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When McKinsey Comes to Town: The Hidden Influence of the World’s Most Powerful Consulting Firm



When McKinsey Comes to Town: The Hidden Influence of the World’s Most Powerful Consulting Firm PDF

Author: Walt Bogdanich

Publisher: Doubleday

Genres:

Publish Date: October 4, 2022

ISBN-10: 0385546238

Pages: 368

File Type: EPub, PDF

Language: English

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Book Preface

n Gary, Indiana, just past the rusting bridges, peeling paint, and railroad switching station sits a green well-tended plot of land that seems oddly out of place. It is a grassy knoll of bushes and trees overshadowed by the drab, hulking remains of a plant run by what was once the world’s biggest, most profitable company, the U.S. Steel Corporation.

To the right, a towering furnace and smokestacks rise high against the northeastern sky. Basic steel is made there, forged in heat so intense the metal resembles white-hot lava flowing from a volcano. Nothing is soft or forgiving, only concrete, fire, and metal. To the left, rows of buildings with gabled roofs stretch to the western horizon. This is where steel is treated to make it less brittle before rolling it into massive coils for shipment to places near and far.

Occupying seven miles of lakefront, the steel plant has two hundred miles of railroad tracks, its own hospital, fire department, and police force. In years past, the company did its civic duty by sending workers with good voices and top hats to sing Christmas carols at grade schools across the city.

Inside the green oasis is a granite memorial with a book describing how 513 people died from accidents inside the steel mill. This book of the dead, covered in thick plastic and soot, tells of workers crushed by railroad cars, trucks, and steel. Others fell to their death, were torn apart by explosions, asphyxiated, burned, buried alive, and even drowned. Forty-one died by electrocution. The labor reporter Joseph S. Pete wrote that steelworker funerals are often closed-casket affairs. The book of the dead explains why.[*]

Gary once held the promise of twentieth-century industrial America, a melting pot of racial and ethnic groups in pursuit of a better life, money for college, paid vacations, and pensions. From this emerged a solid middle class, two Nobel Prize winners, and the Jackson Five, as well as pollution that befouled the air and waterways.

In the last quarter of the twentieth century, the company’s fortunes fell sharply because of cheap foreign steel, old equipment, and suspect management. The workforce dropped below eight thousand. Departments were closed or pared down.

The decay spread to Gary, the city U.S. Steel founded more than a century ago as “a triumph of scientific planning.” By the end of the century, Gary had descended into a landscape of abandoned office buildings, stores, and churches. Rather than spend money it didn’t have to tear them down, Gary rented the locations to crews filming postapocalyptic and horror movies, including A Nightmare on Elm Street and Transformers. Even a scene from the miniseries Chernobyl was filmed there.

Crime spiked, and Gary’s population dropped to 69,000 from a high of 177,000 in 1960. Billboards along the steel mill’s southern border reflect a population that had lost its moorings. “Shackled by Lust? Jesus Sets You Free,” reads one, followed by ads for a strip club, an injury attorney, and a casino.

The year 2014, however, brought Gary’s steelworkers a glimmer of hope. The company’s new chief executive, Mario Longhi, hired an elite consulting firm, McKinsey & Company, to inject new ideas into the aging manufacturer. For decades McKinsey sold clients on its reputation as a firm that delivered scientific solutions to complex problems. Blue-chip companies and governments around the world hired its consultants, as did the CIA, the FBI, and the Pentagon, among others, believing McKinsey had the wisdom and wherewithal that their managers lacked.

McKinsey came to U.S. Steel with the goal of restoring the steelmaker to its iconic status as a company that built the nation’s bridges, buildings, and weapons that defeated America’s enemies. With McKinsey’s help, U.S. Steel promised to recapture that spirit through “a relentless focus on economic profit, our customers, cost structure, and innovation”—all without sacrificing safety or harming the environment. Gary’s labor force had little idea of what to expect from these highly paid consultants, some graduates of Ivy League business schools.

But steelworkers would learn soon enough, as did others before them, what can happen when McKinsey comes to town.


Construction on U.S. Steel’s Gary plant had begun in 1906 under the direction of the company’s chairman, Elbert Gary, a former judge who wanted the city to bear his name, though he did not want to live there himself. Called “a dour moralist” by one historian, Judge Gary cared less about the welfare of residents than about the efficiency and profitability of his steel mill.

Judge Gary sought out European royalty and collected Renaissance art, while steelworkers were stuck living in “the patch,” a raw, disease-infected district that had two hundred saloons with names like Bucket of Blood. They worked twelve-hour days, seven days a week. A church group called this eighty-four-hour workweek a “disgrace to civilization,” and a congressional committee termed it “a brutal system of industrial slavery.” Judge Gary didn’t much care. He opposed unions, considered labor leaders his social inferiors, and believed his employees preferred to work as many hours as possible.

The founder of McKinsey & Company, James O. McKinsey, an accountant from the Ozarks, also believed in efficiency and profits. His young company began advising U.S. Steel in the Great Depression. The company quickly became the firm’s biggest client; more than forty consultants were assigned to the account. At one point, U.S. Steel generated at least half the billings in McKinsey’s New York office. When the Wagner Act of 1935 required companies to negotiate with workers seeking better pay and safer working conditions, McKinsey set up a special unit to advise corporate executives on how to deal with their demands. But McKinsey eventually lost its biggest supporter at the steel company, and in the 1950s the two companies moved apart. Sixty years later, the iconic steelmaker was floundering, and U.S. Steel’s new chief executive, Mario Longhi, decided to restore their close relationship.

The Brazilian-born Longhi became CEO of U.S. Steel in 2013. He inherited a company saddled with old, inefficient manufacturing methods. Smaller companies with newer technology had been gouging out big chunks of business from lumbering U.S. Steel, which had not turned an annual profit in years.

Like Judge Gary, Longhi favored a mustache and opulence. He bought a mansion in Florida with ten baths, a guesthouse, a separate gym, media room, and swimming pool. Longhi sold the complex for $9.8 million. He also owned property on Fisher Island, one of the nation’s wealthiest enclaves, accessible off the Miami coast only by ferries, helicopter, or private yachts.

Longhi had no experience with a big, fully integrated steel company—most of his previous work experience was at Alcoa—but he knew people who could guide him, and that was his “long time trusted adviser,” McKinsey & Company.

At Longhi’s direction, McKinsey implemented a “transformational” business plan called “The Carnegie Way,” in honor of U.S. Steel’s co-founder Andrew Carnegie. The plan was so important to U.S. Steel’s future that the manufacturer cited the Carnegie Way forty-nine times in its 2014 annual report. Among the plan’s most important goals was finding a more rational, cost-efficient way to maintain the company’s aging equipment and infrastructure. There seemed no better firm to manage maintenance costs than McKinsey, widely recognized as the world’s premier efficiency experts.

The following January, Longhi told a trade publication that U.S. Steel’s transformation was a “phenomenal” success. As proof, he cited his consultants “who have seen what we are doing” and have concluded “there is no deeper, broader transformation effort taking place in the country.” Longhi dared anyone to say his company had not considered every option to improve profitability. “We are doing everything that is required—and pretty effectively, by the way.”

With a new chief executive and a turnaround plan, U.S. Steel stock began rising, and in 2014 it posted its first annual profit in six years. But the progress was more illusion than fact. The manufacturer posted a $75 million loss in the first quarter of 2015. The downturn impacted workers as well as investors. Nine thousand employees at company plants, including Gary Works, received notices of possible layoffs. Maintenance workers were hit hard: Dozens of them were laid off. Two hundred others were demoted to roving labor gangs at a significant reduction of pay and sent to work in unfamiliar parts of the plant.

Union members came to believe that the Carnegie Way was simply a cover story for the company’s plan to cut costs—a plan that workers said jeopardized their safety. Mike Millsap, District 7 director of the steelworkers’ union, said McKinsey had no experience running a steel mill or “what it takes to protect the employees from harm.”

The warning proved prophetic. In June, workers in Gary found Charles Kremke unconscious with third-degree burns on his head. A U.S. Steel spokeswoman said the employee could not be revived. The coroner ruled that Kremke had been electrocuted, but months would pass without the company’s disclosing the cause of his death.

Because of the fatality, the State of Indiana cited U.S. Steel for four safety violations, all deemed serious: failing to “de-energize” the live connection prior to maintenance; failing to adequately train employees to identify a live connection; failing to test equipment to ensure live connections were de-energized before maintenance; and failing to provide protective gear to those working around live connections in a confined area.

The layoffs and safety concerns did not dissuade U.S. Steel from going forward with its plan to issue 21.7 million new shares of stock. This special stock offering, which raised $482 million, occurred in August, the same month the union accused the company of gutting its maintenance department. Angry over safety issues, the union on August 26 led a protest march to U.S. Steel’s main gate in Gary. Normally union protests occur only during contract negotiations. Workers chanted, “McKinsey sucks! McKinsey sucks!” Union members carried signs that drove home their sentiment:

  • “Hello Mario! McKinsey must go.”

  • “McKinsey stole.”

  • “McKinsey = contract violations.”

  • “Union yes, McKinsey no.”

  • “McKinsey steals.”

  • “Give McKinsey the (picture of a boot).”

In the days after Kremke’s death, Jonathan Arrizola, a thirty-year-old navy veteran and father of two young children, worried that his maintenance job was becoming too dangerous, so he began looking for other work. Arrizola told his wife, Whitney, that he had recently received an electrical shock on the job. “He was constantly complaining about the McKinsey group cutting back workers,” she told The Times of Northwest Indiana. “There was always some kind of close call with someone he worked with.”

Then, at the end of September 2016, Arrizola was on a four-person crew troubleshooting an electrical issue on a crane when he came into contact with 480 volts and was electrocuted.

“All they care about is money,” his wife said after learning of her husband’s death. “I have no husband. My children have no father. I have no idea how I’m going to pay for my house, or my car, any of my bills. I was a stay-at-home mother. I have no experiences. Jon was everything to me.” Friends and well-wishers raised $14,000 on her behalf through a GoFundMe campaign.

Billy McCall, president of United Steelworkers Local 1066 during the Carnegie Way, said Arrizola was well liked. “U.S. Steel made all these moves via McKinsey schemes, and ultimately he was moved from one area where he was quite proficient into another area where he was not as proficient,” McCall said. “That quite possibly was the direct reason he died.”


For the electrocution deaths of Kremke and Arrizola, the government fined U.S. Steel a grand total of $42,000, though that amount was reduced to $14,500 through negotiations with the company. The steelmaker agreed to make ten corrective actions to prevent similar accidents in the future. Adam Finkel, the former chief regulatory official for worker safety under President Clinton, said fines start low and then get “knocked down and down and down.” He added, “The fine is bigger for harassing a wild donkey on a national grazing land than for killing a worker.”

Union complaints about safety were echoed by U.S. Steel investors who filed a class-action lawsuit, alleging that U.S. Steel misled them on the company’s financial health. Based largely on confidential interviews with eleven current or former U.S. Steel employees, many of them managers or supervisors, the investors called the Carnegie Way a “sham,” a cover for extreme cost cutting through “massive layoffs and deferring desperately needed maintenance and repairs.” They said these policies left the company “with a skeleton crew of inexperienced plant employees who did not know how to maintain or repair equipment, were required to work long hours of up to 90 hours per week, and which resulted in severe unplanned outages.”

The company adopted a policy of “don’t buy, get by,” whereby managers bought items only when absolutely necessary, according to a former U.S. Steel purchasing specialist whose primary job was to order machine parts for the company’s American plants. Rather than make needed repairs, the official said, maintenance teams were asked to “jury-rig” failing machines to keep them operating.

Orders for some parts required approval of a “control tower,” consisting of McKinsey and the plant manager. “The implementation of the control tower resulted in a significant reduction of requisition approvals,” the investor lawsuit stated. A former director of maintenance at another U.S. Steel facility said that McKinsey did not want to hear about “critical” structural maintenance because of the cost and that the consultants played a role in cutting the repair and maintenance budget. (McKinsey and U.S. Steel said consultants had no approval authority over the purchase of parts.)

Billy McCall, the former union official, said he understood that McKinsey received a percentage of what U.S. Steel purportedly saved. In fact, McKinsey’s compensation was tied partly to the steelmaker’s financial performance, raising questions about the firm’s motive in recommending cuts in expenses.

After Donald J. Trump won the November 2016 presidential election, in part by promising to restore blue-collar jobs, Longhi and his second-in-command, David Burritt, decided the time was right to cash in. The two sold a combined $25 million in stock over eight trading days. Longhi told CNBC that he hoped to restore ten thousand jobs, citing a more favorable regulatory environment and lower taxes.

Longhi’s optimism carried over to early 2017, when he reassured investors that the worst was over. Days after President Trump took office, he named Longhi as one of twenty-eight business leaders to serve on his Manufacturing Jobs Initiative.

And that’s where things stood until three months later, when U.S. Steel reported first-quarter earnings for 2017. Analysts had expected a healthy profit. Instead, the company shocked Wall Street by posting a $180 million net loss, triggering a 27 percent drop in the stock price, the company’s largest daily drop in more than a quarter of a century.

Gordon Johnson of Axiom Capital Management called the loss all the more troubling “given that it occurred in a market where U.S. steel prices are high versus previous years.” He further noted that the industry had “enjoyed significant protection from imports from both the Obama and Trump administration.” Johnson concluded that if the company performed this poorly in good times, then the rest of the year “looks set to resemble a ‘Nightmare on Elm Street,’ ” an unintended nod to Gary’s role in that movie.

Within two weeks of that earnings report, Longhi left U.S. Steel with a $4.54 million bonus. Longhi wasn’t the only casualty. His vaunted Carnegie Way disappeared like footprints on Lake Michigan’s sandy shore. Whereas the Carnegie Way merited more than forty citations in U.S. Steel’s 2016 annual report, it received not a single mention in the 2017 annual report. History had been erased, Soviet-style.

U.S. Steel regrouped and in 2018 created a new plan and a new slogan.

“Underlying our efforts,” the company wrote, “is our belief that we must operate as a principled company committed to a code of conduct that is rooted in our Gary Principles and our core values.” Those core values are “articulated in our S.T.E.E.L. principles…: Safety First, Trust and Respect, Environmentally Friendly Activities, Ethical Behavior, and Lawful Business Conduct.”

S.T.E.E.L.—with a dash of Ayn Rand. As a Christmas present, the company’s new chief executive, David Burritt, gave the former union official Billy McCall a surprise gift—the book Atlas Shrugged. “This is the philosophy right now,” McCall said in an interview. “This is corporate philosophy, for crying out loud.”

With Longhi and the Carnegie Way having passed their expiration dates, McKinsey still remained tethered to the steelmaker, taking in at least $13 million in fees from 2018 through 2020, according to McKinsey records.

Three McKinsey consultants even wrote an article that explained, without a hint of irony, “why maintenance staffing matters.” The authors acknowledged that maintenance staffing is easy to get wrong. “Cut too deep and too fast and reliability suffers. And mistakes are tricky to fix.”

Especially, they might have added, when people die.


There is no book of the dead at Disneyland, not at a place sold as the “Happiest Place on Earth.” Walt Disney designed the park to be pure fantasy. “I don’t want the public to see the world they live in,” Disney said. “I want them to feel they are in another world.” Disneyland offered a mix of past and future, adventure, boat rides, cartoon characters posing for pictures, and theme-based roller coasters. Some rides intended to scare, but not endanger. Under Walt Disney, who died in 1966, the park had an exemplary safety record, earning a reputation as the industry leader for safety.

Several years after it opened, the park had already become a cultural phenomenon. At the height of the Cold War, the Soviet premier, Nikita Khrushchev, tried to visit the “Magic Kingdom” but was denied entry. “I asked: Why not?” Khrushchev said. “What do they have, rocket-launching pads there?”

Buoyed by the success of Disneyland, the company’s footprint grew. Other Disney parks opened, including the biggest of all, Disney World Resort in Orlando. The company moved aggressively into filmmaking, publishing, television, and Broadway plays. Then, in 1994, a former toy executive, Paul S. Pressler, became Disneyland’s top executive.

Described as handsome, charismatic, and a favorite of Disney’s chief executive, Michael Eisner, Pressler set out to leave his mark on the company by hiring McKinsey to thoroughly evaluate the park’s operation.

After more than a year of study, on May 13, 1997, McKinsey presented Pressler with its findings in a confidential report titled “Transforming Maintenance: Defining the Disney Standard.”

McKinsey professed to have found a way to make Disneyland more efficient and increase profits without sacrificing quality, but that required rethinking how maintenance should be performed. “Intuition or science?” McKinsey wrote in its analysis for Pressler. The correct answer, the firm made clear, was science, as McKinsey defined it.

Maintenance decisions should be based not on the judgment of veteran employees, McKinsey said, but on an analysis of maintenance histories, breakdowns, and cost. Called reliability-centered maintenance, the process originated in the aviation industry, where safety is paramount.

At Disneyland, though, the process evolved primarily into a mandate to cut expenses. Using terms like “cost avoidance,” McKinsey recommended cutting back on park maintenance, eliminating jobs, paying some people less, and hiring outside contractors. In a broadly unpopular move, most maintenance workers were transferred to the overnight, or graveyard, shift. To deal with the shock of such a sudden move, McKinsey recommended bringing in counselors to address issues of sleep, nutrition, and relationships. Each overnight worker would also receive a one-year subscription to the Working Nights newsletter.

Only a small crew, the Maintenance Response Team, would handle mechanical breakdowns during the day. And even that group, McKinsey said, could eventually be whittled down by 30 percent.

Consultants certainly knew the risk in reorganizing a theme park, already the envy of the entertainment world. But the reward for implementing the changes, they argued, would be “world class maintenance,” eventually saving the company millions of dollars.

McKinsey let no self-doubt dampen its enthusiasm for the changes. “The magnitude of the opportunity gives one pause,” the firm told Pressler. “Change of this magnitude is not managed—it is led.” To meet this challenge, “leaders must inspire and develop a bench of true change champions.”

Finding those “true change champions” might be difficult because McKinsey held a low opinion of many park managers, saying they lacked “critical skills,” necessitating the removal or restaffing of 50 percent of the park’s leadership. After studying one work area, the consultants wrote, “Meetings, admin and safety using too much time.” McKinsey also recommended cost savings through “performance measures based on overhead rate and dollars. Hold shop managers accountable for location overhead.”

“There’s nothing wrong with saving money,” Mike Goodwin, a former maintenance supervisor, told the Los Angeles Times. “But not at the expense of your prime objective, which is to keep the place running safely.” McKinsey asked another maintenance supervisor, Bob Klostreich, why lap bars on a roller coaster were inspected daily when records showed they never fail.

Klostreich, a twenty-year Disney employee, became incensed. “The reason they don’t fail is because we check them every night,” he said. Goodwin said Disney viewed not checking lap bars as an acceptable risk. “It’s like a pilot saying, ‘Hey, we haven’t crashed in a while, let’s skip the preflight.’ ”

Five months after McKinsey recommended cutting maintenance costs, Klostreich warned Disney that safety concerns at the park were growing. “As you know,” he wrote, “I have expressed to you and others on several occasions my deep concerns over what I feel has been a serious decline in management’s readiness, willingness and ability to properly and safely maintain the high speed attractions assigned to the roller coaster team. Our staffing and labor distribution has been and is inconsistent with effective daily preventive management.”

Klostreich said he received no response.

The following year, on Christmas Eve, Disneyland experienced a fatal accident that rocked the industry. Luan Dawson, a thirty-four-year-old computer programmer at Microsoft, and his wife, a pharmacist, were waiting to board an old-fashioned riverboat, Columbia, which had just finished a cycle through the park. Docking the heavy boat required skill acquired only through training and experience. But on this day, a supervisor filled in for an absent employee even though she had never trained on that boat and had never tried to dock it.

With the boat still moving, too fast as it turned out, the supervisor tied a substitute nylon rope to a metal cleat on the boat. The force of the moving boat tore loose the metal cleat, apparently attached to rotting wood, propelling it like shrapnel from a bomb, killing Dawson and severely disfiguring his wife in front of their son, according to court records filed by a Dawson family attorney, Christopher Aitken. The supervisor was hospitalized with injuries as well.

Aitken said a safer rope that breaks under intense pressure had been used in the past, but wasn’t used on this day.


The fatality prompted a national reexamination of safety at the nation’s amusement parks and led directly to a new state law in California requiring an independent investigation of serious accidents there. Previously, park officials investigated themselves. The Dawson family reached a confidential settlement with Disney reported to be $25 million.

Aitken said McKinsey’s cost-saving measures directly contributed to the Columbia accident, among others. At McKinsey’s suggestion, Disney had eliminated the higher-paid expert managers on each ride—called ride leads—including on the Columbia. They were responsible for ensuring that the rides operated safely. Maintenance also suffered. When employees called mechanics to fix problems, they didn’t immediately respond, so they stopped calling, Aitken said. It didn’t help, he added, that workers with the most institutional knowledge of rides were “getting forced into graveyard shifts.”

In February 1999—two months after the Columbia fatality—Klostreich resent his earlier warning to Disney leadership. “I am concerned that the attractions are deteriorating even more so now than at the time I authored the attached memo,” he wrote.

Later that year Klostreich was terminated—a move he said was retaliation for being a whistleblower. Disney said he refused to work the graveyard shift for health reasons and no job openings were available during the day. Klostreich filed suit, but it was dismissed.

In July 2000, safety issues became more pronounced. A wheel assembly fell off a ride in Space Mountain, injuring nine people. Poor maintenance was cited as a cause.

Two months later, a four-year-old boy, Brandon Zucker, fell out of the Roger Rabbit ride and was crushed under another car, where he remained for ten minutes. Before his rescue, he went into cardiac arrest, resulting in permanent brain damage. He never walked or talked again. Employees had placed him in a seat that was less safe given his size and failed to fully lower the lap bar. Brandon died at age thirteen. State officials ordered Disney to make significant changes to improve the ride’s safety.

David Koenig, who has written extensively about Disneyland in books and articles, said the company wanted a firm like McKinsey because management felt park operations had become too expensive. “They encouraged the Disneyland management to reduce staffing, reduce training, reduce maintenance, reduce, reduce, reduce—reduce everything to the point where it became unsafe,” Koenig said. He couldn’t say whether the fault rested with McKinsey’s recommendations or Disney’s implementation of them. “I just know they got the ball started, and we all know where it ended up.”

John J. Lawler, who taught in the University of Illinois’s School of Employment and Labor Relations, believes management consultants mainly serve to legitimize the goals of their clients. “Clients like to be told they are doing the right thing,” Lawler said, adding that management techniques viewed as best practices “are very often propagated by consulting firms and thus these techniques become largely institutionalized in the business world.”

The accidents represented a major blow to Disneyland’s reputation, but they did not slow the corporate advancement of the cost cutter in chief, Paul Pressler. As reported by the Los Angeles Times, Pressler “enjoyed a meteoric rise, leapfrogging over other executives, including managers of the much larger Disney World in Florida.” He joined the inner circle of Disney’s CEO, Michael Eisner.

Still, it was a résumé marked by accidents. And it wouldn’t be long before new questions arose over the wisdom of Pressler’s maintenance policies and McKinsey’s role in recommending them.

Contents

Introduction: When McKinsey Comes to Town

1  Wealth Without Guilt: McKinsey’s Values

2  Winners and Losers: The Inequality Machine

3  Playing Both Sides: Helping Government Help McKinsey

4  McKinsey at ICE: “We Do Execution, Not Policy”

5  Befriending China’s Government

6  Guarding the Gates of Hades: Tobacco and Vaping

7  Turbocharging Opioid Sales

8  “Turning a Coal Mine into a Diamond”

9  Toxic Debt: McKinsey on Wall Street

10  Allstate’s Secret Slides: “Winning Will Be a Zero-Sum Game”

11  “The Enron Astros”

12  “Clubbing Seals”: The South Africa Debacle

13  Serving the Saudi State

14  Chumocracy: Half a Century at Britain’s NHS

Epilogue

A Note on Sources

Acknowledgments

Notes

Index


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