The conviction of Raj Rajaratnam for insider trading means McKinsey can breathe again. For now, the drip-drip of courtroom revelations about what Rajat Gupta, ex-head of the consulting firm, or Anil Kumar, a former partner, told the hedge fund billionaire, has stopped.
Mr Kumar has already pleaded guilty to insider trading. Mr Gupta, who denies wrongdoing, faces Securities and Exchange Commission civil charges. (A third McKinsey partner, David Palecek, who died last year, was mentioned in the trial, but his widow’s lawyer has said that he never agreed to “play ball” with Rajaratnam.)
Pending any action against Mr Gupta, the consulting world is wondering what will be the fall-out from the case – and not just for McKinsey.
My sense is that McKinsey itself may feel bruised by the revelations so far, but it is certainly not broken. McKinsey high-ups have been applying plenty of balm to those bruises – keeping partners and staff informed, reassuring client and alumni networks (which overlap, of course), tightening procedure.
Walter Kiechel has speculated about the temptations that faced Mr Gupta and colleagues – to be a big shot, to look down on clients, to be an insider. McKinsey will want to reiterate to all staff the principle that says not only that they should keep client information confidential but that the firm’s primary focus should be “on making [its] clients successful”, not its consultants.
Whether the bruises go deeper will only become apparent over time. One risk is that McKinsey loses customers – though dropping a trusted adviser is a very big corporate decision and most clients I’ve spoken to say they value the personal relationship with “their consultant”. Another risk is that McKinsey doesn’t pick up as much new business. A third is that, in recruiting new consultants, the “Galleon effect” temporarily diverts some potential McKinseyites elsewhere. But there’s no hard evidence yet of any impact in these areas – I understand competition for places at the firm this year has been stronger, not weaker, than usual.
Then there is the broader effect on the consulting industry as a whole. As John Gapper wrote in March:
One of the main reasons companies hire consultants is to make sure they do not fall behind what their competitors are doing – in return for parting with their own secrets, they gain access to their rivals’ suitably disguised “best practices”. The consultant is a broker who attempts to amass so much knowledge that each company has to hire him, no matter how uncomfortable that feels.
The revelation that some of those secrets leaked out has put a hole in that model (which was itself already under pressure). It’s a small hole, perhaps, but the big unanswered question is whether it will make some customers worry about whether the rest of the system is watertight.
