The Power of McKinsey

Michael Forsythe is an investigative reporter for The New York Times and co-author of the new book When McKinsey Comes to Town: The Hidden Influence of the World's Most Powerful Consulting Firm.

In this podcast, Forsythe joined Motley Fool producer Ricky Mulvey to discuss:

• Why Fortune 500 companies pay millions of dollars for the firm's advice.
• What "The Carnegie Way" meant for US Steel.
• McKinsey's relationship with the FDA and what it means for drugmakers.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Nov. 06, 2022. 

Michael Forsythe: I really haven't talked about this in any other interviews, but much of McKinsey's work is doubly hidden because it goes through law firms. So it would be a law firm hires McKinsey. This is the case we understand with tobacco makers and we have a deposition that we looked at, and we found out this is the case with Jewel.

Chris Hill: I'm Chris Hill, and that's Michael Forsythe, Investigative Reporter for The New York Times, and co-author of the book, When McKinsey Comes To Town, the hidden influence of the world's most powerful consulting firm. Ricky Mulvey caught up with Forsythe to talk about McKinsey's work with US Steel, Walmart, and China's state-owned companies. How the consulting firm works up and down the healthcare value chain, and one way that McKinsey helped weaponize the insurance claims process.

Ricky Mulvey: Most powerful, that struck me. So there's a lot of other consulting firms out there. You got Accenture, you've got the Boston Consulting, Bain & Company. Why are you given this heavyweight title to McKinsey?

Michael Forsythe: First of all, if you look at the management consulting companies in the industry known as MBB, McKinsey, Boston Consulting Group, Bain. McKinsey has been around much longer than the other guys and is bigger, certainly more revenue. But it's more than that and it distinguishes itself from the broader consulting companies, the PWCs, the Accentures in the world is because of the prestige McKinsey has and also its reach around the world. It goes into the boardrooms and talks to the CEOs and the CFOs and it's in almost every Fortune 500 company and in the biggest global companies around the world and with the governments around the world, free and not-so-free. That's why we're using that language.

Ricky Mulvey: Reading your book, one of the mysteries that you uncover in many cases is, what are these consultants exactly paid for? Verizon's paying McKinsey $120 million over a two-year period. US Steel is paying them $13 million over a three-year period. It can't just be, is it just slideshow presentations? What are all these Fortune 500 companies paying for?

Michael Forsythe: No, it's a good question, and it really varies. What they're paying for them is for knowledge and for the diffusion of knowledge. The knowledge that McKinsey picks up hoovers up around the world and delivers to them. They're also sometimes in some cases, paying for having the prestige of McKinsey coming in and telling them what they really knew they had to do anyway. But to have a consulting company like McKinsey tell them that gives people in the boardroom and the C-suites some justification to say do job cuts, do something painful. It's good when you have the emperor of McKinsey saying this is what you should be doing.

Ricky Mulvey: I guess the outside decision, I think that came into play, especially with Walmart, where you have a company that wants to everyday low prices. But in this case, McKinsey's contribution to that was saying, you need to let go these people who've been around for a few years because there's significantly more expensive to keep around.

Michael Forsythe: That's right, and so that can give a company like Walmart a lot of justification for doing things that generate headlines that just do not look good. And I think one of the key parts of our book is that with their absolute focus on doing what the client asks, that's their number one goal. That's there, they have a list of values and their first value is to put the client's interests above the firm's, and they will work their hearts off, these brilliant people and they really are, so many of them, we've met so many and they're really smart, to do what the client wants, and that's why we wrote the book because in so many instances, what the client wants to do is, at times not what is good for society.

Ricky Mulvey: You start that off with the example of US Steel, which I didn't realize this was the largest company in the world at one point, and then McKinsey's advice had disastrous consequences for many of the workers there.

Michael Forsythe: Yeah. I wish my colleague was on now, because he worked at US Steel as a young man at its height when US Steel was churning out just millions of tons of steel. The plant goes for seven miles along the Lake Michigan coast, East, Southeast of Chicago. It is absolutely massive. US Steel has other facilities too, but Gary works as the main one, and it's still in operation. But it's a big lumbering old traditional steel mill, and the company had fallen on hard times, was losing money year after year. McKinsey came in in 2014, and McKinsey had had a history with them, it was their biggest client in the 1930s.

Now they're coming back in about 2014. McKinsey comes up with a plan called the Carnegie Way, which is going to return US Steel to the old halcyon days of high profitability, super efficiency. But what the workers found out in the Gary Works plant in US Steel, was that a lot of that was focusing on streamlining some of the maintenance procedures, letting go of people in maintenance, and that coincided with some pretty grisly deaths of some workers in that plant, and the upshot was the company didn't return to profitability with this McKinsey plan and they abandoned it.

Ricky Mulvey: You have the parallel story to Open the Book with Disneyland, where essentially it was separating the maintenance workers or the maintenance workers schedule so you can work the graveyard shift, and then we're going to cut a bunch of maintenance in order to become more efficient in these cost-cutting measures. However, what ends up happening is that you end up having disastrous second-order consequences. Now, these examples are back in the '90s and mid-2000s. Have you seen examples of McKinsey evolving their advice from that into more on-shoring or more maintenance from these, have they learned from these mistakes?

Michael Forsythe: I mean, more broadly, McKinsey has changed since we started writing about them, and not just us, a lot of journalists who've written about McKinsey in recent years, and they have changed in some ways and this broadens out our talk a little bit here. But for example we wrote a lot about their work with Purdue Pharma and other opioid makers. So they stopped working with opioid makers in 2019. Another area where they've stopped work is with tobacco makers. They stopped that only last year in 2021, they stopped working with the likes of Philip Morris, Altria, as it's called now.

And they've also got a new client selection policy that they implemented in 2019, that puts a few more layers on judging whether to take on a client or a specific job that a client wants done. That's the idea. They also have some more restrictions on working with authoritarian governments around the world and closer supervision of that, you can't work with them. Examples like the Defense Ministry or the Interior Ministry or Justice Ministry with these countries. So they've done some things but the headlines keep coming, Ricky.

Ricky Mulvey: Yeah, we'll get to the relationships with China and Saudi Arabia later in the conversation. But I want to zero in on the drug makers because that seems to be where McKinsey provides a lot of value for their clients, often at the cost of other people, and the FDA stuff really got me going in your book Mike, where it's with the tobacco, it's with opioid makers, but it's also with Biogen and their Alzheimer's drug, Aduhelm, what is the relationship that McKinsey has with the FDA that allows this incredibly controversial drug to get approved, where a lot of these even FDA board members were resigning because of it.

Michael Forsythe: Yeah. I wish we could answer that. I think you've just touched on the frontier of reporting right now, and we haven't fully answered the question about whether there is some relationship that McKinsey had with the FDA that allowed Biogen to do this. To be perfectly fair, Biogen itself has had a long relationship with the FDA as well. I mean, obviously, their whole business model depends on having a good relationship or at least a working relationship with the FDA as do other drug-makers, but maybe even especially Biogen. So I don't think we can say right now that it was McKinsey and its relationship with the FDA or anything that allowed this very strange decision on Aduhelm, very controversial, to go through. But we do know that McKinsey worked very closely to bring Aduhelm into the public eye. They were very proud of that work, even though that drug was not proven to be effective but they were touting it and McKinsey was.

Ricky Mulvey: I think the Cleveland Clinic came in and said, well, we can't just give this to people yet. Yet you have the hope of a dementia Alzheimer's drug that can help people and that's a powerful promise.

Michael Forsythe: It is, yeah.

Ricky Mulvey: Maybe we can learn from past case studies though, which is how they've worked with the FDA on behalf of Altria or Philip Morris, particularly around vaping and cigarettes. In one case, they're working for the company in order to do these loyalty programs for Altria, in order to make a addictive product even more consumer-friendly. What's going on with the loyalty programs that McKinsey helped develop for Altria?

Michael Forsythe: We've heard so much about McKinsey's work with the opioid makers, but the work with tobacco makers is in some ways a little more shocking to us, I think. Because more Americans die still to this day from lung cancer caused by smoking than from opioids. Opioid epidemics is terrible and awful. But cigarettes that's the most deadly product ever invented. There's no redeeming value to it, and yet it took 57 years after the Surgeon General said smoking causes cancer that's when McKinsey stops working with them when smokers have been confined to like smoking on sidewalks, banished from restaurants, banished from offices. Draconian rules come down, restricting cigarette companies, fining cigarette companies, and yet McKinsey's still there.

The loyalty program, this was a slide deck, it's always the slide decks that come out that we got was they were pitching a program to Altria and this would have been about six years ago on how experienced they were. This is part of that diffusion of knowledge I talked about at the beginning. McKinsey does works on all these loyalty programs where all these marquee companies, like the hotel companies or Nike, and things like that. We could do the same for you, Philip Morris/Altria. Maybe we can do some iPhone app, they had a mock of an iPhone app that if you buy so many smokes, you can get some prizes like bottle openers or something like that. Which begs the question, why does a cigarette company need a loyalty program when their customers are addicted to it? I guess they could switch brands. They were doing this work and at the same time, Ricky they were working for the specific department of the FDA that regulates the center for tobacco products. This is also applicable with their work with JUUL.

Ricky Mulvey: Yeah, because the FDA was awfully slow to halt the sales. I remember seeing people buying Creme Brulee JUUL pods in these like fruity flavors and of course, they love it because it's sugar and nicotine. The FDA was awfully slow to come in and say, maybe we should do something about this.

Michael Forsythe: Yeah, I think with the FDA and JUUL, it's very interesting because McKinsey worked with JUUL from about 2017-2019, it stopped working with JUUL as well after the opioid news broke, basically a few months after is when they decided to stop working with JUUL. But we do know and this is something again on the frontier of reporting. We do have a client list that we were able to get through our reporting of all the clients McKinsey has. But we're missing a big part, and I really haven't talked about this in any other interviews, but much of McKinsey's work is doubly hidden because it goes through law firms. It would be a law firm hires McKinsey.

This is the case we understand with tobacco makers and we have a deposition that we looked at it, we found out this is the case with JUUL. Actually, there's work that was done, advice about responding to the FDA that McKinsey did, but it was done through a law firm. McKinsey was hired by the law firm and then reports or information went to the FDA. I'm going on a tangent here, but it's really interesting. As confidential, as secretive as McKinsey is, there are ways that it's even more difficult for reporters to find out because it's hidden through law firms.

Ricky Mulvey: I'm sure it was the client confidentiality. When they're doing this work, is it called direct lobbying? Is it consulting? How do you label it?

Michael Forsythe: McKinsey says they don't do lobbying, they're not allowed to do lobbying and that's an internal rule. I found one instance where they did report for foreign agent registration FARO now with some work with Saudi Arabia. But they're not supposed to be doing lobbying, that's not what they do, but they give advice to companies about the FDA. Then at the same time, they're also working with the FDA. Now what McKinsey will say is the work we do with the FDA had nothing to do specifically with these companies, so it's not a conflict. That's what they say. What we found in the book, and you read in the book is that a lot of people, the FDA were shocked when we asked them, hey, did you know that McKinsey was working with these tobacco companies at the same time they were consulting with you guys and they didn't know.

Ricky Mulvey: Because McKinsey was working on these, it was like stop-smoking initiatives with the FDA, right?

Michael Forsythe: At the same time they were advising, and it wasn't just Altria/Philip Morris. So they were working with British American Tobacco, Imperial Tobacco, Japan Tobacco, all the big tobacco companies in the world, probably with the exception of the China tobacco monopoly, which is the biggest baddest of them all.

Ricky Mulvey: We'll get some more depressing stuff in a sec. But you gained incredible access into McKinsey's client list, which is something they've tried to keep secret for pretty much the existence of the company. I'm curious, I'm sure you see these big Fortune 500 companies. You see the New York Knicks is on there. But were there any clients where you're just like, wait, what are you doing there? Maybe it's like the Southampton Bowling Club or like a local arborist association where you're just like, wait, you're on the McKinsey client list too?

Michael Forsythe: I'm trying to think of some really unusual ones. I wish I had it right in front of me. I can't think of it right off the top of my head anything super unusual. Every time we looked at when we started googling the hell of it and then it started to make sense why McKinsey was there. What was so interesting about the client list was because it's not just a client list, but it also gives you an idea of the magnitude. If they're only doing a $20,000 project for some company, that doesn't mean much, but if it's a $50 million relationship, that means something more.

What you saw from the client list was, where does McKinsey get its money? One of the biggest areas, and it seems like the overwhelming big area was in the healthcare sector. As pharmaceutical companies, but also drug makers, Johnson & Johnson perennially one of the biggest clients, if not the biggest, for McKinsey, hospital chains, managed care, the whole shebang, that whole value chain, the whole drug healthcare value chain; they're just up and down that, and that's a lot of money. Also, the big banks were there as well. It was more of a sense of the magnitude of where the bread and butter from McKinsey comes from. But I got to look, there were definitely some unusual ones that I had to Google. Mostly just funny-sounding foreign names. But they all made sense.

Ricky Mulvey: Well, speaking of work with foreign governments, let's talk about McKinsey's work, especially with firms in China, because the way your book lays it out, it makes sense that you would hire a consulting firm if you're going to go open business in a foreign country where they have local knowledge and expertise. Now, McKinsey might have some difficult decisions with the work that firms are doing in China. Where I think you guys found that 26 of the 96 companies that China has designated as very central enterprises.

Michael Forsythe: Yeah.

Ricky Mulvey: That's also where they're doing work where not only is it at odds with other individual companies that might be on their client list, but also governments like the United States.

Michael Forsythe: Yes. As you said it made a lot of sense for McKinsey to go into China at first, I was there in the late '90s, early 2000s. It was very optimistic time economically, not politically, but China was booming. All those Chinese companies needed Western knowledge and that's something McKinsey gives and that diffuses Western knowledge. They keep coming up with that name, but that's what it does and so for example, one of its most successful clients was this company called Ping An Insurance. They didn't know anything about running an insurance company in China and yet McKinsey had all this knowledge from all the global insurance companies over many years past a lot of that knowledge to Ping An and now it's one of the world's biggest insurance companies run more along Western lines and so there was that knowledge.

It's understandable that they were there. You can't fault McKinsey for that. What we found though is over time, Mckinsey really doubled down there and so these 96 companies, these are state-owned companies and not only are they state-owned companies, but they're state-owned companies managed by Beijing. That means that their CEOs, their top executives are picked by the organization department of the Communist Party. These are the essential companies in China that run the place. At least 26 of those 96, McKinsey has advised in the last decade or so, the thing is, China was not static. Over the last decade we've seen China become more and more authoritarian. Civil propriety pushed out by the president there the head of the Communist Party, Xi Jinping.

But McKinsey has doubled down and so one of the issues we looked at and we were the first to break this was the fact that McKinsey was working with one of these big state-owned companies, it was called a China Communications Construction. These are the guys that help build those islands in the South China Sea and at the same time they were building those islands, Mckinsey was consulting for them around 2015. Those islands are militarized, they've given China this enormous amount of military power projection in the South China Sea. A big problem for the US defense department, for US strategy. Yet the Pentagon is also a client, a much bigger client than any Chinese company. There's a real conflict of interests there. I could go on and on about China, about McKinsey supporting some of the main economic policies under Xi Jinping to expand China's reach abroad. A real cheerleader for that and actually drumming up business abroad for that in countries like Malaysia, it's really a deep relationship.

Ricky Mulvey: What about Made in China 2025? Because this is this plan that China has, they don't want the Chinese state media reporting on it, but it's a way to push foreign firms out of the country. Which if you're a US stock investor, that might be a black swan. China is especially for these high tech firms to get them out of the country. Your reporting found that McKinsey working with them on Made in China 2025. But I'm still curious, like what are the details of that? They're not calling up the semiconductor companies and say pack your bags; what's going on?

Michael Forsythe: I'll be perfectly frank. We didn't find a smoking gun on Made in China 2025. It's more of a sense that McKinsey could see where the wind was blowing in China and they know that Made in China 2025 this plan to make China the most important and self-sufficient global leader in some extremely important industries of the future. Electric cars, for examples, battery production, biotechnology, things like this, that this was an important policy from the central government. McKinsey in China said we can get business through this. We can get more clients in China by touting this policy, showing that the Chinese were just which demonstrate your support, step up and demonstrate your enthusiasm for a policy and they did this report after report after report talking about Made in China 2025. That's until the whole world started really getting concerned about this. Because it looked like it was a Chinese industrial policy meant to push out foreign firms and make China self-sufficient. The Chinese government stopped using that term all the time and that's when McKinsey stopped using it as well.

Ricky Mulvey: But is it still an ongoing strategy thing? It doesn't seem like just because they stopped using the term, it still might be going on.

Michael Forsythe: It's still going on. We're just writing about it last year in relation to electric vehicles and batteries.

Ricky Mulvey: One industry that McKinsey has also left its imprint on is insurance, especially auto insurance and you've got a chapter now on how especially in Allstate and then at other insurance companies they worked with that McKinsey really changed how car insurance and insurance claims operate. This is where you see Wall Street come into play quite a bit as well. How did McKinsey in your view change the claims process? I want to submit that someone rear-ended my car. I've got a bill for $2,000 and then an insurance agent says we'll give you 1,800.

Michael Forsythe: Yeah, the bigger picture is I think McKinsey changed along with the financialization of Wall Street in the 1980s and it was really a boon for the company and so Allstate, which was the stated very conservative with a small C company owned by Sears for many many decades, The Good Hands People spun off from Sears and the early 1990s and their new executives wanted to cash in on this huge boom and CEO pay stock options and everything, and wanted to boost profit at this, again, not very profitable but reliably profitable insurance company and so McKinsey came in and devised a process to lower-cost of processing claims. That's bread and butter, find ways to cut paperwork and things like that. But more importantly, a system that would allow McKinsey, basically, the term they use is to weaponize the claims process and what they did is they made it really difficult and they made it more difficult for people to sue Allstate and so people who hired a lawyer, they would go after them and encourage Allstate to go after them with their lawyers and make plaintiffs lawyers reluctant to sue Allstate.

The other claims they would process very quickly. They would come up with phone matrices to encourage people not to seek a lawyer and to settle quickly. What's interesting about this, and I don't mean to change the subject. But this happened, the Allstate work happened about 20 years ago or more than 20 years ago. But there was an article actually that came out in the New York times just a few weeks ago, right around the time our book came out. It wasn't written by us. Jessica Silver-Greenberg and a colleague wrote it about a hospital company called Providence, where McKinsey had come in and also devised a phone system where the idea was to get poor people to pay bills that they had in the hospital system.

Even though in many cases those poor people were actually not required to pay, they were entitled to free care in many instances, but the hospital wanted to boost profit and McKinsey came in and devised this phone system. How do you talk to these people? If they say this, then you say this. If you say this than say this, all designed to extract more value and that's the same thing that happened at Allstate. What they found at Allstate is they turned the claim center into a profit center and because McKinsey works with different companies in the same industry, they don't just work for one company, they work for the competitors as well, State Farm adopted a similar system. Other insurance companies took on McKinsey as well. So it's spread throughout the industry.

Ricky Mulvey: Mike Forsythe is the co-author of When McKinsey Comes to Town: The Hidden Influence of the World's Most Powerful Consulting Firm. I wish we had more time, but thank you so much for your brave reporting and in-depth research on this book.

Michael Forsythe: Oh, it's my pleasure. Thank you, Ricky.

Chris Hill: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.