In recent weeks consulting firm McKinsey has been back in the news because of the advice it gave its client Purdue Pharma, makers of OxyContin. The advice blatantly looks like increasing drug sales at the expense of patient health and a worsening opioid epidemic. As a result, McKinsey has been fined $573 million.
But even if the Purdue Pharma-related fine is extreme, the example is just one example of McKinsey’s many bad client outcomes. A short list of other bad outcomes or questionable clients include:
- Advising badly-run government coronavirus responses.
- Advising financial firms to increase their debt load in the lead up to the 2008 financial crisis.
- Advising Enron in the lead-up to its financial scandal.
- Advising Riker’s Island jail on ways to improve safety with the outcome a more dangerous situation.
- Advising authoritarian governments including Saudi Arabia, Russia, and China.
In spite of those examples, McKinsey continues to be an elite consultancy. I have friends who worked there. Years ago I went through 10 interviews for a position there (didn’t get the job). McKinsey was (and I believe it still will be) a place where many graduating university students desire to work.
Still, the Purdue Pharma example made me think about the systems that get consultants and their company clients into terrible situations, such as the one that led to increased opioid addiction and overdoses.
Fixing Problems or Solving Puzzles
Beyond McKinsey and Purdue Pharma’s opioid scandal, there are many other examples of businesses acting badly. Here’s another short selection of businesses creating bad outcomes while acting in their own interest.
- Tobacco companies, their employees, and the doctors who endorsed them leading to more deaths from smoking.
- Bad nutrition advice, the food pyramid, researchers the sugar industry paid to create a fear of eating fat (rather than sugar).
- Lenders that encouraged homeowners to take larger loans than needed during the housing bubble.
- Social media and other addiction-based business models that lead to depression among their users.
This list makes me think some of the problem is smart people who treat problems like puzzles.
In an earlier article on that topic, I described the way people sometimes find solutions that lead to good business outcomes while ignoring bad social outcomes. It’s a pursuit of the answer to an optimization question (how do we get more of X?) without asking why you should even answer that question at all.
McKinsey’s $573 million fine is both a big deal and not one, a transition point and a point of continuity. With revenues of $10.5 billion, McKinsey will survive. But let’s look at the way the firm interacted with its client Purdue. How bad was it? Quoting court documents below:
“Purdue hired McKinsey to address the factors limiting OxyContin sales and ‘oversee the execution of a plan to pursue the greatest opportunities for boosting growth. On August 15, 2013, Sackler directors and other board members met with the CEO and Sales VP about OxyContin sales tactics. A week later, Richard Sackler arranged a face-to-face meeting with McKinsey to review tactics to Turbocharge the Sales Engine.’
“Even Purdue’s own Vice President of Sales & Marketing was skeptical about turbocharging the sales engine. He warned: ‘I have some real concerns with the thought that our issues center on a need to turbocharge sales.’ He noted that ‘a majority of this year’s sales loss is in less tabs and continued drop in higher strengths … the tides against using opioids long term, in higher doses are all under fire.’ But another long-time Purdue executive, David Lundie, observed that a proposal to ‘turbocharge’ sales ‘will catch the attention of the shareholders’ – i.e., the Sacklers.
“Lundie was right. After meeting with the Sacklers, McKinsey partner Arnab Ghatak reported: ‘The board mtg today went very well – the room was filled with only family … We went through exhibit by exhibit for about 2 hrs. They were extremely supportive of the findings and our recommendations … and wanted to strongly endorse getting going on our recommendations.’ Ghatak’s colleague Martin Elling agreed: ‘the findings were crystal clear to everyone and they gave a ringing endorsement of ‘moving forward fast.'”
McKinsey consultants provided charts like this in support of their advice:
As defined by the CDC:
- “Opioid use disorder (OUD) – A problematic pattern of opioid use that causes significant impairment or distress….
- “Overdose – Injury to the body (poisoning) that happens when a drug is taken in excessive amounts. An overdose can be fatal or nonfatal.”
This is a chart describing the likely needed rebates and financial impact to Purdue Pharma. It reminds me of an article I wrote that included the payout calculation Ford made on its defective Pinto design. Calculations of this type are not unique.
Responsibility Clawbacks
Where does the responsibility live? In senior management? In whoever thought up the improvement process? In the individuals implementing it? In the risk managers not being able to stop the project? When there are many sources of responsibility you have none except the firm itself.
While the $573 million fine will not destroy McKinsey, it is significant but possibly long since accounted for in project risk analysis, for example using the concept of expected value.
Expected value is a concept where anyone can estimate the value of a payoff under positive and negative conditions.
The problem with expected value calculations is that ethical behavior may only be chosen when it is profitable. There is often no option to just not do the project no matter the payoff or the risk.
If McKinsey judged its Purdue Pharma project’s expected value against history, they may have undervalued their risk. Even with the list of bad client outcomes above, there are many more good client experiences. And in general, risk management that attempts to save on costs often defers to bringing in revenue.
Recently, McKinsey’s global managing partner wrote an email to all staff regarding the settlement. It reads as though McKinsey is the good guy here (emphases mine):
“Today’s settlement on opioids and setting a higher standard
“Today we reached a settlement with 49 State Attorneys General, five territories and the District of Columbia related to the Firm’s past work for opioid manufacturers. This marks an important step in accepting the consequences of a chapter in our Firm’s story about which I am not proud. In reaching today’s agreement, the State Attorneys General importantly acknowledged our ‘good faith and responsible corporate citizenship’.”
Hearing such language it almost seems like McKinsey is claiming a victory in how it handled the aftermath of its earlier behavior. The letter continues:
“However, this does not lessen the need for us to learn the lessons and address the challenges that still lie ahead in relation to opioids. Indeed, while our past work with opioid manufacturers was lawful and never intended to do harm, we have always held ourselves to a higher bar. We fell short of that bar.”
This seems to be a strange twist. Because McKinsey did not intend to do harm, is that ok?
“We did not adequately acknowledge the epidemic unfolding in our communities or the terrible impact of opioid misuse and addiction, and for that I am deeply sorry. It is also a key reason why we chose the course of action announced today since it allows funds to be deployed quickly and directly to victims of the opioid crisis while avoiding a long and protracted legal process.”
Divided out among so many affected people, that $573 million will become small pretty fast. What other ways could McKinsey improve the situation?
“I have thought a lot about how we got to this point, and more importantly, how to make every effort to ensure we never get here again. Today’s focus is on opioids, but we have also faced other issues that have made clear the importance of improving how we act everywhere that we operate.
“As you know, we have made fundamental changes to our professional standards, policies, risk management and culture over the past two years. These changes include:
“- Adopting a new Client Service Policy in 2019 that would have stopped us from doing this work on multiple grounds as the epidemic unfolded. It is also what led us to cease all opioid-specific work anywhere in the world.
The McKinsey partner claims that their new Client Service Policy itself would have been enough to prevent the Purdue Pharma outcome.
“- Introducing a new code of conduct that leaves no room for doubt as to the conduct that is expected of every colleague. We said we would have no tolerance for those who violate our professional standards. In this case, after a thorough investigation, two partners have been terminated for violating our Firm’s professional standards.
“- Adopting a purpose statement after a year of debate and dialogue and using this to inform the decisions that we make. But we need to go further. And we will. We must use this moment to bring further energy to the discussions we have around our values and, critically, to the actions we all take to ensure they are delivered without fail every day, everywhere. This settlement and the journey towards it have caused me to reflect on our history and how it should inform our future. Since our founding in 1926, we have set the standard for our profession. James O. McKinsey defined a vision for what the field of management consulting could become. Marvin Bower grounded that vision in a set of values and professional standards that have guided how we serve clients for decades. I expect that this generation of Firm members will collectively set – and continue to evolve – a new and higher standard for ourselves and for our profession. After all, while we cannot change the past, we can shape the future and in so doing build on the many remarkable examples of positive, enduring change that we have helped our clients create over the last 95 years.”
McKinsey’s social responsibility page says its “purpose as a firm is to help create positive, enduring change in the world.”
But I found that the more interesting page was McKinsey’s client selection page:
“As we seek to create positive, enduring change in the world, we are committed to living the values on which our firm was founded almost a hundred years ago. To that end, we regularly evaluate and update our governance process, including the policy determining which clients we serve and on what topics, ensuring we systematically identify and manage risk before committing to a client project.”
The part about “which clients” and “what topics” would be important in something like the Purdue Pharma case.
The page continues:
“Our policies and professional standards apply to every member of the firm. To ensure awareness, understanding and compliance with our Client Service and other policies, all colleagues are required to complete an annual curriculum of Professional Standards & Risk learning programs that address the expectations outlined in our Code of Professional Conduct. All colleagues are also required to complete an Annual Policy Certification. Similarly, all new hires are required to participate in onboarding sessions where they learn about our values, complete digital training modules on key risks areas, and certify their compliance with these professional standards.”
In spite of writing up a nice policy page, unethical outcomes can happen for several reasons:
- While everyone takes the mandatory training, few really do what the compliance group says. In my corporate experience, this is highly likely.
- Financial and personal targets encourage people to skirt the rules. A partner that isn’t bringing in enough business or engagement managers aiming to become partners push the limits on what client project to take and what recommendations to make.
Why Were There So Many Opioid Users in the First Place?
Backing up from this story, the root problem was not so much opioids and Purdue’s addiction-creating dosing schedule as it was the factors that drive pain. Those include poor medical care, repetitive work that causes injuries, and depressive economic situations.
Some of the Purdue Pharma story might actually win more clients for McKinsey.