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

by Walt Bogdanich

McKinsey’s compensation was tied partly to the steelmaker’s financial performance, raising questions about the firm’s motive in recommending cuts in expenses.

“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.’

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.”

McKinsey was not held to account for what happened at U.S. Steel and Disneyland. No one sued the firm. No government agency accused it of wrongdoing. Consultants were simply doing what they were paid to do: give advice, not orders.

As a result, if something bad happened, the spotlight didn’t shine on them. They took no credit publicly when their clients did well, and for years they accepted no blame when their recommendations sent companies off the road into the ditch.

McKinsey’s own robust earnings make it possible for the firm to run a private hedge fund for senior partners, with large parts of its roughly $31.5 billion in assets under management concealed behind a tangle of shell companies on an island tax haven in the English Channel.

McKinsey’s stature allows it to engage, mostly without criticism, in practices that others might view as awkward or inappropriate. It simultaneously consults for companies competing in the same market, so one set of consultants might be telling Company A how to beat Company B while another set is telling Company B how to beat Company A. McKinsey also consults for government agencies that regulate McKinsey clients. In addition to advising the U.S. Food and Drug Administration, McKinsey has consulted for at least nineteen pharmaceutical clients—all subject to FDA regulation.

Rosenthal, the consultant who started in McKinsey’s Houston office, said the dictum to prioritize client interests sounds selfless but should not be mistaken as public service. “The language around client service makes it seem like serving a client, in and of itself, is valuable without regard for what that company is doing,” Rosenthal said. “I found it jarring that client service is so high at the top without any qualifications.”

What happens if a client sells addictive products known to cause death, or denies immigrants compassionate treatment, or supports corrupt and undemocratic governments? These are not hypothetical questions. In each case, McKinsey had a choice and sided with the clients. “If you want to do ethical work, if that’s a priority, then you have to be willing to turn down profitable opportunities. It was never clear to me that McKinsey was ever willing to do that,” Rosenthal said.

The most shocking revelation, however, was McKinsey’s decision to help companies sell more opioids when the abuse of those drugs had already killed thousands of Americans. Two senior partners discussed possibly purging records, apparently to hide their involvement. McKinsey agreed to pay more than $600 million to settle investigations by dozens of state attorneys general into the firm’s role in fanning the opioid epidemic. The firm also issued a rare apology, and fired the two employees, but said it did nothing illegal.

An even bigger problem, Peters said, might be the “disinvestment in people” in favor of bigger profits. “I really think the shareholder value maximization thing has done more harm than any single thing maybe in the country. It is the father of inequality, and inequality is the father of Trump.”

Karma, the podcast editor, said his transformative moment occurred when he was assigned to help a client fire fifteen hundred of its employees worldwide—“not because it was struggling, but because they wanted to make more money,” Karma said. “Get them out of the door as quickly and efficiently as possible without any litigation.” For him, that marked the end. “I could not come into work every day knowing everything I had worked my entire life for—all of it was being used to make other people’s lives worse.”

The 1980s brought more instability, sparking a breathless string of stories about sudden riches, corporate raids, leveraged buyouts, and the fading appeal of once stable companies. “Billions could be made by buying up American companies and loading them with mountains of debt,” said Les Leopold, director of New York’s Labor Institute and author of Runaway Inequality. As these raiders got rich off what Leopold called “the deindustrialization of America,” their apologists praised them for making corporations more efficient. Some companies had indeed become complacent, but raiders often bought companies to break them up and sell off the pieces, leaving thousands of employees without jobs. “This is not the invisible hand of the market,” Leopold said. “This is the financial extraction process.”

To create an “outstanding corporation,” managers had to keep their stock price high, and cutting costs through layoffs was usually easier and quicker than boosting revenue. Chief executives benefited from higher stock prices in part because their income was increasingly tied to the value of that stock. Layoffs were often couched as necessary to improve efficiency, and no company could match McKinsey’s long record of running up a company’s body count. Call it downsizing or restructuring, the result was the same: sending workers home without a job. Duff McDonald, who wrote a history of McKinsey, put this part of the firm’s business in context. “There is a distinct possibility,” he wrote, “that McKinsey may be the single greatest legitimizer of mass layoffs than anyone, anywhere, at any time in modern history.”

By 2005, the average annual salary at Walmart, a McKinsey client, was roughly $17,500, while the median household income in the United States was almost $50,000. Nearly half the children of Walmart employees, called associates, were on Medicaid or uninsured. Without a union to represent them—the company is rabidly anti-union—the only leverage employees had for better treatment was public exposure, and the pressure that might bring to bear on management.

Best of all, McKinsey did everything pro bono, an in-kind contribution with an estimated value in the millions of dollars based on current prices. “The fact that the firm was volunteering their time and had no aspirations to obtain the state of Illinois as a paying client enhanced their credibility,” MacDougal said, noting that the firm preferred not to work for the government, believing that real change there was unlikely.

Later it appeared that the firm’s pro bono work may have served a purpose less noble than MacDougal believed. By learning the operational details of pro bono state clients, McKinsey laid the foundation for obtaining work later—this time for profit.

With lifesaving services starving for money, Illinois officials were quietly shoveling millions of dollars out the door to McKinsey consultants. These decisions were often hatched in the dark, without legislative oversight or approval, according to Mendoza. Just three months into her new job, in March 2017, she froze $21.6 million the state had agreed to pay consulting firms for technology advice—most of it earmarked for McKinsey.

Mendoza did not yet realize the larger story she was helping to uncover—how government became a willing accomplice in McKinsey’s effort to build a health-care empire around the idea of playing all sides of the game.

State lawmakers knew little about the consulting payments, prompting a Chicago legislator, Greg Harris, to convene three hearings to learn why the state chose to pay McKinsey more than $75 million with the state in financial distress. Early on he focused on two sole-source contracts totaling roughly $24 million. The state awarded both to McKinsey without as much as interviewing a single other company.

Yet it was McKinsey’s link to another expenditure that raised the most concern. Norwood, with McKinsey’s guidance, arranged to pay $63 billion—the largest procurement in state history—to seven managed care companies to administer and pay for medical services through the expanded Medicaid program. The expenditure bypassed legislative oversight, a decision that Mendoza said was grossly misguided. “That means this proposal is not afforded the same independent oversight as, say, a contract to purchase paper clips,” she said.

McKinsey, for one, was not particularly interested in having anyone look over its shoulder, even for its government work. At one hearing, Harris broached the firm’s penchant for secrecy with Norwood. He cited a provision in McKinsey’s contract “that neither the state nor McKinsey can refer to each other or attribute any information to the other party in an external communication including news releases pertaining to this contract.”

“That does not seem to be very conducive to transparency,” Harris concluded.

The firm’s client list, a closely guarded secret, would not have been available to state officials. But the authors of this book gained exclusive access to that list, and it showed McKinsey’s deep financial ties to the managed care industry.

In recent years, McKinsey billed companies that provide managed care more than $200 million, making it one of the firm’s most lucrative sectors. Moreover, four of the seven companies that won parts of the $63 billion Medicaid contract were later acquired by McKinsey clients. And a fifth, the parent company of Blue Cross and Blue Shield of Illinois, was McKinsey’s landlord in downtown Chicago. When McKinsey leased three upper-level floors in a building owned by the insurer, Crain’s Chicago Business called it a big win for the insurance company, which had “a hefty investment to recoup” in the building.

Legislators wanted to know what McKinsey did to earn monthly fees of roughly $1 million. Or in the lingo of consultants, what were the “deliverables”? Harris, looking over documents at a hearing, saw something that troubled him. “Every month they repeat the same deliverables. So why is this the same without variation?” Harris asked. “I think that’s a logical question.”

A consumer group, Missouri Health Care for All, also had questions about McKinsey. “We cannot know if McKinsey has any conflicts of interest because we don’t know who all their current clients are,” the group wrote.

McKinsey was enormously successful, securing more than one billion dollars in state and federal consulting contracts, often without competitive bidding. Many of those contracts involved advising government agencies that regulate McKinsey’s private clients in pharmaceuticals, hospitals, and insurance.

McKinsey, figuring that Big Pharma clients might want more than smart, young Ivy Leaguers, scouted former FDA officials to hire. In one job advertisement, McKinsey sought people with a minimum of five years working inside the FDA’s regulatory affairs office. Applicants had to “have knowledge of, and relationships with, investigators and leadership with District Offices.” McKinsey did not define “relationships.” Job seekers were also required to know pharmaceutical regulations and “the immediate best steps” in responding to an FDA warning letter.

Even if McKinsey doesn’t share confidential information, the firm’s decision to work simultaneously for drug companies and the FDA puts all parties in an awkward position at best. The FDA had already drawn fire for growing too close to Big Pharma. But it was the agency’s close collaboration with the drugmaker Biogen in promoting its controversial Alzheimer’s drug, aducanumab, that raised the most pointed questions about the FDA’s impartiality.

After two drug trials were stopped because they showed little prospect of helping Alzheimer’s patients, the FDA worked behind the scenes to salvage the drug, eventually approving it over the strong objections of its own independent expert advisory panel. Ten of eleven panel members had concluded there was insufficient evidence to show that the drug worked. The eleventh member was “uncertain.” Three panel members resigned in protest over the FDA’s decision. One of them, Dr. Aaron Kesselheim, a professor of medicine at Harvard Medical School, called the regulator’s decision “probably the worst drug approval decision in recent U.S. history.”

While the Aduhelm controversy received extensive media coverage, McKinsey’s behind-the-scenes role in promoting the drug has remained hidden from the public. Documents obtained in connection with the reporting of this book show McKinsey’s strong support for the Alzheimer’s drug. In April 2021, months after the FDA’s expert panel questioned the efficacy of Aduhelm, Kevin Sneader, then McKinsey’s managing partner, praised the drug, calling it a “first-in-class disease-modifying therapy for Alzheimer’s.” For that reason, he said, Biogen expected “massive public interest in the drug and the disease.”

When McKinsey tried to renew this contract in 2015, government officials insisted on a pre-award audit. McKinsey, however, refused to turn over the requested records, prompting auditors to instruct the contract officer at the General Services Administration—the agency that processes contracts for much of the federal government—to either get the records or cancel the contract.

At this point, the audit process broke down. A division director at GSA intervened at McKinsey’s request and removed the contracting officer who had attempted to obtain the audit records. The GSA director then unilaterally awarded the contract to McKinsey, even though parts of it exceeded market prices by as much as 193 percent. As an added bonus, the director tacked on an additional 10 percent rate increase, and later another 3 percent, to the already bloated contract, according to a 2019 report by the agency’s inspector general. The GSA’s unjustified price increase cost U.S. taxpayers an estimated $69 million, and that did not include “any potential costs related to McKinsey’s unsupported team-based pricing,” a spokesman for the inspector general said in an interview.

The inspector general was unsparing in its criticism of the GSA director, saying he “failed to comply with laws, regulations, and GSA policies by using invalid price comparisons, relying on unsupported information, and performing insufficient analyses to justify the awarded contract.” The IG also said the director “abandoned his role as an impartial contracting officer,” creating an appearance of impropriety that potentially gave McKinsey an unfair competitive advantage.

For a company that expends so much effort presenting itself as a voice for health-care reform, McKinsey has remained silent on some of the most important health issues of our time. It did not lead the fight against cigarettes, vaping, and opioid abuse. (It had clients in all three sectors.) McKinsey did not speak out forcefully against the high cost of drugs or the tsunami of direct-to-consumer drug company advertisements. (Five drug company clients were called before Congress to defend price hikes and executive compensation.) Nor has the firm publicly raised alarms about the consolidation of health-care services. (The firm had clients who presumably benefited from these anticompetitive business decisions.)

The article revealed some uncomfortable truths about how far the firm would go in serving clients. According to the article, McKinsey recommended that ICE spend less on food, medical care, and supervision of detainees—proposals that alarmed even some ICE officials who questioned whether the cuts justified the human cost.

He laid out his recommendations in bullet points. Among them: a demand that McKinsey make a public apology for working for ICE and “stop saying we would do this work again.” Another: “Stop using legality as the barometer for ethicality.” On this, he was particularly biting, adding a parenthetical phrase: “If we helped southern states ‘improve agricultural asset yield’ in the 1850s would we still stand behind that? Our guidance so far would indicate the answer is ‘maybe.’ ”

He also wanted to give back any money in his paycheck that could be attributed to the work for ICE and set up a company email address, TakeItOutofMyPay@mckinsey.com, for his colleagues to contribute as well.

Elfenbein didn’t lose his job, and Sneader even let him know that his email was “appropriate.” But another senior partner called and asked him a very McKinsey-like question: Did he know how much money in lost productivity his email had caused?

McKinsey’s work with a Chinese government-owned company that built islands in disputed waters conflicts with the goals of a far more important client: the Pentagon. McKinsey has taken in hundreds of millions of dollars from the Defense Department in recent years. Internal McKinsey records show that from 2018 until early 2020, the U.S. Defense Department was among McKinsey’s top tier of clients.

For McKinsey, it had been a long journey from advising the captains of American free enterprise to advising a Chinese state-owned firm building military bases for America’s chief strategic and economic rival.

Xi saw the world very differently from the bland apparatchik he replaced. To Xi, the party was tottering on the brink of collapse, hobbled by corruption and the influx of Western ideas such as press freedom and rule of law. Xi didn’t want to be China’s Gorbachev and preside over the demise of the Communist Party. Only days into his rule, he gave a speech chastising the Soviet party’s collapse in 1991, blaming it on the fact that “nobody was man enough to stand up and resist.” Xi jailed human rights defenders and feminists. China’s free-for-all social media platforms were reined in by aggressive censorship. Xi began a ruthless crackdown against the Muslim Uyghurs in Xinjiang, involving mass detentions and forced sterilizations that the American government would soon label a genocide.

While it’s true that multinationals like BMW, Apple, Boeing, and Starbucks also stayed the course in China, the cars, phones, airplanes, and coffee they sell differ from McKinsey’s flagship product. By dispensing its know-how to state-owned companies such as China Communications, the builder of the South China Sea islands, McKinsey was bolstering the power of the Chinese state and the ruling Communist Party. Xi made clear that there was no distance between the Communist Party and leading state-owned enterprises like China Communications, telling party cadres that “adhering to party leadership and strengthening party building is the glorious tradition of our country’s state-owned enterprises.”

Usually corporate retreats don’t make headlines. But a photo of this one—complete with the red carpets and sand dunes—appeared on the front page of The New York Times on December 16, 2018. The reason: the McKinsey consultants were partying in Xinjiang, just four miles from a detention camp, one of hundreds in a vast archipelago of gulags in western China housing upwards of one million ethnic Uyghur Muslims and other minorities.

While McKinsey isn’t responsible for the Chinese government’s actions in Xinjiang, hosting a party there put McKinsey on the defensive. “I’m surprised they didn’t catch on to the horrible optics,” said James Millward, a professor at Georgetown University who studies the region. “Somebody should have been reading the news and said, Wait a minute, we don’t want our corporate logo there.”

In Hong Kong, massive pro-democracy protests erupted in 2019, continuing into 2020, often taking place near McKinsey’s office in central Hong Kong. Millions of people took to the streets to demonstrate against Beijing’s increasingly heavy hand over the former British colony, which until then had enjoyed liberties not available to people in mainland China, including freedom of assembly, freedom of the press, and freedom of religion.

McKinsey didn’t take out ads or sign any letters in support of the Hong Kong demonstrators, and likewise raised no public objections when Beijing extinguished Hong Kong’s democracy movement, and with it the city’s civil liberties, with a draconian new national security law.

In contrast, when massive protests erupted across the United States after the murder of George Floyd, McKinsey was quick to ally itself with the cause. The firm was among the signatories of a full-page ad in The New York Times dedicated to F...