KPMG partner cull – between a rock and a hard place?

For a company that made over £350m profit last year, KPMG has had a rough time of late. From their involvement in the Carillion collapse, to controversial partner exits and £20m in regulatory fines, it has been a year to forget.

In recent weeks, rumours around the Big Four firm potentially culling a significant number have swirled, with the Financial Times reporting as many as 65 potential exits.

Indeed, Fox Williams, a law firm specialising in partner litigation, confirmed as much through the sheer number of worried calls they’ve received from KPMG partners considering their next steps.

Jo Chatterton, a partner at Fox Williams, explains that KPMG’s difficulties could have put the wheels in motion for the incoming redundancies.

“I think KPMG has suffered,” she says. “It’s not been doing as well as the other big accountancy firms and so it’s probably thinking ‘we’ve really got to have a holistic look at our business and where is it that we can excel’.

“Part of it is because its profits have gone down, it hasn’t got enough money to share between the partners to keep the people they really want to keep, to remunerate them in a way that will make them stay,” she adds.

Chatterton believes KPMG is likely trying to ensure its best partners are paid adequately enough to stay, while also being aware of the vicious cycle where lower profits lead to lower partner pay –and, in turn, lead to high-value partners leaving, leading to further low profits while potentially strengthening rivals.

“The people who tend to walk in the situation where a firm is doing badly are the people who are highly marketable and have lots of clients,” she continues. “They’ve got to do something to keep these people, so what they’re trying to do is cut the costs so they can make more profit, so they can pay their partners more because it’s the partners who generate the business.”

Daniel Sutherland, another partner at Fox Williams, adds that while problems may start at seemingly inconsequential levels of profit slides — like KPMG earning £58m less in 2018 than they did in 2013 –it can quickly spiral into an existential crisis.

“KPMG is obviously such a vast business that it could probably survive nuclear war,” he jokes. “But we’ve seen at least in the legal sector, in smaller but still substantial firms, where declining profits has led to the top billers leaving. That’s caused the firm to collapse effectively. So, it is a real risk, it can be existential.”

Redundancy tight rope for partners and firms

As for the partners fearing for their jobs, there are a number of legal hurdles that stand in their way when considering any litigation. First among them is the fact that partners don’t have the same rights as employees, and so aren’t protected by many of the employment laws such as unfair dismissal.

But, Chatterton says, they are protected by discrimination legislation, which applies to everyone.

“One of the things we see a lot of amongst partners is age discrimination allegations,” she says. “They’re saying, ‘I think you’ve just chosen me because I’m old, you’ve not really looked at what I can add or what I am adding to the business.’

“The other area would be around gender discrimination. You tend to have more women working part time. So, if you’ve got partners working part time, their financial performance on its face is not going to look as good necessarily as someone else’s, but you’ve got to be taking that into account when you judge them so you’ve got a level playing field.”

In addition, an employment tribunal for discrimination has uncapped damages, which could quickly escalate to deliver another painful hit to remaining partners’ remuneration, causing yet more headaches if a firm were to cull partners like KPMG reportedly are.

However, Chatterton adds that most partners are likely to want to settle and avoid the ignominy of a public tribunal, which may hamper their chances of finding employment elsewhere.

But for those who are unlikely to work again, might they just chance their arm  at a discrimination pay-out?

“What we are finding is that some partners, largely from their mid-50’s onwards, they’re just thinking, ‘well, I may not get another job, so why don’t I just have a crack at it? I could do quite a lot of the work myself in terms of getting ready for these claims,’” Chatterton says.

“Then, by having a bit of a pop at the practice they work for and saying, ‘I’ll see if I can push this because if I push it, and I’ve got potential grounds, I might get a bigger settlement out of it.’”

Amicable split in firms’ interest

According to Sutherland, the key for firms looking to cut partners is to ensure an “amicable, clean break,” and expectation setting is crucial in achieving that.

“The only way to do that when it’s on performance grounds is when that notice comes that should come as no surprise, that should have been a long process of build-up and performance management and expectation setting,” he says.

Sutherland says it’s important in these delicate scenarios to understand the psychological impact that redundancy could have on a partner’s decision-making and actions going forward from that point.

“These are high performing, big earning people who are big characters, who may be big in the industry, and this might be the first time they’ve ever experienced anything close to failure. Psychologically, that that prompts very different reactions than you might expect,” he says.

“Rationally, they may not accept that there is truth to the position or that they are not performing at the level needed. We often see people come in either quite angry or disbelieving as to the situation they’ve been put in,” Sutherland adds.

Between a rock and a hard place?

Partnership firms looking to cut costs face a very delicate balancing act of ensuring they don’t fall foul of discrimination laws and that the partners who do leave, leave happily.

The problem, as is so often the case, is money.

“In terms of what KPMG can do to smooth the way for people to leave with a smile on their face or at least with not as much of a frown, if you have the haven’t laid the groundwork in terms of developing expectations, then obviously the other way is to pay people off,” says Sutherland.

But this, at least for a firm in KPMG’s position, may not be possible due to the high number of high-value redundancies.

“Given the level of remuneration, the kind of money that would be involved for such a large number of people, I think that’s unfeasible,” Sutherland says. “So, they would have to look to other things to try and sweeten the bitter pill of going.”

So, are KPMG stuck between a rock and a hard place?

“They do what they need to do, which is to manage their costs by getting rid of people, then they can bring in the people that they want to be there. So, they probably don’t have much choice about doing that,” Chatterton says.

However, Chatterton suggest the partner cull could be a way of showing the market they’re being proactive in preventing any further slides.

“Possibly, their messaging is ‘we’re doing this market, so we are taking responsible steps, we’re going to be a profitable firm, we’re not just kind of bumbling along, letting the situation carry on.”

Whatever the reasons, if rumours are to be believed and the cull does go ahead, KPMG must tread carefully.