How McKinsey Plans to Adapt to AI (and Reinvent Consulting)

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0:37That's Indeed.com slash podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed sponsored jobs. 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.

1:23so i'm here with bob sternfels the global managing director of mckinsey and bob thank you for being with us oh it's great to uh great to be here i'm excited to uh to have a chat with you so i want to start mckinsey uh is turning maybe has turned 100 hbr by the way we're 103 so welcome to the Century Club. You know, 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? I guess I would start with the nature of how we do our work.

2:01And 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. And so, you know, the whole notion in some ways of credit of did you create something novel or did you, you know, best practice is a bit of a, 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, you know, we clearly invest a boatload in proprietary IP. We invest over a billion dollars a year in innovation, new thought, new ideas.

2:44McKinsey 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 kind of saying, how's the world when you look at assets and liabilities, that's not a best practice. That's a 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.

3:25They want to understand innovation around the world and perhaps even cross sector. And that is part of our model. So I'd probably say it's, 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 their, you know, the reality that they're in. 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.

4:09To what extent is AI shifting the economics of your industry, headcount, pricing, productivity? Are margins improving? Are they under stress? I mean, what are the internal conversations about AI for your business? AI? We haven't talked about that at all. You should. It's really cool. Can you educate me on it? No, I'm just kidding. I mean, it's hard to have a conversation in any context right now that doesn't link back to some form of AI. You know, I think this question around AI and how it impacts. Propel Fitness Water. With Gatorade electrolytes, zero sugar, and vitamins, Propel hydrates better than water.

4:52to help you get the most out of your workout and get back to your best self. What propels you? Propel with Gatorade Electrolytes. When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications, and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a$75 sponsored job credit at indeed.com slash podcast. That's indeed.com slash podcast. Terms and conditions apply.

5:26Need a hiring hero? This is a job for Indeed Sponsored Jobs. McKinsey, there's kind of two sides of that coin. There's a client-facing side, and then there's a way of the implications on McKinsey. And kind of the way that I summarize it is, 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. And I may, Adi, just start with a bit of what I'm actually hearing from clients around the world, across all industries and across all geographies. And, you know, I really hear in the truth room maybe two things.

6:11On 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, you know, 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.

7:08And 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 it's interesting. I know we spend 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.

7:47This is for large, large enterprise. And, you know, it's things like, well, what does your 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, you know, 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?

8:24And 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 kind of say, okay, what does that mean for McKinsey?

8:57Which is, I think, where you started the question, Adi. And it means a couple things for us. One, you know, we're applying this to ourselves. And, you know, I often get asked, how big is McKinsey? How many people do you employ? And 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. And a little over a year and a half ago, that was 3 ,000 agents. Propel Fitness Water with Gatorade electrolytes, zero sugar, and vitamins. Propel hydrates better than water to help you get the most out of your workout and get back to your best self.

9:41What propels you? Propel with Gatorade electrolytes. When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a$75 sponsored job credit at Indeed.com slash podcast. That's Indeed.com slash podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed sponsored jobs. And I originally thought it was going to take us to 2030 to get to one agent per human.

10:22I think we're going to be there in 18 months and we'll have every employee enabled by at least one or more agents. And we're going to have a workforce that is human and agentic. And how do we kind of navigate that? That's kind of 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 what's call it pure advisory work, which was a lot of the origins of our firm and kind of a fee-for-service model, etc. 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.

11:15And it aligns our interests with our clients a lot more and I think will be the way of the future. Now, I mean, AI is going to get better, right? We're still in the early phases of generative AI. If technology can continue to commoditize even the kinds of analysis and insight that McKinsey has long provided, what will clients actually be paying for when they could probably do a lot of that themselves? The kind of problems that we have tackled with our clients over 100 years has not been static, Adi. It has changed radically. And even I'm now considered a dinosaur in our firm because I'm a little over 30 years with us.

12:01But 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 of 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?

12:41they'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. What is the evolving skills profile then of a management consultant? Do you even know yet? I mean, what are you looking for in new hires? And that must be evolving pretty quickly. 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?

13:20And I got a, we're doing great, Bob. We're doing great. I said, well, why? 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, right? It's there's 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 kind of kept asking the question, but 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 really only 500 pathways that would lead you to McKinsey.

13:59And 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 sealing because you have the right credentials. And so we actually applied analytics on ourselves and took the last - Propel Fitness Water with Gatorade electrolytes, zero sugar, and vitamins. Propel hydrates better than water to help you get the most out of your workout and get back to your best self. What propels you? Propel with Gatorade electrolytes. When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs.

14:36It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a$75 sponsored job credit at Indeed.com slash podcast. That's Indeed.com slash podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed Sponsored Jobs. 20 years of data and said, what are the skills and characteristics that are most likely to make partner in McKinsey? Because that's, it's not perfect, but it's kind of a marker of success.

15:11You know, only one in six hires make partner. And it turned out we had some bias in our system. I'll just give you, I mean, it was McKinsey, so we had like 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. It may sound shocking, but we weren't indexing enough on had you had real experience in a significant way working with others.

16:02Fundamentally, we're about helping our clients change. And if you've 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, a human-to-human skill that we're now indexing a lot more on. And then the last one was was interesting. Did you have the aptitude to learn new stuff versus had you mastered the subject that you chose to study? And my youngest guy used this one against me, actually, when he was a middle guy, 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, you know, 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.

16:52Smart. Send his resume to me. It's the only time he quoted me, Daddy. 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 superhuman with these AI tools, what do you want to add on top of this resilience, teamwork, ability to learn new stuff?

17:36That 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 and just be honest with you. And one of them is, well, what do the models not do well? What do the models not do well? One, they don't aspire. They're not good at setting the right aspiration level. And so when you think about what great leaders do is 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.

18:20So we're kind of focusing on that. The second is judgment. And you've seen time and time again, these models don't, 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 kind of 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.

19:00Propel Fitness Water with Gatorade electrolytes, zero sugar, and vitamins. Propel hydrates better than water to help you get the most out of your workout and get back to your best self. What propels you? Propel with Gatorade electrolytes. When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications, and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a$75 sponsored job credit at Indeed.com slash podcast.

19:38That's Indeed.com slash podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed sponsored jobs. 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 kind of saying, hey, you know, 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. We sort of look back, we've looked forward. You've talked about some of the celebratory stuff that's going on.

20:11I 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? Well, I'm glad you asked. And, you know, 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. 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.

21:02And even though we'll face criticism, we're going to push back because that's what we believe in. And let me kind of parse each of those. You know, look, 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, the work with opioids and our partnerships in South Africa, you know, 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?

21:57And so one of the languages that I've used with our partners, And, you know, 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 kind of modernize us around these processes. And that'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.

22:35We want to set out to try and set the standard for professionalism for our industry. And 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've 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.

23:13So I just want 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 for our profession. But then as you say, look, 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. I mean, from the outside, it looked like McKinsey was committed to growing as quickly as possible in markets all over the world, with, by design, relatively little centralized oversight. And again, from the outside, that sounds like a recipe for trouble. Is that a fair analysis?

23:53No, not really. It's easy to kind of say that from the outside, but the truth of the matter is you have three or four forces that are going on here. You know, 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 debate sectors.

24:44It's just naive to say that you're going to solve this problem without that. And 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. And 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.

25:38And 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.

26:22And 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. I'll throw one more sort of critical trope your way, which is that 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?

27:05I hope we get out of PowerPoint entirely at some day. And I tell you that we'd 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. And 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.

27:54My hope is that that crosses a majority of the revenues by the time I'm done being the global managing cart. We've been around 100 years. You've been around 100 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? 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.