Cover Feature: Trading Places

In a way, the logo-emblazoned headpiece is symbolic of that which distinguishes KPMG from Wall Street's other Big Five contender. In the words of one KPMG managing director: "Let Accenture keep its blimp — all we need is Phil's visor."

And such is the thinking of many within KPMG Consulting, where after ten months of economic recession — four involving terrorism and war — consultants are preparing to celebrate their firm's first anniversary as a publicly held company. It will be a well-deserved celebration, according to some of the firm's newfound Wall Street friends, who appear to have been won over — albeit not by record-breaking earnings or revenue. Like most consultancies, KPMG Consulting didn't break many records during the year 2001.

Instead, certain Wall Street denizens are smitten with the $2.9 billion firm's single-minded focus — one that even in the worst economy in ten years has yet to be compromised. It's a focus — not unlike Mickelson's visor — that underscores a less-is-more philosophy, and one that reveals the kind of discipline Wall Street frequently applauds.

"I think that if you look at the consulting marketplace, you have outsourcers, infrastructure players, strategy consultancies, but in terms of pure systems integration, there are very few of us. And I truly believe that KPMG Consulting is the only 'pure' publicly held systems integrator today," says Blazer, whose rigid words have consistently and successfully corralled the thinking of a consultancy whose mission once careened according to the whims of 468 U.S. partners.

"From our point of view, you have to stick to your knitting. What business seemed fashionable two years ago is not fashionable now, and what seems fashionable today may not be fashionable two years from now," says Blazer. Web services and outsourcing are more than likely the "fashionable" businesses KPMG's CEO alludes to as he seeks to shore up support for the firm's laserlike focus on systems integration work. Or was he alluding to venture consulting or even biotech? It doesn't matter: KPMG management says that it prefers to dabble in none of this, or at least as little of it as possible.

A Firm's Leadership Character

In part, Blazer's task has been to distill the details of the firm's complex conversion — from partnership to public corporation — into data points suitable for Wall Street's digestion. It's a challenge he has met head-on since last February, when KPMG began trading stock publicly — preempting the IPO of its largest services rival, Accenture, by five months.

By being the first among Big Five consultancies to sell shares publicly, KPMG forfeited any opportunity to crib from the experiences of its rivals, while exposing what might be called the firm's maturing leadership character. Still, given the fact that KPMG is less than one third the size of Accenture, escaping the long shadow of Wall Street's other Big Five contender will not be easy, and comparisons are unavoidable.

"Neither KPMG nor Accenture is radically changing their business models or target market as a result of the tough economic times … but if there's any real difference, it's that Accenture is shifting its focus to outsourcing deals," says Karl Kierstead, an equity research analyst with Lehman Brothers.

Having two years ago resisted the tantalizing spell cast by Web services, KPMG management is today exhibiting similar willpower when it comes to the allure of what it calls "factory-based" outsourcing. It's an approach that sets the firm apart from its fiercest and largest integration rivals, who today continue to pursue the outsourcing opportunities that flourish during economically troubled times.

"You could argue that they haven't diversified, but while that might make sense right now, in 12 months, as the U.S. economy heads upward and the outsourcing market becomes more mature, there will be a different attitude about outsourcing," says Legg Mason research analyst Bill Loomis, who describes KPMG's management team as having "demonstrated itself to be one of the best in the industry."

Says Loomis: "Outsourcing gives you good visibility in the tough times, but it doesn't ramp up margins quickly as does systems integration, where you can get very good earnings acceleration. … I think that a year to 18 months from now, you'll see KPMG showing strong earnings acceleration and growth, while the outsourcers are going to be plodding along."

At the same time, KPMG management has made no secret of its plans to compete inside outsourcing's managed services segment, a business with a checkered past inside the consultancy, but one drawing new interest following the arrival last month of Jay Nussbaum, the former executive vice president of Oracle Services Industries.

Today, while analysts offer KPMG Consulting praise for exercising discipline in a rocky economy, its stock has often hovered well below its 52-week high of $24.25 per share, a price it reached on February 8, 2001 — its first day of trading.

When asked why KPMG has traded under its $18 a share IPO price for most of its first year, analysts are quick to point out that it was Accenture, and not KPMG, that succeeded in exceeding Wall Street expectations for each of its first two quarters.

Besides matching Accenture's proficiency for communicating with The Street, KPMG is now seeking to improve how the one-time partnership communicates expectations internally.

"When we were a private partnership, we communicated information about performance freely — both historical and predicted performance — so that all of our key leaders knew exactly where we stood. In today's environment, every key manager knows about their piece of the business and where they stand. But they don't necessarily have the same view of the total organization," says Blazer, who admits that the adjustment for internal communications has been "a little tougher than expected."

"We probably erred on the conservative side of that in the first year, and said, 'We're not going to say anything unless we're going to say it to the public at the same time,'" he explains. According to KPMG's CEO, the firm's 605 managing directors had to become smarter at reading what he calls "the indicators," inasmuch as they no longer receive information "straight up."

Some of what KPMG's managing directors need to be getting a better read on is where client work currently resides in the firm's revenue pipeline. Nearly half of the firm's revenues is today tied to the Global 2000 accounts, while another 35 percent is tied to clients' work inside the public sector. The remaining 15 percent, KPMG management describes as middle-market business. During its 2001 fiscal year ending June 30, KPMG added 30 global accounts — allowing its share of the Global 2000 to jump from 501 to 531, according to firm management.

"We win 70 percent of the competitions we're in, and we win an even higher percentage when it's already our client," says Blazer, who credits the firm's 230 business development managers for contributing $1.8 billion of the firm's $2.9 billion in total 2001 fiscal year revenue. Known within the firm as BDMs, the 230 consultants are really sales agents, whose ambitions are carefully aligned with the firm's managing directors'. It's this tricky alignment that has set KPMG apart from more traditional consulting models, and has made some credit the firm with having innovated the profession's approach to selling.

Another area KPMG Consulting is thought to have helped institute is the aggressive use of contract labor to control costs. When it comes to enlisting subcontractors, few firms are purported to be able to bring on, assimilate, and dislodge subcontractors as effectively as KPMG — all supposedly without disrupting the flow of service to the client.

"We use these contractors in times of economic uncertainty as a shock absorber," says KPMG Consulting's chief financial officer, Robert Lamb. Despite its alleged ability to help quickly shrink or grow the firm, KPMG's "shock absorber" failed to prevent a workforce reduction in early November, when the firm cut 400 jobs, and gave voluntary sabbaticals to another 300 employees. The cuts were made as the firm announced that revenue for its first quarter ended September 30 had dropped 10 percent from the same quarter a year earlier. For its part, KPMG management has already cautioned analysts about the first half of its fiscal year, a period that has historically generated less revenue relative to its second half.

"I have to give KPMG credit. They did pretty well all the right things in terms of managing their cost structure, making headcount cuts, adjusting bonuses to protect earnings — which is what they are supposed to do as a public entity," says Kierstead. KPMG's Lamb admits that the firm's bonus structure has from time to time required some fine tuning.

"We did put smaller bonus accruals in the numbers commensurate with how the business was performing with our internal plan," he says. "We would intend to put those accruals up, depending upon what happens in the December and March quarters," he explains.

Although unimaginable a year ago, such an open discussion of the firm's financial nitty-gritty has now become a bona fide component of KPMG's quarterly question-and-answer discourse with analysts. It's a good thing KPMG has paired up with Mickelson, sinker of the unsinkable. No doubt Blazer would like three tries at the tough ones, too.