Will: Hello Chris, welcome to the show.
Chris McKenna: Hello to you too Will. Thank you very much for inviting me.
Will: So I had no idea Glass–Steagall helped management consultant gets started. Talk to me about how that happened.
Chris McKenna: It was kind of surprising thing to me when I was trying to understand the history of management consulting. I didn’t really understand it myself. I was trying to understand where it had emerged from. And the larger story that we all tend to tell is we know a bit about the history of scientific management and Frederick Taylor. And we tend to think that it emerged from Frank Gilbreth putting bricks together and somehow that taught people how to run companies. And of course when you think about it, that’s not what most people do. They’re not worried about the shop floor when they’re doing management consulting. What they’re worried about is the C-suite. They’re worried about how bureaucracies work, and actually what they’re really doing is telling people whether the business is a good business or not a good business. And if you really start to think about it, that looks more like banking. That looks more like what a banker does and what somebody who’s a shop worker does.
And so what I came to understand was that the origins, the early work of management consulting was a combination of law and engineering and banking. And so that the growth of it, which happened very rapidly in the 1930s, came from the regulation of banking. This was a function that was originally performed to aid bankers in evaluating companies. It was the sort of audit that you did if you were going to make them go public or if you were considering a loan to them or if you were evaluating something that had gone wrong. And when they started to restructure these companies in the 1930s during the depression, at the same time we’re changing the banking regulations. They said the people who were consultants who were working inside banks would have to stop being inside banks and we’d have to go outside. And so these early professionals left the banks and they created their own companies. And the ones who got the jump on it were auditor’s who had been doing this work for banks and primarily weren’t even in New York, they were in Chicago. And these are the people who we now know. Names like James McKinsey and company. So that’s the origin. That’s a long way to say it, but it was a forgotten history.
Will: So that’s just one of the chapters in your book, the world’s newest profession, which was published in 2006 which I just got introduced. I just devoured this book. I suppose it’s a little bit as if a pro baseball player had never heard of Babe Ruth. They could probably still hit and play, but you’d think of them as kind of odd. But a lot of management consultants, maybe they’ve heard of Marvin Bower or James McKinsey, but may not really know the history of the profession. So this book, I just was fascinated by it. You told a story about the Frederick Taylor and how a lot of folks think that consulting came from that, but it’s really about more about the cost accounting, right? So that side of it. So talk about what those early cost accountants were doing in the twenties and how that kind of grew into a management consulting.
Chris McKenna: So many of us when we study accounting or learn it on the side, we learn one part of it, which is financial accounting. And that’s of course the mandated accounts that happened every quarter or every year. And we know that in fact those things were not even required of companies until the 1930s until there were some very famous scandals that happened at the beginning of the Great Depression and were required. But before then, during the teens and twenties in America, there were two kinds of accountants who were vying for professional supremacy. And one was the group that would do your accounts at the end of the year and another group who were known as cost accountants. And we still know that. We still value them. Were saying that their work was the most important thing, that if you really wanted to understand how a company worked and how its costs work and how to value it, you should look at that basis. And they for example didn’t think that you should just eliminate the cost of interest because that’s a real cost. And they said you can’t just standardize it. You have to actually understand how it works.
The wrote complicated articles about it. And they taught it in classes and there were two people, for example, at the University of Chicago, one at the University of Chicago and one wanted at Northwestern, who were prominent teachers. And the prominent teacher at Northwestern was Arthur Anderson, and the prominent teacher at the Chicago was James McKinsey. And both of those names survived because both of those people were professors but also built practices. And they did both kinds of accounting. But they were writing important articles about cost accounting and how you evaluated companies. And it’s not a big step to go from cost accounting to think about whether your company in particular needs something special done to it, whether a consultant might help it, whether their costs are too high or how they might standardize something or how they might learn from another company.
And they were offering that kind of advice. And they were offering it to companies, but they were also very much offering it to bankers, and particularly not the bankers who were local, but bankers who were from New York who needed some sort of advice about companies in Chicago or throughout the Midwest where industrial work was happening. So they were competing with one another. They were colleagues that knew each other. They were building businesses, they were hiring their own students. They were doing all this. And then what happened was in the early 1930s when all these scandals started to break, the American government said you’re going to have to all companies, you’re going to have to do annual reports and quarterly reports. And so Arthur Anderson looked at this business and he said wow, that is a big business. And if I just specialize in annual reports and quarterly reports, I will have all the business I needed in the world.
And so he dropped the cost accounting part of it. And meanwhile James McKinsey looked at this and he said I could do both, but actually he did a bit of both, but he said, I think that the most interesting part of this with the cost accounting part. And so his company, James McKinsey and Company would, would do the cost accounting part. And so they’d come up through the same history and through the same background, but they diverged in the 1930s. And what would be ironic is that Arthur Andersen which became a financial accounting firm would eventually come back into the business because it would get interested in using computers and it would build an IT business. And so it would become a very important consulting firm in the end. But it did so in effect, a second time, it did do in the 1950s when it initially walked away from this business in the 1930s. And of course the longer history is of this profession, this nascent thing, consulting which developed from it, developing out of Chicago as opposed to New York or out of out of Europe or any place else. It’s very unusual for a profession to have not just a single country, but even a single city as its home. And almost all the important consultants in the early period came out of Chicago.
Will: So that was McKinsey, which then split into McKinsey and A.T. Kearney, right? And then there was the other firm [inaudible 00:07:38]
Chris McKenna: [inaudible 00:07:40], which was the descendant of Booz Allen. And Booze himself had been a Northwestern graduate who had been an expert in industrial psychology and he had developed his business around the same time. He’s not so much out of accounting and auditing, but he quickly developed some of that capacity. But he is out of Chicago. And as I say what’s important about that is that they had to jump on the New York business. And the reason they had to jump on the New Yorkers is because the New Yorkers, it’s not that they didn’t do this, but rather they were part of the banks. And so when this regulation came along, you had to quit your job in a bank and build an institutional presence. She had to build a company. And if somebody in Chicago already had a company that could step in, they had a business and already worked out how to run a company.
They had a bit of an edge on you. And so the Chicagoans ran ahead of the New Yorkers. Later than New Yorkers, all of these firms would eventually relocate to New York. And of course anybody knows anything about the history of strategy consulting will talk to me about the history of Boston and how it became important. But initially in the 1920s and thirties, it was Chicago where all of this business was coming out of. And by the, by the 1940s, 1950s really, the three leading firms from McKinsey and Company, Booz Allen and Hamilton, Cresap, McCormick and Paget. And maybe to a lesser degree it would have been A.T. Kearney, which was the original Chicago Office of McKinsey and company. Tom Kearney was the first partner of McKinsey, and McKinsey and Company separated and went to New York in the late 1930s, early 1940s.
Will: I had no idea at all about all the history talk about in chapter four, creating a contractor state, about how important consulting firms, about the role they played in World War II of restructuring parts of the Navy and the bureau of ships and other parts of the federal government, the post office later, the Hoover Commission. And how then that experience with the federal government, and they actually parlayed that into a future government work. But then also use that in the private sector. Talk a little bit about what happened during World War II and how that then played out into this hollowed out federal contractors state that I just really had no idea about.
Chris McKenna: Yeah. So that was interesting. What I of course thought when I started this work was I was going to mostly be talking about the relationship between consultants and business because that’s where we tend to think of these things. And yet we know that they’re very important and famous assignments that consultants have done in the federal government. In fact, to get a contemporary criticism in or a separate little remark, one might argue that the funny thing about the Trump administration is that in bringing external people from business in, what they haven’t been doing is using consultants. Trump seems to use his own people and not to use consultants. It’s kind of a funny turn of things.
Will: That’s not funny, Chris. That is a travesty.
Chris McKenna: It’s just a funny thing because there you think you’re bringing in external business oriented people, but his own business a family business, he doesn’t seem to use them. So in all of the work. What’s interesting is how much the federal government has become an outsourced operation, a hollowed out state that uses consultants. And what’s so striking about say his use of Jared Kushner is that the didn’t try to bring in the consultants to do this kind of work. In any case, let me go back to the origins of this, which is that even as I said, Edwin Booz had had learned a lot of his skills in world war one. These people of course during a war you’re brought in and your set of skills which you then lead the military with. But in particular in World War II, which was an all consuming effort.
And of course it involves enormous amounts of industry and logistics and whatever. They turned to people in business and they said we need desperately your help. And so some of these people were fairly young. Some of them were already sophisticated, but they brought in people who were either trained as consultants or would become consultants, and they learned a set of skills. They built relationships in that period. They built relationships working for the Navy, working for the Army. And when they left the business, they looked at each other and they said, we could go back to her old job so we could do kind of the consulting work that we had been doing in the military and we could do it in the business itself. And of course people like McNamara went back to Ford, but Cresap, McCormick and Paget who’d been working in the military and previously had worked for Booz Allen, they decided to found their own firm.
But one of the first things that many of these people did was they didn’t just look to business, but they look to their old contacts, in government and their old contacts in government looked back to them. People in government as they were trying to reorganize after World War II, and they were demobilizing. This had become an enormous thing the American federal government after World War II. They were trying to rationalize it and they turned to business, but the business leaders who they turned to said, “We can’t do all this. That’s not within our power to spend all this time rationalizing this. You need to hire experts.” And so they hired both old and new consultant firms, and these consulting firms in turn told their business clients, they said to people in defense contracting industries for example, they said, well look, we’re working for the Navy or the Army.
If we’re working for them, you would want to hire us as well, wouldn’t you? I mean, we’re giving them set of skills. We can tell you how we do it for them. Then you’ll fit better with their systems. And so bit by bit, a lot of the white collar work, lot of the systems building was turned over to consultants. And the most vivid example of this is really the story of NASA. So when NASA comes out of a long effort to think about missiles and to think about aeronautics and whatever, but when Kennedy says we’re going to send people to the moon, you had to figure out whether the federal government’s gonna build those rockets. How are you going to do this? And it’s not just the will to do it and the money to do it, but actually the ability to do it. And the natural thing to say is to say that we should hire in firms outside business companies to do this, but how do you structure that?
How do you think about the contracts? How do you do this? A contract number one, NASA numbers, its contracts sequentially. And contract number one for NASA was awarded to McKinsey and Company to devise the very structure of NASA how it would work, how they would actually send men to the moon, send somebody to the moon. And that’s what they did. They of course took the model of consulting in a sense. They took the model of contracting and built it out. And there is no more, in that period there is no more successful agency than an agency that can take this large amount of money and successfully send people to the moon. And so this becomes the model agency in the postwar era that you want to look like. And so everybody else is why don’t we mimic this. And politicians both on the left and agreed that it would be good to make the government smaller to lower the number of direct federal employees. And how do you do that?
You don’t decrease the wheel size of government. You don’t decrease what it’s really doing. You can’t do that. What you can do, however is you can in effect outsource the operations of government, and how do you do that? Well you turn to consultants to tell you how to outsource. And in some cases he turned to them as the very outsourcers. And so this is the model of modern government is that we probably have many more than 10 million people working in the federal government in reality, but of course technically on staff, it keeps falling all the time. It’s sort of on the order of a million and a half. And those million and a half and turn oversee a standing army of consultants and contractors and that model really becomes the model for the modern nation state. We’ve exported to other countries where I work in the UK, this is very common.
The UK government does this constantly, and they’re constantly calling in consultants to help them think about how they should restructure the National Health Service, or the post office, or the banking system or whatever. And they’ll believe in their moments when they deal with really important things that you would hardly believe anybody would outsource like the structure of the Bank of England or something like that. But the argument is that these people know more about it than even your local authorities and you want an international group to look at this and you want comparisons. So this is the modern construction and how you gained knowledge is not just by hiring people, and particularly because frankly you can pay them more if you do this if you’re not limited by salary caps in the government. You can just contract out the firm itself and pay a bit more, but also because expertise, it’s hard to hold onto these people and to know how to hire them. Better to run through a standing contract. This is contractual work is crucial to the history of consulting and becomes very important for them in arguing why they’re useful not just in business and in nonprofits, but also to the state.
Will: Now, you talk about how consulting really grew out of Chicago, almost a Silicon Valley of consulting at that point. And then how it became a very American profession and that American consulting firms helped export this inform of businesses abroad to Europe and beyond. I guess growing up today, I wasn’t really even aware that there was something before that, or even too familiar with what it is as sort of a fish in water. Could you talk a little bit about what that transition was, consulting firms helping companies transition to this inform? What was the inform, what came before it? And how did consulting firms work with companies to make this multi-divisional form happen?
Chris McKenna: So to go all the way back, right? The standard company that when you think about it is a family from that makes a single product that sells it within a given region. And globalizations a long and complicated process. But let’s imagine that you make some product, you make chairs. And you might make variants, and you might make furniture, but you probably don’t make cars and chairs. You don’t make multiple things, right? Because it stretches you. It’s very difficult to do so. And your markets tend to be geographic and regional. And so the largest firms, even the most complicated firms that deal in the most complicated products that in fact are linked in the value chain. Things like textile firms by the early 19th century or other sorts of companies, they tended to make one product and they tended to even if the region was large human, even if they exported internationally, they tended to have a scope that was limited.
But starting in the late 19th century, early 20th century, both for regulatory reasons they were limited in terms of their ability to monopolize an industry. And also because of the experience of technology, their ability to start to utilize and leverage multiple technologies. Imagine say DuPpont, which had knowledge of explosives but also of dyes and paints and of textiles and other sorts of things. They started to imagine that they could actually create multiple products and sell in multiple markets and not to the same customers, not in the same geographies and a very complicated structure. Now when you looked at your competitors who are doing this and you started to be a global company and do this, you wondered how would you put the system in? How would you actually install such a complicated managerial system? And since you had no experience yourself doing it and since it was a make or break decision, it’s wise to turn to somebody who knows something about it.
You could try to read a book, but maybe you want someone who’s actually done this for another company. And so what consultants started to do, what’s interesting is in a world of strategy that we now think of a consultant’s leading. What they really started with in many ways, consultants, consultants we think of, people like McKinsey and company or BCG or Booz or whatever, the earlier consultants started in organizational design and structure questions. And those of course have a natural relationship to this strategy, the question of global structure and and global markets and how many products you want to make. But what they had to answer was how you actually did this. How you put the structure in place. And as global companies looked to the American companies in the postwar era, when they saw this challenge coming out of America in the postwar era, were very large American companies seem to have all of the knowledge and uncontrolled the markets and had all the skills, and they couldn’t necessarily hire their executives away and they couldn’t and maybe they could send some of their executives at Harvard Business School or Columbia to learn some of these things, but it was difficult.
What they did is they turned to consultants, and interestingly, at least initially the consultants thought that their markets would be with American companies who wanted to go overseas and they would help them make that transition. But what they soon learned when they went to Europe was the European companies were very interested in learning about these American management techniques. And of course this is a story of dissemination of ideas. And this happens from the 1950s into the 1960s and into the 1970s. A long period, things don’t move quite as quickly back then. Similarly though what the interesting thing is there’s a reverse osmosis as well. What starts to happen by the seventies is that actually the American start to think that maybe there’s something that could learn from the Germans or the Japanese or from other cultures as well.
They start to think that the manufacturing techniques that they’re doing may be good, but there seemed to be a rise of companies from overseas that actually are pretty good competitors. And these consultants who’ve now stationed themselves overseas transferring American methods can in turn, turn back the other way and start to transfer that knowledge a second way. And so consultants become the conduits for the transfer of management techniques. And of course the natural question is why didn’t the Europeans have something like this? Why didn’t they have a similar set of professionals who did this? And the quick answer is they did. Actually they had those people. They had those people inside Deutsche Bank or inside Barclays or inside any number of important firms, inside any number of banks. But because they’d never gone through this process of have a regulation which broke apart and told those professionals they had to leave the banks, those people were still sitting in the banks.
And so while you could go potentially to Deutsche Bank and ask them exactly how can you help me to get information on how I can compete against the Americans in the steel industry or the chemical industry, it was also very efficient instead to turn to these American firms, not to their banks, but rather to the consulting firms to ask how do I pick up this knowledge? And the American consultants in turn would market this back to their clients in the United States saying, “Having worked for BASF, wouldn’t you like to learn about the kinds of things the German chemical industry knows that the American chemical industry should know?”
Will: So in Europe, the professionals were inside the banks and I suppose the fees for that kind of work were bundled into your whole banking relationship.
Chris McKenna: Exactly. The universal bank in which they’re doing investment banking and merchant banking and giving advice, and doing venture capital is all one part of a system. So one of the things we’re talking about is how consultants in effect, it’s just what you described become part of an unbundling of fees. When you separate the consultants from the bank, you’re basically saying the banking fees are going to be commoditized and so is the knowledge in a sense. And this is an interesting process because one of the things you should always think about is the consultants represent, they’re selling knowledge. The case of IBM is very instructive in this way, right? So IBM used to sell you in when it was a monopoly and it controlled the markets and before it’s broken up as a monopoly in the 1950s, it sold you not just a computer, but all of the IT information consulting services, right?
They were the largest publishers in the world. They basically had the people install your system. They sold you a whole set of knowledge along with machine. They didn’t just sell you the machine, but once you break up the regulation the company itself and you say the sale of information by the company is monopolizing the market, that their advisory services are always going to tell you to buy the machine. We’re not going to let those be inside the company. Well then IBM at that point has to drop its consulting services, just sell the parts, and then Anderson rises as becomes Accenture, rises as the firm that advises you on installing probably an IBM system, or arrival. And it isn’t until the anti-trust regulations drop away from IBM in the 1990s that they can really embrace their consulting roots, reintegrate into the firm, and by then you don’t necessarily believe that IBM is just promoting their own services. You don’t worry about the monopoly because they don’t have monopoly anymore. And so they can reintegrate consulting with production of the machine itself, of the computer.
But of course no longer do, unless you want to negotiate some sort of arrangement, but no longer when you buy the IBM computer do you automatically get free advisory services. So what this is a long history of in a way of stuff. And whether it’s got bundled information or not. Because consultants are the unbundling of information, they’re the ones who benefit from the decision to unbundle information from the product itself.
Will: Yeah. And you talk about unbundling information or the economies of knowledge in the book and kind of talk about it as knowledge. I wonder if you would agree with my slight tweak on that, which is that is that knowledge is one thing of saying, “Hey, here is the blueprint of how DuPont set up their multi-divisional form. Here’s all the reporting relationships and KPIs and metrics and discussion of the org chart.” I guess I kind of think of that maybe as knowledge. What consultants probably offered is something that is not just that knowledge but the kind of wisdom and judgment of how to implement that knowledge and sort of the skillset of not the know what, but the know how to implement that to a particular situation. Which is slightly different than maybe knowledge. You might use a term like, almost kind of capability.
Chris McKenna: Yup. I would accept that. So economies of knowledge of course had, what I was doing was I was playing off of economies of scale or economies of production or other sorts of economies, right? So I was talking about the fact that one of the things that’s interesting and in various other sorts of things is that knowledge costs a lot to produce in the first instance. And then of course as we know it’s like software. The second iteration is lower in cost. Right? And so the point that I was making is that if you decide to implement the multi-divisional form inside your company and you don’t get someone who’s already done it before, the cost of the acquisition of that knowledge to build that knowledge yourself. Whether we want to talk about as capabilities or judgment or capacity to understand something, I agree with you, it’s not a blueprint. It’s tweaking.
Bat all of that tacit knowledge, what we often call as tacit knowledge, that takes quite a bit to develop. And so if you only tell it once and then you tell that person to spend three years to understand that implement and then go do something else, you both spent a lot of money to develop that. And then you’ve lost that capacity when that person goes off and do another job. Whereas if that capacity has held out of house, and that’s what professionals do, right? You turn to an IP lawyer to deal with intellectual property. You could do it yourself. You could develop that skill. And you can hire someone and train them, but why would you do that? Why not turn to somebody who sits outside your firm who works for multiple people doing this?
Bring that capacity inside your firm briefly, perhaps even for a high fee, you know you’re going to have to pay a lot for that because only they know it. But then they’re going to do it over and over and over again, and you understand that. You understand that while they’re gonna tweak it to the particularity, what you actually want in effect is the knowledge that they already possess. And you know that they’re going to take a bit of understanding from your organization and bring it to another organization, but that’s not actually the basis upon which you compete. Right? So you don’t compete on the basis of the structure of your company. You compete on the basis of the products themselves. And so if they carry a little bit of knowledge of the way that your company is structured or the way that your company operates to another company that operates in the same industry. That’s all right. You can do that. And so again, it’s not a trade secret, you’re willing to do that. And you get the value of the economy of that knowledge or whatever we’d like to call it, capacity over and over and over again from these people.
Will: So one big insight for me in chapter five was that nonprofits didn’t used to be a thing, they didn’t really think of themselves as a sector. They might think of a religious institution or we’re a educational institution, and that nonprofits became a big business for consultants and also in reverse consultants helped nonprofit institutions think of themselves as nonprofits. Tell us a little bit about that story.
Chris McKenna: Yeah. So that was perhaps the story that I least expected, right? Because I understand the consultants interacted with the state and that they understand the sector with business, that all made sense to me enormously. But when I started to see the relationship to nonprofits, I was kind of stunned. Because first I would notice for example, that they had been working a bit for a museum or they’d worked a bit for hospital. And then I realized that actually they had gone through all the major universities. And in going to the universities are going to the religious organizations are goin to these various things that are not really, a university may be religious but is a political party related to a university which is related to a museum which is related to … They’re not really the same and they never saw themselves the same.
Now they did understand that they were part of the same part of the tax code. Basically didn’t have to pay taxes. But that’s a funny way to define a similarity. We don’t tend to actually clump simply by our taxes. Before I get to know you, I don’t actually ask you what marginal tax rates before we pay before we decide what kind of friends we’re going to become. And so the fact that these institutions started to see themselves as related partly had to do with the consultants coming to them and saying you may not understand this, you may not realize this, but you share common structures. Common forms between you, and you should think of yourselves as a third part of the economy. And they directly marketed themselves to these consultants in that way saying, sorry to these institutions, these nonprofits, what now we understands nonprofits, they said, you are all nonprofits.
And they kinda chanted back, okay, we are all nonprofits. Now tell us what that means. And what that meant was that you could see that same dissemination of similar forms across places. And this fits very strongly with, and this is where I get a little the little geeky here for a second with a with sociological theory, with the understanding of how it is that organizations come to resemble one another. And this has always been an interesting question to people. Why should organizations look so similar? And one answer is that actually it’s easier for us to intersect with an organization, interact with an organization if we understand its parts before we get there, if we know what we’re talking about. So in other words, who should you talk to if you’re a student at a university and you have some issues about your dorm? Who do you go to?
Well, in America you go to the dean of students, right? There is a person who holds that role and they’re all called the same. And if we gave them a completely different name, you’d have to figure that out and that would take you time. And so by standardizing that role and that name, consultants helped not just to gel the universities and for them to even understand who they could talk to. Who was their parallel person at that same university or at a different university, but also that it helped people who were intersecting with it, a person who is first coming to the university to know how it operated. And what’s very funny is my case since I teach in a university, I find Americans who come to Oxford say, this is so weird. I don’t understand the system. You have all these different words and different names and different structures. Why doesn’t it look like an American, I know what an American University looks like. And I say, “I know you do because the consultants got their hands on it.”
And actually interestingly in Britain, largely things are uniform because the consultants did the same thing there. At a national level they would go around and standardize things and that’s fine. I’m not being critical of that, but it helps to explain the process that we otherwise might think with somehow just kind of creeping bureaucratic miasma that is happening to organizations, but actually what we’re talking about here is a sales pitch and that somebody is arguing that this is a valuable thing to do to your organization to get the best practices of have a parallel organization, install them in your organization, and to give it a given name, a name that we would all know.
Will: I was particularly surprised by the religious institutions. Religious institutions practiced at McKinsey when I was there. I mean maybe they did some work in the nonprofit practice, but there was some significant projects for significant fees for religious institutions.
Chris McKenna: Yeah. They were going to the Mormons or they were going to the Catholic Church or they were going to the Presbyterian Church. And one of the things they had to help them with, one of the things they had to sometimes say to them, it’s strange is the opposite of what you might expect. They might have to say to them, “Actually you’re extraordinarily efficient. You might want to spend some money, you might need some new desk chairs. You actually might need to invest in some things.” But also I think they learned some things or sometimes failed to learn some things about some of the values that nonprofits have. And one of the things that is interesting is if you want to understand about common purpose and a strategy that everybody understands, look to a nonprofit, look to what a religious institution or university or a doctors to a hospital, and understand how they really come together to understand their strategy.
When I sit in Oxford and we talk about strategy, we don’t have the same kinds of problems you sometimes have inside a business because we’re very clear on why we’re sacrificing, what we’re all in this for, and what our larger purpose is. And that’s something that I think consultants could learn and sometimes did learn from these nonprofit organizations. But yeah, that was particularly true in religious organizations. It’s very interesting to understand. And what interested me was the degree to which I could almost at will decide that I would investigate a nonprofit organization. I could find almost anything of any scale and whether as I say, whether it be museums or whether it be associations or whether it be political parties or whether it be religious organizations, whatever it was, I could find that and then go start looking through the records. I could find the records of these consultants.
One of the more interesting things, this is again my geeky side, this is the historian speaking, is nonprofits hold onto their records. They hold on to these kinds of, these were big assignments for them. And so they retain these. So there’s much better evidence of what these people did for them. It’s also that the people who were on the board if you think about who’s going to sit on the board of the Museum of Modern Art, they’re going to be important investors, important business people, important politicians. They probably will have used these people in their corporate firms, and they’ll recommend the same people to the nonprofits. In fact what was interesting in the end was that during the 1950s, if there were a sort of three different firms that led the triumvirate, when this was McKinsey and Company, Booz Allen, and Cresap, McCormick and Paget, it was actually Cresap, McCormick and Paget that had probably the most elite name. And it had that elite name largely because of its work for nonprofits. So McKinsey specialized in business and Booze specialized in government.
And because Cresap, McCormick and Paget specialized in working for places like Yale or the Metropolitan Museum of art or Mount Sinai or something like that, they actually had a much more prestigious set of people who they cultivated as their friends. So it’s an interesting way to break into a market actually is to go via the nonprofits and then show that you’re very good at this and then build your business out.
Will: I hadn’t heard about Cresap I read your book and it’s kind of sad story. It’s like one of the most prestigious and then it sort of fizzled out. Selling to Citi and then getting finally sold to Towers and then kind of disappearing. Tell us a little bit about the history there.
Chris McKenna: That’s one of the interesting questions about corporate governance in consulting firm. So consulting firms, if you think about professional firms, it’s not so obvious that they need to be partnerships. We tend to think of them that way now. I mean, we have plenty of examples that aren’t, but we tended to think that McKinsey Company has to operate in effect as a virtual partnership and maybe a business, but it’s really, and we do this with all of the major firms. They tend to think that they in order to motivate people to strive just like law firms to get ahead, they need to work that way. But advertising firms don’t necessarily do this, there’s lots of examples of very highly creative farms where you have high paid professionals who work in industries who have to build careers. It doesn’t have to work that way.
Cresap did though one of the things that’s powerful in the long reputation of a company is that, and one of the reasons I think that partnership hold on and it was very powerful was that if you sell the firm to somebody else and you lose the name and people cash out, well then it’s a bit of a problem. And Cresap decided in the 1960s that it was going to sell out, early seventies was going to sell out to Citibank. And they did so. And what was interesting was they’d already forgotten the history of how they had been separated from banks in the 1930s. And the federal reserve stepped in and said, “You can’t actually do this.” And Cresap of said why?
And the Federal Reserve said, “Because a consulting firm, it’s a conflict of interest. Consulting firm can’t be owned by a bank.” And they said, “Could you show us where it says this?” And the Federal Reserve said, “This is just an understanding. We don’t actually have it on the books.” And of course in lawyerly fashion, people said, “I don’t know about that.” But in this process, that was an agreement reached. And ultimately it just didn’t work out. It fizzled. And so as you say, they purchased themselves back and then they ultimately went to Towers Perrin. They went to a different firm, and so they kind of got buried in the process. And this happened over and over again with fairly reputable firms, some of which were family firms, some of which were small proprietorships.
When they sell themselves, we tend to lose the name, we tend to forget about it. And this reputational effect is very powerful and consulting that if you have a name that’s lasted for decades, it tends to be one that people will turn to. And so it’s a sad story. On the other hand, it’s like any, any story of industry. We expect new firms to rise. And of course, around the same time we saw the emergence of BCG and Bain and other sorts of firms. So Cresap may have fallen away, but there was a new set of strategy consulting firms that would soon come and take its place.
Will: You mentioned it a little bit earlier. I’d love to hear what the process was like of digging through archives to research this book. And did McKinsey, does it have a vault somewhere with papers? Or did you get to Marvin Bower’s papers?
Chris McKenna: Like Gringotts, they open it up, some moths fly out.
Will: I guess I can understand nonprofits or universities, but businesses are often a just three year retention record. Just throw those boxes away. What kind of records did you find companies have that you were able to go through and find old Booz Allen reports from 1942 or whatever?
Chris McKenna: How do you find this stuff? Right. That was one of the questions I had. I think it’s one of the questions people had, why they hadn’t really done a lot of research before I did it. Was that in a way they didn’t even believe you could even get it. And one of the things I think they made the mistake of was they started by just writing to McKinsey and saying me, “Excuse me, can I see your stuff?” And when McKinsey said no they went, oh well I guess it can’t be done. So I had to think parallel in a sense. So one of the things I did actually was I started reading early trade publications and early business magazines from the teens, twenties and thirties, and I started collecting names. And I collected names of very, very old firms that people may not even know of anymore, firms say like Stone and Webster.
That was an engineering firm that became very important. It looked a lot like Arthur D Little, it became important in the energy industry and it eventually kinda faded away. And what do we do is I would approach them. So that’s one way was to go to very small firms that weren’t so well known, but might have some records where they might, and that was kind of a way to build up some materials before I approached the other firms. The other thing was to figure out where there might be records for example through bankruptcy or whether a firm for example, had donated the record. Occasionally firms will donate their records to a repository, very specialized repositories around the United States. Around the world where they will accept the business records and I suggested any of your listeners who are interested, they can talk to people like the Minnesota Historical Society, the Hagley Museum and Library or the Harvard Business School about donating records.
There are places that accept large record groups like this from businesses, and then you can go into those and you can figure out are there any records relating to McKinsey? And of course as you said, one way was also to come at through nonprofits in the state. The state is required to keep all of its records, so this means when you go to a presidential library, there are tens of millions of records. And so you have to sort through this, but once you learn how to do that, that’s possible. Similarly, nonprofits tend to hold onto things forever because they think of that as their public purpose. But it was a little more complicated with companies. So if I approached IBM, they might well have the records, but they not have a public way to get access to it. And so I would ask them very specifically about something. Or I would track it for reference in the press or I would track it.
So the interesting thing was the stories, one of the examples we were just talking about was A.T. Kearney and McKinsey and Company were once the same company. They were once the same organization. And a very long time ago when they separated in the late 1930s, they in effect had dual records. And so they made copies of each other’s records, of all the client reports that they had. And somebody at A.T. Kearney, not at McKinsey in the 1960s took a copy of all of those records, took a microfiche copy of every one of those projects for A.T. Kearney going back to their origins in 1926. Well that means that every report that they had from the twenties and thirties and actually until the 1940s, was actually an ineffective report from McKinsey and Company.
And so what I was looking at were reports from A.T. Kearney that were sitting in A.T. Kearney’s offices, but were of the predecessor firm which had been McKinsey. Or the same thing Cresap, McCormick and Paget which in the business I’d also saved its records. And so those records were then at repository in Towers Perrin. So it was a very slow process you can imagine to go from organization to organization and many things had been lost along the way. But the point is actually in the modern world, there’s so much paper that even if you unearth only a small fraction of it, you can probably get back to primary documents. In fact, I sort of thank God that there were many of these things have been destroyed because had everything been saved I couldn’t possibly gone through in a lifetime.
Right? So it’s not a useful only to have a sample. And then the problem of course is when you write a narrative history, when you write something, if it appears too fragmentary, the story gets a little weird, right? So what you have to do is you try to be, you hope to be a talented writer and kind of write past the gaps in such a way that someone, if do it artfully, people don’t notice that you’re missing information. So sometimes I’d be dealing with information that came out of the client. Sometimes I was dealing with information that came out of the press. Sometimes I was dealing with information that came out of the firms when they were able to and kind enough to give me an entry. So it was always about repatching information. Of course the best thing you can have is a triangulation where you’re getting information from the press and from the consulting firm, and from the client. And some cases I was able to do that. But that can be very hard. And so it was a complicated process to write all that, but it was a piece of detective work. So that’s quite interesting.
Will: Were there any kind of favorite signs or shining moments that you recall when you were in the archives and you found something that just said that is amazing?
Chris McKenna: It’s been a long time since I wrote this. So in a way I’m probably forgetting some of those moments. I’m trying to think. There were some marvelous moments in effect where I would talk to somebody. You were talking about the late Marvin Bower who had rebuilt McKinsey in the 1930s/1940s. And I would know that there was probably something out there, but I wouldn’t know how to get access to it. And I knew that there was a source. And Bower was very careful about what he said about his clients. He was the ultimate professional and didn’t want to let in on something. But for example, I was doing some research. I went to meet him in Florida before his death, and I was seeing some research in the Pan Am archives that are down there.
Once a firm has gone out of business, the archives can go somewhere and be open. And I said to him, I’d be interested if you ever worked for Pan Am. And I’m going to be in the archives and it’s a little bit like finding a needle in the haystack. And, I realized you can’t give me very much information, but if you gave me say a year or a name or something like that, it would be helpful. And he did just that. He said, and I can’t remember actually when it was, but I think he said, “You might want to look around let’s say 1963 in the autumn or something.” And that’s all I’m going to say to you. And that was kind of marvelous because that was sort of like one of those moments that you’re likely to find something but you’re going to actually then have a little bit of a detective chase to chase it down.
And so those were the kinds of things where I got, as I say it was a bit like being a policeman or something. I’d have a lead and I could run into it. And that was kind of fun. But mostly I tell the story of myself about my wife who, the title of the book as you can tell is a double entendre about the world’s newest profession because listeners will automatically think about I’m the world’s oldest profession. And my wife is a historian of red light districts and various forms of vice. Was at one point working in New York and I was working in New York and I had just been doing all this research and had had marvelous records.
I had access to corporate archives and a high speed photocopier and some people from a consulting firm had taken me out to lunch had a really marvelous Sushi restaurant. And so we met up at the end of the day and I said to her, “Oh, I’m so happy. I’ve had so much interesting research I’ve done all day.” And I said, I’ve got all these papers with me. And I had a marvelous lunch and great discussions and I feel secured. And she just looked at me and she said, “Oh that sounds marvelous. All I’ve been doing all day is looking at pornography.” I said what am I doing with my life? How is it that your job is to look at pornography. So actually there’s always a different view on what’s on what’s the more interesting set of sources. Right?
Will: I guess so. Tell us a bit about your research since this book. So this came out in 2006. What kind of topics have you been working on since then?
Chris McKenna: So I’ve been slowly working on a history of white collar crime, and that partially came out of this book because of Enron and some of the issues that arose from Enron and liability that various parties had. McKinsey of course was very involved in Enron, but there were various claims and counterclaims about who was responsible for its demise and so forth. But one of the things I found interesting about that was a lot of that work looked at a white collar crime starting in the 1930s. That’s where the sociology of white color crime comes from, I was talking to you about the scandals of the Great Depression and how they’re important for regulation. But one of the things I’ve become interested in is how to think about how crimes have shaped business, corporate governance in particular over time.
But also what was interesting to me was that the beneficiaries of crimes, white collar crime is interesting because it’s investigated by white collar cops. So if you think about a blue collar crime where someone comes up to you on the street and puts a gun in your ribs, that will be likely investigated by a traditional police person who wears a blue color and has a badge and so forth. Whereas if someone steals from your firm and you go to investigate it, you don’t actually call the cops right away, the first thing you call is the lawyers and the forensic accountants and the consultants. And you pay them a lot of money to do the investigation. In fact, what’s interesting is if something really goes wrong with your firm, you may drain the last bit of money doing the investigation. And so that’s a for profit business in a sense that professionals do.
And if you think about the longer history of professionals, consultants, lawyers, accountants and whatever, they arose with the development of the corporation in the late 19th century. And in many ways they’re the police, the transaction cost police for the corporation. And so I’ve been interested in thinking about that, and the history of whether that be tax havens or whether that be the development of the long story, and the importance. Ponzi schemes that were once called Kruger schemes, or whether that be theft of technology or intellectual property, whether that be about bubbles and so forth. And so I’ve been doing work on that. The other thing that I’ve been doing more recently, and so anyway that book I hope will come out, it’s going to take a while. It’s still in process, but I’ve been doing various pieces on that.
And the other thing that I’ve been doing more recently is to think very globally about a very big topic which is the global history of capitalism. And what I’m trying to do is to link it to various work that’s being done to rethink markets in terms of a long, long history of global markets. And once you do that, you don’t necessarily look to Europe or North America. You start to think about Asia and the Indian Ocean and the way that the corporation developed in transatlantic or just a oceanic trade. I mean it’s a big topic, but I’ve enjoyed being very multidisciplinary and leading a kind of a international and regional work in Oxford around this. And so I run a center that crosses various departments and Oxford. And I teach around this area too, increasingly I work with executives and MBAs and other kinds of students. And I link material culture the actual stuff, with the understanding of how trade works and how capitalism developed and how the corporation has restructured itself over time. And so I’m working with the British Academy at the moment on this and even people like the World Economic Forum and so forth. So if you can hear, I drift. I’ve gone very broad from various specific things, but many of this is still linked to ideas that came from consultants and their important and the importance in the world economy.
Will: And Chris for the intelligent lay reader, the nonacademic, and this might be a little bit unfair because I’m sure you have dozens and dozens of friends in the business history world, but are there a handful of going to business history books that are your kind of most recommended that are not necessarily global surveys, but maybe just one specific firm or things that you think would help a management consultant get a deeper understanding of history the way your book does?
Chris McKenna: Yeah, that’s an interesting question. I probably should have written something down before our conversation because it’s hard to pull these things off the top of my head. You would be amused to see my bookshelf, my desk which is littered with books. One of the great people that you might just start with. An author who was very heavy to read, but very important in all this is a man named Alfred Chandler. And there are echos of him all through my work. And whether you read him or somebody else talking about him, his work is influential. And remains so. He died several years ago, but he remains very important to all of us in the field.
Will: And his book, The Visible Hand is fantastic.
Chris McKenna: The Visible Hand yeah. It won the Pulitzer Prize. I mean there’s not very many business historians who win the Pulitzer Prize. And he did just that and he did. He did so because his arguments, it’s a very thick book, but his arguments are always in the title. And his argument was that don’t look to Adam Smith’s invisible hand of the market, but rather look to the visible hand of executives in business to understand how business is structured around the world. And that’s a simplified but very powerful argument. And he elucidates how that works, particularly in the American economy during the 19th and 20th century. He really talks about understanding, so we’re now probably in either in the third or fourth industrial revolution and we’re all arguing about that at the moment. But he’s the one who ultimately finally and powerfully explained how the second industrial revolution operated.
And we really live, even if we’re fascinated by the third and fourth, our material world around us is out of the second industrial revolution. There are couple of other books that you might want to think about or issues you might want to think about. A colleague of mine at Harvard who has also won any number of prizes for his work is Sven Beckert. And he writes about capitalism and particularly he’s written a fantastic book, a recent book called Empire of Cotton, which talks about the importance of cotton in world trade. It’s not really a, maybe not a consultant’s book, but it helps you to understand how global markets have operated for a very long time and how they come and go and how they work. And even the importance of social issues and all this, right?
You can’t have cotton without slavery and you have to reckon with that when you think about how cotton developed as a product around the world. And so that’s important. And then there are other sorts of marvelous ideas that are out there similarly that have been popularized. There’s a lot of work on what’s called the great divergence, and you can look up some, just search under the great divergence, look up some of this stuff. It’s the question of why did the east and the west diverge? Why did China and Japan and the east take a different path than the west? And we’d been puzzling over this for a long time, and there continues to be really good work around this. And one of the interesting things to think about is whether the path that the west took is a better path.
And what’s interesting is that that path is now slightly reversing. So in many ways, China is what America used to be and that America is what China is, that the west is starting to look backwards and to try to hold onto tradition and trying not to change, where some of the east is deciding to change. But the interesting point about this, and this is made by people 100 years ago, is this a very technologies that enabled the west, Europe, North America to get ahead were technologies that came out of China. They had all these technologies. If they had wanted to change in the same way, they could have, they just chose not to. And so it becomes an interesting question not just about technological determinism and practicality and skills and so forth, but about cultural will and culture itself.
And so those are a whole set of interesting readings out there. But anyway, what I would say to people is that what’s so interesting is just to pick up any object and hold it in your hand and ask where did the material come from, how old is it, what are you looking at, what’s the long history of it? And I do this myself now by just wandering around and I’ll hold the coin in my hand and wonder where it came from, what’s the history of that? Why is it in the form it is, and why do we assume that it has the value it does? And just to ask some of those what almost seemed like ridiculous questions and slightly historicize them. If you ask that question about a coin, it really helps you understand bitcoin for example. And so just wondering about bitcoin is one thing, but actually asking historical questions about the nature of why coins developed the form they did and why we trust one where we trust one metal over another and why we trust it when it’s stamped in a certain way and how hyperinflation works. And blah, blah, blah, blah, blah. Right? It’s all great fun if you just ask questions about where did this come from, and maybe it’s not the easy answer.
Will: Where did this come from and how did I get here? If folks want to find out more about your work, what’s the best place for the best place for them to go online and find out?
Chris McKenna: It’s an easy google search. You’re welcome to Google Chris McKenna Oxford, and you’re welcome to visit the website that’s on the global history capitalism and see all the various things we’re doing. We have various case studies that you can download. We have podcasts and materials that we’re doing. We have seminars and conferences that we’re running. So I’d be delighted if people want to get in touch or if they want to just circle around it. And then to read out from there. I encourage all people to be interested in these subjects and they’re great links to other organizations and other people around the world. We’re a very small number of people, business historians, but we’re a global group. There are probably people associated with the universities near you or with conferences near you that you could get involved with, but I would encourage people to think historically. Because what’s interesting in a globalizing world is that you need to understand, as you just said where do we come from? Because globalism naturally leads questions about history, local history and wider history, and cycles and patterns. And to understand what’s moving now, it’s hard to project variation unless you can think of variants. And the best variants are historical variants.
Will: Chris, your students at Oxford are very lucky people. I’ve had a fantastic time speaking with you for an hour. Your book The World’s Newest Profession, winner of the 2007 Hagley prize for the best book in business history is one of my favorite reads this year. It’s just awesome. Every page. Thank you so much for joining.
Chris McKenna: Thank you very much for inviting me.