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BusinessWeek: January 18, 1999 |
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The Corporation: Breakups
Andersen vs. Andersen: Next Stop, Splitsville What a divorce will cost Andersen Consulting
That sort of cocky attitude has helped propel Shaheen and his army of 64,000 to the top of the consulting world. Hired out as experts on projects as diverse as managing purchasing systems for Texas Instruments Inc. and installing finance software for the DuPont Co., they have racked up 20% average annual revenue gains over the past five years. In calendar 1998, revenues exceeded $8 billion. PIQUED PARTNERS. But now Andersen faces its toughest challenge yet: negotiating an ugly divorce from auditors Arthur Andersen in the coming months. The consultants have clashed with the auditors almost from the moment they became a separate division of Andersen Worldwide in 1989. But the squabbling boiled over 13 months ago, when Shaheen asked an arbitrator to decide how the two sides should proceed--as one bickering unit or two independent firms. Shaheen wants independence, which could be expensive. The contract with parent Andersen Worldwide calls for exiting partners to pay 1.5 times annual revenue, or as much as $10 billion based on 1997 revenues. So far, Arthur Andersen has not demanded that payment. The consultants, meanwhile, are requesting the return of $500 million they've paid the auditing firm since 1994. They're arguing that Arthur Andersen broke the contract when it began its own consulting business. But Shaheen is running a risk: If Andersen Consulting is forced to pay anywhere close to $10 billion for its freedom, it would sap capital just as his firm is making a push into a hot new growth area: outsourcing the job of operating a corporation's computer systems and technology networks. Like so many failed marriages, this one fell apart over money. The power of the Andersen name--an asset the consultants may be forced to give up in the split--opened doors for the consultants early on. But as the consulting practice exploded, the Andersen Consulting partners chafed at the stratospheric yearly payments they, as the more profitable division, had to pay to balance the firm's income and expenses. For 1998, they are scheduled to kick in some $200 million. Andersen Consulting expects the arbitration to be resolved by the end of the year, though it could drag out longer since Arthur Andersen has contested the arbitrator's jurisdiction. Meanwhile, both sides are proceeding as if they were already on their own (page 102). "We have to be ready," says Arthur Andersen's worldwide managing partner, Jim Wadia. For his firm, that means expanding new businesses, including information-technology consulting. Though Arthur Andersen generally targets smaller clients than Andersen Consulting, this is already causing problems for the consulting firm. "We're experiencing more and more marketplace confusion and competition, which is frustrating and detrimental to our future," says Shaheen. The confusion comes just as Andersen Consulting is moving into new areas of business and placing its biggest bet yet on its new outsourcing practice. DuPont was one of the first big clients to sign an outsourcing contract with the firm. Andersen employs about 400 people that manage DuPont's order-processing and finance systems under a 10-year contract. When the partnership dispute erupted, DuPont Chief Information Officer Robert R. Ridout worried that it would distract Andersen Consulting's employees and drain its finances. "Had we, in essence, picked a partner that could look at the long term, or could they only focus on the short term?" he recalls thinking. It took face-to-face meetings with Shaheen to calm Ridout's concerns. Still, DuPont has a clause in its contract to provide the option of pulling out of the deal. Outsourcing is brutally competitive--especially in the area of electronic services. Unlike Andersen, computer-servicing giants Electronic Data Systems and IBM can actually buy and install very expensive hardware. And hordes of entrepreneurial outfits can offer narrowly targeted expertise. But Andersen Consulting's strength is its combination of technology knowhow and international reach--it has offices in 46 countries--plus a deep pool of talent. Sprint PCS, the Kansas City (Mo.) cellular-telephone carrier, uses about 150 Andersen consultants to run its internal help desk and other back-office departments. "They can really bring on the armies," says Sherry L. Browne, chief information officer for Sprint Corp. But it's expensive. Sprint pays up to 40% more for Andersen consultants than it would for technical workers hired off the street. So management plans to take back the business as soon as the expertise can be transferred in-house. Outsourcing contracts now generate $1 billion a year for Andersen Consulting, or more than 10% of revenues. Shaheen hopes to increase that to 40% within five years. Although profit margins on outsourcing projects run about 15%, half the level made on traditional consulting jobs, it's a fast-growing area. SHARK TANK. Shaheen, 54, is no stranger to risk. He pushed Andersen Consulting to its quasi-independent role under the Andersen Worldwide umbrella 10 years ago and followed in 1992 with a shift beyond the firm's traditional expertise in technology systems into business strategy and workforce issues. In late 1996, he reorganized the firm around worldwide industry groups such as financial services and communications, rather than geographical regions. Now, he's leading an E-commerce initiative. "It's the same thing Bill Gates did," he says of his switch. "The Internet will drive change that is fundamental to the way we do business." Andersen sees a broader system of commerce shaping up in Internet-based telecommunications networks. More and more businesses--from car dealers to health-maintenance organizations--will provide services and information over the Net. "So you need a whole modification of business processes," says Shaheen. "Many will be designed and built by businesses like ours." Shaheen has clearly staked a lot on his firm's technology consulting practice. But as Andersen expands that franchise it will have to wrestle with some fundamental limitations. Rivals such as EDS and IBM are, respectively, about 3 times and 10 times as big as Andersen Consulting. And unlike Andersen, they have the capital to supply hardware as well as advice. One obvious answer would be an initial public offering, but Shaheen says that is not in the cards. He disdains the notion of being accountable to shareholders and is confident Andersen won't need the capital. Being a partnership also limits Andersen's ability to attract talent. It can't offer stock options to employees below partner--a prized asset for tech workers. Andersen consultants don't have ownership until they become partners, a cutthroat 12- to 15-year haul most young hires are unwilling to undertake. At other firms, associates are given authority earlier. "The market has changed, and they haven't figured that out yet," says an analyst who left for a job at a small public firm that included stock options. "The world is our oyster." To address consultant concerns, Andersen has launched programs to reduce travel time and improve communication with partners, but the battle with Arthur Andersen also has taken a toll. Andersen Consulting's churn rate--the percentage of employees leaving each year--has edged up from 16% in 1996 to nearly 18% in 1998. The acrimony helped persuade one four-year consultant to jump ship to Arthur Andersen only weeks ago. "There's a whole lot of turmoil inside," the executive said, arguing that the auditing firm had remained better focused. "[Andersen Consulting] took their eye off the people side." What the firm needs now is a good divorce settlement--and to move on. Return to top | |
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 TABLE The Feuding Andersens ANDERSEN CONSULTING CEO George Shaheen PARTNERS 1,258 EMPLOYEES 64,000 (53,500 of whom are consultants) '98 REVENUES $7.8 billion, up 28% STRATEGY Expand from advising on management and technology into designing, building, and running a company's electronic systems ARTHUR ANDERSEN MANAGING PARTNER Jim Wadia PARTNERS 1,662 EMPLOYEES 61,000 (7,800 of whom are consultants) '98 REVENUES $6.1 billion, up 17% STRATEGY Move beyond traditional accounting toward providing advice on international finance, human resources, legal affairs, and business strategy Return to top Up from Bean-Counting It was a turbulent year at Arthur Andersen & Co. The firm landed on the hot seat over financial scandals at clients Sunbeam Corp. and Waste Management Inc., where its insurance company paid out much of an estimated $80 million to settle shareholder suits. But the auditor ended 1998 on an up note, beating out No. 1 PricewaterhouseCoopers for the auditing business at MCI WorldCom and Banc One and even hanging on to Waste. Even more encouraging is an expected contract to help privatize the vast London Underground rail system. Andersen would structure everything in the deal from human resources to stock options. One thing it won't do much of, though: traditional auditing. That's just fine with Jim Wadia, Arthur Andersen's worldwide managing partner. As his firm moves closer to a formal split from Andersen Consulting, Wadia is pushing the other side of the Andersen house away from its bean-counter roots. His goal: a multipurpose advisory firm that chases everything from due diligence on stock offerings in China to the design of employee benefit plans in Germany. Wadia is driven by pure economics. At Arthur Andersen, traditional financial statement auditing grew just 8% last year and made up only a fifth of the firm's $6.1 billion in revenues. But consulting grew 38%, to $1.1 billion. That's not to say that auditing will disappear. Indeed, the firm is rapidly expanding add-on services it sells to auditing clients, such as measuring susceptibility to fraud. But Wadia is concentrating on consulting and advising--an emphasis that nettled his colleagues in Andersen Consulting. "If I had to trade an auditing account for other business, I would do it," he says. REGULATORS WARY. Wadia, 50, came to the top spot at Arthur Andersen 15 months ago with all the credentials to shake things up. A British national, he's the first nonaccountant to run the firm. Born in Bombay and educated in Geneva, he made his mark building Andersen's British practice into a big force in tax and corporate finance. As CEO, he has overhauled the management team, expanding it from 10 to 17, sharply reducing the dominance of audit partners, and increasing the number of non-Americans. But Wadia and his rivals face challenges pushing a panoply of services. The Securities & Exchange Commission is warning that companies should be wary of awarding too much business to the Big Five accounting firms for fear of conflicts of interest. And some companies don't buy into the one-stop-shopping concept. "It has some real economic synergy, but I insist on picking and choosing among an array of suppliers," says Ameritech Chief Financial Officer Oren G. Shaffer, who uses Andersen for auditing and regulatory compliance. The worst outcome, of course, would be for Wadia to build a multiservice firm only to face an uprising of consultants or auditors--in other words, a repeat of Andersen Consulting. "We need to make sure that the leaders of all the practices are integral parts of the team," says Steven M. Samek, managing partner for the U.S. Arthur Andersen has no intention of making the same mistake twice. Return to top |
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