Herbalife Says KPMG Resigns as Auditor Amid Trading Allegations…A pedestrian walks past the offices for the accounting firm KPMG LLP in Los Angeles, California, U.S., on Tuesday, April 9, 2013. KPMG LLP resigned as the auditor for two companies and fired the partner overseeing its Los Angeles audit practice amid allegations the person leaked confidential client information to a third party who used it to make stock trades. Photographer: Patrick T. Fallon/Bloomberg
KPMG UK said it will take into account how much money partners have billed and the strategic importance of their work when deciding who to let go © Bloomberg
The person with the hardest job in professional services right now could be Tim Jones, chief operating officer of KPMG’s UK partnership. As part of a restructuring following a string of hits to its reputation, from regulatory fines to the collapse of audit client Carillion, the firm is decimating its partners. Mr Jones has had the task of drawing up a list of colleagues whose Christmas is about to be ruined.
Chief operating officers are appointed to make these tough decisions. I’m reminded of a colleague who took a managerial role and said, chillingly, that it became easier to lay people off, the more such conversations you had. But it is not the fact of having to cull the herd that makes the task difficult, it is the nature of the beasts Mr Jones has earmarked for slaughter.
Managing even the most pliable of teams in the best of times can be exhausting and complicated. Partners of professional services firms, though, boast a combination of status, high pay and fragile ego that is almost unmatched in the corporate world. In a conventional partnership, they also own the business and bear collective responsibility for how it is led, making them naturally resistant to voting for their own demise.
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Making an accurate assessment of who should get the chop and who should be spared is also far from straightforward. KPMG has said it will take into account how much money partners have billed and other factors such as the strategic importance of their work.
The difficulty of assessing partners’ contributions is one reason why partnerships developed the “lockstep” system of reward, whereby members were paid according to seniority. Lockstep has faltered under pressure, though, from the extreme alternative of “eat what you kill”, where partners are paid on the basis of how much money they bring in — and are themselves hunted and poached by rival firms.
Between these two models lurk some awkward hybrids. Accountants’ crossbreeding with management consultants further complicates decisions on performance and partner value. A commercial focus on growth and profitability battles with the partnership ethos of professionalism, and individual partners struggle to resolve the conflicts, says Laura Empson of Cass Business School, who has studied leadership in professional services firms. She points out that under such circumstances, answering the question “who is best?” is not simple.
Commenting on the KPMG story, one well-informed reader described a matrix system of partner assessment at the Big Four accountancy firms, that takes account of sales, “quality of delivery”, risk management, and contribution to other departments. It is a nice-sounding formula for something that partners used to assess collegially.
In fact, research shows that collaboration across disciplines, in law or consulting, pays off in higher margins and greater client loyalty.
But it takes careful management to ensure such collaboration bears fruit. Even in the old word-is-my-bond era, free-riders could exploit partnerships, slacking off while keener colleagues brought in the fees. As the reader points out, there are still “far too many partners who game the system . . . When a deal approaches [they] jump out of the woodwork to get involved so that they can claim credit for the sale”.
An objective assessment is blurred by the need to pay up to retain the leading professionals. In this, accounting, consulting or law are hardly different from other businesses. When a partnership is under pressure, though, as KPMG is, sweetening one partner’s reward package simply to keep him or her on board further widens the cracks in the collective and fills them with envy, greed and resentment. A chief executive might be able to reimpose discipline in a conventional hierarchy. In a partnership, though, leadership is also shared. Senior or managing partners are merely first among equals. If they push colleagues into a corner, they may even face being ditched themselves.
Research into partnership politics does offer some potential consolation to KPMG UK and its chief operating officer as they struggle to identify the underperforming tenth of the partnership. It is easier to appeal to the community spirit of partners who own equity and want to see the business as a whole flourish. Prof Empson studied one crisis-hit law firm where the two leading partners had to ask 15 per cent of the partnership to leave or scale back their equity share. They convened the most powerful partners to decide who should be asked to go. The others were so happy not to have been culled that they did not insist on their right to vote on the restructuring.
Relief and survival, it turns out, are powerful unifying forces.
