McKinsey Founds a Management Consulting Firm Summary

  • Last updated on November 10, 2022

James Oscar McKinsey, a noted certified public accountant in Chicago, established in 1925 what was to become the world’s largest management consulting firm.

Summary of Event

James Oscar McKinsey was a certified public accountant (CPA) and professor of accounting at the University of Chicago when, in 1925, he established a CPA firm that was to become McKinsey & Company, the largest management consulting firm in the world. Management accounting intrigued McKinsey. He wrote the first textbook on management accounting (Managerial Accounting, 1924) and the first book on the subject of budgeting (Budgetary Control, 1922). Both were the products of early consulting engagements. Before McKinsey, educators in accounting largely neglected the users of accounting information. Only through years of experience could an accountant master the knowledge needed to use accounting information profitably. [kw]McKinsey Founds a Management Consulting Firm (1925) [kw]Management Consulting Firm, McKinsey Founds a (1925) [kw]Consulting Firm, McKinsey Founds a Management (1925) Management;consulting McKinsey & Company[Mackinsey and Company] Business;management [g]United States;1925: McKinsey Founds a Management Consulting Firm[06240] [c]Business and labor;1925: McKinsey Founds a Management Consulting Firm[06240] [c]Organizations and institutions;1925: McKinsey Founds a Management Consulting Firm[06240] McKinsey, James Oscar Frazer, George E.

McKinsey was born near Mexico, Missouri, in 1889. In 1912 he received a bachelor of pedagogy degree from the State Teacher’s College in Warrensburg, Missouri, and a year later he received a law degree from the University of Arkansas. McKinsey’s penchant for business education was noted even by his law student colleagues at Arkansas, whose “class prophecy” predicted that McKinsey would someday buy out Draughon’s Business College (a large chain of proprietary business schools) and change the name to McKinsey’s Business College.

McKinsey’s accounting career began in 1914 at St. Louis University, where he studied and taught bookkeeping. Although he already had a bachelor’s degree and a law degree, he decided to enter the School of Commerce at the University of Chicago, where he subsequently earned both bachelor’s and master’s degrees. He received his master’s degree in 1919, the same year he passed the CPA examination. Before he had finished his degree at Chicago, he was asked to join the accounting faculty. This was a typical experience for McKinsey: He claimed that he was hired to teach in every school he attended even before he had attained his degree there.

It was during 1919 that McKinsey began his prolific writing career, which led to his being viewed as having the expertise to be a management consultant. Although much of his work was of a pragmatic nature for management use, he also wrote for accounting students. McKinsey applied a pioneering philosophy to accounting education through his emphasis on principles over techniques. Unlike other authors of the time, he required students to view accounting from the position of a manager rather than from that of a bookkeeper. Consequently, he emphasized the uses of accounting data. He believed that most firms had adequate accounting systems, partly as a result of requirements of the 1913 income tax law; the only problem that many firms faced was how to use the accounting information that was available.

Perhaps the real root of McKinsey & Company was the publication of McKinsey’s Budgetary Control in 1922. Budgetary Control (McKinsey) This book provided impetus for the spread of industrial budgeting. World War I and the resultant emphasis on efficiency provided stimulus for acceptance of McKinsey’s work, which summarized all experimentation to date in a complete budgetary program. McKinsey’s was the first book on budgeting and the first attempt to cover the entire budgetary program. Before Budgetary Control was published, budgeting was not even considered applicable to business operations; only government units used it. The book was a compilation of several articles that McKinsey had published over the two preceding years. Although these articles had appeared primarily in Administration magazine, some were also published in such journals as American Fertilizer and Cost Accountant. The book was heavily based on McKinsey’s early consulting work and included numerous illustrations of real situations.

McKinsey noted in the preface of Budgetary Control that he was indebted to his mentor at the University of Chicago, George E. Frazer, for counsel and assistance. As McKinsey’s professor, his department chairman at Chicago, and later his CPA firm partner, Frazer was the source of many of the ideas published in McKinsey’s book. Frazer was reportedly pleased with Budgetary Control because it followed outlines used in his seminar at the University of Chicago in 1917 and 1918.

In the book, McKinsey stressed the fact that budgeting is a dynamic field in which all the answers are not known. Despite the fact that the book was a pioneering effort, it covered most of the budgeting aspects used today. In 1945, Budgetary Control was included on a list of twelve indispensable books in the field of management. The author of that 1945 critique apologized for including such an old book on the list but argued that McKinsey’s work had lost none of its value with the passage of time.

Although McKinsey’s first managerial accounting textbook was not published until 1924, he publicly espoused his philosophy of managerial accounting education in a 1919 article that appeared in the Journal of Political Economy. McKinsey’s philosophy was that accounting was something that should serve as a basis of functional control in a business. In the preface of Managerial Accounting, Managerial Accounting (McKinsey) Accounting;managerial he stated that it was time to organize the business curriculum into one coherent whole:

If the accountant is to be of most service to the business executive, he must understand the latter’s point of view, and be able to present data of such nature and in such form that the executive can use it in the solution of his daily problems. Unfortunately the accountant and the business executive often do not appreciate each other’s point of view or understand each other’s problem.

McKinsey pioneered an approach that emphasized teaching students how to use accounting data. Even the problems at the end of each chapter of his textbook were unusual, in that a student could not answer them by memorizing the text material. Instead, the problems required the application of the material in the text to new situations. Unfortunately, McKinsey’s philosophy did not catch on soon enough for him to sell many books—a second edition never appeared. Another of his books was very successful, however. In 1929, South-Western Publishing Company published McKinsey’s Accounting Principles, Accounting Principles (McKinsey) which became one of the best-selling books in the field of accounting for decades.

The year 1924 marked a turning point in McKinsey’s career, as his interest began to shift from accounting and budgeting to managerial accounting. He was later to move further away from accounting as he developed his interest in management. After 1927, he taught only business policy courses and devoted the remainder of his time to his consulting work, to the exclusion of research and other faculty activities.

McKinsey is best remembered as the founder of what was to become the largest management consulting firm in the world. In 1925, he started his own accounting and consulting firm, McKinsey & Company. One of his former students later recalled how impressed students were with McKinsey’s success. McKinsey would have his chauffeur drive him to class and carry his briefcase into the classroom. Following the class, the chauffeur would reappear to erase the blackboard and take McKinsey downtown to his office.

The success of McKinsey’s firm was as much attributable to perspiration as to inspiration. McKinsey worked seven days a week and expected his staff to do the same. Staff members could never accept social engagements or even promise their wives that they would be home at night, because McKinsey might decide on the spur of the moment that they were needed in some distant city. He even made his secretary work on Christmas Day, because the client always had to come first.

Significance

McKinsey’s contributions can still be found in accounting and business education in the fields of budgeting, managerial accounting, accounting principles, business policy, managerial finance, and management consulting. McKinsey was fortunate to be affiliated with the School of Commerce and Administration at the University of Chicago at a time when that school was experimenting with a comprehensive approach to business education. He worked within the confines of that experiment and developed programs for both industry and education that are still in use today.

McKinsey’s consulting firm was immediately successful. Even in the 1920’s he charged $500 per day for his services, and he still received more requests than he could handle. McKinsey’s consulting philosophy hinged on three elements: unquestioned respectability, a reputation for expertise in an area of some concern to top management, and professional exposure. He established the element of respectability through his academic connections, used his writings to establish his expertise, and gained professional exposure through his officer roles in such professional organizations as the American Accounting Association and the American Management Association, both of which he served as president. He was also active in community organizations such as the Red Cross and various charities because he wanted to be known as a good citizen. He gave speeches to various groups most nights.

McKinsey claimed that he ate more than half of his meals, including breakfasts, with potential clients. At such a meal, McKinsey would probe the mind of his guest to learn what problems the individual was facing. He would then either offer a solution or return to his office and enlist his staff in coming up with the solution. McKinsey would then write the guest a letter full of free advice. Consequently, the guest would think of McKinsey as a person who could help solve problems; many such guests became clients.

McKinsey’s affiliation with the University of Chicago provided status to his consulting firm, but his educational background helped in another way as well. McKinsey’s teaching experience contributed to the success of the firm in that he was always teaching younger staff members. Even within the firm, he thought of himself as a teacher. Staff members never went out on a job without the proper training and the shared expertise of their leader. McKinsey’s emphasis on individual coaching did have its downside, in that he did not hesitate to point out a person’s mistakes and frequently suggested to staff members and partners how they could improve themselves. This style meant that McKinsey was never really loved by his coworkers, but he was always respected.

Another element of the firm’s success was McKinsey’s interpersonal style with clients. McKinsey would begin by establishing rapport with interviewees and then start asking questions rather than giving answers. After listening to an individual, he would diagnose the problem. Finally, he would make suggestions as to how the problem could be solved.

In 1935, McKinsey’s firm was hired to conduct a study of Marshall Field and Company, Marshall Field and Company the Chicago department store. The company’s directors were so impressed that they offered McKinsey the position of chairman of the board. Because Marshall Field was still hurting from the Great Depression, McKinsey thought the job would be a challenge. He had long been telling others how to manage their businesses; now he would have a chance to prove himself. In addition, a position as chairman of the board and chief operating officer at the largest store in the world would fulfill McKinsey’s desire for prestige and status. McKinsey severed his ties with the University of Chicago and decided to take a temporary leave from his consulting firm. He soon turned Marshall Field’s red ink into profit by making drastic cuts in departments and personnel; in fact, he received several death threats as a result of the personnel cuts. The job of cleaning up Marshall Field was accomplished at the cost of his health, however. McKinsey died of pneumonia on November 30, 1937.

At the time he became chairman of Marshall Field, McKinsey was approached by about a dozen firms that wanted to acquire his consulting firm. Although he planned to return to consulting as soon as he had solved Marshall Field’s problems, he agreed to merge his firm. A merger was accomplished with the CPA firm of Scovell, Wellington & Company to form McKinsey, Wellington & Company. Following McKinsey’s death, the firm split into two separate consulting firms, with McKinsey & Company having offices in New York and Boston, and McKinsey, Kearney & Company keeping the Chicago office. Subsequently, McKinsey, Kearney & Company changed its name to A. T. Kearney & Company because McKinsey & Company grew into a national firm and moved into Chicago.

Under later leaders, McKinsey & Company became the largest management consulting firm in the world. In addition, the American Management Association, a professional organization that McKinsey helped found and served as second president, became the world’s largest professional management organization.

James Oscar McKinsey operated at the frontiers of business research. To some, it might be surprising that the author of the first managerial accounting book and the first budgeting book is best remembered as a management consultant, but perhaps that is appropriate. McKinsey always stressed how information could be used by managers. Management;consulting McKinsey & Company[Mackinsey and Company] Business;management

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Flesher, Tonya K., and Dale L. Flesher. “James O. McKinsey.” Accounting Historians Journal 12 (Fall, 1985): 117-128. Summarizes McKinsey’s contributions to managerial accounting and accountancy education. Includes analyses of several books authored by McKinsey.
  • citation-type="booksimple"

    xlink:type="simple">Hopf, H. A. “Soundings in the Literature of Management: Some Classic Contributions to Professional Management.” In Historical Perspectives. Vol. 2. New York: General Electric, 1956. Describes McKinsey’s contributions to the profession of management.
  • citation-type="booksimple"

    xlink:type="simple">McKinsey, James O. Budgetary Control. New York: Ronald Press, 1922. The first book on business budgeting, containing virtually everything on the subject of budgeting, is still useful today. In 1945, this book was ranked as one of the twelve greatest business books ever written.
  • citation-type="booksimple"

    xlink:type="simple">_______. Managerial Accounting. Chicago: University of Chicago Press, 1924. Reprint. New York: Ayer, 1980. The first book on the subject of managerial accounting. Although not a big seller, its legacy can be traced to the most popular managerial accounting books of the present.
  • citation-type="booksimple"

    xlink:type="simple">Wendt, Lloyd, and Herman Kogan. Give the Lady What She Wants! The Story of Marshall Field and Company. 1952. Reprint. Chicago: Rand McNally, 1997. Discusses McKinsey’s role at the Chicago department store.
  • citation-type="booksimple"

    xlink:type="simple">Wolf, William B. Management and Consulting: An Introduction to James O. McKinsey. Ithaca: Cornell University, New York State School of Industrial and Labor Relations, 1978. Excellent work includes not only a biography of McKinsey but also an analysis of his perspectives and strategies. Describes McKinsey’s diagnostic approach to business problems, including his general survey outline.

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