Co-Founder Taliferro
Introduction
The recent scolding of McKinsey & Company by regulators for its weak consulting work at Silicon Valley Bank (SVB) sheds light on a recurrent issue in the corporate world: the tendency to prioritize relationships over expertise and ability. The US Federal Reserve's post-mortem report on SVB highlights McKinsey's failure to identify critical shortcomings in the bank's business model, ultimately contributing to its downfall. This incident serves as a cautionary tale, illustrating the risks associated with placing undue reliance on consulting firms solely based on their reputation or connections.
Where it went wrong
When SVB sought assistance in managing new regulations as it approached the $100-billion asset threshold, it engaged a cohort of consultancies, including McKinsey, to navigate the challenges ahead. McKinsey, specifically tasked with completing an EPS assessment to measure SVB's readiness for stricter prudential standards, faltered in its duty. The Federal Reserve report revealed that McKinsey failed to design an effective program to assess SVB's vulnerabilities, submitting a report riddled with weaknesses.
The consequences were dire. SVB's business model proved highly susceptible to the risk of a sudden increase in interest rates, which materialized in 2021 and 2022 to counter persistent high inflation. As a result, SVB suffered a bank run in March, leading to its subsequent bailout and sale to First Citizens Bank & Trust. McKinsey's inability to identify and address the bank's susceptibility to interest rate hikes showcases a severe deficiency in its consulting approach.
Take the money and run
While McKinsey defended its work by claiming that it was hired for a targeted assessment rather than a comprehensive risk assessment, this response raises questions about the firm's commitment to thoroughness and understanding of its engagement's scope. Clients entrust consulting firms with critical decision-making processes, relying on their expertise and insights. In this case, McKinsey's narrow focus on specific criteria failed to account for broader vulnerabilities that ultimately contributed to SVB's demise.
Regulatory Oversight
The episode also underscores the importance of regulatory oversight. Bank examiners from the Federal Reserve rightly questioned the value of McKinsey's work, raising doubts about the consultancy's ability to deliver meaningful results. It was after SVB enlisted the help of a different consultancy to address the EPS gaps that the situation began to stabilize. This suggests that McKinsey's approach was inadequate, underscoring the need for robust evaluation and scrutiny of consulting engagements by both clients and regulatory bodies.
It is essential to recognize that while McKinsey bears responsibility for its shortcomings, the bulk of the blame for SVB's failure rests with the bank's mismanagement and the regulatory oversight that fell short. However, this should not absolve consulting firms from their duty to provide thorough and effective guidance. Clients should exercise caution when selecting consulting partners, prioritizing expertise, proven track records, and a commitment to comprehensive assessments over mere reputation or personal relationships.
Conclusion
The regulatory scolding of McKinsey in its consulting work for SVB is a stark reminder of the risks associated with prioritizing relationships over expertise. Companies must diligently select consultants, ensuring they possess the necessary skills and dedication to conduct thorough assessments and deliver meaningful results. By embracing a more discerning approach, organizations can mitigate the risks associated with shallow engagements and set themselves on a path toward sustainable success.
Tyrone Showers