Motley Fool Hidden Gems Investing - McKinsey’s Hidden Influence

Episode Date: November 6, 2022

One of the most powerful private companies in the world is also one of the most secretive. 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.” Forsythe joined 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 Companies mentioned: X, BIIB, ALL, DIS, WMT, PNGAY Host: Ricky Mulvey Guest: Michael Forsythe Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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law firms, right? 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 that we found out this is the case with Juul. I'm Chris Hill, and that's Michael Forsyth, 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 Forsyth to talk about McKinsey's work with U.S. 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. Most powerful, that struck me. So there's a lot of other consulting

firms out there. You've got Accenture, you've got the Boston Consulting, Bain & Company. Why are you giving this heavyweight title to McKinsey? Yeah. So, you know, first of all, if you look at the management consulting companies, this is in the industry known as MBB, McKinsey, Boston Consulting Group, Bain. McKinsey's 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. 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. U.S. Steel is paying them $13 million over a three-year period. I mean, it can't just be, is it just slideshow presentations? What are all these Fortune 500 companies paying for? Yeah. No, it's a good question. And it really varies. You know, 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. You know, they're also sometimes, in some cases, you know, paying, you know, 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, you know, people in the boardroom in the C-suites, some justification to say, do job cuts, do something painful. It's good when you have the imprimatur of McKinsey saying, this is what you should be doing. I guess the outside decision, I think that kind of came into play, especially with Walmart, where you have a company that wants to, you know, 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 they're significantly more expensive to keep around. That's right. And so that, you know, that can give a company like Walmart a lot of justification for doing things that, you know, generate headlines that just do not look, you know, good. And I think that's, you know, one of the key parts of our book is that, you know, with their absolute focus on doing what the client asks, you know, that's their number one goal. That's their, they have a list of values and their first value is to put the client's interest above the firm's, and they will work their hearts off, you know, these brilliant people, and they really are. So many of them are just, you know, we've met so many, and they're

really smart, you know, to do what the client wants. And that's why we wrote the book, because in, you know, so many instances, what the client wants to do is, you know, at times not what is good for society. In some cases, you start that off with the example of U.S. 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. Yeah. So, no, I wish my colleague, Walt Bogdanich, was on now because he worked at U.S. Steel as a young man at its height, you know, when U.S. Steel was churning out just, you know, millions of tons of steel. The plant goes for seven miles, you know, along the Lake Michigan coast, you know, east, southeast of Chicago.

It is absolutely massive. This is the, you know, U.S. Steel has other facilities too, but Gary Works is, you know, the main one. And it's still in operation. But it's, you know, it's a big lumbering old, you know, 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. And now they're coming back in about 2014. McKinsey comes up with a plan called the Carnegie Way, which is going to return U.S. steel to the old halcyon days of high profitability, super efficiency. But what the workers found out in the Gary Works plant in U.S. Steel was that a lot of that was focusing on streamlining some

of the maintenance procedures, letting go people in the 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. You have the parallel story to open the book with Disneyland where essentially they were separating the maintenance workers or the maintenance worker 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 onshoring or more maintenance from these? Have they learned from these mistakes? You know, I mean, more broadly, you know, McKinsey has changed, you know, since we started writing about it, not just us, you know, a lot of journalists who've written about McKinsey in recent years. And they have changed in some ways. And this kind of broadens out our talk a little bit here. But, you know, 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 or 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 and they also have some more restrictions are working with authoritarian governments around the world uh and you know a closer supervision of that not you can't work with them examples like the defense ministry or the interior ministry or justice ministry with these these kind of countries so they they've done some things but the headlines keep coming ricky yeah let's let's get to let's get we'll get to the the relationships with with china and saudi Arabia later in the conversation, but I want to, 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, and it's, it's, it's, it's with the tobacco, it's with the opioid makers, but it's also with Biogen and their Alzheimer's drug, Adihelm, which, you know, 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? Yeah. You know, I wish we could answer that. I think you've just kind of touched on the frontier of reporting right now. And we haven't fully answered the question about whether there was 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 autohelm, you know, very controversial to go through. But we do know, you know, that McKinsey worked very closely, you know, to kind of bring autohelm into the public, you know, eye to, you know, it was, and they were very proud of that work, even though that drug, you know, was not proven

to be effective. But they were, they were touting it, McKinsey was. I think the Cleveland Clinic came in and said, we can't just give this to people yet. And yet you have the hope of a dementia or Alzheimer's drug that can help people. And that's a powerful promise. It is, yeah. 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. And 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? Yeah. So 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 from, still to this day, from lung cancer caused by smoking than from opioids. Opioid epidemics are terrible and awful, but cigarettes, that's the most deadly product ever invented. There's no redeeming value to it. And yet, 57 years, 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, you know, banished from restaurants, banished from offices, you know, draconian, you know, rules come down, you

know, restricting cigarette companies, fining cigarette companies, and yet McKinsey's still there. So the loyalty program, this was a slide deck, it's always the slide decks, you know, 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. And this is part of that diffusion of knowledge I talked about at the beginning. You know, McKinsey does, works on all these loyalty programs for all these, you know, marquee companies, you know, like the hotel companies or Nike and things like that. And we could do the same for you, Philip Morris slash Altria. And maybe we can do some sort of

an iPhone app. They had a, you know, a mock of an iPhone app that, you know, if you buy so many smokes, you can get some prizes like bottle openers or something like that, you know, which kind of begs the question, you know, why does a cigarette company need a loyalty program when their customers are addicted to it? I mean, I guess they could switch brands. So they were doing this work. And yet at the same time, Ricky, they were working for the specific department, you know, of the FDA that regulates tobacco, the Center for Tobacco Products. And this is also applicable with their work with Juul. Yeah, because the FDA was awfully slow to halt the sales. I mean, I remember seeing people buying creme brulee Juul pods and in these like fruity flavors. And of

course they love it because it's sugar and nicotine. And the FDA was awfully slow to come in and say, maybe we should do something about this. Yeah. And I think with the FDA and Juul, It's very interesting because, you know, Juul, you know, worked with, McKinsey worked with Juul from about 2017 to 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, kind of on the frontier of reporting, you know, we do have a client list that we were able to get, you know, through our reporting

of all the clients McKinsey has. But we're missing a big part, you know, 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, right? 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 that we found out this is the case with Juul. So actually, you know, there's work that's done. There was done advice about responding to the FDA that McKinsey did, but it was done through a law firm, you know. So McKinsey was hired by the law firm, and then the work went, you know, the reports or information went to the FDA. So it's, you know, I'm kind of 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. I'm sure. What is a client confidentiality when they're doing this work? Is it, is it, would you, is it called direct lobbying? Is it consulting? Like what's, how do you label it? So McKinsey says they don't do lobbying. They're, they're not allowed to do lobbying. That's an internal rule. I found, you know, one instance where they, and we, I don't want to skip it, you know, that they did report for foreign agent registration, FARA, now with some work with Saudi Arabia. But they're, you know, they're not supposed to be doing lobbying, you know, that's not what they do.

But they give advice to companies about the FDA. And 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, you know, when we asked them, Hey, did you know, 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. Yeah. Because McKinsey was working on these, well, it was like stop smoking initiatives with the FDA, right? Yeah. And, and at the same time they were advising, you know, and it wasn't just Altria slash 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. We'll get to 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. And I'm curious, were there any, you know i'm sure you see these these big fortune 500 companies you see um the new york nix is on there but were there were there any were there any clients where you're just like wait what are you what are you doing there maybe it's like the southampton bowling club or or like a local like

a local arborist association where you're just like wait you're on you're on the mckinsey client list too 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 or anything super unusual you know every time we looked at one, we started, you know, Googling the hell out of it. And then it started to make sense, you know, 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. You know, if they're only doing like a, you know, $20,000 project for some company, you know, that doesn't mean much. But if it's a $50 million relationship, that means something more. And, you know, what you saw from

the client list was, you know, where does McKinsey get its money? And one of the biggest areas, it seemed like the overwhelming big area was in the healthcare sector. So it was pharmaceutical companies, but also drug makers, Johnson and 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. You know, also the big banks, um, you know, were there as well. So it was kind of more of a sense of the magnitude of where the bread and butter from McKinsey comes from. But, but I got to look, there's, there's, there were definitely some unusual ones that I

had to Google, mostly just funny sounding foreign names, you know, but they all made sense. Hey, well, well, speaking of work with foreign governments, let's talk about McKinsey's work, especially with, uh, 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, Zhongyangqi, 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. Yeah. So as you said, you know, it made a lot of sense for McKinsey to go into China at first. You know, I was there in the late 90s, early 2000s. It was very optimistic time economically, not politically, but, you know, China was booming. All those Chinese companies, you know, needed Western knowledge. And that's something McKinsey gives them that diffuses Western knowledge. I keep coming 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. You know, they didn't know anything about running an insurance company in China. And yet McKinsey

had all this knowledge from all the, you know, global insurance companies over many years, passed a lot of that knowledge to Ping An. And now it's one of the world's, you know, biggest insurance companies run kind of more along Western, you know, lines. And so there was that knowledge. So it's understandable that they were there. You know, you can't fault McKinsey for that. What we found, though, is, you know, over time, McKinsey really doubled down there. And so these 96 companies, these are central, these are state-owned companies, right? And not only are they state-owned companies, but they're state-owned companies managed by Beijing. And 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. And And at least 96, or 26 of those 96, McKinsey has advised in the last decade or so. And the thing is, you know, China was not static. You know, over the last decade, you know, we've seen China become more and more authoritarian, a civil society, you know, pushed out, you know, by the president there, the head of the Communist Party, Xi Jinping. But McKinsey's 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 China Communications Construction. And these are the guys that helped 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 have given China this enormous amount of military power projection in the South China Sea, a big problem for the U.S. Defense Department, for U.S. strategy. Yet the Pentagon is also a client, a much bigger client than any Chinese company. So there's a real conflict of interest there. I could go on and on about China, you know, about McKinsey supporting some of the main, you know, economic policies under Xi Jinping to expand

China's reach abroad, a real cheerleader for that, and actually drumming up business abroad for that, like in countries like Malaysia. It's really a deep relationship. 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. If you're a U.S. stock investor, that might be a black swan. So, China is, especially for these high-tech firms, to get them out of the country. And your reporting found that McKinsey worked or working with them on Made in China 2025. But I'm still curious, what are the details of that? How are they, you know, they're not calling up these semiconductor companies and saying,

pack your bags. What's going on? Yeah. And so, we didn't, you know, I'll be perfectly frank, we didn't find a smoking gun on Made in China 2025. It's more of a sense that, you know, McKinsey could see where the wind was blowing in China. And they know that Made in China 2025, this plan to make China, you know, the most important and self-sufficient, you know, global leader in some, you know, extremely important, you know, industries of the future, you know, electric cars, for example, battery production, you know, biotechnology, things like this. This was an important policy from the central government. So McKinsey, you know, in China said, we can get business through this. We can get more clients in China by touting this

policy, showing, you know, that we are, you know, the Chinese word is biao tai, which is like kind of demonstrate your support, you know, step up and demonstrate your, you know, 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, you know, 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. So the Chinese government stopped using that term all the time. And that's when McKinsey stopped using it as well. But is it still an ongoing strategy?

It doesn't seem like just because they stopped using the term, it still might be going on. It's still going on. It's still going on. We were just writing about it last year in relation to electric vehicles and batteries. One industry that McKinsey's also left its imprint on is insurance, especially auto insurance. And you've got a chapter now on how, especially at Allstate and then at other insurance companies they worked with, that McKinsey really changed how car insurance and insurance claims operate. And this is where you see Wall Street come into play quite a bit as well. So 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. Yeah. So, I mean, the bigger picture is, I think McKinsey changed along with the financialization of Wall Street in the 1980s. And, you know, it was really a boon for the company. And so Allstate, which was this staid, very conservative with a small C company owned by Sears for many, many decades, the good hands people spun off from Sears in the early 1990s. And their new executives, you know, wanted to cash in on this, you know, huge boom in CEO pay, stock options and everything, and wanted to, you know, 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. You know, that's kind of bread and butter, you know, kind of find ways to, you know, cut paperwork and things like that. But more importantly, a system that would allow, you know, McKinsey basically the term they use is to weaponize, you know, the 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, you know, and, you know, encourage Allstate to go after them with their lawyers and make people reluctant, you know, plaintiff's 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 settle quickly. And 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, you know, this, this, how do you talk to these people? This, if they say this, then you say this, if you say this, then say this, all designed to extract more value. And that's the same thing that happened at Allstate. What they found at Allstate is that turned the claim center into a profit center. And because McKinsey works with all different companies in the same industry, They don't just work for one company. They work for the competitors as well.

You know, State Farm adopted a similar system. You know, other insurance companies took on McKinsey as well. So it's spread throughout the industry. Mike Forsyth, he's 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. Oh, it's my pleasure.

Thank you, Ricky. 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.