It was, in many ways, a routine piece of work for one of the consultancies to which big businesses regularly turn for advice on how to boost their profits in increasingly complex markets.
The slickly-packaged Evolve 2 Excellence plan to “turbocharge” a product’s sales involved targeting its most prolific distributors, honing its messaging to boost brand loyalty and circumventing restrictive retailers by offering mail-order deliveries to its keenest users.
But the product was OxyContin, the highly addictive painkiller; the client was Purdue Pharma, a drugmaker now synonymous with America’s opioid crisis; and the consultancy was McKinsey, the most prestigious brand in an industry that emerged early last century.
The “E2E” plan and other details of its work for Purdue emerged in lawsuits brought by 49 US states, which McKinsey settled this month for $574m — a reckoning without precedent in an industry that typically takes no blame for how its advice is used.
It was a jarring blow to “the McKinsey mystique”, a concept dating back to Marvin Bower, who forged the modern consultancy after the death of its founder James McKinsey. He laid down the principles that its partners would not take on clients about whom it had a shadow of a doubt and would always “uphold absolute integrity”.
“McKinsey partners were seeking to turbocharge a tragic undertaking,” said Phil Weiser, Colorado’s attorney-general. “They put profit over people’s lives.”
The opioid litigation was no isolated challenge to McKinsey’s golden reputation. Coming on the heels of hostile headlines about its work from South Africa to Saudi Arabia, it has raised a question its trusted advisers might ask a troubled client: is “the firm”, as insiders know it, suffering from more profound cultural or leadership problems?
That question is playing out this week as senior partners vote on whether Kevin Sneader, the man they picked as global managing partner in 2018, should have a second three-year term.
The mystique has long allowed McKinsey to have its pick of bright business school graduates and to charge a premium for their work, building annual revenues to an industry-leading $10.5bn in 2019, by Forbes’ estimate. It has also turned a network of alumni at the top of the world’s leading companies and governments into a lucrative source of business.
Sundar Pichai of Google and Facebook’s Sheryl Sandberg are ex-McKinsey, as is Joe Biden’s transportation secretary, Pete Buttegieg. The new heads of UK employers’ organisation the CBI and Lloyds Banking Group are alumni, and Dominic Barton, Canada’s ambassador to China, ran the consultancy from 2009 to 2018.
As the states’ lawsuits remarked, “its influence is vast because of its best-in-class reputation”.
But, even before it was accused of exacerbating an opioid overdose epidemic which has cost an estimated 232,000 American lives, a firm that trades on its shrewd insight was admitting to a series of errors of judgment.
Over the past two years, it has paid $15m to the US Department of Justice to settle claims that it failed to disclose conflicts of interest in bankruptcy cases, and repaid tens of millions of dollars in fees to South Africa after a corruption inquiry found irregularities in contracts with a local partner. With MIO Partners, which invests partners’ money, it paid another $39.5m last year to settle a class-action lawsuit over the handling of its pension fund. And its work in authoritarian countries such as China, Russia and Saudi Arabia is attracting growing scrutiny.
The financial penalties will be felt personally in a profit-sharing partnership where senior partners can earn $3m-$5m a year or more. And the headlines have alarmed some clients. One US chief executive who asked not to be named said he demanded a meeting with Kevin Sneader, McKinsey’s global managing partner, when the opioid lawsuits became public two years ago.
“I told him I had a tonne of concerns about McKinsey failing to live up to the values and standards it professed to have and I told him I was pausing our work and we were out,” he recalls. “He knows that McKinsey needs to change its culture, that you could say it’s just a couple of bad actors here and there, but honestly it’s a cultural thing.”
Too big to govern
The states were not compelled to launch their litigation by just a few PowerPoint presentations or a one-off lapse. McKinsey worked for Purdue for more than 15 years, between 2004 and 2019, long after its client’s 2007 guilty plea and $634m fine for felony misbranding.
Moreover, it collected millions of dollars designing and implementing marketing campaigns for three other opioid manufacturers — Johnson & Johnson, Endo Pharmaceuticals and Mallinckrodt — the lawsuits found. One presentation released in court showed it suggesting that “high abuse-risk patients” were an “opportunity” for J&J with a patch based on fentanyl, an opioid that is 50 to 100 times more potent than morphine.
Even as it was advising Purdue to “band together” with other manufacturers to “defend against strict treatment” by the Food and Drug Administration, other McKinsey partners were advising the regulator, though the FDA and the consultancy both deny that its multimillion-dollar contracts with the agency related specifically to opioids.
As the toll of opioid addiction became ever clearer, McKinsey was also counselling state governments on their response and advising Purdue to begin selling opioid treatment medications.
“McKinsey knew where the money was coming from and they zeroed right in on it,” said Letitia James, New York’s attorney-general.
McKinsey admitted no guilt in the settlement, although it expressed “regret”. But its work in so many corners of a pariah industry has played into critics’ suspicions that its growth has exposed it to conflicts of interest and pushed partners to take on clients that earlier generations would have avoided.
Interviews with current and former partners, clients, competitors, academics and analysts yield conflicting opinions of what went wrong at McKinsey and whether Sneader can put it right. But many of them believe that the firm’s rapid growth has exposed it to new risks.
In the past decade, it has expanded from 1,200 partners to 2,500. Barton, who handed over to Sneader in 2018, told Canada’s Globe and Mail recently that he had been in no position to oversee every client engagement and simply did not know about its work for Purdue.
One partner-turned-client believes that McKinsey’s size has made it “ungovernable”, that its pursuit of growth has made it less risk averse and that it struggles to retain its exclusive aura with so many partners. “The special forces have become a bit more like the marines,” he says, though he is still happy to hire his old firm.
Laura Empson, professor at City Business School, has a different theory: that McKinsey’s success has led to “organisational narcissism”.
“They become very grandiose in their belief in their own success. When they start to get information that challenges this self-belief, the feedback is deemed to be wrong,” she argues.
McKinsey’s revenues, including performance-related fees on which it once frowned, have roughly doubled in a decade, making today’s partners wealthier than their predecessors, a phenomenon Bower worried about decades ago.
“Have we begun to think too much about money because we’ve got so much coming in?” McKinsey’s co-founder asked in a 1993 interview. “People who make a lot of money get to thinking about having four homes to keep up, or maybe they want to buy a yacht,” he observed, making them more likely “to attract a client who shouldn’t be attracted”.
In an interview with the FT, Sneader dismisses such concerns. “We have never swung for the fences in terms of growth,” he says. McKinsey is larger than direct rivals such as BCG and Bain but he adds that compared with the Big Four accounting firms that have muscled into its market, “we’re not exactly big”.
Need for transparency
Sneader, a genial but driven Celtic FC fan who joined the firm straight from Glasgow University in 1989, says he never liked the idea of the McKinsey mystique.
“It sounded covert and sleazy and [as though] somehow you can play in a different way,” he says. “If we do good work for the right clients, the truth will out, [but] the mystique hasn’t been helpful.”
The privacy that McKinsey long prized is out of step with a modern business culture that prizes transparency, says Jeffrey Sonnenfeld, a Yale School of Management professor who has known every managing partner since Bower. Sneader, he adds, is “bringing it up to date”.
“We’re not hiding,” Sneader says, pointing to the decision to settle the opioid litigation and his many calls to clients to explain how he is trying to head off further crises.
The 54-year-old has brought in new leaders such as a new general counsel, drilled staff on its values and code of conduct and set new policies for which clients it will work with, based on factors from their impact on society to whether they are based in democracies.
One “fundamental shift”, he says, has been to change the remit of the firm’s client service risk committee, which must now assess any piece of work he describes as being in “the grey zone”. Last year alone it reviewed more than 2,000 engagements.
This level of supervision is unfamiliar in a federated firm where partners have long enjoyed remarkable autonomy, subject to an “obligation to dissent” — a McKinsey value that encourages even junior consultants to challenge more senior staff if they think something is wrong.
“We are actually impinging on the ability of any individual partner to commit the firm on their own,” Sneader says, but McKinsey’s scale is such that “the interests of the partnership do have to take precedence”.
If others wonder how he will balance more supervision with the entrepreneurialism the firm has encouraged, he sees the trade-off differently, saying “the price of liberty is eternal vigilance”.
Damage control
The firm’s reaction to the latest blow to its reputation has some echoes of past scandals, notably the charges laid against Anil Kumar, a former McKinsey partner, who pleaded guilty to securities fraud in 2010, and Rajat Gupta, who had been its global managing partner and ultimately served two years in prison for insider trading.
After Kumar was arrested in 2009 while still at the firm, the partnership reviewed its ethics policies, improved governance and communicated intensively with staff and alumni. Then, as now, partners agonised over whether it had grown too fast.
One industry analyst who asked not to be named says this crisis feels different from that era because its focus is not on rogue individuals. “Institutionally, McKinsey is now being called into question,” he says.
But the early evidence suggests that Sneader’s damage control efforts are reassuring clients. The chief executive who fired the firm two years ago is using its consultants again, saying Sneader has convinced him that he is “determined to return McKinsey to the values it once stood for”. Sneader himself says the firm has lost “very, very, very few clients”. Analysts say it is sharing in the industry’s recent boom, as the pandemic shakes clients’ old business models and accelerates their pursuit of new ones. Even some of the attorneys-general who sued McKinsey say their states would still hire it.
Similarly, Sneader says it has just had its “best recruiting year ever”. Some of Sonnenfeld’s Yale students “have admitted that they’ve had pause for thought but I haven’t heard a single one who’s declined a job offer”, the professor confirms. “The McKinsey brand has been tarnished but it’s still the gold standard. There’s no firm that’s succeeded them.”
Will Harvey, a professor at University of Exeter Business School, cautions that if more news emerges that widens the gap between McKinsey’s identity and reputation, then “it becomes harder in a credible way to close it”.
Sneader cannot turn the page on what he calls “a dark chapter” in McKinsey’s history just yet. Nevada and a few smaller jurisdictions still have unresolved opioid lawsuits and McKinsey has agreed to publish tens of thousands of documents relating to its opioid work, which could contain further damaging details.
He admits that McKinsey is on “a journey” to restoring trust, but paints his commitment in historic terms. “In 1926, James McKinsey and Marvin Bower created a profession out of what had been a craft industry,” he says. “I see this as a similar sort of moment.”
Whether he gets to complete that journey and prove that his changes will be more effective than those made a decade ago remains open to question as his first three-year term is coming to an end.
Barton was reappointed unchallenged after the Gupta crisis and former insiders say it would be unusual for an incumbent not to be re-elected. But its 650 senior partners have already held the first two rounds of voting on who should lead the firm for the next three years. The 10-candidate slate could narrow to two or produce a clear winner this week.
It is the one subject on which Sneader refuses to comment. He may dislike the notion of the McKinsey mystique, but there are some of the firm’s secrets he is keen to preserve.
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