ADI IGNATIUS: I’m Adi Ignatius.
ALISON BEARD: I’m Alison Beard and this is the HBR IdeaCast.
ADI IGNATIUS: All right, Alison, this question’s going to seem random, but I promise you it’s not, what was your major in college?
ALISON BEARD: I was a double major in journalism and politics at Washington and Lee University.
ADI IGNATIUS: Okay. I was history at Haverford, another liberal arts college. If you’re like me, you probably figured that your majors equipped you well for something like journalism, but maybe not so well for something like management consulting, which is tended to recruit people who studied economics or engineering or business.
ALISON BEARD: Yeah, I always thought of consulting and finance as the place where all the most ambitious, highest achievers, most capitalistic students wanted to go and those firms definitely focused on the Ivy League and the big universities.
ADI IGNATIUS: The world is changing. We know that AI is remaking everything including the world of management and my guest today, McKinsey’s global managing partner, has a lot to say about how it is rethinking its business in this era.
So McKinsey already views its first AI agents as very much part of its workforce and is rapidly expanding that part of its team, but while AI is really good at linear problem solving, it’s not so good at out-of-the-box thinking, which means McKinsey is rethinking its talent needs. I’m not going to spoil it, but your journalism politics double major might line up well with what the consulting giant is increasingly looking for. So here’s my interview with Bob Sternfels, global managing partner at McKinsey, which is celebrating its 100th anniversary this year.
So I want to start, McKinsey is turning, maybe has turned 100. HBR, by the way, we’re 103, so welcome to the Century Club. How would you summarize the company’s 100-year legacy? To what extent has McKinsey created the ideas that have shaped the business world or to what extent is it about identifying and suggesting best practices that come from elsewhere?
BOB STERNFELS: I guess I would start with the nature of how we do our work. And the idea is, look, we co-create with our clients and when we’re at our best, it is figuring out how do we help clients get to places they can’t get to themselves. The whole notion in some ways of credit of, “Did you create something novel or did you have best practice?” maybe the way we frame is we’re co-creating with clients to help them come up with things that they may not have come up with themselves or we might not have come up with themselves.
And we clearly invest a boatload in proprietary IP. We invest over a billion dollars a year in innovation, new thought, new ideas. Our McKinsey Global Institute, for example, which is a bit of our independent research tank, but we’ve now created McKinsey Health Institute, I think if you do look at their history, a lot of that is novel thinking, the most recent looking at a global balance sheet and saying, “How’s the world when you look at assets and liabilities?” That’s not a best practice, that’s new thought. But equally, part of the reason we stay global as an operating model is, then at the more micro levels, the clients that we serve don’t want to understand what the leading edge innovation is in their particular country.
They want to understand innovation around the world and perhaps even cross sector. And that is part of our model. So I’d probably say, if I had to guess, it’s probably half-half on this around where are there truly novel co-creation and where is this idea of figuring out, “How do you bring innovation around the world to clients who may not have access to that innovation based on the reality that they’re in?”
ADI IGNATIUS: So one area of innovation obviously is AI and I’m sure you’re advising companies all the time on how to adapt to an AI-driven world. I want to talk about that, but I’m interested in the internal discussions that are happening at McKinsey about this. To what extent is AI shifting the economics of your industry, headcount, pricing, productivity? Are margins improving? Are they under stress? What are the internal conversations about AI for your business?
BOB STERNFELS: AI, we haven’t talked about that at all. No, I’m just kidding.
ADI IGNATIUS: You should. It’s really cool.
BOB STERNFELS: It’s hard to have a conversation in any context right now that doesn’t link back to some form of AI. I think this question around AI and how it impacts McKinsey, there’s two sides of that coin. There’s a client-facing side and then there’s, “What are the implications on McKinsey?”
There’s a unique moment to help all of our clients reimagine themselves leveraging this technology. And to be able to do that, we have to rewire ourselves to be able to deliver that. I may audio just start with a bit of what I’m actually hearing from clients around the world, across all industries and across all geographies and I really hear in the truth room maybe two things. On the one hand, an enormous belief in the potential for this wave of technological change and that’s everything from enormous productivity gains in areas like customer care or back-office processes, but also to growth things. If you think about radically shortening the time of drug discovery and what that actually means for longevity and life and that’s top line growth.
So folks are excited and they’re believers, but at the same time, from the conversations that I have with CEOs, they’ll often say, “Hey, Bob, so do I listen to my CFO or my CIO right now? My CFO is in my ear that we’re spending a lot of money on technology, but we’re not yet seeing enterprise-level value from this. And so do we really need to be at the cutting edge or why can’t we be a fast follower, let other folks figure out where this is and then we’ll adopt quickly because it’s a lot more efficient to be a follower than a leader? CIO is saying, ‘Are you crazy? This is one of those moments. And if we’re not in the lead, we’re going to get disrupted.’”
We’ve spent a lot of time looking at at least what we think the answer is here and I know we spent a lot of time talking about technology, but what we’re finding is half if not more of the secret sauce is organizational change as opposed to technology implementation. This is for large enterprise. And it’s things like, “Well, what does your work look like after you’re implementing these? Could you have, for example, a much flatter organization that cuts out a lot of middle layers and makes your organization faster?”
When you think about really complicated workflows, think about a mortgage process, you got all these steps, origination, credit scoring, collection, after service, et cetera. Those are all departments in a bank. Well, why do you have four or five departments in a process if you can really enable this through AI? Can’t you break those walls down? And so we’re spending a lot of time thinking through not only what’s the strategy and how do you implement, but how do you change the organization? How do you rewire the organization to realize the value?
And if you can get that right, all of a sudden, the CFO and the CIO are actually on the same page, but we’re finding that’s harder and it’s taking longer than people thought. And so I do think we’re going to be in this period where really enterprise fundamentally changing themselves, yes, enormous potential, it’s going to take a little while to get there. \
So then you say, “Okay, what does that mean for McKinsey?” We’re applying this to ourselves. I often get asked, “How big is McKinsey? How many people do you employ?” I now update this almost every month, but my latest answer to you would be 60,000, but it’s 40,000 humans and 20,000 agents.
Little over a year and a half ago, that was 3,000 agents and I originally thought it was going to take us to 2030 to get to one agent per human. I think we’re going to be there in 18 months and we’ll have every employee enabled by at least one or more agents. That’s one piece of what are the assets and technologies that we’re building in ourselves.
The other big piece is how does it change our model. We’re coming around to the conviction that we’re migrating pretty quickly away from, let’s call it pure advisory work, which was a lot of the origins of our firm and a fee-for-service model, et cetera. And what’s it moving to? It’s moving to much more of an outcomes-based model where we say, “Look, let’s identify a joint business case together and we will underwrite the outcomes of that business case.” And it aligns our interests with our clients a lot more and I think will be the way of the future.
ADI IGNATIUS: Yeah. Now, AI is going to get better, right? We’re still in the-
BOB STERNFELS: It is, yeah.
ADI IGNATIUS: … early phases of generative AI. If technology can continue to commoditize even the kinds of analysis and insight that a McKinsey has long provided, what will clients actually be paying for when they could probably do a lot of that themselves?
BOB STERNFELS: The kind of problems that we have tackled with our clients over a hundred years has not been static. It has changed radically. I’m now considered a dinosaur in our firm because I’m a little over 30 years with us, but the stuff that I did when I joined as an associate 32 years ago, we wouldn’t consider even doing right now. Why? Because clients do that stuff themselves and we are solving much more complicated interconnected questions with our clients.
And I think what this is going to then mean is this is just going to be that next evolution of there’ll be a whole bunch of things that a couple years ago we did for our clients that our clients will do for themselves and the imperative will then be to move to the even more complicated questions. And to your point, what are clients going to pay us for? They’re going to pay us to find ways to double their market cap. And until we get to CEOs who say, “I don’t want to double my market cap,” I think there’ll always be a more complicated set of questions and opportunities out there.
ADI IGNATIUS: What is the evolving skills profile then of a management consultant? Do you even know yet? What are you looking for in new hires and that must be evolving pretty quickly?
BOB STERNFELS: This is a really fascinating question. It’s a passion of mine. I might frame it in, “What are some things we’re confident about now and then what are some things we’re exploring?” When I came into this role, and it was a little over four years ago, I asked our talent attraction team, “How are we doing on attracting talent?” and I got a, “We’re doing great, Bob. We’re doing great.” I said, “Well, why?” They said, “Well, we get over a million applications a year and we hire anywhere between eight and 10,000 people. And even the million aren’t a normal distribution. They’re some of the brightest minds in the world that are applying. So effectively, what’s the problem? Why are you asking me? Let me go back and do my job.”
And I kept asking the question, “But, well, how many profiles are we really looking for? What are we systematically screening out?” and it turned out that really, when you boiled it down worldwide, there’s only 500 pathways that would lead you to McKinsey. And that wasn’t tying with what our own organizational research was saying, that the half-life on skills was getting shorter, that people were too focused on paper ceiling because you have the right credentials. And so we actually applied analytics on ourselves and took the last 20 years of data and said, “What are the skills and characteristics that are most likely to make partner in McKinsey?” because it’s not perfect, but it’s a marker of success. Only one in six hires make partner.
And it turned out we had some bias in our system. We had 50 different implications, but I’ll give you the biggest three. One was that we were too focused on, “Did you have perfect marks?” versus, “Did you have a setback and recover?” And the applicant who had a setback and recovered was more resilient and more likely to be a higher probability of making partner in McKinsey and we weren’t screening for that. So we’ve changed the process to look for resilience in the application process.
And it may sound shocking, but we weren’t indexing enough on, “Had you had real experience in a significant way working with others?” Fundamentally, we’re about helping our clients change. And if you’d done a team sport or if you’ve worked in retail, working your way through college, you’ve had to engage with others. And it’s built a skill, human-to-human skill, that we’re now indexing a lot more on. And then the last one was, “Did you have the aptitude to learn new stuff?” versus, “Had you mastered the subject that you chose to study?” My youngest guy used this one against me actually when he was changing his major for the third time and I was a little frustrated with him and he’s like, “But dad, you published a paper that said if you have the aptitude to learn new stuff,” and I’m like, “Yeah, but you have to do well in the subject that you go to.”
ADI IGNATIUS: This kid’s smart.
BOB STERNFELS: Yeah. Well-
ADI IGNATIUS: Send his resume to me.
BOB STERNFELS: It’s the only time he quoted me, Adi, and I was like, “Really?” But it did get us to then change our assessment techniques where we purposely create an environment where no human in the world will have any pattern recognition in this environment and we figure out, “How well do you do in an environment where you have no pattern recognition and you just have to go figure things out?” So those are some of the skills now we know we’re moving to. We’ve launched more of an exploratory look now going forward where you say, “Okay, but if everyone gets super humid with these AI tools, what do you want to add on top of this resilience, teamwork, ability to learn new stuff?”
That part I just told you I feel pretty solid about. This part I’m going to tell you is places we’re more in exploration mode. One of them is, “Well, what do the models not do well?” They don’t aspire. They’re not good at setting the right aspiration level. When you think about what great leaders do, they help an organization set the right ask, “What should we aspire to?” And so how do we start to look for and develop the skills of leadership? Leadership is going to be durable in a post-AI world because one of the great things leaders do is they help set an aspiration and get people to stretch.
The second is judgment. And you’ve seen time and time again, these models, there’s not truth in the model, there’s not judgment in the model. Humans need to impose those parameters. So how do you build judgment and how do you build that capability?
And then maybe the last one we’re spending a lot of time on is the models are inference models. They’re great at a linear approach to problem solving, which is what we’ve been teaching for the last hundred years. What they’re not great as discontinuous leaps, truly novel thinking. And so we’re starting to figure out, “Where are backgrounds that are going to be more creative to come up with things that aren’t about the next logical step, but are about a discontinuity?”
And so we’re going back to liberal arts degrees and saying, “Hey, let’s come back to some of the things that might have been deprioritized in the past to see if we can get a little bit more creativity.”
ADI IGNATIUS: Yeah. We had a piece from the chief technology officer of Goldman Sachs who had wanted his child to be a coder and then thought, “Nope, I think she should be a philosophy major, that that’s what this world calls for.”
BOB STERNFELS: Maybe, right?
ADI IGNATIUS: We’ve looked back, we’ve looked forward. You’ve talked about some of the celebratory stuff that’s going on. I need to ask though, you’ve also had your share of unwelcome publicity in recent years and I’m talking about OxyContin, bribery charges in South Africa, conflict of interest, accusations in the U.S. and elsewhere. How do you account for all of that? How do you look at what happened and why?
BOB STERNFELS: Well, I’m glad you asked and this has been … I think it’s been a real soul-searching for us starting about four or five years ago of really two questions, Adi. On the one hand, where should we be more humble and learn from our mistakes? And at the same time, where should we be more courageous and just say, “Look, we disagree with you. And even though we’ll face criticism, we’re going to push back because that’s what we believe in”? And let me parse each of those. Some of the ones that you mentioned fall clearly in the humble camp and I think some of the great learnings that we had, if I just take two in particular, opioids, the work with opioids and our partnerships in South Africa.
What we learned is that we have to have a higher diligence around client selection. And we put in place a framework that is a really robust assessment now that looks across every aspect from the country, the topic, the institution, the individuals and the operating environment to say, “Is this a client that we actually want to bring in to the firm?” And so one of the languages that I’ve used with our partners, and it’s hard to drive change in a partnership is, “You all grew up with the idea that one of the privileges of a partner is to commit the firm. And I’m not saying that’s not the case anymore, but you don’t do it alone. You do it with risk professionals.”
And we invested about a billion dollars. I brought in the head of internal audit from Apple, the head of compliance from Walmart, to basically modernize us around these processes. And it’s why I also said, “Look, we apologize. We got those wrong, but we don’t want to set out just to remediate the problem. We want to set out to try and set the standard for professionalism for our industry.” So I think that is an important lesson of, “How do you learn from your mistakes?” stay humble, but not seek to just repair them, but seek to actually make yourself better and we’ve had a lot of learnings around that.
McKinsey has learned a ton from this and we’re setting out to make ourselves better. And one of the things that I’ve tried to open myself up to, both to regulators and to clients is, “Look, these are the new protocols we put in place. Do you have any ideas on how we can make them better?” Because even what we’ve put in place, I’m not sure we’re ever going to be done on this front. So I just wanted to close the loop on that. I’m obsessed with, “We got to be a journey to try and aspire to set the standard for professionalism.” The lifeblood of what we do and it’s why so many great talent from around the world come is the kind of impact that they can have with clients.
ADI IGNATIUS: From the outside, it looked like McKinsey was committed to growing as quickly as possible in markets all over the world by design, relatively little centralized oversight. And again, from the outside, that sounds like a recipe for trouble. Is that a fair analysis?
BOB STERNFELS: No, not really. It’s easy to say that, Adi, from the outside, but the truth of the matter is you have three or four forces that are going on here. On the one hand, there’s an increasing scrutiny on the side of media, governments for all institutions. And so one of the things that we learned through this process is there are some things that we’re going to be criticized for that we’re just going to push back on. We got heavily criticized for our work in hard-to-abate sectors on their transition issues. And it was, “McKinsey’s accelerating climate degradation, et cetera.”
And we pushed back and said, “No, look, if you’re going to be committed to climate transition, you have to work with the hardest-to-abate sectors. It’s just naive to say that you’re going to solve this problem without that.” So there’s a portion of this that was rooted in just more transparency, more criticism and I’m trying to build a bit of thicker skin. There’s a portion which was an evolution in our organization model that said, “Look, as we do get bigger and as the world gets more complicated and more requirements are thrown in, we do need tighter compliance standards. This is where the idea that we should have the same compliance and accountability standards as a publicly traded company, even though we’re not publicly traded,” was I think one of the greatest changes that we’ve been through in the last six years.
And growth has never been our objective function. We’re privately traded. We don’t have quarterly earnings. You don’t see McKinsey talking about, “Oh, we had revenue growth of this or that,” because the ethos internally is that we’re a profession, not a business, meaning that we want to put our clients’ interests ahead of ourselves and the objective should be, “Are we doing distinctive work versus any kind of work?” But without the right controls, you can’t guarantee that. And so one of the things I think we learned is, even though we had that as our ethos and the objective function was never grow at all costs, if you don’t put in place compliance, you’re not going to actually be able to enforce those standards.
It’s painful for a partnership to give up some of that autonomy, but I think it’s one that we now have pretty … I mean, look, you never get 100% uniformity in a partnership, but I think there’s pretty good agreement that these things have made us better and it’s worth giving up that autonomy to actually preserve the integrity of the enterprise.
ADI IGNATIUS: People would say consultants prescribe frameworks, but don’t have to live with the consequences. How do you ensure that McKinsey’s advice is more than a PowerPoint strategy, that it creates real, lasting, long-term impact?
BOB STERNFELS: I hope we get out of PowerPoint entirely at some day and I tell you that would love to Microsoft, but it isn’t about providing a unique insight. It goes back to this notion of what we really aspire to be is to be impact partners with our clients. We’re on a change journey of moving, quite frankly, from a model that was advisory to one that underwrites outcomes. And today, Adi, about a third of our revenues total are underwriting outcomes. So it’s not, “Hey, you handed me a PowerPoint. Great.” It’s, “We collectively signed up for this outcome together and we’re tied on this journey all the way through until that impact is delivered.” My hope is that that crosses a majority of the revenues by the time I’m done being the global managing partner.
ADI IGNATIUS: We’ve been around a hundred years, you’ve been around a hundred years. We’re all presenting important ideas, there are others as well, and yet this is hard, right? Running a business is hard. Nobody really has cracked the code forever. Where do you think leaders most consistently get things wrong?
BOB STERNFELS: I think there is some mix of a couple things that are, at least in my mind, increasingly important. One is this hunger and thirst to acquire new information. And whenever you get too confident, too overconfident, I think change for the negative is going to come. And so how do you have this almost ruthless quest for, “Let me continue to question new things,” and maybe also from all levels in the organization, often the best ideas are embedded somewhere lowered out.
The second and, Adi, you linked it when you talked about both of our organizations is, “How much do you do this yourself versus do you think about partnerships?” And I think, increasingly, we’re seeing, when people collaborate across the value chain, et cetera, you find disproportionate gain, and yet, our organizations aren’t geared to collaborate well, right? We’re just not. And so thirst for new, “Focus on collaboration.” And then finally, I would say, and maybe this is a sign of the times, maybe not, speed matters. One of the things that we’ve studied to death is faster organizations outperform slower organizations even if they make more mistakes. And yet, we’re not wired to do that. There’s such risk aversion in large enterprise. If we could lean in a bit more to that, I think great things happen.
ADI IGNATIUS: In the issue of management, what seems to be fundamentally different today versus how companies have to adapt to jolts in geopolitics or with technology? What are you seeing in terms of new management paradigms that are taking shape today?
BOB STERNFELS: I look at it from the lens of the discussions that I have, which is, “What are CEOs focused on? What are some big topics right now that are occupying the minds of senior management teams and their discussions both amongst themselves and with boards?” and as you can imagine, that varies based on where you sit in the world. But there are some themes to your question, Adi, that seem to be transversal. I’d be lying if one of the themes wasn’t one of the ones that we talked about, which is, “How do I get value from this technology and what is everyone else doing because this is hard?” And so I would put that as one of the themes of, “How do I transform my enterprise through this revolution in technology that we’re seeing right before our eyes?” It is a big theme.
The second big theme is, “How do I build more institutional resilience because I’m increasingly …” I’m talking now in the guise of a CEO of the mind, “that unfortunately things will never go back to how they were? There’s going to be a world of continuous shocks. And so in a world of continuous shocks, do I have enough institutional resilience in my organization?” And when you burrow under that, what folks often say is, I like sports, I’ll give you a sports analogy, “I need to play offense and defense at the same time. So I need defense that I need enough buffer, enough cushion to be able to withstand something that I don’t see coming and have I built that margin into my system to be able to take the next blow that I may not see coming?
But I also can’t just play defense. I need some capacity to take some bold bets even when I may be getting hit with exogenous shocks. So can I play offense and defense at the same time as my simple version of ‘How do you build institutional resilience?’”
And then maybe the last one, if I were to just give you three, I haven’t met a CEO yet that thinks that their organization model is perfect. Haven’t met one. And a lot of the seminal thinking actually comes from some stuff – a 1959 paper in HBR by Gil Clee. This was before he became a GMP. He was one of my predecessors, but it was about creating a global organization and it was the precursor thinking to the matrixed organization.
And if you look at almost every large enterprise today, there is some version of a matrixed organization and I hear different tension points from CEOs about why their org is one of the bottlenecks in getting done what they need to get done, “It’s too slow. It’s too cumbersome. I can’t resource, reallocate. It doesn’t help me with complicated geography decisions.” Whatever it may be, Adi, I hear a lot of questions about, “What should my future organization model be?”
ADI IGNATIUS: So in 10 years’ time, what would you like McKinsey to be known for that it is not known for today?
BOB STERNFELS: I think it’s got to be a mix of, “What do I hope we’re still known for and then what might be some new things?” because it’s not going to be just stuff that McKinsey isn’t known for today. I hope the part that it’s continued to be known for is leadership factory of the world. And one of the things that’s been very exciting is, no matter how long folks stay with us, they tend to do pretty well wherever they go. We produce more CEOs than any other institution in the world and I hope that’s still the case in 10 years. “Are folks coming to us and …” Sorry, this is just my direct language, maybe the experience isn’t easy, maybe it’s pretty hard and they get a lot of tough feedback, but, “Do we make you a better leader no matter how long you’re in McKinsey? Two years, 30 years, but do you leave McKinsey a better …” I hope that remains.
I hope the part that is new, to your point, is something that’s in flight today, but I think not really well known, which is we complete this journey from being an advisor to an impact partner and that McKinsey is not known for, “Hey, they gave me great advice, but if it worked, that was because they were smart, and if it didn’t work, it’s because I didn’t implement,” which is the joke, right? But as it moved to, “You know what? We designed a business case together and these guys underwrote the same outcomes that I took to the board and we went on this journey and we kept at it until we got to someplace I didn’t think I could get to.” I think that’s the part that I’d love to land fully in this next decade.
ADI IGNATIUS: Bob, thank you very much for being here. That was a great discussion and congratulations on turning 100.
BOB STERNFELS: Thank you. I enjoyed it. It’s great to see you.
ADI IGNATIUS: That was Bob Sternfels, global managing partner at McKinsey & Company. Next week, Alison looks into the latest research on what it takes to really be ready for the C-suite.
If you found this episode helpful, share it with a colleague and be sure to subscribe and rate IdeaCast in Apple Podcasts, Spotify or wherever you listen. If you want to help leaders move the world forward, please consider subscribing to Harvard Business Review. You’ll get access to the HBR mobile app, the weekly exclusive insider newsletter and unlimited access to HBR online. Just head to hbr.org/subscribe.
And thanks to our team, senior producer, Mary Dooe, audio product manager, Ian Fox, and senior production specialist, Rob Eckhardt. And thanks to you for listening to the HBR IdeaCast. We’ll be back with a new episode on Tuesday. I’m Adi Ignatius.
