Great America

Can We Please ‘McKinsey-Proof’ America?

The “experts” Governor Andrew Cuomo wants to hire to help New York reopen have a history of doing little more than helping failing institutions fail in style while growing rich in the process.

Andrew Cuomo has a plan for a “Trump-proof” reopening of New York. Or actually, he has a plan to hire some people to develop a plan. According to CNBC, “Cuomo has hired high-powered consultants to develop a science-based plan for the safe economic reopening of the region.” Wow, a science-based plan from high-powered consultants!

The report goes on to say that these consultants will be “producing models on testing, infections, and other key data points that will underpin decisions . . . .”

Expert models have been pretty spot-on this year, so this sounds really amazing. Remember how last month, a model by an expert predicted 2.2 million Americans would die from COVID-19? Or how about the professionals (and nonprofessionals!) who just a few weeks ago were telling us that masks don’t work and that ordinary people lack the proper training and competence to wear one right anyway? Now, they’re mandatory.

So who are these consultants who will advise America’s loudest governor? The answer, of course, is McKinsey & Company. Some people—not me, you understand—have been known to describe McKinsey’s business model thus: “You give them your watch so they can tell you what time it is.”

No, I wouldn’t say that. It’s too generous.

One of Cuomo’s top advisers said, “we are reaching out to top experts and other professionals to come up with a bullet-proof plan.” Bullet-proof. So far Cuomo’s track-record on planning for the future is pretty dismal. But then again, the “top experts” he’s hired have pretty dismal records, too.

Cuomo spent much of March and early April complaining in his daily press conference that New York didn’t have enough N95 masks or other personal protective equipment (PPE) for healthcare workers. Nor did it have enough ventilators, he said.

He was right on the PPE: there isn’t enough. But why? Two main reasons: first, basically every business has adopted the “just in time” inventory model. That means they only hold enough inventory to sustain them until the next regularly scheduled shipment from their suppliers. And that inventory is calculated on average demand. They do this because it conserves working capital and makes their business financially more efficient. But it also means that they can’t cope with systemwide surges like we’re experiencing now when demand for PPE is 20 times normal. And this model extends all the way up the supply chain so it’s not just the distributors don’t have enough inventory, it’s that manufacturers don’t have enough raw materials to meet increased demand and so on.

The second reason America has a PPE shortage is that when demand spiked, we were unable to ramp up supply because we’ve spent the last 30 years offshoring lots of the manufacturing to Asia in general and China in particular. This includes N95 respirators, gloves, pharmaceuticals, reagents, and lots of other things required by healthcare professionals. That means we don’t have the domestic capacity to produce what we need.

Guess which high-powered consulting firm has been advising their clients for decades to switch to just-in-time inventory and to offshore manufacturing? McKinsey. You might call them the super-spreader of an intellectual virus that has infected American business.

For example, the McKinsey Global Institute in 2003 published a study titled “Offshoring: Is It A Win-Win Game?” Guess how they answered? Yes! CFO Magazine, citing the study approvingly in an article called “Exploding the Myths of Offshoring” noted that “True, some workers will lose their jobs,” but still, let’s go for it. Of course, they didn’t address what happens when a country really needs something made and delivered quickly but it can’t get it because the factories that make it have moved to China.

Nevertheless, McKinsey has been advising clients to keep their inventories lean because, as they explain, “working capital management is often underappreciated as a source of cash and value creation.” So they advise management at client firms to “convince people at all levels of the organization to change their day-to-day behaviors, e.g. convince the warehouse manager to reorder spare parts on a more just-in-time basis every few weeks or so, rather than every six months.” Less working capital is required, but the business and the people who rely on it are more exposed to bad outcomes from unexpected events.

To be fair, lean inventories work well under normal circumstances. The problem is that they fail pretty spectacularly when something abnormal happens. And, it turns out, that happens pretty frequently.

Remember that in 2007-2009, the models used to predict residential mortgage default rates all failed at the same time because they all relied on the same faulty assumptions, the chief of which is that black swan events are less common than they really are. The weaknesses of lean inventory strategies could be mitigated while the supply chain was onshore. But offshoring is a central tenet of the corporatist faith. And it has failed rather dramatically, leaving the richest country on the planet held hostage because we can’t produce enough $.85 masks or reagents for testing kits.

But don’t question McKinsey. They’re the smartest guys in the room. They’re smart enough to get paid to tell American businesses to send their factories and the middle-class jobs that go with them overseas. They’re smart enough to get a big chunk of the $1 billion in professional fees being paid by Puerto Rico to “restructure” after the U.S. territory’s 2016 bankruptcy. Smart enough also to land illegal contracts in South Africa that were worth hundreds of millions of dollars and that sent graft payments to insiders.

You also might not be surprised to learn that Enron, the energy trading firm that collapsed in a massive fraud scandal, was created by Jeffrey Skilling after he’d spent 21 years as a McKinsey consultant. As one report notes, “[T]his wasn’t guilt by association. Enron, under Mr. Skilling, was paying McKinsey $10m (£6m) a year for advice. McKinsey fully endorsed the dubious accounting methods that caused the company to implode in 2001.”

They had a hand in the mortgage crisis, too. As business journalist Duff McDonald reported in The Firm, his history of McKinsey, “Its consultants actively promoted the [securitization] of mortgage assets, the practice that poisoned the global financial system and precipitated the 2008 credit meltdown.”

They were also smart enough to get paid millions by Purdue Pharma for strategies to “turbocharge” sales of Oxycontin, according to one lawsuit. After McKinsey’s consulting contract, Oxycontin sales did accelerate—along with the opioid crisis that killed nearly 47,000 Americans in 2018 alone.

These are the smart guys Cuomo decided to hire. Looking at their history, just think what McKinsey could do for New York.

It’s tempting just to blame Cuomo for typical Boomer credentialism. That would be true as far as it goes, but it doesn’t go to the heart of the matter. Part of the standard critique of McKinsey is that the company’s business model is optimization rather than innovation. In other words, they tell people how to get a little extra mileage out of whatever they do, but they don’t create anything new. It’s a form of managed decline. That critique is legitimate but even worse is what McKinsey tells us about the country because the firm is a reasonable proxy for American elites in general.

Still, even that misses the service McKinsey really provides for our elite institutions. They are a scapegoat—a sin eater—for failing institutions that launder bad ideas and entropy and give their clients the veneer of respectable failure. And that’s why Cuomo hired them.

America deserves better. As we cope with the combination of a dangerous public health threat and an unfolding economic disaster—and all of the human suffering that entails—we need better. Much better.