Does McKinsey need to revamp its strategy for Emerging

Markets, especially when it comes to government

contracts?
Strategic dilemma by: Adithi Raju

Descriptive info
Main firm: McKinsey
Secondary firm (if any): Eskom
Industry: Consulting
Year when event took place: 2015

1
Story
In late 2015, McKinsey signed a contract with Eskom, a state-owned power company in South
Africa. The deal was touted to be the biggest ever in Africa, with an estimated value of $700 M.
Eskom was struggling with maintaining operations and suffered another setback after a boiler
explosion. McKinsey stepped in to help Eskom with its rebuilding and turnaround efforts.

However, McKinsey failed to do a robust due diligence of the stakeholders involved before
entering into a contract, which turned out to be illegal. Eventual investigation revealed that a
Senior Partner at McKinsey was enabling the funneling of money from Eskom into Trillian,
another management consulting firm owned by the Guptas- an Indian family with links to the
then president Jacob Zuma. The subsequent fall out led to a major scandal in South Africa, with
significant anger directed at McKinsey. This prompted the firm to temporarily exit the country
and bring in senior level executives to handle the PR nightmare that followed.

The firm’s recovery from this setback was further delayed by the next steps it took. McKinsey
denied any plausibility or involvement in the scandal and claimed to receive a fair pay to do fair
work. This not only further angered the relevant players in South Africa, but also brought into
question years of reputation the firm had built for itself. The role played by a senior partner in
the scandal further raised questions about governance and risk management mechanisms the firm
had failed to institute while working with state-owned companies.

Eventually, McKinsey’s Managing Director, Dominic Barton, decided to change course and
move away from a defensive stance to a more reflective one. In an effort to rebuild its image in
South Africa and the world, McKinsey asked 2000 of its global partners to repay the country
from their own pockets.

McKinsey is still embroiled in the investigation and these are the questions they are held
accountable for— How did a company like McKinsey, famed for its diligent and comprehensive
approach to problem solving, miss such a big red flag in South Africa? And more importantly,
what are some of the key lessons it can take away from this mess to avoid a similar one in the
future? Finally, what should its strategy in South Africa be—quit while they are ahead or focus
efforts and resources on regaining lost ground in the country?

Link to full article: https://www.nytimes.com/2018/06/26/world/africa/mckinsey-south-

africa-eskom.html
Source: New York Times
Date of publication: June 26, 2018
Author: Walt Bogdanich and Michael Forsythe

2
Question 1
If the negotiation process stipulated that Trillian receive a percentage of the deal for McKinsey
to win the contract, what trade-offs did McKinsey consider before finalizing a decision? In
retrospect, should they have brought Trillian in or asked for further information?

3
Suggested answer to question 1
This is a classic example of a trade-off turning sour for an organization. McKinsey pursued an all
or nothing strategy to successfully convert this deal in South Africa. It had a lot to gain—a foot
in the door of one of the fastest growing emerging economies in the world. The partnership was
valuable to the path McKinsey was forging for itself with government consulting. Additionally,
the deal was structured in a way that McKinsey would only get paid if they successfully
delivered. Eskom was a flailing company with major operational issues. For McKinsey to take
on such an at-risk client, there should have been significant potential rewards. In this case, if
McKinsey delivered on its commitment, it stood to win a payout of nearly $700M.

What did McKinsey stand to lose?

The first signs of trouble were revealed when a third player was brought in. Eskom wanted
McKinsey to work with a local management consulting firm- Trillian- to deliver the project.
While it is not uncommon for firms to do that, Trillian had no significant prior experience in
South Africa, and at the time of the deal was staffed with only two consultants. Further, the
company refused to indulge McKinsey’s request for full disclosure on ownership. All these red
flags were ignored, and McKinsey went on to sign the contract with Eskom. At this point, if
things did go south, the firm stood to lose more than its reputation. There was a huge legal risk
looming on the horizon.

Who made the final decision?

In such a case, the culture played a big role in the final decision taken regarding Trillian. While
the jury is still out on whether McKinsey knew about Trillian’s dubious involvement, it is
obvious that important decision makers believed the subsequent benefits outweighed the
potential risks of massive reputational damage. In an analysis of the tradeoffs that were taken
into consideration here, it is possible that some decision makers only accounted for individual
gains.

What should have been done instead?

In the case with any high-risk partnership, the focus needs to be on thorough due diligence
before following through with the deal. In this case, McKinsey ignored several red flags—1. It
was operating in an environment where corruption was rampant 2. Eskom was struggling to stay
afloat; an outcome-based payment increased the risk of exposure 3. Trillian’s unwillingness to
share information clearly signaled suspicious intent. A deeper analysis of tradeoffs would have
presented a clear picture of this deal bringing in more bad news than good for McKinsey.

4
Question 2
Before entering into the contract with Eskom, there was significant pushback from senior
executives at McKinsey. What were the decision structures and incentives that came into play
leading to the outcome? What is the best way to approach government contracts in the future?

5
Suggested answer to question 2
On studying the consequences of the fall-out, it is very clear that there were multiple
stakeholders who signed off on this deal. From the resignation of a senior partner and lawyer at
the South Africa practice to the transfer of the head of the Africa practice, it is clear that it was
group level decision making across the hierarchical structure that led to the final outcome. As for
the incentives, there are clear organizational incentives to be achieved from such a decision, but
the flaw exists in decisions linked to personal incentives. Any organization that gives an
individual with vested interest absolute power to decide exposes itself to a legal and financial
risk, and McKinsey was the perfect example.

Unintended consequences of an incentive system

The article highlights the dangers of an outcome-based payment. In this case, the consulting firm
could be serving its own interests in advising the client to take a particular action. McKinsey
learnt an important lesson that government contracts need to have a cap on the fee structure in
order for the decision making to be fair and effective.

Additionally, the case highlights the problem with pursuing a single-minded goal without
considering further contributing factors. Other consultants who played a role in the decision-
making process should have been incentivized to conduct due diligence instead of successful
deal conversion. Following this, they should have been sufficiently empowered to call out any
discrepancies and escalate them to relevant stakeholders.