In a note distributed with every copy of Perspective, Marvin [Bower, founder of McKinsey & Company] reminded the recipient that the book was "privately printed and copyrighted by the Firm for readership only by Firm personnel. I urge everyone who receives a copy not to give or loan copies to people outside the Firm." Please continue to honor Marvin's request.Today is a very sad day for McKinsey. The have faced an incredibly complicated risk management problem for a long time, and until very recently, they've handled that risk well, or they've been lucky.
First, let's consider the problem. A consulting firm has people and a reputation. The people create the reputation, and the people risk the reputation with their every action. McKinsey trains it's people in incredibly particular ways. The Firm also indoctrinates the new people (almost) like a cult. I mean this in a very good sense. It is The Firm, it is not a company. (As a side note: I have been gone from McK for more than five years. I worked in the investment office which keeps information ridiculously confidential. A hedge fund manager on a call this morning asked me how much money McK manages. I wouldn't tell them. I'm not bound by legal confidentiality. I honor their desire for confidentiality.)
The Firm remains, however, massively short volatility. Every single consultant has the whole of the reputation on their shoulders. A junior analyst can easily destroy a client relationship. A senior partner could destroy the Firm.
Some very quirky details work to limit this risk. One interesting fact: They control very carefully the value of the equity of the Firm. Partners may only sell their shares back to the firm, and they may only sell them at book value. If you cannot grow the value of your equity inordinately quickly by taking risk, you are less likely to do it. If you know the book value grows without material volatility every year, and there's no upside, you automatically worry much more about the downside.
A corollary to controlled equity value: Partners cannot achieve extravagant wealth...until they leave the Firm.
As a never wavering fan of McKinsey & Company, today is a sad day. One man broke the rules: Marvin Bower's well designed system to protect everyone was hurt by someone who thought he was special. He was special, he had been a partner at the Firm.