Pete Buttigieg’s stint as a management consultant at McKinsey & Company has become a point of contention for the presidential hopeful, as it relates to his work for specific companies like Blue Cross Blue Shield of Michigan, which fired hundreds of workers and raised premiums after bringing McKinsey on board.
But the larger issue is the very nature of management consulting firms; so much of their work “is about increasing investors’ share of profits by reducing labor’s share,” Anand Giridharadas, a former McKinsey consultant turned journalist and author, recently put it.
Consulting firms, by this line of thinking, are one of the drivers of the current state of runaway economic inequality. Academic and journalistic findings tend to support this idea.
Broadly speaking, management consulting firms advise other organizations how to do their jobs better. They are hired, as CNBC’s Abigail Hess notes, “to assess and address problems, such as downsizing, acquisition or restructuring.”
The key to management consulting firms’ function is in the word management. Management consultants work for a company’s executives, not its employees, and the hiring of one is often a sign that layoffs are imminent. Wendell Potter, a former vice president at the health insurer Cigna, says “it was clear that when [a management consulting firm] was brought in there would be layoffs. In my own department, there were times when I had to lay people off because off because of McKinsey’s work.”
As Duff McDonald, author of “The Firm: The Story of McKinsey and Its Secret Influence on American Business,” once put it: “McKinsey might be the single greatest legitimizer of mass layoffs in history.”
McKinsey, which did not respond to multiple requests for comment from The Washington Post, defines its mission as helping “organizations across the private, public, and social sectors create the change that matters.”
Other major consulting firms present themselves in similar terms. Their promotional materials place a strong emphasis on concepts like social responsibility, diversity, empowerment and inclusiveness.
Potter says the emphasis on work that employees and others do to try to make the world a better place to live in is “done to largely obscure how the companies really operate, to have the public see them as good corporate citizens and overlook what it is they do for a living.”
For the hundreds of billions of dollars spent annually on management consulting work, there’s surprisingly little independent research into their effects on businesses or the economy as a whole. In part this is because the firms are the ones producing much of today’s business research. McKinsey publishes an influential business journal, the McKinsey Quarterly, dedicated to “defining and informing the senior-management agenda.” But what independent research that does exist is nevertheless instructive.
In 2003, Ajay Prakash and Andrew A. Samwick of Dartmouth published a working paper that analyzed the performance of companies that hired management consulting firms from 1991 to 2001. They found that after one of these firms was brought on, two things tended to happen: The company’s stock performance went up, and company employment went down.
Investors profited, in other words, while workers got laid off — a dynamic that’s helped fuel income and wealth inequality since the 1970s.
Samwick cautions that causality isn’t really knowable here — it could be, for instance, that companies looking to shed workers are more likely to bring on a consultant in the hopes of justifying layoffs — and that not all companies publicly disclose when they hire a consulting firm, making it unclear how representative their sample is of all U.S. companies. But, he added, the results they turned up 16 years ago still strike him as “eminently plausible” today.
Consulting firms, McKinsey in particular, also played a key role in the explosive growth of CEO pay that started in the middle of the 20th century. In his book, McDonald details how McKinsey consultant Arch Patton became the “Godfather of CEO Megapay” in the postwar era.
Patton, as McDonald tells it, produced a number of compensation reports in the 1950s showing that executive pay was actually rising more slowly than that of the rank and file. Those reports were published in Harvard Business Review, becoming highly influential as chief executives and corporate boards used them to justify increasingly extravagant managerial compensation schemes. “Demand for Mr. Patton’s imprimatur on executive pay packages went through the roof,” McDonald writes. At one point, Patton’s clients accounted for close to 10 percent of McKinsey’s billings.
The disparity between CEO pay and worker compensation is one of the key drivers of modern-day income inequality. In the 1960s, according to the Economic Policy Institute, the typical chief executive earned about 20 times as much as the typical worker. Today’s CEOs earn hundreds of times the pay of their employees, propelled in large part by stock option packages that Patton helped popularize.
McKinsey and other consulting companies were also instrumental in the privatization of government functions and public resources that began in the 1960s and continues to this day. In his book “The World’s Newest Profession: Management Consulting in the Twentieth Century,” for instance, Christopher McKenna describes how in the 1950s and 1960s, NASA paid McKinsey to promote “the use of outside contractors over building internal expertise.”
“By 1964,” McKenna writes, “90 percent of NASA’s $5 billion budget went to private contractors.”
Today, McKinsey publishes white papers that highlight how state-owned enterprises “struggle to meet the private sector’s performance levels,” meaning that “potential profits remain unrealized.” It’s been active in ongoing efforts to privatize Puerto Rico’s power grid in the wake of Hurricane Maria, and to explore the feasibility of privatizing Boston’s public transit system.
A 2016 report by In the Public Interest, a nonprofit that promotes “the democratic control of public goods,” details how “privatization increases income inequality through the decline of contracted workers’ wages and benefits … when private companies take control, they often slash wages and benefits in an attempt to cut labor costs, replacing stable, middle class jobs with poverty-level jobs.”
McKinsey and consultants like it are at some level simply a reflection of the capitalist world in which they operate. When managers and executives prioritize shareholder profits over other concerns, such as the well-being of their workers or of the planet, businesses that cater to those managers will reflect those desires.
“Companies like McKinsey, the work they do is to help their clients’ bottom line,” said Potter, the former Cigna executive who now heads a business group advocating for Medicare-for-all. “If [their client] is a for-profit, the goal is to increase shareholder value. That’s the objective. That’s what they do.”
For a long time, that way of doing business in America was almost universally cheered. But in today’s climate, where the spoils of commerce accrue to an ever-shrinking share of the population and even companies are rethinking their emphasis on profits above all else, that way of business is increasingly being questioned. And nowhere is that questioning more intense or happening in a more public way than in the Democratic presidential campaign.
