Archive for the ‘Management consulting’ Category

Sins of the Other Bain

Thursday, May 24th, 2012

Those seeking to defend Mitt Romney’s track record at Bain Capital argue that private equity is a special kind of business. The firms that are taken over, they tell us, are often in bad shape, and restoring them to health may involve some painful surgery.

Turnaround situations, they insist, cannot be judged by customary job creation benchmarks.

The problem with this claim is that the harsh remedies applied at supposedly sick companies have often been used at healthier ones as well—and this practice is exemplified by the career of none other than Mitt Romney. Prior to his tenure at Bain Capital, Romney spent a decade as a management consultant, mostly at the firm of Bain & Co., which launched Bain Capital.

When the young Romney joined Bain & Co. in the late 1970s, management consulting was starting to be regarded with the same kind of mistrust today directed toward private equity and hedge funds. Sure, the consultants were celebrated by some as wizards of the corporate world, yet their magic frequently involved getting large companies to embark on radical restructuring that resulted in the elimination of many jobs and the multiplication of the workload of those workers who remained. Although their advice was frequently dressed up in strategic jargon, firms such as McKinsey were essentially perpetuating Frederick Taylor’s time-and-motion studies of the 1920s.

Bringing in an outside consulting firm enabled corporate managers to carry out drastic measures that would otherwise face insurmountable internal resistance. And the results could be disastrous, as seen in the retrenchment plan that Booz Allen cooked up for supermarket chain A&P in the 1970s.

Consultants fueled the manic business restructuring of the 1980s by making corporate executives think that joining in was a matter of survival. “If a chief executive officer isn’t thinking of restructuring, he’s not doing his job,” Jim Farley of Booz Allen insisted to the Wall Street Journal in 1985.

Bain & Co. was not satisfied with simply giving aggressive advice to companies; the firm wanted to be involved in implementing the changes. That could lead to trouble. During the 1980s, when Bain had some 60 of its staffers in its London office working on the Guinness account, it became embroiled in a scandal over illegal stock manipulation by the brewer during the takeover of a rival beverage company.

The creation of Bain Capital was a vehicle by which Bain’s principals could not only help implement restructurings but also profit from them in ways that were even more lucrative than consulting fees. Romney, who was tapped to run the offshoot, admitted to a Forbes interviewer (11/30/87) that his outfit worked very closely with Bain & Co., often hiring partners from the consulting firm to run the companies it was buying. Bain Capital also did deals involving companies that had been clients of Bain & Co. One of Romney’s first big scores involved the buyout of Accuride, a truck wheel unit of Firestone, which had been a long-time user of Bain’s consulting services.

Romney’s ties to Bain & Co. remained so close that when the consulting firm ran into financial problems of its own—exacerbated by a huge cash-out by founder Bill Bain and other senior executives—Romney was called in to complete a rescue that included the internal use of downsizing and restructuring measures it had so often executed at client firms.

The continuity between Romney’s work at Bain & Co. and his slash-and-burn activities at Bain Capital is suggested by the track record of his clients during his consulting years, which at Bain lasted from 1977 to 1984. It’s been reported that those clients included Monsanto, Corning, Burlington Industries and Outboard Marine.

Using the handy Fortune 500 online archive, I tracked the total headcount at the four companies during Romney’s Bain & Co. years. Each one of them had a dramatic drop: 14 percent at Monsanto, 17 percent at Corning, 25 percent at Burlington Industries and 33 percent at Outboard Marine. Together, they shed more than 36,000 workers from the end of 1976 to the end of 1984. Undoubtedly, there were other factors at work, but Romney and his Bain & Co. colleagues must have played a significant role in bringing about that job destruction.

Private equity can be a ruthless business, but its methods are not entirely unknown to the rest of the corporate world, especially when management consultants get into the act. Mitt Romney, whose business experience is supposed to qualify him for the White House, should answer for his actions at both Bains.