McKinsey's Playbook: What He Knew That Everyone Else Didn't

Mentor Mindset #1 · James O. McKinsey (1889 to 1937) · founder of McKinsey & Company

Everybody in business knows the name McKinsey. Hardly anybody knows the man behind it.

James O. McKinsey was an accountant who saw that a company's numbers could do more than keep score. They could steer the business. He wrote that idea down, sold it, and built what became the biggest name in consulting.

But he never built that firm to run without him. Two years after he died, it split in two.

The 30-second version

• Who: A CPA from the Missouri Ozarks who founded McKinsey & Company in 1926.
• What changed: In his 20s, he studied teaching, then law, then business. In his 30s, everything he did built on one idea.
• The habit that made it work: He wrote his method down, then turned it into a checklist.
• What it cost him: The firm still depended on him and on one big client. When he died, it lost both.
• The lesson: A business is worth more when it can run without the person who built it.

Who he was

McKinsey grew up in a three-room house near Gamma, Missouri, in the Ozarks (Johnson County history, Commoncog). At a time when budgeting was mostly something governments did, he showed it could help businesses plan and stay in control (Encyclopedia of Chicago).

• His 20s: Earns degrees in teaching, law, and business, and teaches bookkeeping and high school along the way (Johnson County history).
• 1917 to 1919 (ages 28 to 30): Serves in the Army Ordnance Department, rising from private to lieutenant. Becomes a CPA in 1919 (Johnson County history).
• 1922 (age 33): Publishes Budgetary Control, the first book on business budgeting (Palgrave Encyclopedia).
• 1924 (age 35): Publishes Managerial Accounting, the first managerial accounting textbook, and is elected president of the national association of university accounting instructors (Palgrave Encyclopedia).
• 1926 (age 37): Opens James O. McKinsey & Company in Chicago. Its founding client is Armour and Company (Umbrex, Commoncog).
• 1931 (age 42): Writes the General Survey Outline, a 30-page checklist for evaluating a company (Commoncog).
• 1935 (age 46): Becomes chairman of a struggling client, Marshall Field & Company (TIME).
• 1937 (age 48): Dies of pneumonia in Chicago (TIME).
• 1939: The firm splits in two (Commoncog).

Where he started, and the turn

Before, in his 20s: He earned degrees in teaching, law, and business, and taught bookkeeping and high school along the way (Johnson County history). Three fields, no single direction.

The turn: In the Army, he traveled to military suppliers and found a disorganized supply network (Commoncog). Back home, he went all in on one idea: use accounting to run a business better. Through the 1920s he wrote book after book on it (Palgrave Encyclopedia, Johnson County history).

After, in his 30s and 40s: A book led to a client, the client led to a firm, and the firm led to a checklist. Each step built on the one before.

Why it matters to you: The problem usually isn't starting new things. It's starting over. McKinsey kept taking on new projects, but each one built on the last.

The habits that built it

The record shows four working habits. No reliable source describes his daily routine, so we won't guess at one.

1. He wrote it down before he sold it. Armour's treasurer read Budgetary Control and hired McKinsey to put its system in place across the company. That became the firm's founding client, and the treasurer later left Armour to join the firm (Commoncog).

Try this: Write a two-page guide to the problem you solve best.

2. He turned his judgment into a checklist. In 1931 he wrote the General Survey Outline, a 30-page checklist covering a company's finances, operations, competitive position, and management depth. During the Depression, banks hired the firm to judge which companies could be saved, and that work kept the firm afloat (Commoncog).

Try this: Pick one thing only you know how to do. Turn it into a checklist someone else can follow.

3. He kept teaching while he built. He taught at the University of Chicago through the firm's early years and didn't leave academia until 1935 (Commoncog, Johnson County history).

Try this: Explain your process to someone once a month. Teaching shows you the gaps.

4. He took the lead in his field. In 1924 he became president of the national association of university accounting instructors, the group that became today's American Accounting Association (Palgrave Encyclopedia).

Try this: Take one leadership role in your industry this year: a board seat, a committee, or a talk.

The mistake: a firm that needed him

What happened: By 1935, Marshall Field & Company had lost $13.2 million in four years and had an $18 million loan coming due (TIME, Commoncog). McKinsey's team recommended deep cuts. The board then made him chairman and put him in charge of carrying them out. He shut down the wholesale business and reorganized the mills, and the company was back in the black by 1937 (TIME). But the work wore him down, and he died of pneumonia that year (Commoncog).

Cause and effect:

• Cause: The firm's direction came from McKinsey. Effect: After he died, his two lead partners couldn't agree on where to take it. One wanted a regional firm of experienced accountants. The other wanted a national firm. In 1939 they split it in two (Commoncog).
• Cause: One client, U.S. Steel, made up 55% of the firm's billings. Effect: That work ended shortly after his death. With its reputation also hurt by the Marshall Field cuts, the firm lost money that year (Commoncog).

Why it matters to you: You don't get to pick when you step away. A health scare, a family emergency, or a big opportunity can pull you out with no warning, the way a client's crisis pulled McKinsey out. If your business loses its direction or most of its revenue when that happens, the damage is done before you can fix it. It's also one of the first things a buyer checks: how much does this business depend on you, and on any one customer?

This week's practice

Write your playbook, 15 minutes a day.

• When: before you open email.
• What: add to one running document. Each day, answer one question about how your business works: what you check, why it matters, and how you fix it.
• Track it: mark the calendar each day. Five marks by Friday is a win.

How I'm applying it: I'm doing this myself this week, writing down how I get a business ready to sell. I'll report back in the next issue.

Pass it on

Know an owner who's the only one who knows how the place really runs? Send this to them.

Next week

Michael Gerber, author of The E-Myth, on why so many owners end up working in their business instead of on it.

Sources

• The Origins of McKinsey, Commoncog case library. Draws on Duff McDonald's The Firm (2013).
• "Business & Finance: Professor's Purge", TIME, December 27, 1937.
• "Milestones", TIME, December 13, 1937.
• "McKinsey, James O. (1889 to 1937)", by Tonya and Dale Flesher, The Palgrave Encyclopedia of Strategic Management (2018).
• Accounting, Encyclopedia of Chicago.
• "1912: James O. McKinsey graduates from UCM", Johnson County, Missouri history, drawing on University of Central Missouri archives.
• Profile of McKinsey & Company, Umbrex.
• Facts cross-checked against Wikipedia.

A note on the sources: Sources disagree on the exact years of his early degrees, so we say "his 20s." The 55% figure and the year-end loss come from one source (Commoncog, citing McDonald's The Firm).