Do McKinsey services deserve high fees?

This is the second of a series highlighting industry leaders that struggle to deal with their flaws and mistakes. ― ED.

By Kim Tae-gyu

In the global consulting world, McKinsey has been king of the lucrative market for a long time. In fact, McKinsey alumni are constantly invited as top management to Fortune 500 companies.

Any consulting company's work with its clients is supposed to remain secret. However, the walls have ears and a few interesting stories have been disclosed to the general public and McKinsey is not an exception.

The business bellwether, which was set up 90 years ago, may have bragging rights for many successful cases, but there were also debacles like its involvement with U.S. energy company Enron and its role in promoting the securitization of mortgage assets, cited as one of the main reasons for the 2008 financial crisis.

The consultancy, which opened a Seoul office in 1991, also has been directly or indirectly involved in some corporate and financial failures in Asia's No. 4 economy.

McKinsey would argue that it is up to the management team of its clients to decide whether or not to accept its advice. In response, criticism has risen that such a stance is not responsible for an entity, which charges prohibitively high prices for its services.

Here are some cases related to Korean companies, which McKinsey may not be proud of.

LG Electronics

In the first decades of the new millennium, LG Electronics was touted as the closest rival of Samsung Electronics in Korea Inc. Yet, the firm lost the status in a dramatic way by failing to deal with the international transition to smartphones in the late 2000s and early 2010s.

Surrounded by several consultants-turned-executives and McKinsey, then Vice Chairman Nam Yong opted to go for the conventional breadwinner of feature phones instead of the rising star.

It was in line with the management style in his former workplace at LG Telecom -- without investing in next-generation networks, he focused on marketing and reducing costs to improve the bottom line of the country's smallest mobile carrier.

The strategy worked for LG Telecom and appeared to work for LG Electronics soon after he took over the latter in 2007 as the electronics giant earned huge profits in handsets in 2008 and 2009. The firm's overall sales almost doubled by 2009 compared to 2006.

But the popularity of smartphones crucified LG Electronics the next year and Nam was ousted from his job.

After his departure, some even claimed that Nam should not take credit for the good performance of LG in the late 2000s. Instead, they contended that Nam's predecessor of former Vice Chairman Kim Ssang-soo's all-out efforts to improve technology bore fruit.

In the aftermath of the voluntary but somewhat disgraceful exit from LG, Nam failed to take the helm of another company and once worked as an outside director of POSCO, a steelmaker.

While he was in control of LG Electronics, top aides came from McKinsey and the company reportedly paid some $30 million for McKinsey's consulting services every year.

The widespread belief is that McKinsey recommended Nam to bet on feature phones.

There is still a controversy on how much McKinsey is responsible for LG Electronics' ill-fated disregard for the upcoming killer device -- the smartphone.

But many LG workers seem to blame McKinsey and former Vice Chairman Nam for the fatal mistake.

"There is no ‘what if' in history. But I think LG would not lag behind like this if Nam did not depend on McKinsey that much," said an LG official. "I believe McKinsey contributed much to LG's freefall in the Korean corporate hierarchy."

By contrast, some refuse to point the finger at McKinsey since LG Electronics' archrival, Samsung Electronics, also failed to predict the fast paradigm shift to smartphones.

But the latter managed to catch up through its Galaxy products while the former has never done so.

Doosan Group

Doosan Group faced reputational risks last year with regard to its aggressive restructuring programs for multiple subsidiaries. Along with the conglomerate, McKinsey also grabbed headlines in newspapers.

As one of the oldest groups in Korea, Doosan originally had a diversified business portfolio ranging from restaurants, beverages and breweries to the construction and defense sectors.

However, it started to focus on heavy industry in the mid-1990s through 2000s by dumping such outfits as Oriental Brewery and Korean operations of 3M, Nestle, KFC and Burger King.

With the cash, Doosan went on a shopping spree for heavy industry firms in the 2000s including Korea Heavy Industries & Construction, Koryeo Industrial Development, Daewoo Heavy Industries & Machinery and Bobcat, the world's top supplier of small construction equipment.

The advice of McKinsey reportedly played a crucial role in Doosan's shift to heavy industry and that's why the consultancy also came under fire when Doosan had to extensively cut its payroll.

The critics' rationale is that Doosan could have coped with the recent difficulties in a better way if it had not sold off the business-to-customer enterprises, which rake in cash nowadays.

A Doosan spokesman said that it was not McKinsey but Doosan management, which decided to conduct the conversion of the corporate structure.

"Doosan could grow at a fast pace because we focused on heavy industries," the spokesman said.

Samsung Life

Few are trying to outspokenly criticize McKinsey but there is an exception at Samsung Life, which struggled after almost halving the size of its sales network in the 1980s.

In 1981, McKinsey advised the country's largest life insurer to restructure its sales organization, which was composed of mostly female agents, so as to care more about the quality of the sales rather than the quantity.

The life insurer accepted the advice and reduced the number of agents from more than 60,000 to 35,000. But the results of the drastic step were far from satisfactory.

"When former Samsung Life employees meet, we talk about the 1981 measure more often than not. The conclusion is always the same ― McKinsey led us in a wrong direction," said a former Samsung Life director.

"After the unprecedented restructuring, Samsung suffered from great setbacks throughout the 1980s. I think the negative ripple effect still continues."

Another former Samsung Life executive echoed the opinion.

"Even those who spearheaded consulting with McKinsey and insisted on the acceptance of its advice now show regret," he said.

"Samsung should not have asked for McKinsey consulting at all. Then, it would have been able to save exorbitantly expensive fees without losing market share. It was a hard lesson to learn."