A Firm For All Reasons

The Life-and-Death Answer

The plan to split off Deloitte Consulting from Deloitte was made public in early 1992 — nearly five years after KPMG Peat Marwick had first announced its own consulting split-off strategy, and two years after the sale of Ernst & Young Consulting to Cap Gemini was first announced. At that time, the market for consulting services was experiencing one of the worst downturns in its history, and in light of this, the split-off's payout was expected to rank among the smallest of Big Five returns. If only Deloitte Consulting had split off before Enron turned its ugly head, or before the NASDAQ tumble of March 2000, things may have been different, Deloitte partners routinely mused.
Nevertheless, given the heightened regulatory scrutiny and the unrest among its audit clients, the firm had no option but to split off. Or did it?

After spending tens of millions of dollars over a 14-month period on its plan to split off consulting and rebrand it as a separate entity known as "Braxton," objections were raised in late March 2002 at what has now become something of a legendary board meeting in the annals of Deloitte history. The crux of the objections was the sizable amount of debt Deloitte would be required to take on in order to split off consulting. Such a huge debt could put Deloitte's very survival at risk, a growing number of partners believed. And no one partner reportedly voiced his concerns at the meeting more compellingly than James Quigley, the future CEO of Deloitte & Touche USA. Days before the board meeting, partners say, the objections had become carefully amplified among the firm's executives, allowing Braxton supporters to suffer a climactic boardroom defeat.

Word of the demise of Braxton came as a blunt surprise to many within Deloitte Consulting. As one senior consulting partner recalls, it was as if management had hastily opened the door to the room and said, "Okay, we can't do that. Sorry."
Meanwhile, the option of selling Deloitte's consulting arm (Plan B) appears to have received little consideration when compared to the efforts to achieve the parentally supported creation of Braxton. Today, Deloitte partners attribute this not only to their displeasure over the meager sums such a sale was projected to fetch, but also to the growing support behind a third option.
"We'll be particularly interested in any conflicts of interest that may arise because they haven't yet spun it off," the chairman of the Public Company Accounting Oversight Board, Charles Niemeier, told The Wall Street Journal in late March. Caught between a rock and a hard place, Deloitte conceived yet another option, one that had been routinely discarded by its Big Four rivals — that is, if they had ever seriously considered it at all.
"The life-and-death answer was to bring Deloitte Consulting back into the firm and integrate it and build on the value that actually none of the Big Four any longer had," says Paul Robinson, who would be named Global Managing Partner of Deloitte Consulting, and part of the management team that would succeed Deloittle Consulting CEO Doug McCracken. Having fought vigorously for the creation of Braxton, McCracken suddenly found himself at odds with the firm's newly elected management.

"When looked at coldly, the idea of keeping consulting as part of the firm appeared to be an unlikely option, frankly. And yet that March it was the option that very quickly was chosen," recalls Robinson, who believes that the complexities of the split-off had in some ways prevented the firm's leadership from examining the integrated option more closely. In the days that followed the collapse of the separation scheme, Robinson says, the firm's leadership began to come to a consensus that an integrated approach could become a "genuine driver" — a vision that its various countries' managements could pursue and use to distinguish Deloitte client offerings around the world.

Up to that point, Robinson points out, the option of selling the consulting unit was still something under consideration, and big decisions related to a potential sale began to stir debate within the firm about options such as the possibility of selling consulting operations in certain geographies while holding on to those in others. By quickly embracing an integrated services vision, the leadership helped to curtail some of the uncertainty that had begun to plague the firm's partnership ranks. Still, the traumatic decision brought forth a challenge unlike any the firm had faced before.
"The issue became, Can we pull it off?" recalls Doug Lattner, who today heads Deloitte Consulting, USA.
Besides the costs the firm would have to incur as it acquired the consulting arm, Deloitte faced the unprecedented challenge of explaining to a scandal-wary marketplace exactly what it was aspiring to achieve by mixing up accountants and tax professionals with consultants.
"We began by analyzing each client relative to a number of factors, including their position in the marketplace and the frequency with which they use professional services. Then we identified the relationships that we had and determined how to best provide services," says Lattner, whose career at Deloitte spans 30 years. "Perhaps tax takes the lead. Perhaps the attest function does, or perhaps consulting takes the lead, but no matter who leads, they bring the firm's total services to the client."

The concept of an integrated professional services firm was not new. In fact, such an approach had sprung up from time to time throughout the history of Big Four accounting houses and their various ancestors. What was new was the fact that Deloitte was hoping to create a model that did not lead with audit services, a development largely clouded by reports of an "accountant victory." Instead, going forward Deloitte was angling to become a business where competencies are "mixed and matched" as appropriate to deal with specific client needs. It was an approach of historical note, and one that had long eluded the professional services industry.

A Movement of Historical Proportions

"It has been difficult for the accountants to adjust themselves to the rapid movement toward the enlargement of services and responsibilities," wrote accounting wunderkind Arthur Andersen in 1934, as part of a speech titled "The Accountant and his Clientele."

He continued: "Some regard [this] movement as wholly unsound, the opening of a territory into which the accountant could not venture except at great risk of loss of professional standing. Others saw in the movement an opportunity for greater and more constructive service to business."
Had Andersen not died more than half a century ago, you could easily have believed that he was describing the movement of audit houses into IT consulting services in the 1990s. Instead, Andersen was underscoring concerns related to the movement of audit houses into business advisory services driven by changes in federal and state tax laws — services that would become the early building blocks of tax practices within Andersen as well as other audit firms.
While his concerns about accounting firms enlarging their services have proven to be eerily prophetic, Mr. Andersen would likely never have imagined the speed with which accounting houses devoured IT consulting opportunities in the 1990s. It was just such an appetite for business that proved to be the undoing of the firm which bore the Andersen name for 89 years — or at least it was the perception that the firm's audits were no longer "world-class," but rather loss leaders designed to gain access to more lucrative IT consulting opportunities.
As each of the then–Big Six accounting houses watched their consulting businesses grow to dominate their revenues in the 1990s, certain conflicts became ever more visible.

In 2001, both Congress and the media seized on the fact that Enron had paid Andersen $25 million in audit fees and another $23 million for consulting work.
"It wasn't the IT consulting arm that killed Andersen. It was the audit arm. The firm killer is audit," says Deloitte's Robinson, who contends that the imperative for a world-class audit practice within Deloitte remains unchanged. What has changed is that Deloitte now wants to be world-class in all its businesses.
"You can't have a substandard tax practice that relies on the audit practice anymore, because they're going to have to compete in the marketplace by themselves, on their own brand and competence. In other words, leading with audit is not the way to do business any longer," explains Robinson.

Today, there exists a school of thought within Deloitte that its delay in pursuing a split off strategy permitted more time for its "third option" vision to gain hold. "Enron led certain firms to hurry up and press the eject button, but with a little bit of time and distance, and understanding about how the rules were going to play out, a better option became clear," says Cathleen Benko, a senior Deloitte partner and head of the firm's IT industry segment.
To its credit, even in the 1990s Deloitte had projected a point of view somewhat different from its Big Five rivals. Clearly, the idea of integrated services was already percolating within its management ranks when in 1998, Deloitte's then–deputy chairman, James Quigley, told this interviewer: "We have five manufacturers where we don't have the audit [attest] relationship, and the primary relationship is a consulting relationship. And yet, we have done over a million dollars in audit and tax-related services for each of those five clients. So the relationship remains strategic and important to both sides of the firm."

A Multidisciplinary Approach

Besides evangelizing for the firm's integrated approach, Quigley is today credited with having voiced grave concerns over the split-off of Braxton.
When it came time to discuss its split-off verdict with the analyst community, Deloitte attempted to put something of an upbeat spin on its news by putting forth the notion that the firm's consulting business could still afford to forfeit large portions of business within the firm's audit clients given the fact that Deloitte's audit clients represented only 25 percent of the Fortune 1000. In other words, as far as the regulators were concerned, 750 companies were fair game for Deloitte's consulting services.
"We blasted them," says Michael Doane, an analyst with META Group, who recalls that he initially found humor in the fact that Deloitte had shared its news with him on April Fool's Day. After his briefing, META published a report on Deloitte titled "The Seventy-Five Percent Solution."
"We really challenged them. At the time, their integrated approach just seemed like so much jazz," explains Doane, who has since been won over by what he characterizes as strong demand for Deloitte's services. "The fact is that they really have an offering, and these groups do work together in an integrated fashion to make it happen, and clients are realizing this."

While Deloitte would not name specific clients, MCI Corp., Volkswagen of America, and General Electric are customers identified by different consultants and sources as having struck sizable deals over the last year involving multiple services.
For the moment, Deloitte's approach continues to win admirers as well as skeptics."Let's put it this way: We aren't finding our clients saying, 'Gee, I wish you had more tax capability.' We don't see the linkage ourselves," says John Donahoe, Worldwide Managing Director of strategy firm Bain & Company.
Asked about whether he believed a world-class consulting unit could exist within a multidiscipline organization, Donahoe replies: "We think it's hard. Because the very top talent — the people who have the most options — are looking for environments where they can have confidence that they can learn and grow at a very fast rate, and this means not being subjected to politics and bureaucracy, and uncertainty."

The End of Chaos

Politics, bureaucracy and uncertainty — three words few Deloitte partners would deny have burdened the firm over the last 18 months.
For its part, Deloitte appears to have weathered the storm reasonably well. Besides CEO Doug McCracken, who announced his retirement upon the split off's demise, approximately 25 "Braxton" partners have left the firm — not a large number, Deloitte's management points out, given the overall size of its consulting partner ranks include 700 Braxton partners globally (Deloitte places the current number of consultant partners within the firm at 1100) . Still, with consulting responsible for nearly a third of Deloitte's overall revenue, only about 14 percent of the firm's partners are consultants. What's more, the number of consulting partners that play leadership roles for "cross-functional" practice areas appears to be lagging behind the number of accounting partners in such leadership positions.
"It's a handful right now, but I would expect that you'll see a lot more consultants taking on leadership roles," says Jim Reichbach, the partner-in-charge of Deloitte's financial services practice, and one of the consultants within the "handful."
"What's clear is that consultants tend to think a little bit more broadly about how to package capabilities and how to deliver some kind of service or solution. And that's a skill this firm greatly values right now. And so I think that there's no question more positions will open up for people with those skills," says Reichbach.
Meanwhile, 13 of the firm's attest clients, including such marquee consulting accounts as General Motors Corp., have opted not to procure consulting services from the firm. Again, Deloitte management points out, in light of the firm's size, 13 accounts is not a bad number. 

Sometime this past May, a senior partner in Deloitte's NY offices captured the thinking of many of his Deloitte colleagues when he candidly remarked, "I declare the end of chaos."
Recalls Robinson: "I thought, as we were going through the separation, that it was the most difficult thing that I had ever seen done — until we changed direction, at which point I realized that there's only one thing more difficult than separation, and that's reintegration after you have decided to separate."