By Joanne Sammer and Jack Sweeney
Even now, Bill Canton still feels the sensation of his sweatpants clinging to him. Only hours after being named a KPMG consulting partner, Canton had taken an unexpected dip in the hotel pool when two colleagues ambushed him on his way to the gym for a late evening workout.
Last month, nearly a decade after his "partnership baptism," Canton, along with the other 468 KPMG U.S. partners, exchanged his partner title for the more nebulous label of managing director — and a potential share of IPO riches. The move more or less formalized that which had been put into motion 18 months earlier, when the firm's partners voted to incorporate the consultancy — a maneuver that among other things curtailed the role KPMG partners play in the firm's policy-making.
"I wish I could say it's just a title, and that I've experienced no regret over losing it, but I can't," admits Canton, who quickly emphasizes his faith in the firm's current management vision before asking if we could conceal his identity using an alias (we obliged).
Canton and his fellow KPMG partners are not alone. Last month, as Ernst & Young LLP pursued a deal to sell its consulting unit to publicly-held Cap Gemini, PricewaterhouseCoopers LLP split off its own consulting organization to form a standalone unit — a move that many believe could be a prelude to the consultancy's own IPO or corporate merger. If such transactions occur, the firms' partners, not unlike KPMG's, would ultimately be required to relinquish their coveted titles.
Besides easing the regulatory pressures on their audit businesses and offering greater access to capital, the looming transactions have created an atmosphere of professional anguish and jubilee, where career-building consultants savor the anticipation of a new covenant — one that promises stock options instead of a share of the profits, and accountability instead of autonomy.
"These partners are going to have to deal with being treated like any other professional, whose success is tied to whether he is still learning and growing. This means that if I'm a partner, I'm now going to be more accountable in the corporate environment. Instead of it being assumed that I'm producing, I'm now going to have to prove it — and what I'd suspect is that a lot of these partners are scared about suddenly now having to be accountable," explains David Maister, author of Managing the Professional Services Firm and pundit of the consulting profession.
Since the Big Five consulting outfits have already forfeited many of the basic ingredients of partnership, explains Maister, enforcing accountability may be the greatest challenge they face as they attempt to transport the more positive aspects of their cultures into corporate entities. (See CM's interview with Maister, page 65.) "This is going to call for a lot of culture change. And the only question is, 'Do you do the culture change within the firm, or do you sell it out and let your buyer do it?'" says Maister.
Ernst & Young partner Brad Callahan says, "The challenge we're all facing is how to retain the soul of the consultancy when the body or structure is changing around us." Asked whether the changes underway at E&Y will likely undercut his partner status, Callahan says, "There may be some partners who look at this with resentment, but it's wasted energy, because the world has changed and nobody stays at a company 20 years anymore, and that's what it once took to become partner."
Former KPMG partner Chuck Burns, who today wears the title senior vice president, says the firm's management is now examining how the consultancy's new corporate stucture can be enhanced to enforce accountability across the firm.
"We are very conscious of our culture and values, and are looking at what we need to change so that we can create the right behaviors among all the players in the organization — from leadership on down to the staff level," says Burns.
Accountability and Stock Options
Just how successful KPMG, E&Y, and others are at infusing their career-building consultants with a new ethos of accountability and stock options could have far greater impact on their future than any immediate gratification from Wall Street. It's a challenge magnified by the different firms' global proportions.
"The ability to manage a $3.5 billion consulting business with what I would call a collegial atmosphere, where we all sit around a table and decide the right strategy and policy, really does not exist, and you cannot manage a global business with all the countries that we have with that model," says KPMG's co-CEO Rod McGeary, explaining why he believes participation in policy-making is no longer feasible for consultancies that today operate on a global scale.
"The partnership model was really just a vestige of an earlier model for how you paid people — the old classic partnership model went away a long time ago," he explains.
Maybe so, but many consultants still speak of enjoying a unique career path rich in culture and nomenclature — one that offers both ownership and freedom.
"I haven't been anything other than a partner for 20 years, but while that has changed, I think it is and will be special. Maybe it is a mindset or culture thing, but with both firms I have been with, there is a sense of ownership and freedom that is unmatched. For me, this is very important and something I thrive on," says Kevin Campbell, who last year joined E&Y as a partner from Andersen Consulting, where he was the youngest consultant ever to be named partner.
Asked about the changing partnership model, Campbell explains: "Nothing in life stays the same, so of course the meaning of being a partner has changed, as our firms have grown, expanded, and evolved."
Making Partnership Accessible
Consider Campbell's old firm, Andersen, which earlier this year announced plans to eliminate its associate partner level. With this change, consultants will be eligible for partnership consideration after they reach the manager level. The thinking here is to make equity partnership more relevant to consultants by reducing the average number of years to partnership from 15 to 9 or 10.
"We want to make partnership more accessible and achievable and realistic," declares David Reed, director of recruiting and associate partner in the firm's Denver office. "A 15-year timeframe is not relevant to some college graduates."
At the same time, in an attempt to provide a level of "equity" to nonpartners, Andersen Consulting is also introducing an annual incentive for consultants based the firm's overall financial performance, with unlimited upside potential if the firm exceeds its financial goals. "This will take pressure off the need to reach partnership before you get a financial stake in the firm," says Reed.
For its part, Andersen has not excluded the possibility of pursuing an IPO of its own, and consulting pundits suspect such action could follow its split-off from sibling Arthur Andersen.
Be that as it may, not all Big Five consulting firms appear to be smitten with the idea of selling shares to the public. Although some firms are "deciding that they don't believe in partnership and want to give away that structure" to make more money, that is a short-sighted approach, says Stephen Sprinkle, managing director of service lines and marketing for Deloitte Consulting in Atlanta. "Firms and individuals who abandon the long-term rewards of partnership in favor of short-term monetary rewards may be in for an unpleasant surprise. It is unclear whether any consultant with short-term motivation can satisfy clients," says Sprinkle.
Jerry Blaesing, senior vice president of KPMG's content and media practice, says that the profit-sharing models used by traditional partnerships suffer from their own short-term view. "At the end of the year, you count up the net rubles and divide them up — so I think this offers only a short-term look at things and drives incorrect behavior, [whereas] a corporate culture is in fact going to help us take a much longer-term view," says Blaesing, who suggests that KPMG's newly charged values and principles today bolster the firm's long-term outlook.
Big Paydays, but No Tenure
The debate over partnership's alleged virtues further underscores some important but conflicting truths about the nature of partnership today. On the one hand, firms are flourishing, allowing partners to reap unprecedented financial rewards. More partners today are being paid in excess of $1 million annually than ever before. Clearly, "partners don't worry about their financial futures," says Dean McMann, CEO and president of The Ransford Group, a professional services consulting firm. "They have a new comfort and confidence that wasn't there a few years ago."
But in many ways, partnerships have already abandoned the ingredients that helped separate them from the corporate world in the first place. For one thing, being a partner is no longer an automatic ticket to power or even job security. In the digital age, partners gain power much like corporate vice presidents — through their accomplishments and credibility within the firm. "There is no position power, only credibility power," says McMann. Moreover, partners are no longer an immovable force with the kind of tenure that required a two-thirds vote to remove. "Firing a partner is now the same as firing a vice president" in any other firm, he says.
Besides loss of tenure, partnerships' horizontal consultative structure is also changing. "I still feel a strong connection with my fellow partners, and feel a strong sense of being an owner in and part of a business. I don't expect this to change. As with any growing company, as growth occurs, informal connections and processes are by necessity replaced with more formal organizations and more formal processes. This doesn't always feel good, but there are no other choices," says E&Y's Campbell.
Partners must also get used to operating in an environment where transparency is the rule. "The bottom line is that the smartest people have the power, not those with the most secrets," says Mel Bergstein, CEO of Diamond Technology Partners in Chicago. "We have light-speed communication, so everyone knows everything, and it will come back at you if you are not open and honest about everything. Partners need to lead by sharing power and information."
The question of whether partnership is still viable in this industry or attractive as a career goal for consultants is a valid one, for which only time will provide the answer. For all the flight to equity, partnership still maintains its allure for many. "Partnership is alive and well as a career aspiration," says Pete Pesce, managing partner with Arthur Andersen. "People look up to partners, see what they do, the energy they bring to their work, their lifestyle, and they like what they see."
As for the regret experienced by KPMG's Canton and others, Burns says: "I think the world will come to realize that the title managing director is the same as or is synonymous with partner, and they will receive the same recognition. After all, what clients really want from us is talent."
Sidebar: The Partnership That Wasn't
A time-tested governance model loses its luster after a historic deal collapses.
It was a marriage proposal meant to hatch the preeminent partnership — one that would combine KPMG Consulting's $2.3 billion in revenue and 15,000 consultants with E&Y's $2.1 billion in revenue and 12,000 consultants.
In the end, it more resembled a rude affair — with each party questioning the other's commitment and assessing just whose intellectual capital may have been compromised during their short courtship.
As always, what went wrong remains a matter of opinion, but more than two years after KPMG and E&Y discarded a nuptial plan, the two consultancies have steadily distanced themselves from their once venerated model to pursue business transactions destined to bump thousands of career-building consultants from the partner track.
"Our view is that the professional services market is an area where there will be a lot of aggregation, and many players will not survive. The (failure of the) E&Y deal woke us up a little bit, and helped crystallize our thinking on what it was going to take to be a survivor," says KPMG's co–chief executive officer, Rod McGeary.
"If you look at the most successful companies in the world, I think that most of them view having a free trading currency — one that the market is valuing every day — as a positive rather than a negative, and while E&Y appears to be taking a different path than we are, they are certainly going to have a very different look and feel under the Cap Gemini umbrella," he says, referring to E&Y's pending deal with the integrator giant.
So, while their paths to the future are now different, KPMG and E&Y today find themselves together in facing the same direction — away from partnership. — Jack Sweeney
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