By Joanne Sammer
Think back to 1993 — to the days when few consulting firms would seriously consider taking equity stakes in their clients, forming incubators to nurture some promising businesses, or providing venture capital for others. Not to mention worrying about ways to share the gains from these activities with rank-and-file consultants.
Yet, it was in 1993 that The Parthenon Group, a Boston-based strategy firm, began sharing the gains from its consulting-for-equity arrangements with its consultants. At the time, a bonus pool funded by equity stakes in clients was a hard sell even to the recipients of those bonuses. "It was something that people learned to love and appreciate," recalls Kosmo Kalliarekos, a partner with the firm. "Pretty much everybody was leery about it at first, because nobody else had ever done it before." It didn't help matters that other major firms were either dismissive or disapproving of the arrangement. "They pretty much maligned it and tried to arrest our approach and our innovation," says Kalliarekos.
Fast-forward to 2001 and the irony of the situation becomes clear. Many of the same firms that maligned Parthenon's bonus plan are working feverishly to develop some form of equity-based compensation to attract and retain their best people. The result is a change in the relationship between consultants and their firms. Rather than waiting patiently for partnership, mid-level consultants are now beginning to expect a fair share of the gains from the New Economy. In return, firms are expecting consultants to demonstrate a greater sense of loyalty and ownership in their firms.
The dot-com legacy
Perhaps the greatest legacy of the dot-com revolution has been the growing adoption of equity-based rewards in the consulting industry. At once, firms were losing some of their brightest stars to start-up companies promising a wealth of stock options, while at the same time they also were making money by investing in many of those same companies. To stanch this loss of talent, firms have been feverishly working to develop rewards that allow consultants to gain some wealth from the New Economy while remaining in the relative safety of a consulting firm.
But will this new, equity-based approach be enough to make consultants feel and act like owners of their firms? After all, not everyone is happy about having part of their pay tied up in equity investments that may not have immediate returns. Even the partners in these firms are not always thrilled with the idea — especially those who view these investments as high risk.
"Theoretically, nobody has a problem with it," says Chuck Lucier of Booz-Allen & Hamilton. But when the ultimate payoff is both uncertain and five years away, people need some convincing. "Until the returns from the investment are clear, there will be an inherent tension between people with different time horizons wondering whether those are all worthwhile investments," says Lucier. "We have some partners who view this as something that won't bring any return at all, and others who believe that it will double their wealth creation." Ultimately, the partners should enjoy between a quarter and a third of the fruits of their wealth creation efforts within the course of their career as a partner.
So far, Booz-Allen has been able to share the returns on its equity investments only with partners. However, the firm is working through SEC issues and regulations in order to begin offering consultants access to these investments. In the meantime, the firm has increased its bonus pool for consultants and has set up a Web implementation business that it plans to take partly public within the next year or so. Consultants working in that business are receiving shadow stock that reflects the value of the business unit but will not become liquid until the IPO.
Risky business
If partners are having trouble accepting the risks of these investments, just how far can firms go toward introducing their consultants to the risks as well as the rewards inherent in equity ownership? Yet, a key reason that firms are developing equity-based compensation is to strengthen consultants' financial ties to the firm.
"It is too early to tell if the risk/reward balance in consulting has changed," says Bill Ziegler, global director of recruiting with Andersen Consulting in New York. Indeed, Ziegler's firm took pains to increase the potential reward for its consultants without adding any risk. "We rolled out our e-units plan last September as an add-on to existing compensation, to create a shared reward but no additional risk, and to allow consultants to share in the investment in pre-IPO companies to which they would otherwise not have access."
If consultants are sheltered from some of the risks of equity ownership, Andersen Consulting is making sure those consultants are fully aware of its rewards. In fact, to make the gains from e-units as visible as possible, the firm has developed a password-protected site on its intranet that helps consultants track the value of their e-units and calculate potential future returns. "We are trying to make it easier for consultants to see the value of their holdings and reinforce the notion that e-units are creating value for them," says Ziegler.
The site relies on a database that is constantly updating the value of an e-unit based on the value of the underlying investment. The site also allows consultants to see the number of e-units in their account, their current value, and their vested status. In addition, consultants can use tools on the site to calculate the future value of their e-units using various performance scenarios.
Getting some skin in the game
Deloitte Consulting is also looking to create a greater sense of ownership among consultants while limiting the risks. Late last year, the firm launched its v-units plan for consultants, which is tied to the returns of Deloitte Ventures. But the firm has also made some changes to its total compensation package to introduce some variability in bonus and v-unit payouts. "We want our people to think and act like partners or owners in the firm; we want them to have some skin in the game," says Karen Morrell, the firm's managing director of HR for the Americas region.
To accomplish this, the firm has designed consultants' bonus and v-unit payouts to emphasize both individual and firm performance. And to reinforce this, the firm is now communicating firmwide results against plan on a quarterly basis. "We want people to think about things they can control, like increasing their own utilization" or reducing discretionary spending, that have an impact on bottom line performance, says Morrell. "There's a big difference between being 60% utilized and 75% utilized. If everyone has a little bit more billable time and seeks out more opportunities to be on client work, everyone in the firm is better off." Moreover, if the firm does not reach certain financial goals, it is possible that both bonus and v-unit awards could be reduced or eliminated.
Firms need to take care that they do not completely insulate consultants from risk, because that almost negates the purpose of equity. Laura Kohn, a senior principal with The Parthenon Group, feels that having an equity stake in some of her clients — and by extension her firm — brings a new level of excitement to the work. Kohn has worked with start-up e-commerce companies to develop an effective business plan and revenue model, and even accompanied the client to raise capital and meet with potential investors. "I often feel like the company's CFO and I feel like a partner," she says. "Having an equity stake in a client is a very compelling option, and I think it aligns us quite nicely with clients. Even when the case is finished, you're constantly watching to see if the company gets its financing or does its IPO, because there is that partnership element. We're actually linking part of our fees to how well the company does. I think the case team gets very excited to work on a company in which we feel we have a stake."
The stock option
Not everyone is likely to feel this direct connection between their work and their equity stake. For publicly traded firms, providing an equity stake to consultants is a somewhat easier proposition, thanks to stock options. However, finding ways for individuals to impact stock price performance can be a much greater challenge. "When it comes to stock price movements, 50% is completely out of the company's control," says Allan Frank, president and chief technology officer of answerthink, Inc. That may be true, but it can still be hard for individuals to remember when the entire sector gets hammered in the stock market because of the earnings shortfall of one player.
"The other 50% depends on the collective performance of the individuals in the company," says Frank. That is why answerthink tries to focus consultants' efforts on what they can control — their own performance and their ability to collaborate in teams. "If everyone performs well, that must be reflected at the company level and in company performance," says Frank.
From the very beginning, answerthink has provided stock options to every employee in the firm. "We didn't want to build a two-class system," says Frank. So far, it has worked and created a significant sense of ownership within the firm. For example, Frank says that he continually receives e-mail from consultants with suggestions on how to save money on travel and how efficient (or inefficient) the firm's operations are compared with other firms. "I am always getting e-mail that starts, 'As a shareholder in this company, I think it is important that we continue to look at …,'" says Frank. "And I know from conversations and questions that people feel linked to the performance of a public company, and what that means to them and their families."
Some firms are less convinced of the need to give everyone an equity stake of some sort. Keane, Inc., a publicly traded firm, has resisted providing stock options to all consultants. "We save equity stakes for senior consultants and above, because they're the ones driving the business and bringing in revenue and they're the ones with direct contact with and impact on decision-makers in the client organization," says Scott Santoro, the firm's director of recruiting in Boston. "There has been some pressure to offer stock deeper in the organization, but we feel that doing so will dilute the intrinsic value of an equity stake" for higher-level consultants.
But almost in the same breath, Santoro admits that the firm may be considering some changes. Believing its stock to be undervalued, the firm plans to buy back 7 million shares that could be used to provide equity-based rewards for consultants. The firm plans to revamp its compensation package this year, but Santoro was unable to say what changes are likely to occur. The firm is considering providing equity-based rewards for certain performance targets, such as performance within budget, utilization improvements, tenure, and promotion.
Owning up
As new expectations and new forms of equity returns and ownership create a smorgasbord of opportunities for consultants, it pays to do your homework when pondering career moves. "People looking for a quick hit probably won't get it," says Santoro. To make a long-term play, "you have to look at strengths of a firm's management team and you need to balance the need for equity with the need for the best opportunities and career paths." After all, having equity in a poorly performing firm is not worth much.
Moreover, firms should be doing all they can to help consultants understand what equity investment is doing, and why and how it links to and supports the basic strategy of the firm. "The power of [equity investment] is that it's another part of our dialogue and relationship-building with clients," says Lucier. Once that has happened, the next step will depend on the actual returns consultants realize from equity investments or stock options. "It's one thing to hear about the money, but it's another thing to actually see the money," says Lucier. "Until we begin to get these initial investments to pay out so people can see the wealth, there's going to be a fair amount of skepticism."
Once firms get over that first hump, consultants are likely to see more fundamental changes in the way consulting firms contract with their clients and, as a result, their people. "The firm of the 21st century will define a new axis of differentiation and competition in our industry," says Kalliarekos. "It will blend intellectual capital, operating capital, and financial capital to create a new type of firm." And, chances are, consultants will be there to get a piece of the action.
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