Accenture’s recent IPO is the latest in moves by big consultancies away from partnerships and towards public control. Driven both by the SEC’s ruling that consulting firms must separate their consulting arms from their accounting brethren and the need to generate capital to finance large investments in technology, several of the industry’s leviathans have taken a new direction. Last year, for example, Ernst & Young spun off its consulting arm to Cap Gemini, and KPMG hit the public market in the US in February 2001, raising around $2bn. PricewaterhouseCoopers appears to be next in line.
But while such moves bring substantial rewards for partners what do they mean for staff in the longer term? Will they benefit financially but be less secure in their jobs? KPMG, for example, laid off more than 800 employees in January, just prior to the IPO. And Accenture has just laid off 1,500 staff in the US.
KPMG’s UK chairman Alan Buckle explains the thinking behind the move to public ownership: “Consolidation in this marketplace is being driven by client and alliance partner selectivity where, increasingly, very big organisations with very big project budgets are looking to deal with a couple of key players, which then allow other firms access for specific projects. You have got to have mindshare from the very big organisations which are buying the majority of services. To do that you have to have access to capital to grow. Having the simplicity of financial structure you get as a corporate enables you to move much more quickly, keep your product offerings fresh and be able to change as the market changes. The partnership culture doesn’t give you the flexibility you need to move quickly and responsively.”
On the staff level, he says, people work for KPMG for three reasons. “First, how challenging and interesting the work is. People are far more likely to work on the biggest projects and the biggest clients in one of the very big players that will emerge. Not everyone wants that but the people we have want to play the big game and experience the work challenge and career advancement that comes through adding skills and experiences all the time.”
The second reason people join the firm is the working environment, he says. “The partnership environment has many attractions but the types of people we want are more likely to be attracted by a more corporate environment where things happen quickly, life is simpler and they don’t have to spend a long period getting to understand the complexities of the organisation and how to handle it,” he adds.
The third reason is money. “The partnership model is designed to distribute wealth in a particular way and assumes that people join the organisation and stay forever. If you join a partnership at 20 and leave at 60 you probably will get your fair share but we recognise that, while we want people to stay with us for a long time, people see their careers in different ways now. Putting it crudely, our more junior people want to get a share of the action on the way through,” he says. “We have a bonus scheme and I think people appreciate seeing some benefit from the profits, but to be able to get capital access through shares and share options is a great way to motivate employees.”
Such views are not universal, however. Deloitte Consulting has launched a marketing offensive which challenges the IPO strategies of its competitors. The campaign, designed to raise brand awareness and differentiate the firm from other consultancies, suggests that Deloitte can focus more on clients because it is not answerable to stock analysts.
Says Stephen Sprinkle, global director, strategy, innovation and eminence: “Because we are private we can choose to make a sacrifice for the benefit of our clients or our people. For example, during the e-business wave, we could depress earnings by taking a bunch of people out of the field to put them through e-business education and lose revenue without having to explain it to a single investment analyst. No-one is going to hurt our stock price because earnings were off for one quarter. We like the freedom to make those kind of decisions because we think they have long-term benefits.”
He adds: “We can afford to make an investment in our people even in downturns that a public enterprise never could because the investment community pressure would be too great. Our investors are the people who actually operate the business and they are long-term investors – they are here for their careers.”
He believes that publically held firms will feel an intense pressure when times get tough to accompany the release of disappointing quarterly figures with the announcement of some dramatic fix, such as a reduction in workforce. “I’m not saying that a private firm is totally immune. If there is a severe downturn we could get smaller too but perhaps with less of a kneejerk reaction.”
Buckle, not surprisingly, disputes this. “Obviously if you are driving quarterly results you have to be very focused on the short term but it doesn’t mean that we are blinkered about the future.”
And, on the subject of short-termism, he points out that partnerships are obliged to pay out all their profit every year. “That is not necessarily the way to run a business that requires peaks and troughs of investment,” he says.
Keith Cornwell, a one-time partner at E&Y, founded Cornwell Affiliates 10 years ago. “In partnerships the only people who really benefit are the partners – and they kneejerk just as quickly in a downturn as a listed firm,” he says.
After a qualifying period, all Cornwell staff are offered the chance to participate in equity, he says, and he plans eventually to take the firm to IPO. “Most of the people who join us come from the Big Five, most haven’t been partners and are attracted by the opportunity to participate in equity,” he says.
Sprinkle plays down the importance of stock options, however. “Stock options are wonderful in the speculative bubble of a year ago. People tend to think of them in terms of the spectacular successes, such as Microsoft and The Gap, but they are a tiny proportion of all the enterprises that issued options, and they paint expectations that overwhelmingly are not met.” The E&Y partners who gave up compensation in exchange for stock when the firm merged with Cap Gemini might agree with him – they have seen their holdings decrease in value since the merger.
Sprinkle also suggests that public firms will come under pressure to control costs, ultimately reducing salaries. “We might find that public firms’ salary structures drift back to the ‘average’ for the industry. We pay way above the average to attract most talent – we can do that because we are private and the only people who know about it or make a sacrifice are the owners.”
SO WHAT DO THE STAFF THINK?
After an internship with Accenture, Nick Fletcher opted to join Deloitte four years ago. He feels the key thing for staff about going public is the uncertainty about what happens if share price goes down. “Friends at Accenture seem confused about what the effect will be for them – especially those on a lower grade like me who don’t have high-level access,” he says.
Fletcher likes the paternalistic feel of a partnership like Deloitte. “If a partner identifies a need in the business or your personal career and you can justify it, they will invest time and resources in you, becoming your champion,” he says. “There is a huge amount of flexibility about what they can recommend, whether it be working abroad or doing training courses. For example, I recently did an eight-month, non-fee earning internal role, developing our M&A capabilities.” He suspects this wouldn’t happen elsewhere.
Jim Cuthbert, a more experienced consultant and one-time employee of E&Y and Gemini Consulting among others, is a principal consultant at Cornwell Affiliates. “We are something of a halfway house here,” he says. “If we were quoted it would be clearer how successful we are being but then the vagaries of the market become rather worrying.”
He believes anything that keeps the management structure simple has to be a good thing. Too often, he says, both corporates and partnerships focus on sales rather than delivery – but both processes have to be well managed. “The reward is always on the sale rather than completion of the professional assignment. The thing that would worry me about conversion (to a public company) is the sudden need to focus on profit.”
He adds: “It begs the question – what do the owners want capital for? Consultancy should not be a capital-intensive business.”
However, Cuthbert is in favour of the wider ownership of organisations. “I wouldn’t go back to a partnership unless it was run like John Lewis,” he says.
THE VIEW FROM THE PUBLIC GALLERY
KPMG’s Mike Walker joined the firm at the end of January, from Round, a small customer management consultancy. “If you see the market consolidating, you need to decide who’s going to win. KPMG was expanding, knew where it wanted to be, it offered share options and public ownership was on the horizon.”
He is very much in favour of the general move towards IPO. “I think it’s a good thing-it keeps employers on their toes – once quoted they have to abide by certain disciplines and deliver on targets. The individual is much more likely to realise a return on share options.”
Having raised capital, the public firm is able to do better things much faster, he says. “That gives you more opportunities as an employee.”
And does he think that a private firm might be more likely to put staff on non-fee earning work or sabbaticals? “To a degree,” he says. “If you are growing a business there is always a focus on what people are doing – that’s fair enough. We get paid well and expect to have to work for it.”
He thinks that training is just as important to public firms, however. “In the financial services area in which I work, KPMG is increasing the amount of money being spent on training next year, indicating that the company is willing to invest in people for the long term,” he says.
On the job security front, Walker is sanguine. “If you have a good skillset you can always move on,” he says. And the kneejerk reactions predicted by Deloitte’s Sprinkle do not worry him. “With a good management team with its eye on the horizon, we should be able to ride out the storm.
But the opposite may be true in a partnership. The structure can produce laziness: without the external disciplines of corporate governance and pressure from shareholders, the firm could take its eye off the ball and then have to react more harshly later on,” he says.
He wouldn’t rule out working for a partnership however. “While it is not a fair way of rewarding staff, there is a trade-off there. You hope that you might one day make partner. But you have to ask yourself how realistic that hope is. And playing a 10-15 year waiting game is less realistic in itself. The marketplace is a lot more short-term than it used to be. People move around and are not locked into feelings of corporate loyalty as they once were.” ?:
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