Using the hypothetical decline of McKinsey as an example, this article reveals several crucial career lessons on how to combine frugality, or efficient living, with ethics to significantly improve your career options and career flexibility.

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Firmsconsulting is built on a strong foundation of ethics. Many clients struggle to understand how that leads to business success. They assume it is an intangible benefit. It is not. There is a clear, measurable and direct link.

This piece explains how such a model can be used to create significant upside in your career.

Career flexibility is a pre-condition for career success. However, you cannot have career flexibility unless you live well within your means. And if you live outside your means you will be forced into poor ethical choices, which further reduce your career flexibility.

How does that work in practical terms?

Ethics, Frugality & Career Flexibility

Most people who breach their values do not get up one morning and decide that today is the day they will cross the Rubicon. It happens much more subtly and usually with a forced drift into such a situation.

Good people routinely do not do good things.

There were times when I have done things I have regretted. It was usually forced. And my regret is not so much that I stepped outside my moral comfort zone. Rather, I regret placing myself in the situation where I was forced to do something unethical.

That is because unless I change the environment, I could likely be forced into the same situation again.

So if the environment matters, how do you change the environment?

When you step outside your ethical boundaries, it is usually because you need to do so or you want to do so. This is a crucial distinction of the two types of ethical lapses.

In the first type, maybe you tried to sell a client a hip replacement they do not need since you are paid a commission and you really need the money to make your monthly rent. If you do not make your rent, your kids and wife will be on the street or you will have to move in with your in-laws.

In this example, you need to breach your ethical boundaries since you really have no choice. You need to do so.

In this type of ethical breach of “need”, living a simpler life could have created a financial buffer or savings, in simple English, which could have allowed you to avoid this situation. In other words, you could have had a choice. If you had a savings cushion, you could realistically have done something you felt was more acceptable.

In most cases, ethical breaches occur because people do not have the financial cushion to create an alternative option. In other words, you have no choices and cannot walk away from this.

You also open yourself to neglect and abuse. If someone knows you really need something, they hold all the leverage.

In the second type, wanting to step outside ethical boundaries, you may not need a Porsche Panamera but you really want it because your friend drives one, and you are willing to do whatever it takes to obtain the cash to fund such a lifestyle. This is the flip side of “need” and it is equally dangerous.

If you automatically throttle your lifestyle back to what you can afford, you will never be in a position to want more. This is not to say you should not be successful or wealthy. It just means that wealth itself should not be the objective, but rather wealth should be the outcome of being successful at what you do.

Ethical breaches of “want” are the ones you read about in the newspaper all the time. They are flashy and get attention. Ethical breaches of “need” are not deemed worthy by the press, but they are more likely to occur to you, especially in the early stages of your career.

Think about any major financial fraud in the recent press. The CEO gets all the vile attention but many junior employees also willingly aided and abetted the act. You could argue one was a breach of “want” and the other a breach of “need”. I can assure you the feeling of guilt is the same for both parties.

Moreover, ethical lapses of “need” can be seductively warped into a heart-jerking story of compassion. Aiding the CEO perpetrate fraud because you needed the job to pay for your child’s medication is one such example. It is clearly wrong to do so but you can see how easily it can be justified. You are doing it for your kids. What could be wrong with that?

Unfortunately it is a moral trap.

The secret to staying within ethical guidelines is to always be in a situation where you have options in life. You must have the ability to walk away from a deal, opportunity, job or promotion if the need arises. Options cost money. Creating alternate paths which may never be taken costs time and money.

It means you have to work harder to save more, improve your skills and network more.

If you think this is not true, remember that Merton, Scholes and Black won the Nobel Prize in Economics for figuring out the equation to price just that optionality. Granted, they did it for financial instruments, but the equation can easily be adapted.

The bottom line is there is value in this optionality.

The insight is that living frugally creates the ability to build that financial cushion to create options in life should you not be pleased with the evolution of your career path. If you have options, you can walk away and avoid ethical lapses.

How this lack of optionality plays for a professional partnership is interesting.

At Firmsconsulting we have a rule: never bet the firm. “What” we do is far less important than “why” we have this rule.

We never undertake any investment or initiative that could expose the firm to catastrophic financial consequences. The crucial point is how we define catastrophic. It is not defined as something that will cause the firm to shut down, need to close off units or even release people.

No, our definition is much more nuanced. Catastrophic is defined as any action, which forces us to accept capital or accept capital on terms which contradict our values.

This distinction is vital to understand. We are not referring to the cost of capital. If we received the cheapest possible capital, and a lot of it, but the investor or loan bank wanted us to focus on profits, it would contradict our values.

Therefore, a catastrophe is an action, which results in limiting our independence to serve our clients interests.

When we make an investment we ask ourselves a simple question: if this failed and was completely written-off, could we survive without altering our values? If the answer is no, we will not do it. It is not even open for debate. This may appear to be a small point, but it is not.

Below, I am going to present a hypothetical situation of how any business could lose its values with the wrong kind of investments, aka living outside its means.

Career Lessons from McKinsey’s Hypothetical Death

Let’s think for a second what could happen if a firm like McKinsey or Booz invested in a major initiative which went south – a bet the firm made which just had to work or they could collapse.

Although, this situation is not so far fetched since AD Little went through this, as did Bain in 1990, there were rumors Booz was in this state before the PWC takeover and there are rumors that Roland Berger may be in this state right now.

Immediately, the firm would lose their independence. Business people think of independence as the legal holding structure. Professionals think of independence as the ability to ignore outside influence. They are distinctly different and the latter usually corrodes before the former.

In this hypothetical example, the loss may be so large that they may need to go to their banker and ask for capital to keep the business afloat. McKinsey’s legal holding structure may not change in this scenario, but they are clearly not independent. If they did things to support their values and the banker felt this was wasting money, the bank would not release the money.

Since McKinsey therefore cannot ignore this outside influence, it means they are no longer independent.

Moreover, the banker is going to ask for a plan to build revenue as fast as possible. Banks are not interested in a client’s long-term viability. They are interested in getting their capital back at the highest return and with the lowest risk. That means McKinsey would likely need to do things in the short-term which will increase revenue but hurt the values they took years to create.

Yet, if they ignored revenue and stuck to they values, they would not get the much-needed capital infusion.

The trouble does not stop there.

This infusion of capital and the related repayment plan creates an operational downward spiral, which changes the structure and philosophy of the organization.

Clients will quickly notice the difference in the way McKinsey operates and the clients McKinsey wants will leave while the clients who are more transaction oriented will join them, since by the mere action of pursuing revenue, they have become a transaction oriented business willing to sell anything to anyone at any time and for any price.

As McKinsey becomes a transaction-oriented business to pay back the loan, they will slowly change. In fact, they have no choice but to change to be a successful transaction business, which is what they would need to be to pay back the loan. That is the irony of the situation, to go back to their original values McKinsey needs to move further away from those values as quickly as possible.

McKinsey’s systems, processes, culture, language, remunerations structures all change to meet the bankers mandate of faster revenue and as much of it as possible. You may think that they can pay off the loan as quickly as possible and go back to business as normal; yet, they are now a new company and likely cannot remember the old model.

During months when McKinsey needs to replay that loan, a typical management meeting will invariably revolve around profits, retained earnings and interest coverage. This conversation is anathema to a professional partnership. McKinsey should never make decisions for the sake of profit.

As these discussions continue, employees will see the change and think profit is the most important measure. That becomes very difficult to change later.

Beyond the culture, do you really think there are many professionals in the world who would want to go back to a smaller McKinsey with higher margins and values, after having feasted at the trough of uninhibited growth?

So, even if McKinsey had the gumption to push for a tighter partnership after repaying the loan, they would need to fire people, lower partnership payouts and deliberately shrink the firm.

Imagine explaining that logic to a business reporter who typically uses growth and share price as proxies for success. Yet, that is exactly what a firm of professionals must do if it is to survive.

Not handled well, that kind of turmoil tears apart a firm, or leads to an ousting of the managing partner and the creation of just another transaction-oriented business, which preaches values but chases the almighty dollar.

Therefore, do not even go down this path of betting the firm. All roads lead to ruin.

Independence must be sacrosanct: personal or professional.

It must not even be a point for discussion.

Living your values

Finally, there is a practical matter about the ability to be independent and live by your values: it must not be an idle threat. It cannot be a fancy set of words which are placed on a website/blog or things you tell your co-workers. It needs to be constantly practiced so that everyone with whom you engage knows it is real.

Unless you are disengaging from people who do not subscribe to your value system, you have no value system.

Eventually through routinely pulling the trigger on value breaches, you will only attract people, friends and employers with those very same values and this has a cascading effect as they draw more like-minded people into your orbit.

However, act and act aggressively on value breaches. In fact, overreact. It is the one time when you cannot be blamed for overreacting. I cannot stress this enough.

The thing is that values/culture change so fast, that unless you stamp out lapses then and there you might as well have poured fuel on the fire.

I recall speaking to the worldwide marketing partner of one of the world’s largest consulting firms last year. We regularly speak since he wants an outsider’s perspective on the firm. In our last conversation he was using terms like “taking market-share in region x” and their plans for doing so.

Midway through that, I very politely stopped him and said he should not be discussing market share at all. If he speaks like this, his junior partners will adopt the language, as will their managers, their associates and finally the business analysts. It is the wrong language and demeaning to clients. No client wants to be taken! They need to be earned.

The only thing his firm should be discussing is how to improve their ability to serve clients’ needs. If they did that right, everything else would follow.

Although, that was a good conversation, he has never called me back since then. We clearly disagreed on how clients should be treated. That is a clear example of living our values. We politely indicated that clients deserve to be treated better.

It should be obvious this independence has a cost: add up all the people with whom you declined to work, and they could well be the majority. This is the cost of having values and it must be embraced.

Michael Boricki is a partner and director, based in Firmsconsulting’s Toronto office.

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Image from Trey Ratcliff under cc.