The problem with consultants

No skin in the game

 

idealistThere was a time not long ago when Jeffrey Sachs—the Harvard-educated economist who tried to end poverty forever—was known more for his capitalism than his bleeding heart. In the early 1990s, Sachs, then a whiz-kid academic, was charged with jerking Russia out of communism and into the free-market age. The solution he crafted was essentially capitalism on steroids. It called for a sudden and complete end to central planning. It was radical and audacious, and it bore in it the blueprint for every significant adventure Sachs has attempted since.

In Russia, Sachs offered a single, overarching answer to a broad complicated question. He denigrated alternative plans. And, as Canadian writer Nina Munk details in The Idealist, her new book about the economist, he refused to take any blame when things went wrong. Two decades on, it’s clear Sachs’s plan for Russia was, if not a disaster, at least badly misguided. The hasty transition to capitalism sowed the seeds for many of Russia’s current problems. But Sachs, even now, will brook no criticism of his work there. When Munk (her father is Barrick Gold founder Peter Munk) confronted him about Russia, he became outraged, called it a “tired question” and stormed out of the room. The problem with Russia, he later explained in an e-mail, wasn’t that his ideas were flawed, but that people didn’t follow them closely enough. “I constantly warned that we should be doing more,” he wrote. “Nobody wanted to hear it.”

Sachs’s work in Russia—and indeed his entire career as recounted by Munk—suffers from what you might call the problem of the genius outsider. Gurus and consultants like Sachs are always full of brilliant plans for total transformation. But they have the freedom to be so bold at least in part because they aren’t playing with any stakes. As the Black Swan author Nassim Nicholas Taleb would say, they have no skin in the game. If their radical ideas work, great: their reputations are burnished, and they move on with great credit and reward. If they fail, it’s still no big deal. Gurus can always claim—as Sachs did with Russia—that the implementation wasn’t pure or that their advice was ignored.

After leaving Russia, Sachs took on an even bigger challenge. In 2005, he published The End of Poverty, a book that promised that, with sufficient investment, extreme deprivation in Africa could be conquered within decades. The Idealist is an audit of Sachs’s attempts to do just that. For six years, Munk trailed after Sachs, visiting the villages in Africa where his ideas were being put to work. What she found was not promising. Sachs had no problem raising $120 million and getting elites from all over the world to buy into his plans. (He counts Bono and Bill Clinton among his friends.) But on the ground, his ideas haven’t sparked the revolution he claimed they would.

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You get the feeling reading The Idealist that Munk desperately hoped to write a more optimistic book. But it’s hard not to call what she finds a failure. After six years, the villages are no closer to self-sustaining, for all the millions poured into them. Sachs, meanwhile, comes off as a man undone by his own ego. He ignores outside advice and bullies would-be allies. When Munk caught up with him in 2012, he already seemed detached from his mission. Asked where the money would come from to keep his villages going for another five years—in other words, to keep his project alive—all he could muster was: “It is what it is.”

If Sachs is the singular embodiment of the genius outsider, McKinsey & Co., the legendary consulting firm stacked with the best and brightest of Ivy League thinkers, is the problem coalesced in institutional form. Over the past 87 years, McKinsey has taught the world how to think about business. But as detailed in The Firm, Canadian Duff McDonald’s new history of McKinsey, it too has mastered the art of dodging blame.

The Firm is on the one hand an exhaustive—some might argue exhausting—chronicle of every McKinsey era since its founding in 1926. But it is also, more interestingly, a kind of ledger. McDonald attempts to answer a pair of key questions about McKinsey, and indeed about the business of consulting in general: whether the work it does for clients is worth the huge fees it charges, but also whether the work, on the whole, is of net benefit to the consultants.

McDonald does find much he admires in McKinsey, such as its corporate culture, the commitment to hiring the best, and the loyalty of its alumni. But he also catalogues a dizzying number of times the firm was involved in, if not the cause of, corporate disaster: McKinsey men endorsed the strategy that led Swissair into bankruptcy; its consultants pushed hard for the disastrous AOL–Time Warner merger in 2000; and, in 1995, McKinsey even advised J. P. Morgan to get out of the lending business. (Fortunately, the bank ignored that advice.) Only very rarely has a foul-up at the client level dented McKinsey’s reputation. Even the conviction of former McKinsey managing director Rajat Gupta on charges of insider trading last year failed to seriously harm the firm’s image or, just as important, its billing.

None of that is accidental. McDonald writes that McKinsey has always structured its consultations to make sure the ultimate responsibility for any decision rests with the clients. That allows McKinsey to claim, if things go wrong, that the firm’s ideas weren’t the problem. “It’s almost never that we fail because we come up with the wrong answer,” a partner once said. “We fail because we don’t properly bring along management.” In other words, McKinsey isn’t wrong; it’s just that sometimes the client isn’t right.

Beyond its failures, McDonald does believe McKinsey ultimately provides value to clients. Eighty-five per cent of its business comes from return clients, CEOs and boards who wouldn’t continue to pay its fees if they weren’t getting something out of the deal. Munk doesn’t come to a similarly rosy conclusion about Sachs. The economist “misjudged the complex, shifting reality” in Africa, she writes. A harsher critic might say he never judged reality at all. His solutions seemed tailored for an invented world, one free of nuance or complication. For the good of everyone, it might be better if they stayed there, far from the complex landscape of actual life.

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