How McKinsey Destroyed the Middle Class [Archive.org URL]

Because complex goods and services require much planning and coordination, management (even though it is only indirectly productive) adds a great deal of value. And managers as a class capture much of this value as pay. This makes the question of who gets to be a manager extremely consequential.

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Middle managers, able to plan and coordinate production independently of elite-executive control, shared not just the responsibilities but also the income and status gained from running their companies. Top executives enjoyed commensurately less control and captured lower incomes. This democratic approach to management compressed the distribution of income and status. In fact, a mid-century study of General Motors published in the Harvard Business Review—completed, in a portent of what was to come, by McKinsey’s Arch Patton—found that from 1939 to 1950, hourly workers’ wages rose roughly three times faster than elite executives’ pay. The management function’s wide diffusion throughout the workforce substantially built the mid-century middle class.

At the time of Patton’s study, McKinsey and other management consultants still played a relatively minor role in how American companies were run. The earliest consultants were engineers who advised factory owners on measuring and improving efficiency at the complex factories required for industrial production. The then-leading firm, Booz Allen, did not achieve annual revenues of $2 million until after the Second World War. McKinsey, which didn’t hire its first Harvard M.B.A. until 1953, retained a diffident and traditional ethos—requiring its consultants to wear fedoras until President John F. Kennedy stopped wearing his.

Things changed in the 1960s, with McKinsey leading the way. In 1965 and 1966, the firm placed help-wanted ads in The New York Times and Time magazine, with the goal of generating applications that it could then reject, to establish its own eliteness. McKinsey’s competitors followed suit, as when the Boston Consulting Group’s Bruce Henderson took out ads in the Harvard Business School student newspaper seeking to hire “not just the run-of-that-mill but, instead, scholars—Rhodes Scholars, Marshall Scholars, Baker Scholars (the top 5 percent of the class).”

A new ideal of shareholder primacy, powerfully championed by Milton Friedman in a 1970 New York Times Magazine article entitled “The Social Responsibility of Business is to Increase its Profits,” gave the newly ambitious management consultants a guiding purpose. According to this ideal, in language eventually adopted by the Business Roundtable, “the paramount duty of management and of boards of directors is to the corporation’s stockholders.” During the 1970s, and accelerating into the ’80s and ’90s, the upgraded management consultants pursued this duty by expressly and relentlessly taking aim at the middle managers who had dominated mid-century firms, and whose wages weighed down the bottom line.

As the business journalist Walter Kiechel put it in his book Lords of Strategy, consultants openly sought to “foment a stratification within companies and society” by concentrating the management function in elite executives, aided (of course) by advisers from consultants’ own ranks. Management-consulting firms deployed a panoply of branded processes against middle management. Another account of the industry, The Witch Doctors, explains that the Computer Sciences Corporation’s consulting arm, working with the Sloan School of Management at MIT, developed corporate “reengineering” to “break an organization down into its components parts,” eliminate the redundant ones, namely middle managers, and then put the remaining parts “together again to create a new machine.” GTE, Apple, and Pacific Bell would all cite reengineering as responsible for their downsizing. McKinsey framed its path to downsizing, which the firm called “overhead value analysis,” as an answer to the mid-century corporation’s excessive reliance on middle management.

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They downsized in response not to particular business problems but rather to a new managerial ethos and methods; they downsized when profitable as well as when struggling, and during booms as well as busts… Overall, middle managers were downsized at nearly twice the rate of nonmanagerial workers. Downsizing was indeed wrenching.

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Production workers did not escape the whirlwind, as companies—again with help from consultants— stripped them of their residual management functions and the benefits that these sustained. Corporations broke their unions, and jobs that once carried bright futures became gloomy.

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Overall, the share of private-sector workers belonging to a union fell from about one-third in 1960 to less than one-sixteenth in 2016.

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The shift from permanent to precarious jobs continues apace… And the gig economy is just a high-tech generalization of the sub-contractor model. Uber … deprives drivers of any role in planning and coordination, and it has literally no corporate hierarchy through which drivers can rise up to join management. As ever, consultants are at the forefront of change, aiming to disrupt the management function. A new breed of management-consulting firms now deploys algorithmic processing to automate not the line workers’ or sales associates’ jobs, but the manager’s job.

In effect, management consulting is a tool that allows corporations to replace lifetime employees with short-term, part-time, and even subcontracted workers, hired under ever more tightly controlled arrangements, who sell particular skills and even specified outputs, and who manage nothing at all.

The management function has not been rendered unnecessary, of course, or disappeared.  Instead, the managerial control stripped from middle managers and production workers has been concentrated in a narrow cadre of executives who monopolize planning and coordination. Mid-century, democratic management empowered ordinary workers and disempowered elite executives, so that a bad CEO could do little to harm a company and a good one little to help it. Today, top executives boast immense powers of command—and, as a result, capture virtually all of management’s economic returns. Whereas at mid-century a typical large-company CEO made 20 times a production worker’s income, today’s CEOs make nearly 300 times as much.

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Management consultants insist that meritocracy required the restructuring that they encouraged—that, as Kiechel put it dryly, “we are not all in this together; some pigs are smarter than other pigs and deserve more money.”

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…corporate reorganizations have deprived companies of an internal supply of managerial workers. When restructurings eradicated workplace training and purged the middle rungs of the corporate ladder, they also forced companies to look beyond their walls for managerial talent—to elite colleges, business schools, and (of course) to management-consulting firms. That is to say: The administrative techniques that management consultants invented created a huge demand for precisely the services that the consultants supply.

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Whereas a century ago, fewer than one in five of America’s business leaders had completed college, top executives today typically have elite degrees—M.B.A.s as well as bachelor’s degrees—and deep ties to management consulting. Many executives have consulting backgrounds themselves. McKinsey alone counts 70 Fortune 500 CEOs among its alumni.

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These facts give management consulting a powerful charisma for students and recent graduates of elite colleges and universities.

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Management consulting, Kiechel observed, acquired its power and authority not from “silver-haired industry experience but rather from the brilliance of its ideas and the obvious candlepower of the people explaining them, even if those people were twenty-eight years old.”

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Meritocrats like Buttigieg changed not just corporate strategies but also corporate values. Particular industries, and still more individual companies, may be committed to distinctive, concrete goals and ideals. … Executives who rose up through these companies, on the mid-century model, were embedded in their firms and embraced these values, so that they might even have come to view profits as a salutary side effect of running their businesses well. When management consulting untethered executives from particular industries or firms and tied them instead to management in general, it also led them to embrace the one thing common to all corporations: making money for shareholders. Executives raised on the new, untethered model of management aim exclusively and directly at profit: their education, their career arc, and their professional role conspire to isolate them from other workers and train them single-mindedly on the bottom line.

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Technocratic management, no matter how brilliant, cannot unwind the structural inequalities that are dismantling the American middle class. To think that it can is to be insensible of the real harms that technocratic elites, at McKinsey and other management-consulting firms, have done to America. Such obliviousness may not be malevolent; but it is clueless.

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American democracy, the left believes, cannot be rejuvenated by persuading elites to deploy their excessive power somehow more benevolently. Instead, it requires breaking the stranglehold that elites have on our economics and politics, and reempowering everyone else.