging institutions and devising new regulations. To this day, Barton is a close friend and adviser to Korean president Lee Myung-Bak.

For Barton, living in Seoul and later Shanghai was “like seeing a curtain open.” He learned that Asian businesses’ biggest constraint was a manager shortage — one oil company had 600 senior positions it couldn’t fill. And clients wanted different things from consultants: not long-term strategy (McKinsey’s forte) but help grabbing immediate opportunities.

Despite Barton’s trouble making it up the first rung, his climb beyond was swift. Barton’s work in Asia, in fact, made him a managing partner contender as early as the late 1990s, and, at age 40, he was one of the seven finalists vying to replace Rajat Gupta. McKinsey’s first non-American leader, Gupta ran the firm from 1994 to 2003 and left a legacy of aggressive expansion, but he also departed from some of McKinsey’s most treasured principles. In the rollicking ’90s, the firm accepted payment in stock (a previously verboten tactic seen as tainting the impartiality of advice), and there was talk of McKinsey going public and starting its own Internet ventures. When Briton Ian Davis succeeded Gupta, his selection was seen as a repudiation of Gupta’s revenue-raising experiments and a return to McKinsey’s core values. Davis, however, didn’t stop the expansion, and over the course of Barton’s years there, McKinsey’s practice in Asia gained in strategic importance.

With Davis forced to step down because of age restrictions, Barton was a strong candidate. Lobbying for the managing director’s post is counterproductive at McKinsey, which disdains self-promotion over the collective. Elections at the firm have been compared to papal conclaves: low-key, deeply secretive, but intensely political. By the fall of 2008, it was down to Barton and Michael Patsalos-Fox, a longtime contender who runs the New York office. Barton had charisma, intelligence (he’s an Oxford-educated Rhodes scholar) and global bona fides (he was raised in Africa and British Columbia, and has lived on four continents). But what put him over the top was his experience running the Asian operations.

Back in 1997, when Barton went to Korea, it was deemed a dubious career move. His practice in Toronto was on a roll, and Asia was still fairly low-profile at McKinsey. “Dom deserves huge credit for his foresight in going to Asia,” says John Kelleher, a former McKinsey consultant who worked with Barton and now runs Toronto-based uniform maker R. J. McCarthy. “It was a big choice for him. Now it gives him a huge amount of credibility when talking to U.S. CEOs. That’s why he’s an attractive leader for the firm.”

During the 12 years Barton spent in Asia, he witnessed a massive transformation. A few years ago, a McKinsey team met with the board of a large state-owned Chinese enterprise in its Communist party room, which featured a huge Last Supper — like painting of Mao Zedong, Karl Marx and other Communist heroes. Barton was nervous and got straight to business, but the chairman stopped him and said, “Why don’t we enjoy this moment? I bet when you joined McKinsey you didn’t think you’d do this. When I joined the party, I certainly didn’t.”

Scenes like this persuaded Barton that China’s importance, promise and threat remain vastly under-appreciated by western business. American households, which drove recent economic growth, are awash in debt and scaling back as the population ages. Meanwhile, within the next five years, China and India will comprise 900 million consumers — three times the U.S. market — and China will have more affluent citizens than any country except the U.S., U.K. and Japan. All this points to an epochal shift, Barton believes, involving the re-emergence of Asia into the position of economic dominance that it held up until the Industrial Revolution. The financial crisis has accelerated that transition, with trade among Asian and Middle Eastern countries surging along the old Silk Route.

One of Barton’s pet phrases is “I worry about …,” and his list of global concerns is long. Climate change is both a massive challenge and huge opportunity. The financial system needs a new infrastructure. And water is a looming crisis: a recent McKinsey report forecasts that global water demand will rise 40% over the next 20 years. (Because of its natural resources and a multicultural workforce, Canada could thrive in this increasingly scarcity-dogged world, Barton believes.) Then there is this economic downturn still to solve. “We’re not out of it,” says Barton. “A lot of the recent improvements have come from cost reductions, not revenue improvements.” Companies and governments haven’t done enough to trim industrial overcapacity, focusing on wrong-headed programs like Cash for Clunkers that artificially boost demand. What matters is finding growth, he argues. “We’re at a crossroads, and what I worry about is that if we don’t deal with this crisis properly, and just paper over the potholes, we’ll be dealing with [these issues] again.”

Many of the biggest challenges demand co-ordination between business and governments, requiring what Barton calls “tri-sector athletes” — thinkers and managers who can span the corporate, public and social spheres. It so happens that McKinsey has cultivated all three arenas. Its work with governments comprises a fifth of its revenues, and it’s growing fast. The firm is modernizing the education system in Saudi Arabia, revamping health-care delivery in Egypt and designing new training methods for medical staff in Tanzania. But at a time when the public sector has made a major resurgence in the global economy in the wake of the economic collapse, Barton feels McKinsey is still “looking through a keyhole” at public-sector issues. To remain relevant, it needs to go after these opportunities aggressively, but chasing business has never been part of its cultural DNA. While 80% of its assignments come through referrals, the firm has been lousy at growing the 20% for which it has to compete. “We are the world’s worst marketers,” says Barton. “We come in, we’re young-looking, we’re incredibly expensive, and our documents aren’t the most [impressive]. That really frustrates me.”

Injecting entrepreneurial verve into an organization that considers selling a dirty word won’t be easy. For starters, leading McKinsey is less like being a CEO than the captain of a hockey team. In the firm’s non-hierarchical structure, the managing director needs a united effort to chase any new goal. Indeed, teamwork is a key aspect of McKinsey’s near-mythical culture. One insider compares working for McKinsey to “being recruited into a very intelligent, erudite army,” and it’s an apt analogy: the high-minded goals, the unforgiving hours, the pressure to conform to the McKinsey way. Barton remembers meeting one bright young thing on a recruiting visit to the University of Western Ontario who boasted he’s been No. 1 at everything he’d done. “I told him, ‘I think this interview is probably not going to last much longer.’ We don’t want ‘I’m the one’ [types]. That rips the place down.”

McKinsey is painstaking in choosing new recruits, subjecting candidates to gruelling series of up to 15 interviews. A key part of the process is ensuring potential hires hold its values, which are celebrated and analyzed on an annual Values Day when McKinsey takes a hiatus from client work to study itself: well-handled situations, ambiguous calls, how to ensure adherence to its principles in the future. “I gotta tell you, I’ve been inside hundreds of companies, and there’s nobody that has values like McKinsey,” says Kelleher. “It’s taken very, very seriously.”

Carefully selected, lavishly groomed (through ongoing training) and constantly reviewed, McKinsey employees have been compared to products of a Stepford factory with the corporate culture programmed into their internal database. Whether or not they make partner depends on their work’s impact, which Barton defines as, “Did you deliver results? Did [your advice] change the client organization in a positive way?” McKinsey consultants know that they’re sometimes hired for optics — to placate the board or to give management a scapegoat if a reorganization fails — and will resign engagements if they harbour doubts.

This insistence on impact has a tinge of arrogance, as if the only reason the firm’s advice might be ignored is a client’s lack of sincerity, or courage, or both. Yet McKinsey hasn’t always been right. For nearly two decades, it supported many of the practices that brought down Enron (while McKinsey raked in annual fees of as much as US$10 million), and it led an early-’80s restructuring of GM that went disastrously off track. Asked whether McKinsey’s advice to its many Wall Street clients may have contributed to the financial crisis, Barton pauses. An internal committee has reviewed McKinsey’s recommendations and didn’t find any specific missteps, but Barton allows that may not be enough. “The more fundamental issue is, ‘Were we stepping back and asking the right questions?’ When you look at that easy money, there’s something in that ecosystem that should have worried us.”

The past year has put the firm in an unusually unflattering spotlight. Last week, a 33-year-old former McKinsey consultant was arrested on charges of helping Iranian investors skirt the U.S.’s financial embargo. And last fall the new CEO at ailing insurer AIG made hay with demoralized employees by firing McKinsey and mocking its Project Destiny plan. Being unable to give their side for confidentiality reasons, “we tend to go underground,” says Barton. But he wants the firm to take more risks to get its message out, especially as it increasingly takes on deeply political challenges like climate change or health care. “We have to be more open if we’re going to be more relevant. We’re not used to that.”

None of these fumbles, however, compare to the mortification spawned by the Anil Kumar affair. To have a senior partner commit the type of misconduct that, according to McKinsey’s own studies, has caused the image of business to drop to all-time lows is devastating. After the news hit, McKinsey launched an internal investigation into procedures while Barton spent that weekend on the phone with clients and staff. But he’s gone further, bringing up the scandal at the start of outside presentations. Ignoring the issue is counterproductive, he figures: “I feel like I have a big wound on the side of my head.” Meanwhile, there’s a born-again fervour at the firm around confidentiality. “It’s a feeling of, God damn it, there’d better not be any transgression,” says Barton. “I will not even tell my wife what client I’m meeting.”

Despite these setbacks, the firm is highly profitable and largely recession-proof. Its revenues are estimated to have grown more than 12% in 2008. But one of the many paradoxes about McKinsey is that growth scares it. After the big expansion in the 1980s, and again in the latter ’90s, the place was roiled by debate about whether it was moving too far from its roots as it chased revenue opportunities. Barton seems impatient with that fear of success. As he pushes the firm further into government corridors, Barton realizes that people are leery of power that hides its face — that there’s something sinister about the mysterious adviser who sits in a corner taking notes and is never introduced. So he wants to show the McKinsey mob’s friendly grin. “It’s a secretive organization, but we’re at a size now where we have to deal with [public perceptions],” he says. “There are faces behind this, and there’s a passion that can never come across when we write our documents.”

Is the new pope a heretic? Felton, Barton’s mentor, has an old McKinsey hand’s pragmatism. “I wouldn’t worry about him changing the firm too much, no matter how much he tries,” he says. “McKinsey is a values-driven place, and those are the hardest places to change.” Barton has taken charge of a successful institution, and seems to realize that the leader’s job isn’t to revolutionize it but to find the next level of performance. He has 2? years left at the top before another election could knock him off. “Someone told me, you have to have the courage of a dead man,” he says. “I’m going for broke.”

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