How McKinsey Resisted Disruption

Welcome to HBR on strategy, case studies and conversations with the world's top business and management experts, hand selected to help you unlock new ways of doing business. The consulting firm McKinsey has helped its clients navigate disruption in a wide range of industries. But what can we learn from how McKinsey itself responded to disruption in the management consulting industry in the early 2000s? In this episode, the originator of disruptive innovation, the late Harvard Business School professor Clay Christensen, joins former McKinsey managing partner Dominic Barton to break down how the firm shifted its internal strategy to prioritize flexibility and efficiency. This episode originally aired on HBR IdeaCast in September 2013. Some of the market conditions have shifted since then, but the insights about managing change and internal culture and remain as helpful as ever. And just a note, we recorded one of the guests by phone, so while the audio quality is not great, the conversation is. I think you'll enjoy it. Here it is.

Welcome to the HBR IdeaCast from Harvard Business Review. I'm Amy Bernstein, and I'm here today with Clayton Christensen, professor of Business Administration at Harvard Business School and co author of Consultants on the Cusp of Disruption, a feature in the October issue of hbr. Joining us on the phone is Dominic Barton, Global managing director of McKinsey & Company. Dom. Clay, thanks for being here.

Today. Delighted to be with.

You. Great to be.

Here. Clay, you've documented the phenomenon of disruption for years across numerous industries, probably most famously in the steel business. What are you seeing in the world of general management.

Consulting? Well, I will say that I see disruption occurring there, but everybody needs to know that we're not pointing the finger at everyone else. The process of disruption is occurring against the Harvard Business School itself. So this is not just a targeted shot at anyone, but you do see it happen. And disruption always occurs in ways that it emerges in parts of the market where you wouldn't even think to ask. In this case, what disrupts any business is somebody takes a piece of business that is not attractive to the leaders. And because it's not attractive in the pursuit of profit, they go to bigger and bigger and nicer and nicer pieces of business, and then the disruptor starts at the bottom and moves up. And what's attractive in the consulting business is big clients who have big problems. And the more they can have more of those kinds of clients, the more profitable they become. And what they leave behind are small pieces of business, small companies, tangible, immediate projects that they do, and then you leave. And those are the kinds of disruptive innovators in Consulting that are taking root, and then they move up, going after bigger and bigger pieces of.

Business. Does this differ in any way from what you saw in manufacturing and what you see in other.

Industries? Yeah, really. Disruption is a process. The theory itself is in evolution over time. So at the beginning, we thought that the vertical axis in the disruptive diagram was the quality of the product. And then we realized that, no, that's just what customers are more profitable versus less profitable. And when we understood that, just everything fell into place. So, for example, if you think of the airline industry as being disrupted, what's the vertical axis on that diagram? I mean, once you have economy in first class, how do you go up market from first class? It just doesn't make sense. But then we realized, oh, my gosh, it's the length of the route. Long routes are more profitable than short routes. And so the big majors are getting out of short routes and turning that over to regional jet providers so that they can go into longer and longer international roots where the margins are. And once you understood that, it just. It's.

Happening. So that's your point about bigger problems, bigger clients. That's the top of the Y.

Axis. That's exactly.

Right. Okay, Dom, when did you know the world of consulting was changing and that McKinsey had to change as.

Well? Well, first of all, I think I'd say that consulting has been changing, you know, for the last, I think, 20 or so years. There have been changes. I think what was, if you will, an inflection point was, for me at least, was in 2009 when I took on this role. I had some work done, which we recommend we typically have our clients do when new CEO comes in, which was just, how's the global context shifting? And it was a work called Global Forces, which are. What are some of the core shifts over the next 15 to 20 years, as far as we can see out? Recognizing that that can be a difficult thing to do. And to cut a long story short, that work kind of said to me that we are in a time for some significant change in the world, and why should we think that we're immune to that? I sort of try and see Amy, as, you know, two CEOs a day. And one of the things that always came through was technology is moving five times faster than management. I don't know whether to be paranoid or excited. I'm typically both. Was sort of a. This shift towards Asia and Africa, resource scarcity, just a lot of big issues. And it just made me think, well, maybe we better think about what it is that we're doing. And so as a result of that, we launched a kind of internal strategy review. It was basically an 18 month process again where we took our own medicine and spent a lot of time talking with our clients and also with people that we don't work with, clients we would like to serve but don't, companies that we've never served, talking to people outside the industry observers and so forth. And it suggested that, as Clay has written in the article, that change is afoot in many.

Dimensions. Can you talk a little bit about what you were hearing specifically from CEOs that made you think you needed to go back and challenge the orthodoxies of.

McKinsey? Yes, there were a number of things. I think one was, you know, why does every issue or opportunity or problem take a project manager plus two associates three months to solve it? Surely there are other ways, more efficient ways. Surely there are. Sometimes we may just want data. If you had. If you guys had collected information on how hospitals worked and you had a large number of them and looked at how often an operating table was used and so forth, and collected data like that, we may just want the data, not the people, if you will. So there was a notion of be more flexible. You know, what we really value is X versus Y. Sometimes you go into far too much analytical detail. We only need to go 60% of the way to be able to get it. We value the judgment, not so much the analytics. And it this obviously varied by situation and type of client, but there were a lot of questions on or suggestions on. You could be a lot more flexible in terms of how you work with us, the type of people, the amount of time and so.

Forth. Anything about this strike you.

Clay? Actually, no. McKinsey is doing all of the right things, and yet by doing the right things, it sets in place the process of disruption, which you then have to account for. And so the descriptions of the work that they're doing, unbelievably foresighted work about complicated problems, as we would call sustaining innovations. Absolutely. It's hard to do, and that's why they do it so well. And then when they take low value adding activity and outsource that to somebody, if you listen to the people in that company about what do they do next and next and next, they will try to do more and more high value adding work relative to where they started out, you know, and so the process is. He's described it exactly right. And dealing with that is the biggest innovator's.

Dilemma. So Dom Talk a little bit about McKinsey Solutions, if you would, if you could describe it and tell us about the internal rethink that led to.

It. Sure. Well, as I mentioned, we did this. We called it a firm strategy review, which isn't a very exciting name, but that was the 2010 effort we launched where again we talked to a whole range of clients and non clients and third parties if you will, and also alumni. And in that a number of ideas for how we could work differently with clients and what we work on were put forward. And one of them was actually an idea that had already been lurking in the background. It come in in 2007, which was around taking data, if you will, and we sort of stumbled into it and I'll give an example. One was around Chinese consumer insights. We, we found when I was living in China we couldn't rely on a lot of the publicly available data and what consumers were doing. So we ended up. It just wasn't reliable or it wasn't accurate. So we started to develop our own and we built a very large database of the Chinese consumer which the middle class consumer who's changing at a very rapid rate, far more rapidly than we'd ever seen before. And I won't bore you with all the detail of it, but we built that and then what we found was that that database was something that actually clients wanted and they wanted, that was the prime thing they wanted as opposed to the McKinsey people around it, if you know what I mean. They said we would actually like that data and you've been collecting it and we'll pay for that. We don't really need a team. And so that was one of the early McKinsey solutions. There were some things in healthcare and a number of other areas and we were experimenting with this, but the firm strategy review really kind of popped that out and people said, boy, if you had that type of thing, we'd be very interested in that sort of information and a new way of working with people and so forth. So that was the genesis of it. There had kind of been glimpses of it or it was lurking in the organization. We weren't really aware of what we had. It was brought more to life through this review. And then what we did, what I did on that one was put one of the most experienced senior people in the firm, actually Michael Pozalis Fox, who's a very close friend and has been in the firm for 30 years. He used to run our Americas group. I had him lead our McKinsey solutions. And it was a bit of New ventures group, but McKinsey Solutions was a big part of it because I knew he would stimulate it and he'd protect it, because one of the things I'd be interested in, Clay's view. But when you try new things, it's amazing the number of people and antibodies that are in the organization that try and kill it, because it's different. And it's, you know, where are we doing this, how we're cannibalizing something, this isn't right, all that sort of stuff. So we needed a very strong leader to protect it, if you will, and nourish it. And he did. And he took that from kind of having, I guess There were three of them to. I think we now have 18. And it really was to help develop the model, by the way, some of them have not worked. We've had to shut them down. But fortunately, the vast number of them are working. But it meant we had to change our people processes. Right. A person who's running a McKinsey solution, which is more like a piece of software. So that's sort of a bit of an.

Overview. It's really interesting. And Clay's been taking notes. I wonder what you think of what Dom's been.

Describing. So you're doing everything right that I can imagine you would do. And as a result of that, I worry about you. My wife said that. She describes me as the Jewish mother of business in that it doesn't matter everything that is going right. A Jewish mother always worries about what's not going right, you.

Know? Right.

Right. So just by analogy, disruption occurred in the traditional department store business. You know, in the early 60s, there were over 300 department stores. There are now only eight remaining. Macy's is the largest, and they were disrupted by discount retailers like Walmart and Target and Kmart. And the way the traditional department stores made their money is they generated gross margins of 40%. They turned their inventory over three times a year. So they got 40% times three equals 120% return on capital invested in inventory every year. And that's the way they measured things. When the disruptive retailers came in, they generated gross margins of 20%, and they turned their inventory over six times a year. So 20% times six equals 120% return on capital invested in inventory. And so their profitability, the bottom line, was the same, but the method by which they generated that result was different, and that was the killer. And so the challenge, which will be a perpetual challenge, is that imagine that McKinsey Solutions, in fact, becomes very profitable and its bottom line is the same. The formula by which they generate the profitability will be different. And so every day somebody's going to come in to senior management saying that doesn't make sense, because from their perspective, it doesn't make sense. And I wish I could say from my studies that that will go away, but it's just smart people in the core business trying to improve their profitability when they see resources being spent on something that from their perspective, doesn't make sense in their belief that they're helping. McKinsey tries you to stop doing what disruption says you should do. So it's a long way of saying congratulations and oh my gosh, be.

Careful. That's a very good.

Caution. So, Dom, how do you deal with those antibodies, the ones that you referred to that Clay just.

Described? And they're not bad antibodies. No, they exist in the pursuit of profitability, but they're antibodies.

Nonetheless. Yeah, and also I think it's the. We don't measure profitability like a department store in that sense. Right. Where it is. But that. But it's also tradition. Right. It's kind of we're here to work in a particular way. We're not a software house. I mean, what is this? There's that element that comes in too. One of the things I found, by the way, is history is just a good thing to look at in your own institution as to what's worked and what hasn't worked. And so one, believe it or not, this sounds very trite, was when we decided to move to Europe from the US in 1959, there was a huge debate about it. I mean, I think it was. The partnership was split as to whether this was a good idea or not to do it. Another incident that I looked at was when we established the Global Institute. Right. This was a research body that was actually set up purposely to do nothing to do with client work, if you will. It was a micro view of macro issues. You know, it's to help advance the state of management. But it explicitly could have not a direct link to clients. And I thank God every day that we've got that institute up and running. But I know that there were so many people that tried to kill that thing for probably eight, nine years in McKinsey, why are we. We're not a think tank. Why are we wasting this money? How much are we paying these people? Blah, blah, blah. So in a minor way, sort of. Look, I'm fearful of the antibodies because I've seen them and I know that Just from some of the things we did do, it took extraordinary leadership of some of the people in those places to kind of. They probably got a lot of scars on their back to keep it going. So I think also relating that a bit to the organization's importance to say, you know, we actually have done some things differently. One other story, I remember when we set up our operations practice, and I sometimes tease people about this in McKinsey. It was in, like, 1990, I think, is when that started. And this is, you know, how to do lean and how to take costs out of procurement and so forth. And there was quite a raging debate in McKinsey about going into this. And this isn't, again, so much an innovation in how we work, but certainly was in what we work because we were seen as a strategy firm. And there were literally comments from some senior people in McKinsey saying we don't want to do that type of work. That's the work that knuckle draggers do. I mean, really sort of rude statements were made to this group of partners that wanted to build this practice. And again, I think there were some lessons learned from us on why that practice was able to grow and be successful, even though they did things in quite different ways. We hired quite different people because of how they worked with the organization, what they stood for, how committed they were, all this sort of stuff. So those are things that are going on, but trying desperately to look as much as we can for wherever we've had some innovation to try and drive it, and then kind of relate that to people and say, you know what, guys, I know this may seem strange to you and where it is, but we have done this. My only worry is, I think that the speed and pace of change that we're going to have to go through is going to go faster and be bigger given these global forces. And that's where I think Clay's Jewish mother analogy is a good one. I'm a bit paranoid about.

That. Good for you. It is so exciting for me that I can't stop jumping up and down.

Here. You know, another thing, Amy, I was going to ask Clay this, like, to what extent do you think it's normal that. You know, I'm struck by that some of the changes that you need to go through are actually lying around in the organization, but we don't recognize them. So sometimes I wonder, maybe we don't know what we have, if you know what I mean, that could help us. I.

Don'T. It's a great observation. And what you can predict is that all of these things are bubbling up. And the organization itself will only identify those things that help the organization make more money in the way it's structured to make money. And if there's an idea that is proven at a small level, if it doesn't fit the way the organization makes its money, it will either languish or the organization will force it to conform itself to the way it makes money. And so you have kind of two strikes against it in that it won't come up to the top as an interesting idea if the organization can't use it. And then B, even if they see it, they will make it conform itself to the way they make money. And to have something that truly is disruptive and in this case, that deep understanding of how an area or an industry works and use that in the context of McKinsey solutions, which would be disruption in disruption is really hard to do. And if you can pull it off, my gosh, congratulations. It just is really.

Hard. So this last question is to both of you. Where is the consulting industry going? What's it going to look like in the next 10 to 20.

Years? So I would bet that the existing leaders are going to be very vibrant 20 years from now. And what they're going to be increasingly known for and good at are the complicated problems for which there is no standard solution, and that they are projects that they can bill at higher prices for the world's largest.

Corporations. So scale is an important factor in this.

Complexity. That's right. That's right. But on the other hand, there will be new companies that begin to be more and more important and things that today seem out of the ordinary, unique, judgment filled. A generation from now, these will be standardized and outsourceable. And it's those that get the outsourcing balls from McKinsey, they then start doing the low value adding stuff. And then always the next question is, next year, how can we provide more and more value adding? And so my bet is that 20 years from now, there will be people who today aren't significant now start to become more and more significant. And I think we can predict that. And it's not because I wouldn't ever attribute anything to McKinsey doing anything wrong. It's doing things right that makes it.

Hard. So from where you sit, Dom, does that seem to be where the industry is.

Going? Yeah, I think I would agree with Clay in the sense that I think there'll be some new players. I mean, I'm biased. I'm determined that we're going to be around and be leaders come hell or high water. But I think the way what we do and how we work will I think have changed pretty significantly. And what I mean by that is if I again I go back to the kind of, you know, 70% of our work was in strategy, organization, corporate finance is now 30%. I think we're going to see at minimum that kind of a shift in terms of the what we're working on. But more importantly, I think, as Clay said, is how we're working on it. And I think there'll be any elements that can be disaggregated or outsourced will be out. And just to put a personal example on it, I remember one of the very first projects I did in McKinsey was in 1986 was a consumer goods project. We were trying to figure out it was for a fast food company and what the size of a particular meal should be, how many pieces of chicken should be in the order and so forth. And it took about, I think it took six months to come up with a recommendation. I think with today's technology, the search technology, the amount of data that's available, I'd be surprised if that project wouldn't take two weeks, if you.

Will.

Absolutely. Last thing that goes through my mind is this work that Foster did on looking at the average lifetime of AN S&P 500.

Company.

Yes. And that one, that sort of. If I had anything that's over my office wall, that's one. I think the average lifetime was something like 90 years in the middle mid 1930s and now it's somewhere in the order of 18 years. So I just think we have to have an assumption, a bit of a paranoid view of where we have no God given right to be here. So we better be spending some certain amount of resources or experiments going.

On. Amy, could I just add one other.

Thing? Of.

Course. I think in many ways the business of the Harvard Business School is to develop useful theories about management that can be used. And in many ways McKinsey and its competitors in the consulting business are a distribution channel for our ideas. And if they aren't vibrant, then we don't have a way of getting our ideas to individual. Individual people can read the Harvard Business Review, but for an idea to impact a company, we don't have in academia a channel for that idea, it has to be people like McKinsey who I'm sure that you won't be happy with my referring you as a value adding reseller. You take an idea, you value added and you send it. And it's just very important to us that we have a great relationship with you. And if I were going to be a Jewish mother for the Harvard Business School, I would say, ladies and gentlemen, have you noticed that McKinsey is pulling in house the development of the next generation business ideas? When you see that happening, as the provider of the ideas, we gotta say we need to just look at the mirror in a very, very thoughtful.

Way. You just heard the late Harvard Business School professor Clayton Christensen and former McKinsey managing partner Dominic Barton in conversation with Harvard Business Review Editor Amy Bernstein on HBR IdeaCast. Barton now serves as chairman of Rio Tinto and Leapfrog Investments. We'll be back next Wednesday with another handpicked conversation about business strategy from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues and follow our show on Apple Podcasts, Spotify or wherever you get your podcasts. While you're there, be sure to leave us a review. And when you're ready for more podcasts, articles, case studies, books and videos with the world's top business and management experts, find it all@hbr.org this episode was produced by Ann Sanney and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoke, Erica Truxler, Ramsey Gabaz, Nicole Smith, Ann Bartholomew and you, our listener. See you next.

Week.