Online Extra: Q&A with Rajat Gupta

McKinsey's managing partner talks about the dot-com boom and bust, measuring impact, and Enron

BusinessWeek Senior Writer John A. Byrne recently sat down with McKinsey & Co. Managing Partner Rajat Gupta for a wide-ranging interview. Gupta, who took office in 1994, is nearing the end of this third consecutive three-year term as the head of McKinsey, the world's most prestigious consulting firm.

The first foreign-born partner to head McKinsey, Gupta has led a vast expansion, more than doubling the firm's size and opening new offices in such emerging markets as China, Korea, and India. Here are edited excerpts of his conversation with Byrne about his tenure at the top of the firm.

Q: You've been through a remarkable economic period, an unprecedented boom and then a rather sobering bust. Do you think McKinsey has maintained the values laid down by the firm's modern architect, Marvin Bower?


Broadly, yes. We've maintained the one-firm idea, the single profit pool. If we were to drive toward efficiency, we would have a command and control structure. But that isn't what we're trying to do. Many of our processes, especially direction setting and so on, are designed to be very inclusive.

Q: Some of your partners now say that the tremendous growth of the firm under your leadership has made it difficult to know the other partners. You now have nearly 800 partners, up from less than 400 when you became managing partner. Can the firm continue to grow and still retain its values?


How many people can a human being really know? It's maybe a few hundred, not thousands. So one of the tests of partnership isn't whether you know your partners. We crossed that limit sometime back -- I would say in the 1970s.

Q: There are observers who believe that you have been the most powerful managing partner since Marvin Bower. Do you think that is true?


I don't know. The servant-leader model doesn't quite jibe with power. I don't even relate to power. [What] has some appeal to me is thinking of McKinsey as a client. How do you change it and move it in the right direction? I relate to that more than I do to power.

Q: What was the overall impact of the dot-com boom and bust on the firm? Certainly, you hired a lot of people and the subsequent drop-off in business now leaves you with too many consultants and not enough assignments.


It has stress-tested some of our processes. I would say that it has also created the conditions where you can actually improve these processes. In times of change and adversity, the stronger institutions get stronger. And I'm absolutely confident that we will emerge from this period...much, much stronger.

Q: Has there been any sign of a pickup in your business yet?


Yes. But it's slow.... I can't resist the temptation to say I actually don't follow [the numbers] that closely. It's not whether our numbers are right. That's not the mindset. Financially, we're in good shape. There's zero debt. We're meeting all our obligations and all the expectations of compensation and we still have surplus.

Q: But your partners will not be making the kind of money they did in 1999 and 2000, right?


Yes. The question is whether 1999 was unnaturally high.

Q: What about the advice the firm dispensed during the boom to clients? Does it stand up to scrutiny, or do you think you pushed the e-commerce bit too far?


That I feel extremely good about. I think our point was not so much that e-business is a different business [but] a different way of doing business. To most of our clients we were saying this is a technology to be harvested for transforming existing businesses, and the bulk of our work had to do with that.

Q: A long-held value at McKinsey is that its consultants should have a meaningful impact on their clients. Define impact for me.


I start off with what is the quality of clients I'm serving -- are these leader institutions or are these average institutions? What's the quality of the issues I'm dealing with? What's the nature of my relationship with the CEO and top management -- am I sitting across the table with him, shaping his agenda, or just responding to some project he wants me to do?

What's the actual impact of my work? Is it substantial and does it get implemented? If it's more strategic, does it lead to better competitive position? If it's more organizational, does it make the organization work better? Does it result in the long-term strategic health of the institution? How am I in making that interaction work effectively in a team structure with clients? I think in those terms.

Q: It's interesting you never used the word results. Some firms actually define a successful result in terms of financial results or even an increase in stock price.


Financial results are a part of it if you're doing performance-improvement work or a cost-reduction study.

[Our goal] is to build the long-term competitiveness of an institution. In a way the financial markets reflect that. But we all know the shortcomings of looking at market cap as a surrogate for the long-term strategic health of an institution. We've seen that in spades in the last five years. So I think we're not overly focused on share price or the bottom line because we believe it's much more complex.

Q: How often does McKinsey have a successful impact on a client as opposed to a failed impact? In what percentage of your engagements would you give your firm an A, a B, a C, or an F?


In terms of client expectations, I would hope that almost everything is an A or B, and it would be an exception if it were anything less than that. Relative to our own aspirations, I would say it's much more distributed. I've been personally on assignments where I've felt not very happy about things, where I would give ourselves a C and the client would say [things went] great. This happens fairly frequently. We sit in partner meetings and say this can't be the preeminent consulting firm because we're so critical of ourselves.

I talk a lot [with] clients and even if I factor in grade inflation when they talk to me about what we've done, I'd say we do very good quality work. We wouldn't have as many ongoing client situations if we didn't. Are all of them absolutely out-of-the-ballpark hits? No. My conviction is that predominantly we have a very high impact. Once in a while it doesn't work.

Q: McKinsey had a long-term and deep consulting relationship with Enron. And of course, the former CEO of Enron was a McKinsey partner. How do you explain what happened there?


I won't specifically talk about our work at Enron. The broader answer is it's very sad to see an institution like Enron go through what it has gone through.... In all the work we did with Enron we didn't do anything related to financial structuring or disclosure or any of the issues that got them into trouble. We stand by all the work we did. Beyond that, we can only empathize with the trouble they're going through. We have clients who are friends.

Q: I know that after Enron filed for bankruptcy, you sent your chief legal counsel down to Houston to safeguard McKinsey's documents relating to its Enron work.


I wanted to make sure that we understand what we did so I could make the statement I made to you with conviction. This was such a high-profile case that we wanted to make sure we were upfront and prepared for anything that occurred in the course of an inquiry and investigation.

Q: Enron wasn't the only McKinsey client that has suffered a meltdown. There's also Kmart, SwissAir, Global Crossing, and several others. Why have so many McKinsey clients gone bankrupt in such a short period of time?


In these turbulent times, with our serving more than half the Fortune 500 companies, there are bound to be some companies that are clients of ours get into trouble.

Q: Aren't you concerned that these high-profile failures can affect the firm's image?


Most sophisticated potential clients would understand the asymmetric nature of that. This is part of this business for anybody. Good news is reported less often than bad news.

Q: One of the surprises in speaking with people at the firm is that there is only one female partner on the 31-member shareholders' committee, the governing board. Women have been coming out of business school in droves since the 1980s. Why does McKinsey have only one woman on its board -- who happens to be the only female on the shareholders' committee in the firm's history?


To set the context: About 9% of the partners are women.... The percentage of female partners has doubled in the past four or five years. It's hard to combine being a consultant at McKinsey and being a mother. It's true not only here but basically true [for any] high-powered career in business.

We have made an enormous amount of progress in the election [of women] to partnership. I have gone out of my way to make appointments of women leaders, not in any unfair sense because they are all deserving. It's more to do with [when you have] roughly equal candidates, it's a plus to be a woman. The shareholders' committee itself is an election. It will be what it will be. I personally have a very strong interest in this because I have four daughters.

Q: Over the next 10 years, do you think it might be possible for McKinsey to elect a female managing partner?


I think it's possible. Are there potentially viable candidates? Yes. If you asked if it were likely, I would say not very.

On the other hand, if before I was elected you asked somebody if we would elect a non-American, let alone a foreign Indian, they would have said it was unlikely. By the way, one of the great things about the firm is that it's not even a pertinent question [or] one that anybody gives that much thought to.

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