McKinsey, It’s a Lot More Than Digital Capital

by Jay Deragon on 08/08/2013

mckinsey

Imagine the influence the world’s largest management consulting firm has on the minds of executives all around the globe. The fact is that many of those executives are in fact ex-McKinsey Managing Directors who stay loyal to the perspectives offered by the firms remaining MD’s.

Whatever McKinsey says is usually considered thoroughly thought out, researched and grounded in intellectual discourse by some very smart people.  With that kind of influence one may assume their positions on emerging business issues are logical, holistic and strategically sound. But what if their positions on issues did not tell the whole story? How many firms would head off into the Milky Way believing the wrong things?

Let’s Examine a Recent McKinsey Article

The article in question titled ” Measuring the full impact of digital capital”  authored by Jacques Bughin and James Manyika. Both of these authors are people with global recognition for their intellectual contributions to business.

The article starts by mentioned the recent decision by US Bureau of Economic Analysis GDP figures categorizing research and development as fixed investment. It will join software in a new category called intellectual-property products.

Then they go on and frame the discussion around a knowledge based economy and a mismatch between the digital economy and the way we account for it. They continue explaining their definition of digital capital and the different tangible and intangible assets that make up digital capital. Things like disruptive innovations, new business models, new players with unlimited scale and radically new ways of doing things are all the result of digital capital and all the related intangibles.  All well said. OK, so far so good.

Then McKinsey begins to stray. They say “Since identifying intangible assets is difficult, companies may be missing growth opportunities.”  Here is what is wrong with that statement:

  1. There is an entire body of work representing a complete taxonomy of intangibles as well as tools to identify, measure and prioritizing intangible assets.
  2. There is a global community of over 500  academics, management consultants, accountants and professionals in finance called Smarter Companies who have studied, identifying, measuring and prioritizing intangibles for years.
  3. If McKinsey typed “intangible capital” into Google they would find  references on the first page to things like Mary Adams book, Intangible Capital, to the Smarter Companies Community, to The Conference Board studies on Intangibles with contributions by Mary Adams and a host of other relevant references indicating that identifying intangible assets is not difficult because it has already been done.

McKinsey goes on and says “We want to emphasize the importance, for many business leaders, of making the mind-set shift required to embrace the importance of digital capital fully“….But what they are suggesting isn’t really a mind shift. It’s a continuation of silo industrial thinking.  The real mind-set shift required is to embrace the importance of intangible capital fully as a system and not a silo. The body of work done to date shows the systems includes four elements:

  1. Human Capital
  2. Strategic Capital
  3. Structural Capital
  4. Relationship Capital

Under each of these are dozens if not hundreds of other interrelated intangible components that interact with each other and with the four primary elements. Digital Capital would be a part that fit under one or more of the elements (mostly structural capital) but interact with all of them.
Digital Capital is a significant intangible but by itself it cannot produce anything. After all, intangible capital creates value from and through interaction. Interaction requires two or more moving elements that inspire, engage and connect people with people and things.

In my humble opinion the social and economic opportunity for improvement is larger than just digital capital and McKinsey, as a thought leader, should have addressed the whole and not just a part.

BTW, McKinsey does not enable interaction through comments on its own articles thus not exhibiting use of the very intangible capital it talked about, digital capital. Go figure.

{ 5 comments }

Gerry N. August 25, 2013 at 8:23 am

During my international business career, I have used the services of consultants ,including McKinsey, many times. It’s important for a CEO to have access to professional opinion outside of the organisation when addressing issues such as, expansion into new business areas, new geography, and mergers and acquisitions. It must be realised that most companies do not have the resources , statistics ,data banks etc. to fully analyse, and understand the opportunities. It is extremely important however to clearly identify the issues with the management team and know what you would like to achieve before consulting. Finally I do not believe that a consultancy firm can be blamed for the demise of a company. The buck clearly stops with the CEO..

Rizvi August 14, 2013 at 8:53 am

all valid points by author and good remarks by readers. Been on both side as a industry leader and in management consulting, i agree with you. Things are changing though, C level execs are getting smarter in who they hire and how much they spend.

JNJ leaders has been very careful over the years to bring on the big 4 consulting or the all-mighty McKinsey. But we still need them for the obvious reasons. Industry management and employees cannot deliver change in a manner evolution desires it. Finance and Technology transformations cannot be implemented without consultants.

Leaders just need to manage them with clear defined deliverables and both sides held accountable. Rates should be negotiated and free work required before engagement letters signed.

Martha August 10, 2013 at 9:55 pm

Wow, this is good read for sure Jay.
Its amazing how big companies are getting away for exploiting young idea makers.
I would wish to see more dream makers CEOs and Partners rather than bunch of college grads that will get drained out of their ideas in the early stage (while in most cases ideas will be changed to corporate mess anyways).

Kay Plantes August 9, 2013 at 8:46 am

Use just-out-of-graduate-school youth for the work, guided by partners who are chasing dollars while espousing “big ideas” and you get these results. IBM, Accenture, etc. share this business model for getting the work done. CEOs and leadership teams must be held accountable as well – for not being smart enough to know a good idea from a bad one.

Manie Mulder August 8, 2013 at 10:35 pm

How a firm such as McKinsey survives in the modern business world is a situation that defies all logic. It’s done with smoke and mirrors through their PR work and extensive network of influential people.
The Witch Doctors, written by The Economist journalists John Micklethwait and Adrian Wooldridge, presents a series of blunders and disasters that have been McKinsey’s fault.
Dangerous Company: The Consulting Powerhouses and the Businesses They Save and Ruin by James O’Shea and Charles Madigan critically examines McKinsey’s work within the context of the consulting industry; the findings are extremely negative for McKinsey.
A selection of criticism from McKinsey clients:
• Extremely expensive – charges in excess of US$10 000 per day
• Misguided and unimaginative analysis (e.g. in 1983 it insisted that AT&T abandon its leading position in the cellular phone business as it would only be a niche market in future; today AT&T has virtually no share of this trillion dollar world-wide business)
• Groupthink (its consultants strive under time pressure to converge on a unified set of findings and recommendations)
• Extreme hubris and arrogance from consultants
• Consistently underestimating the difficulty of implementing recommendations
• Emphasis on shareholder value and short-term returns, often at the price of people, investment and long-term strategy (e.g. this doomed the British railway company Railtrack, which collapsed after a series of accidents following McKinsey’s advice to reduce spending on infrastructure and return cash to shareholders instead)
• It aims to become an expensive permanent presence with clients, rather than focusing on solving a clear set of problems and leaving, thereby functioning as a substitute for proper leadership and organization.
• Increasing concern in the public sector, where McKinsey has become a permanent fixture with agencies such as the British National Health Service
• Concerns from teachers and parents regarding their consultation for public school districts. (McKinsey worked for the Minneapolis Public Schools, where the firm recommended that the district cut “high costs,” such as teacher health care, and recommended converting the 25 percent of schools that scored the lowest on standardized tests to privatized charter-school status – a plan under which schools receiving public funds are run by independent charter associations, or for-profit entities, and operate outside the authority of local school boards).
• Teachers in Seattle passed a resolution of non-compliance with McKinsey’s study of the Seattle Public Schools in protest of their record of favoring privatization, high-stakes testing, and other tactics associated with the No Child Left Behind Act – see:
http://seattletimes.nwsource.com/html/opinion/2004078970_hagopian18.html
• McKinsey have been criticized by CNN as the developers of the controversial insurance practice in the USA whereby insurance companies will fight injury claims against them if the claim involves only soft tissue injuries – this is done because these types of injuries are hard to verify by X-ray or other common examination methods other than surgery
• The then British Prime Minister Tony Blair faced criticism in the Financial Times for hiring McKinsey to consult on the restructuring of the Cabinet Office. A top civil servant described McKinsey as “people who come in and use PowerPoint to state the bloody obvious.”
• Their intimate involvement with the Enron scandal, which has been carefully hidden from public scrutiny. http://en.wikipedia.org/wiki/Enron_scandal
• Their carefully guarded track record: more than 60% of businesses McKinsey becomes involved with do not exist anymore within 3 to 5 years from the start of their involvement.
• The Hunter Strategy devised by McKinsey killed SwissAir: http://www.economist.com/node/705265
These guys are bad news – steer clear of them.

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