Mitt Romney

Bain: A consulting firm too hot to handle? (Fortune, 1987)

January 15, 2012: 9:30 AM ET

Editor's note: Every Sunday, Fortune publishes a favorite story from our magazine archives. This week, we turn to an April 1987 item on the management consulting firm Bain & Co., which counts former Massachusetts governor and Republican presidential hopeful Mitt Romney as an alumnus (and former CEO). Romney co-founded the spin-off investment firm Bain Capital in 1984. The following story takes a close look at some of the benefits and pitfalls of the consulting firm's famously aggressive business approach.

Bain & Co. gets its hands ''deep in the trousers of client companies,'' says an executive who knows it well. Maybe too deep, the Guinness scandal suggests.

By Nancy J. Perry with Susan Caminiti

FORTUNE -- On a January morning four years ago, 30 sleek, immaculately turned-out executives sat tensely at a ring of tables in a large conference room at the Hyatt Rickeys Hotel in Palo Alto. They had flown in from all over the world for a regular partners' meeting of Bain & Co., a Boston-based management consulting firm. Their attention was riveted not on a discussion of the firm's revenues but on a speakerphone placed on a table in the center of the room.

Rising out of the ether was the voice of John Theroux, Bain's managing partner in London. He was describing a palace coup in progress at Guinness PLC, one of Bain's largest clients. Ernest Saunders, the Guinness managing director who had hired Bain, was trying to unseat Deputy Chairman Anthony Purssell, the man who had brought Saunders in to head the company. Because it was in the Bain firm's interest to have its man indisputably in charge, Theroux was seeking advice on how to help Saunders consolidate his position.

For the next two hours the partners were canvassed for ideas on how to place Purssell in such an untenable situation that he would have to quit. Ultimately a strategy was devised. ''It was quite cold-blooded,'' recalls a partner who attended. Within the month Purssell was out, and Saunders was alone at the top.

The creator of ''relationship consulting,'' Bain has built its business on the close ties that it develops with chief executives. Among the comparatively few people who know its work, the firm has become noted for the enormous power it wields with clients, for the cloak-and-dagger mystique that surrounds it, and for the shrewd, suave people it employs. Starting salaries in excess of $60,000 lure the sharpest, most presentable MBAs from Harvard and Stanford.

The brainchild of one man, William W. Bain Jr., 49, Bain & Co. has created a new type of management consultant, the quasi-insider, privy to his client's secrets, who works directly with the CEO. to help put into effect the consulting firm's recommendations. As the Guinness affair was to show, it's a concept that can be pushed too far.

Bain's relationship with Guinness began on a damp day in October 1981, when a patrician-looking man appeared, unannounced, at the firm's elegant London offices near Hyde Park. He introduced himself as Ernest Saunders and said that he needed help rather badly. During the previous 10 years, Guinness had diversified into 250 businesses ranging from yacht rentals to a drug made from snake venom. Meanwhile, sales of the company's flagship product, Guinness stout, were declining steadily, and the stock was languishing at 50 pence a share, the equivalent of 81 cents at the recent rate of exchange.

The payoff from Saunders's visit was spectacular. Within two years of retaining Bain, Guinness had sold off 150 companies, imposed one of the tightest financial control systems in Britain, and revitalized Guinness stout. Then, at Bain's recommendation, Saunders began to position the company for the Nineties by diversifying into hard liquor. In rapid succession Guinness acquired two major producers of Scotch whisky: Arthur Bell & Sons and Distillers Co.

By the end of fiscal 1986, profits at Guinness had risen sixfold, to nearly $400 million, and the stock had peaked at $5.75 a share. ''The turnaround at that terrible, awful company was the most beautiful thing I've ever seen,'' gushes a London businessman. ''What Bain did for Saunders was extraordinary.'' It was Bain's finest hour.

See also: Gingrich's 'Bain bomb' fizzles

And, ultimately, its darkest. In December, Britain's Department of Trade and Industry launched an investigation into Guinness's purchase of Distillers in April 1986 for stock valued at $3.8 billion. The department suspects that Guinness may have illegally inflated its stock price to woo Distillers' shareholders away from a competing offer from the Argyll Group, a Scottish food retailer. Guinness was thought to have purchased its own stock during the offering period to keep the price up and to have indemnified against loss other firms who bought it on Guinness's behalf.

Among those implicated in the scandal were Ernest Saunders, whom the board removed as chief executive, several top executives at Morgan Grenfell, Guinness's investment bank, and a 36-year-old Frenchman named Olivier Roux. Roux was director of financial strategy and development of Guinness and also a vice president at Bain; in 1981 the firm had lent him ''temporarily'' to its client.

Olivier Roux

Olivier Roux

One of Saunders's top aides, Roux was a member of the special ''war cabinet'' that masterminded the Distillers battle. Unfortunately he was also still on the Bain payroll, to the tune of $200,000 a year, prompting criticism that the firm was guilty of a conflict of interest and leaving Bain vulnerable to some of the lawsuits likely to arise from the Guinness affair. Roux resigned his posts at both Guinness and Bain earlier this year.

Making matters even stickier for Bain, Sir Jack Lyons, whom the consulting firm hired to help it get business in Britain, has admitted receiving more than $3 million in fees from Guinness for ''advisory services.'' His company, J. Lyons Chamberlayne, is also under investigation for accepting another $480,000 from Guinness linked to improper share buying. Bain fired Lyons in January.

So far Bain & Co. has not been accused of any wrongdoing in the Guinness affair, and Bainies, as the consultants are known, still haunt the halls of Guinness, although in fewer numbers. But a nasty question foams up from the brewing brouhaha: How could a respected, albeit highly aggressive, firm like Bain have left itself open to being tainted by the scandalous behavior of a client? The answer may lie in Bain's approach to business: ''They get their hands deep into the trousers of a company,'' says an executive who knows the firm well. ''They behave more like colleagues than consultants.''

Notoriously secretive about itself and its work for clients, Bain has over the years been labeled the ''KGB of Consulting,'' or a ''Moonie commune'' run by the ''Reverend'' Bain. Bain consultants seem possessed by a mission to increase the ''total economic value'' of their clients. Like religious zealots, they single-mindedly dedicate themselves to improving their customer's competitive position. Business is a holy war that the client must win and the competition must lose.

On the surface there is no mystery to Bain & Co. If it were a person, it would be articulate, attractive, meticulously well groomed, and exceedingly charming. It would exude Southern gentility. But it would also be a shrewd, intensely ambitious strategist, totally in control. The firm would be, in short, Bill Bain, its Tennessee-bred founder.

Unlike the consultants who work for him, Bain does not put in long days, and weekends are devoted to his second wife, Colleen, 37, their two sons, 11 and 8, and a 2-month-old daughter. Bain also has a 28-year-old son from a previous marriage. ''I spend a lot of time at home,'' he admits. ''But I think a lot about the business.''

Like a pole vaulter, Bain devotes most of his time to preparing for the event -- say, a meeting with a chief executive. Physical preparation is as important to Bain as mental preparation. He jogs daily and plays a serious game of tennis. When he walks into the client's office, Bain is in top form and in control of the situation. That control extends to the firm that bears his name.

Until 1985, when Bain & Co. incorporated, the partners were partners by courtesy only. They did not have rights to a specific percentage of the firm's earnings; rather, Bain parceled out profits at the end of the year as he saw fit. Partners could not easily argue with the split because most of them were never told what the firm earned. The partnership agreement did, however, contain a noncompete clause.

See also: Bain's jobs data: Under lock and key

When James Lawrence and Iain Evans, two European partners, told Bain in 1983 that they were going to start their own firm, Bain stalled them in his office long enough for a deputy sheriff of Suffolk County to arrive with a notice that Bain & Co. had filed a lawsuit against them.

Some consultants chafe under such a tight grip, but most display a fierce loyalty to their leader. Employee turnover, while higher than in the past, is still only 12%, lower than the industry average of 20%. One thing that has kept folks aboard is the firm's spectacular growth. Since its founding in 1973, revenues at Bain & Co. have grown at over 50% per year, compounded annually, to more than $150 million in 1986. In 1987 the company expects that number to exceed $200 million. More than 30% of those revenues will come from consulting for overseas clients, now the fastest-growing part of Bain's business. Says a former Bain consultant: ''It is a pretty damn amazing place.''

Between 1980 and 1986, the size of Bain's staff more than tripled. Today, Bain has a worldwide professional staff numbering close to 800. Not all are MBAs; to keep costs down and numbers up, the firm has over the years employed a growing number of recent college graduates, which it styles ''associate consultants.''

Bainies are a homogenous bunch. Monogrammed shirts and red ties prevail. Manners are impeccable. ''Each one of them is cut out of the same cloth,'' says Vernon Loucks, CEO of Baxter Travenol Laboratories, a longtime client. ''If you don't like the cloth, don't hire Bain. If you do, though, you know what you'll get for years.''

Headquartered on three sprawling floors in the ultramodern Copley Place building in the heart of Boston, Bain & Co. also has offices in London, Munich, Paris, San Francisco, and Tokyo. Bill Bain has come far for a man with no business background. In 1967 he was toiling away for $19,000 a year as the director of development at his alma mater, Vanderbilt University. Vanderbilt was thinking of setting up a business school, and Bain sought out Bruce Henderson, a fellow alumnus and the founder of the Boston Consulting Group, for advice. In addition to advice, Henderson gave him a job, even though Bain admits that back then he didn't fully understand the concept of depreciation.

By 1973, Bain was earning $150,000 a year as a group vice president at BCG and thought it was time to set up his own firm. On the day before Henderson was to fly to Madrid for a meeting of BCG's European vice presidents, Bain and a colleague, Patrick Graham, showed up in his office to tell him they were quitting to start a software company. An upset Henderson left for Spain as scheduled, only to be tracked down at a Spanish restaurant that night with an urgent call from his secretary. It seems the ''software company'' was setting out to solicit BCG clients, although this is a point Bain disputes.

Henderson caught the next flight back and frantically began rousting his consultants out of bed to get to his firm's clients before Bain did. Recalls Henderson: ''It was war.'' By the time the guns stopped firing, several weeks later, Bain and Graham had made off with seven of BCG's consultants and two of its biggest clients, Black & Decker and Texas Instruments (TXN).

Henderson, now a professor at Vanderbilt's business school, felt that he had been a mentor to Bain, and he was bitter. Yet today he says, ''Bill is an imaginative man. He is a very able man. I wish he had stayed.''

Bain was itching to try a new approach to management consulting. During his stint at BCG, he had grown increasingly dissatisfied with traditional project-oriented consulting. Says Graham, a self-effacing Midwesterner: ''The client would think he had a marketing problem, and then you'd find out halfway through the project that he really had a cost problem.'' Hence Bain's idea to focus on the profitability of the entire organization.

To alter a company's economic trajectory requires a thorough understanding of the competition, Bain says. ''All big companies are out there clashing against each other. The company that knows what it wants to accomplish and how it wants to position itself against its competitors has an advantage.'' Such knowledge demands data and a great deal of time for analysis. So Bain would strike a deal. In order to guarantee clients a proprietary strategy, he promised that his firm would not work for their competitors.

The notion was unique; other consultants thought nothing of working for two or more competitors simultaneously. In return for abiding by that restriction, Bain ultimately expected a long-term commitment from the client. Says one: ''Because of their guaranteed exclusivity, they're privy to stuff that makes them insiders, really.''

He also insisted on something else: He wanted to work directly with the chief executive. That partnership with the CEO more than anything else is the key to the firm's success. For one thing, Bain has seldom had to market itself; it lets satisfied customers do the job.

Word of Bain's unique product has spread, primarily by word of mouth, from boardroom to boardroom. Chief executives at Baxter Travenol (BAX), Chrysler Motors, Dun & Bradstreet (DNB), Owens Illinois (OI), and Sterling Drug rave about Bain's services. If a satisfied chief executive is worth his weight in billings, a dependent one is even better. Indeed, competitors carp that the Bain approach demands an insecure CEO. That is not exactly true, says a former Bain partner: ''Ideally we wanted a paranoid CEO.'' From this unpromising clay, he adds, ''Bain creates unbelievably powerful CEOs.''

To hook the big boys, Bain consultants sell not a 50-pound report but tangible results. To that end, Bainies stick around to implement their recommendations. This also helps the firm achieve another of its objectives -- to grow its billings from a client every year. With Bainies swarming all over them, it becomes difficult for clients to disengage themselves from the firm. Says one: ''They anchor themselves in the stomach of the business. They forge a dependent relationship: 'If you have a problem, call us.' There should be a weaning-away process.''

Sensitive to the criticism of the firm as a tapeworm in the corporate intestine, Bainies take pains to prove to clients that they add value. Four years ago the firm developed a ''Bain Index,'' which charts the performance of Bain client stocks against various indexes. The index, audited for Fortune by Price Waterhouse, shows that the stock market value of all Bain's U.S. clients has increased 319% since 1980, compared with 141% for the Dow Jones industrial average and 67% for an index of stocks in industries in which Bain has clients. Bain also conducts periodic meetings with its clients to quantify the results of its consulting activities. The goal: to produce value worth 10 times fees. Bain typically bills out its consultants at a rate three to four times the consultant's salary.

The Bain approach has yielded some remarkable successes. When National Steel hired the firm in 1981, it was the highest-cost producer of flat-rolled steel in the country. A small task force of Bain consultants undertook a six- month study of the steel market. While its conclusions were hardly surprising -- it urged National to downsize, modernize what was left, and cut costs -- it saw to it that National Steel was the first company in the industry to adopt a new continuous-casting technology for all its steel operations.

Bain consultants were accused of running the company, and line managers who disagreed with their recommendations found themselves ousted or moved around like chess pawns. But, says the company's president, James Haas, ''they weren't dancing around our boardroom.''

By 1984 National Intergroup, as it was renamed, had become the lowest-cost steel producer in the country. Haas estimates the economic value added to the company during that period at close to $200 million per year. Says he: ''It wasn't hard to tell you were getting more Bain for your buck.''

At Chrysler, Bainies figured out the fewest ways to produce the Omni Horizon that would still incorporate 99% of the combinations of options that customers wanted to buy. Largely as a result, Chrysler was able to lop $1,400 off the price of the Omni. Chrysler plans to extend Bain's analysis to other cars as well, and has the firm beavering away on half a dozen other fronts. ''Bain consultants have a peculiar tenacity about them,'' says Chrysler Motors Chairman Gerald Greenwald. ''They'll dig up 50-year-old city planning commission records just to understand a competitor's building costs.''

Convinced that the firm really does add value and tantalized by the juicy profits it is helping to squeeze out for clients, Bain has moved to grab a bigger piece of the action for itself, with results that have consulting industry eyebrows heading skyward. As Bill Bain puts it, the firm has ''quite naturally'' begun to experiment with ''more uniquely appropriate'' methods of getting compensation from its clients. For example, it wants its publicly traded companies to pay it with a combination of fees and stock appreciation rights, so that its objectives, Bill Bain explains, ''will be more closely aligned with those of our clients.'' Bain claims that a few companies have been willing to go along with this unusual compensation scheme, although he will not name any.

Mitt RomneyBain also wants to expand its direct investment in its clients. In 1984 the firm set up Bain Capital, a limited partnership run by W. Mitt Romney, son of George Romney, a onetime presidential hopeful. The partnership invests in start-up companies and buyouts of small to medium-size firms in which Bain feels it can add value with its advice.

Preliminary results have been impressive. Bain Capital has so far acquired seven companies and started nine. The combined rate of return of all the investments the partnership has made since 1984 exceeds 60%. The firm also plans to acquire ownership in larger private companies. Grumbles James Kennedy, publisher of Consultants News: ''What they are doing flies in the face of everything we know about ethics in management consulting.''

The real problem for Bain & Co., though, may be the firm's tendency to alienate and weaken lower-level managers at the companies where it works. Complains a former executive at Dun & Bradstreet: ''Once Bain gets into a company, and D&B is a perfect example, there is nobody left who is credited with being able to make the decisions and do the analysis that are part of his job.'' Adds an executive at Monsanto (MON), a company that was Bain's biggest client during the mid-1970s: ''On a scale of one to 10, I'd give them a nine for antagonizing our people and creating management problems.''

See also: What Mitt Romney did at Bain

Not surprisingly, shortly after Monsanto's chief executive retired in 1984, the company retired Bain as well. Notes the chairman of another management consulting firm: ''Their product is brilliant. It's the package that has been a problem. Five million Bainies saying, 'Stand aside, asshole. Here we come.'''

Chastened by some early failures -- the firm lost Texas Instruments and Black & Decker as clients -- Bain has made more of an attempt to avoid what one ex-Bainie calls the ''transplant-reject syndrome'' that results from not fitting into the client organization. Bain claims it now builds consensus at all management levels of a client company and encourages line managers rather than Bain consultants to present reports to the chief executive. Says John Halpern, one of the firm's founders: ''We've become more and more explicit in our description of the conditions under which we'll work for a client.''

In addition to the requisite sense of partnership with the CEO, he says, there now must also be a ''collaborative relationship with the organization.'' Indeed, Bain offers a free acquaintanceship period to see if consultant and client can work together.

In Guinness, Bain found what might have seemed the ultimate client. Ernest Saunders showed up when the firm was struggling to crack the London market. ''The Guinness relationship was held up within Bain as the ideal,'' says a former partner in Europe. ''It was the perfect marriage.'' Bain became so entrenched at Guinness -- as many as 70 or 80 Bainies worked there at any one time -- that managers complained that they couldn't do anything without the consultants around. They had become, says a former Bain consultant, ''the brains of Guinness.'' One division president physically threw a Bainie out of his office. Still, fees paid the firm soared as high as $12 million per year.

Ernest Saunders became dependent on Bain. He hounded Olivier Roux to come to work for him as his financial director. When he couldn't persuade Roux to quit, he nagged Bain for a loan. How could the firm refuse? Guinness was one of its most important European clients. Bain reluctantly seconded Roux to Guinness.

The arrangement was to have lasted only until Saunders could build his own management team. But when Saunders brought in David Defty as a replacement for Roux in August 1984, Roux accepted a seat on the Guinness board of directors. Although Bain had an explicit policy of not allowing its consultants to serve on client boards, the firm made an exception for Roux.

Defty left Guinness as the Distillers battle was heating up, and Roux once again became financial director. It was then that he found himself caught up in a mess of conflicting loyalties. Should he go along with the scheme or blow the whistle? Either way, he placed one or both of his employers -- as well as one of the largest takeovers in British history -- in jeopardy. Comments a source close to Roux: ''It's all a pretty sad story.''

Bain has tried to contain the damage to its reputation, particularly in Europe, telling new hires that the publicity has provided it with free advertising and assuring clients that the firm will suffer no gross embarrassment. So far the fallout appears to be minimal.

One thing seems clear: The Guinness affair is unlikely to change Bill Bain. Asked recently what drives him, he thought for a moment. Sitting in the serenity of his royal-blue office, surrounded by Oriental ceramics, fresh flowers, and family photographs, he took a sip of his ever-present Dr Pepper, tapped his index fingers to his lips, and stared into the Boston twilight. A man who takes care to say exactly what he means, he finally settled on just the right phrase: ''I enjoy staying at the edge of the state of the art.''

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