Leading a Public Life

Quarterly Reporting

Perhaps the biggest changes these firms face are in reporting requirements and the pressure consultants, particularly senior-level consultants, are under to make their numbers. "There is a heightened sense of accountability and pressure, but we should feel that," says Ken Taormina, senior vice president with KPMG Consulting. "Four times a year, the marketplace decides how we're doing."
Rather than focus primarily on annual results and profits, public firms have to report earnings quarterly and be aware of the other measures analysts and shareholders will be watching. "Revenues are now getting a lot more focused," says Kevin Meehan, a vice president and director of Watson Wyatt Worldwide. "Before, you could control expenses to make your profit margins. However, analysts are keenly focused on revenue growth as well as profit, because they know that your future stream of profits is dependent on your revenue growth."

Others agree that the biggest change has been in the frequency of financial reporting and the resulting pressure consultants feel to make their numbers. "As a partnership, we could miss a month or a quarter as long as the pipeline was full," says Chell Smith, vice president with Cap Gemini Ernst & Young (CGEY). Now that CGEY is part of a public company, financial results have taken on a new urgency. "I spend a lot more time looking at the numbers and reports than I used to," Smith admits. "However, it is important to keep from totally immersing yourself in administration and looking to drive the numbers. You need to be in the marketplace, talking to clients, and that balance can be hard to achieve."
CGEY's Smith has also found the renewed focus on financial reporting to be an unexpected people management tool. For one thing, it provides a yardstick for considering new service offerings. "We focus more on how quickly something will pay back and the overall return on investment," she says. "The analysis is much more focused on the business case." And when it comes to managing her people, "I find that there is more focus on conference calls as we discuss where we are doing well," she says. "It has really sharpened our focus."

For some firms, generating the necessary data to manage on a quarterly basis is a challenge, but an essential one. Always important, the ability to forecast the pipeline and revenue stream and business development initiatives has become a pressing priority for these firms. After all, public firms have to be more than just profitable. They have to show growth in those profits. "Growth is critical to survival, so having a good information system that tells what is in the pipeline becomes critical," says Meehan.
To meet that need, Watson Wyatt has developed a client information system to allow for more efficient reporting of all its clients. "This way, anywhere in the world, the people responsible for that client can get the information that they need," including news and developments, current projects, and any competitor activity within the client company, says Meehan.

Rainmakers Ascending

Meeting quarterly earnings forecasts is a key change in the life of a public firm. As a result, public firms are likely to be much less forgiving from a business development standpoint. "The people who are most affected by going public are the managers, because they are now accountable to a new group — external shareholders," says Meehan. "It doesn't matter how good their friendship is with their boss. If they're not delivering on their numbers, the marketplace will punish us."

This, coupled with the need to show earnings growth, is leading to what some predict will be a renaissance in rainmaking. Even though rainmakers have always been important to a firm's success, a rainmaker with a track record of bringing in new business — not just maintaining existing relationships — will take on an additional cachet.
"A lot of the people who became the big honchos in this business did so by working primarily on maintaining big accounts, rather than bringing in new work," says Meehan. "Going public changes the emphasis to reward those people who can help us grow the most." As a result, Watson Wyatt is planning to steer more of its best and brightest consultants toward the account management function, which is responsible for maintaining and growing client relationships, by adding to the function's prestige and rewards. "There will be more emphasis on people who are able to broaden their skills and become rainmakers," says Meehan.
Some firms are restructuring how they develop business and manage accounts. As part of Cap Gemini, CGEY is focusing its business development efforts on global accounts. "As Ernst & Young, we were focused on clients' service line needs rather than their global needs," says Brad Callahan, a CGEY vice president. "Now we are focused on servicing the global account globally." For individuals within the firm, that global focus can provide important career and networking opportunities to do different types of work in a much broader global account. With many more services to offer, CGEY provides more opportunities for consultants to branch out beyond their traditional service lines. However, this global reach also makes the business development process a bit more complex as consultants work to understand the broader and more diverse service offerings of CGEY.

Pay and Performance

The availability of stock options has monopolized the conversation when it comes to compensation in public firms. But stock options are just one change consultants are likely to face when it comes to pay and performance measurement. After all, partnerships were and are notorious for being less than strict in performance management and pay decisions.

However, newly public firms are determined to wipe the slate clean and take a much more disciplined approach to managing performance and rewarding results. KPMG Consulting, for example, measures performance in five key areas: profitability, growth, margins, cash collections, and the ability to hire and retain key employees. "This is not a club," says Taormina. "We measure people two times a year and compensation is driven by individuals' numbers."
Watson Wyatt is making a concerted effort to enforce a more detailed and disciplined performance management and measurement process. "There will be more accountability in making sure that managers are managing their people, doing performance evaluations, and looking at assignments that we win and lose," says Meehan.

Even seemingly minor administrative tasks will be scrutinized. For example, the firm used to tolerate certain individuals who did not turn in their timesheets regularly. "We could sometimes be a little bit lax about those things, especially when somebody was a major player," says Meehan. But no more. "Everybody has to play by the same rules."

Cultural Openness

An unexpected benefit to being part of a public company is more crisp decision-making. "There's a much clearer hierarchy, which makes us more efficient," says CGEY's Smith. "A partnership is collegial and consensus-driven. That may make everyone feel good, but it is not necessarily conducive to responding quickly to changes in the marketplace."

For example, when it comes to forging global alliances, there is now a single person responsible and accountable for making those decisions. Taormina of KPMG Consulting also sees some of the operational efficiencies associated with being a public company. "There is now the tendency to go after bigger programs and make decisions more quickly, and that changes the culture to a large degree," he says.
Another major change for newly public firms is in their openness in communication and information-sharing. As a public firm, public disclosure about everything from executive salaries to financial results will be a major change for many of these firms.
"Older firms will have to change their governance," says Anthony Abbattista, a partner and managing director with DiamondCluster International. "They are not used to being open about the economics of the firm, but they will have to have a new openness about how they are achieving their numbers." Because DiamondCluster was formed with the intent to go public, the transition to public ownership was much easier, particularly because the firm made it a point to be open about firm performance.

Indeed, some nonpublic firms have already started to be more open about their operations, as evidenced by PricewaterhouseCoopers' willingness to talk openly about the possibility of selling its consulting arm to Hewlett Packard. "That would never have happened a few years ago," says Allan Frank, president of answerthink. "Some firms are disclosing more because they want to establish themselves as potential public companies."

The Story Continues

Amid all these changes, it is important not to lose sight of the primary reason these firms went public — greater access to the capital markets for investment and growth. After all, with this access comes the ability to make strategic acquisitions and investments. But just how this will all play out remains to be seen. "This is sort of like giving birth, and the firm is emerging as a newborn," says Meehan. "It's a brave new world out there, and we're going to be learning a lot as we go along."

Stay tuned.

Sidebar:  PowerPoints:

• Consultants say that since their firms went public there has been a keen focus on revenue growth as well as profit, and a heightened awareness that tomorrow's profits are dependent on revenue growth today.

• The increased focus on financial reporting within publicly held firms provides a yardstick for considering new service offerings.

• Newly public firms appear to be determined to wipe the slate clean and take a much more disciplined approach to managing performance and rewarding results.

Lessons from an IPO Guru

The IPO is just one step in a much longer journey consulting firms must take to transform themselves into public companies. As the national practice leader of professional services consulting for Watson Wyatt Worldwide (itself a newly public firm), Ellen O'Daniell has helped several firms to manage this transformation. Here, she discusses what consultants can expect.

CM: How big a change is going public?
O'Daniell: When you change a firm's capital structure, that leads to change for the firm, for the partners, and for consultants. Different firms are going public for different reasons, and those reasons will drive the degree of change. The biggest change will be greater accountability and the need to report quarterly results. Firms will have to move away from managing on an annual basis around unit value. And many firms don't have the reporting structure or the mechanisms to handle quarterly reporting. Firms also have to figure out how to compensate people, over what time horizon, and using what performance metrics. Public firms will have more centralized authority, with a board of directors. There will no longer be one partner/one vote. The good news is that this should help speed up the decision-making process, and it will also help make sure that the firm is very strategy-focused.

CM: You mentioned compensation. How will that change?
O'Daniell: For one thing, former partners will have much more skin in the game. Under the partnership model, partners almost routinely saw growth in unit value until it was almost expected. Public firms are likely to offer lower base salaries plus equity with significant upside opportunity truly tied to performance. The ability to offer equity will also make it much easier for public firms to bring in mid-career hires from nonconsulting entities. And there will be far less tolerance for underperformance, because everyone is more likely to know who's doing what.
If you look at an IPO situation from the consultant's perspective, this is exactly what they've asked for. They don't want to wait for partnership. They want money and they want it now. And they are not happy with the lack of performance differentiation they often see. A public firm can tell an employee that there's an upside that is tied to performance. There's so much ambiguity about performance in many firms. Consultants need to know where they stand, so clearer performance expectations and measurement will do a tremendous amount to help a consultant focus and feel a sense of accomplishment. Consultants also want to be measured on an annual basis, and the best way to do that is through a stock plan that rewards individual, team, and firm success.

CM: Are some firms making changes even if they aren't immediately planning an IPO?
O'Daniell: Yes. The attitude is: Let's position ourselves in case this happens. Many firms have not declared that they plan to go public, but they want to be prepared if the whole market moves in that direction and it becomes an issue of competitiveness.