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A new boss for McKinsey

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THE Jesuits, the US Marines and the Freemasons: McKinsey has been compared to them all, at one time or other. The firm prides itself on being the most prestigious management consultancy, sending out its bright, young footsoldiers to advise executives and policymakers on tricky strategic issues. It is everywhere, counselling 90 of the top 100 firms (as ranked by Forbes magazine). Among its many government assignments it is helping Britain to leave the EU, Lebanon to fix its economy and the Saudis to wean themselves off oil.

Occasionally the company needs new leadership itself. On February 25th the result of a long election process was made public. Kevin Sneader, the Scottish chairman of McKinsey’s Asia unit, will replace Dominic Barton as managing partner—the top job. He inherits a thriving business. The firm remains by far the biggest of the premium consultancies (see table). Over the past decade, annual revenues have doubled to $10bn; so too has the size of the partnership, to more than 2,000.

The firm has also overhauled its own operations in many respects. Mr Barton claims that half of what it does today falls within capabilities that did not exist five years ago. It is working to ensure that customers turn to McKinseyites for help with all things digital. It has had to make acquisitions in some areas: recent purchases include QuantumBlack, an advanced-analytics firm in London, and LUNAR, a Silicon-Valley design company. It is increasingly recruiting outside the usual business schools to bring in seasoned data scientists and software developers.

Staying relevant to big tech firms is not easy, however. McKinsey has kept plenty of older ones as clients, such as Hewlett Packard, but it has a lot more to do to crack new tech giants and unicorns (private startups worth more than $1bn). In general, management consultancies have made fewer inroads into firms such as Facebook and Google. That is partly because consultants typically help struggling firms cut costs; they have less appeal to firms already on the cutting edge. Cash-rich tech firms also tend to prefer keeping things in-house rather than bringing in consultants. They compete with McKinsey in some ways, too. Amazon has become the largest recruiter at some business schools, and the firm’s own consultants are lured away by tech firms’ generous pay packages.

McKinsey’s response is to try to gain a foothold earlier on in tech firms’ life-cycles. It is targeting medium-sized companies, which would not have been able to afford its fees, by offering shorter projects with smaller “startup-sized” teams. As it chases growth, the firm is also doing things it used to eschew as being insufficiently glamorous. In 2010 it moved into business restructuring and it has also set up a global strategy “implementation” practice. That is a far cry from the days when its consultants stuck mainly to blue-sky thoughts in their ivory towers. Mr Barton has also overseen a shift towards a results-based fee model, bringing the firm into line with its nearest competitors, the Boston Consulting Group and Bain & Company.

As McKinsey takes on more people and practices, cracks in its distinctive “One Firm” ethos, and its reputation for discretion, might start to show. It is under investigation in South Africa for working with Trillian, a local consulting firm owned by an associate of the controversial Gupta family, on a contract worth hundreds of millions of dollars for Eskom, a state-owned utility. The firm says it never worked for the Guptas, but admits to “errors of judgment”, particularly in starting work with Trillian before its internal due diligence was complete. The fallout so far has been limited to South Africa, with a few local clients, including Coca-Cola’s local unit and some banks, saying they will not give McKinsey any new work.

Events in South Africa may be an aberration, rather than a consequence of rapid growth. But the tension between profit and principle is not new. It manifested itself most clearly when Rajat Gupta, a former managing partner, was convicted of insider trading in 2012. Can McKinsey continue to grow rapidly while keeping its key asset—its reputation as a trusted adviser—intact? Now there is a question worthy of the world’s best consultants.

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Japan still has great influence on global financial markets

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IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.

“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.

This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.

One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).

But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.

Tokyo storm warning

These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.

Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.

What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.

Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.

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