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The real power behind No 10

McKinsey is a highly secretive consultancy firm - and Tony Blair is more likely to listen to its advisers than to his own ministers. Katherine Griffiths investigates the 'Jesuits of capitalism'

Monday, 27 June 2005

They are the modern buccaneers of the business world. They jet between cities, rack up huge expenses, and charge up to £6,000 a day to think the unthinkable for clients including big corporations and governments.

They are the modern buccaneers of the business world. They jet between cities, rack up huge expenses, and charge up to £6,000 a day to think the unthinkable for clients including big corporations and governments.

They are the star consultants of McKinsey, the élite global management consultancy. Their backgrounds are diverse - former SAS commandos, business people, aid workers - but they are drawn together by the distinct McKinsey culture. Known as "the Firm" or the "McKinsey Mafia", they are radical, zealous - and above all secretive.

But now, it seems, McKinsey is becoming the problem rather than the solution. After almost 80 years as the most prestigious name in the management consultancy world, these "Jesuits of capitalism"are under attack.

McKinsey stands accused of cronyism, greed and arrogance, as a result of associated scandals that stretch from the offices of Enron in Houston, Texas, to the corridors of 10 Downing Street.

The firm, founded in 1926 by James "Mac" McKinsey, a professor of accounting at Chicago University, has grown to 83 offices around the world. It has counted former US President Dwight D Eisenhower and the Bank of England among its clients. Alumni have gone on to run famous companies, such as Louis Gerstner, who departed in the Seventies for American Express and later became chief executive of the food giant RJR Nabisco, and then IBM.

Others, such as its director Kenichi Ohmae, helped to define thinking on globalisation in the 1980s. Stephen Green, chief executive of Britain's biggest bank, HSBC, trained at McKinsey.

However, among the successes, there have been some notable failures for the firm. In recent years, a string of McKinsey accounts have become public-relations disasters, attracting a great deal of unwanted attention, including Swissair, America's discount retailer Kmart, and the telecoms group Global Crossing. The firm also advised the computer maker Hewlett-Packard on its acquisition of rival Compaq in 2002.

More significantly, the firm has an uncomfortably close history with Enron. The Texas-based energy giant was transformed from a plodding company into a highly leveraged energy-trading powerhouse by Jeffrey Skilling, a rising star at McKinsey who joined the company in 1990 and seconded several other McKinsey graduates to help implement his radical ideas.

While there is no suggestion that McKinsey was complicit in the subsequent scandal, critics say the arrogance of Enron's leaders is emblematic of the McKinsey culture. McKinseyites are notorious for enjoying bravado-fuelled pastimes and a hothouse work culture often compared to that of a conservative law firm.

David Craig, a former consultant, wrote a book called Rip-Off! The Scandalous Inside Story of the Management Consulting Money Machine. He said consultants have been known to celebrate deals at parties with this song: "McKinsey management consultants are we/ We take all our clients' money/ We can earn many a million/ Because our clients have no vision".

Craig, who is not using his real name, says McKinsey people are not above subscribing to the popular management consultancy acronym AFAB - Anything For A Buck. "They are a colossus. They are utterly and totally dominant, and they are light years ahead of everyone else. They also have a network of alumni in powerful jobs around the world."

Nowhere are McKinsey's connections more notable than at the heart of the British Government. Focus groups, think tanks and consultants have never been far from Tony Blair's leadership. Yet the extent to which Downing Street relies on McKinsey has only recently been made clear - with the help of the Freedom of Information Act.

McKinsey shares a long and fruitful relationship with UK governments. William Hague worked there as his first job, and John Major recruited Norman - now Lord - Blackwell from the firm to lead his policy unit. But the degree to which McKinsey alumni have ended up among Blair's most favoured advisers is unprecedented.

Earlier this month, David Bennett, a former McKinsey partner, was appointed as the new head of Downing Street's policy directorate. He joins Adair Turner, another McKinsey insider, who was asked by the Government to formulate sweeping changes to Britain's pension system. Also at the Prime Minister's side in 2001 and 2002 was Nick Lovegrove, a director at McKinsey, who acted as an unpaid adviser to Blair. Matthew Elson, another former McKinsey consultant, was brought in to Downing Street in 2002.

Most controversial of all was the appointment of Lord Birt of Liverpool, a former director general of the BBC and a close friend of Blair, who has been ushered into No 10 to do "blue skies thinking" on everything from transport to crime. Lord Birt, who works for free, handed over millions in fees to McKinsey to help set up the infamous "internal market" in the BBC, under which programme makers had to pitch ideas to accountants. These days, the boot is on the other foot: as well as providing strategic advice for Blair, Lord Birt is a paid consultant at McKinsey, where he is formally attached to its New York office.

And the flow has not all been one way: Sir Michael Barber is about to leave his post as head of Downing Street's "delivery unit" to take up a role looking after public-sector clients at McKinsey. Below the big names, McKinsey middle-rankers have permeated through government departments in Blair's time in office, working with civil servants on huge swathes of public policy.

The scale of investment in consultancy by the Blair Government is alarming for many. British taxpayers paid £1.9bn last year for consultants. The Government has resisted being specific about how much of that went to McKinsey but, in response to a request under the Freedom of Information Act, it had to reveal that the Ministry of Defence alone has directed £40m to McKinsey since 2002. Before then, the annual bill for McKinsey was less than £500,000.

Lord Hanningfield, a Conservative peer and a House of Lords whip, believes the situation is of such concern that a thorough investigation of the relationship between Whitehall and the firm is needed. "At present we almost have a revolving door, with senior figures moving in both directions," he says. "Given the scale and value of existing government contracts undertaken by McKinsey, the relationship must be beyond reproach."

The peer is keen to get to the bottom of the many roles played by Lord Birt. "The Government has consistently refused to reveal what advice Lord Birt, a paid consultant of the company, gives in his role as the Prime Minister's strategy adviser. They won't even deny whether he has used his office in No 10 to meet McKinsey colleagues and clients."

McKinsey is not used to being in the spotlight, and is even less accustomed to being in hot water. It never reveals its clients, and refused to comment for this piece. But senior staff who've left the firm are now speaking out.

Eileen Shapiro, a McKinsey consultant in the US for 10 years, lifted the lid on the more cynical side of its business in her book, Fad Surfing in the Boardroom. Fad surfing, she says, is "the practice of riding the crest of the latest management wave and then paddling out again just in time to ride the next one; always absorbing for managers and lucrative for consultants; frequently disastrous for organisations".

Craig, who did not work for McKinsey, believes that - leaving aside the intrigue of the web of connections between Downing Street and McKinsey's Jermyn Street offices - there is a fundamental culture clash between consultants and civil servants. "The Government says it is using unbiased experts, but in fact it is using incredible selling machines. Are they going to say, 'Don't worry; we can fiddle around and make this work'? No. They are going to want to build a new system," Craig says.

McKinsey's supporters reject the notion that the firm cavalierly incurs huge expenses for clients. One of its core teachings to new recruits, they say, is that consultants should put clients' interests before those of their own firm.

Those close to the firm also maintain that it is not full of arrogant whizz-kids. They say McKinsey's atmosphere is collegial, and that most staff have the attitude, in internal meetings, that others in the room are probably more intelligent than they are. Also, McKinsey's people are encouraged to be risk-taking iconoclasts because they are meant to invent new ways of doing things rather than just to patch up imperfect systems.

That bold approach does not always come off, however. If it goes wrong, McKinsey can move on to the next project, but its clients are left with a mess - and a hefty bill.

I'm with the Firm: McKinsey alumni

David Bennett
Arrived in No 10 on 1 June to lead its policy unit after a 20-year association with McKinsey, which he left last year. Expected to head an electronic revolution in services delivery.

Nick Lovegrove
A director of McKinsey for 20 years, and an unpaid adviser in 2001 and 2002 to Downing Street's Forward Strategy Unit. Lovegrove is head of public-sector work at McKinsey.

Matthew Elson
A former McKinsey senior partner, he became transport adviser in the No 10 Policy Unit in 2002. Lord Birt and Lovegrove have also worked on British transport policy.

Adair Turner
Another ex-McKinsey partner drafted into Lord Birt's Forward Strategy Unit. A former head of the Confederation of British Industry, he is in charge of rethinking pension policy.

Sir Michael Barber
The head of Downing Street's delivery unit, Sir Michael is poised go into the private sector - by joining McKinsey in a newly created post looking after global public-sector clients.

Lord Blackwell
An example of McKinsey's contacts with the Conservatives, he was lured from the firm to head John Major's policy unit between 1995 and 1997. He was made a life peer in 1997.

Stephen Green
Chief executive of HSBC, and ordained Church of England minister. He started his career in the Ministry of Overseas Development, joining McKinsey in 1977 and HSBC in 1982.

Lord Birt
Jumped from his role as BBC director general to a senior position at McKinsey as a media expert. Now an unpaid adviser to Tony Blair, along with a string of other senior McKinseyites.

William Hague
Joined McKinsey after first class degrees at Oxford and the Insead business school in France. Spent five years with the firm before entering the House of Commons.

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