The Life of "Me"

by Denis Campbell posted on Saturday, 10 January 2009

Times are not tough everywhere. Indeed, The Big Four accounting firms: Deloitte & Touche, Ernst & Young, KPMG and PriceWaterhouseCoopers reported annual combined 2008 global earnings in excess of $102 (US) billion and a blended growth rate of almost 16%. $102,775,000,000. Shall we let that sink in whilst you catch your breath?

The 581,423 people employed directly by them have some of the best paid professional jobs in the world. The nice thing about this profession, even in receivership or bankruptcy, the accountants and the lawyers always get paid. Sitting quietly in the background during these processes is a very nice place to be indeed. Too, with the toughening of regulations that came with the passage of Sarbanes-Oxley, companies now must conduct much more thorough audits and one can here the ding, ding, ding of the hourly cash machines within these firms.

Accountants are also very good at controlling expenses and managing numbers since that is what they do for a living. So looking at the chart below and even assuming they let expenses for people, buildings, office supplies, computers and travel get so out of control they consume 75% of the above figure, the partners of these firms still put an average of $769,000(US) per partner into their pockets.

More realistically, they probably controlled expenses to somewhere between 50% and 67%. The effect was to raise that per partner earnings number to somewhere between $1 and $1.5 million dollars. So the competition for those partner slots (and one can be assured a junior partner earns far less than this average number) is fierce.

Inside Big Four firms are competitive cesspits where only the strong survive and prosper. Climbing to the top is done over the backs of others and the 12-15 years it takes to get there produces an interesting blend of people. It’s up or out so Momma, they need to be tough and strong, just like cowboys/cowgirls (diversity being a key buzzword although in practice few firms have yet to pass the 25% mark in terms of numbers of women and minority partners), to get there.

Now I have a unique insight as between 1986 and 1993 I worked for one of the Big 8 firms that was merged into another to create the Big Four. Arthur Andersen folded during the Enron scandal and the rest paired up or expanded globally (KPMG was Peat Marwick Mitchell that merged with second-tier firm Main Hurdman).

What I have always found most intriguing is that most Big Four partners could not make the money they do in any other field than an accounting firm. Many who leave the ranks or fail to make the partner cut go on to significant six-figure corporate CFO positions, but their main qualification is survival.

I found it intriguing to see the dearth of post-educational business degrees within the partner ranks because the almost fraternal system bred intense loyalty to firm and work product excellence over anything else, even expanding one’s educational horizon. Too, the lack of people and communication skills at the partner level is stunning.

I once had dinner with a young man in Houston who was a ‘lock’ for making partner. Everyone before the business development session I ran said the guy was a superstar and would be on the next partner list. When I told him this, he stared at his plate for a few moments. He finally said “thank you. It’s funny that I have to hear that from you, a stranger to this office, but never from those with whom I’ve worked side-by-side with for 11-years.”

Most firms heavily recruit from universities with top accounting programs and the competition for the best students is fierce, yet the entry requirements are onl an undergraduate degree after 4-5 years of university study in business and accounting. While the incubator that is a Big Four firm encapsulates them in an intense cocoon environment of continuing education in their field and some of the top performers pursue firm-funded MBAs, the percentage of those who make it is miniscule and the longer one’s career last within a firm, the bigger the fall.

So one is heavily wooed at 21 or 22, paid a very handsome salary and benefits, given amazing global experiences with large companies, moved up through the ranks towards the brass ring of partnership and then falls short in their 11th or 12th year. They are then 34, their entire life has been this insular world and pursuit so in the words of the fish bobbing in plastic bags on the surface of Sydney Harbour after making an escape they planned throughout the entire film, Pixar’s Finding Nemo, “Now, what?”

Yes top financial positions are always available but what of the human side, the feelings of rejection and true pain for them. They are quite real and mostly… glossed over. To add salt to the wound, the partners then add the recent failure to their “alumni list” and expect to retain their loyalty after such a public snubbing, then scratch their heads in true wonderment when payback hits them equally as hard in the loss of a big client.

Alas, even those are probably factored into the equation as a mere $5.5 billion in earnings separate number 1 (PWC) from 4 (KPMG). It is indeed almost back to the old days of the 1970s where if a CFO of a company I knew you audited approached me about doing their work, I felt a moral obligation to let you know they were dissatisfied.

Hey, I said almost. Shhh. They all know they have a very good thing going. It’s good to be king!

MAY 2009 • David Cogman, Richard Dobbs, and Massimo Giordano

Source: Corporate Finance Practice

This short essay is a Conversation Starter, one in a series of invited opinions on topical issues. Read what the authors have to say, then let us know what you think.

The credit crisis and its shocks to the real economy have put chief financial officers on the front lines, as they implement emergency measures to help companies survive the recession. Now, as an eventual recovery begins to seem more likely, the CFO’s task may become still more complex. Even for those whose companies avoided the most severe effects of the crisis, uncertainty about the future is abundant, and credit remains tight. Capital and management time are available for only a few relatively big moves, and a new appreciation of risk accompanies each opportunity.

So the CFO’s judgment will be critical to push the management team’s thinking on the opportunities and to cast a dispassionate eye over the costs, benefits, and risks of pursuing them. Here are ten questions we think all CFOs should be asking themselves and their executive colleagues as the recovery approaches. Read the questions and tell us what you think a CFO’s priorities should be coming out of the crisis.

1. What shape will a recovery take? Even if the worst is over—though we make no assurances that it is—much uncertainty remains about the recovery’s nature and pace. A steady recovery over 12 to 18 months would pose challenges very different from those of a tepid one over, say, five years or even a slip back into recession. What weight are you giving to the possibility of wage and price inflation, high unemployment, lower international trade, or dramatic swings in currency values? What’s more, if excess leverage inflated demand and profitability in the years leading up to the crash, CFOs must help managers to understand what they should expect as normal after the crisis has fully passed and to set appropriate performance targets.1

2. Have you restructured enough? A weak economy makes it easier to implement unpopular operational changes and divestitures: companies have more leverage over suppliers, unions and regulators are more cooperative, and employees understand the need for change. When the economy strengthens, these advantages will quickly vanish. CFOs should challenge their colleagues to examine how much more restructuring might be undertaken to secure a company’s cost position for the medium term.

3. Is your supply chain sufficiently flexible? In 2008, the key question was what would happen if the downturn was worse than expected. In 2009, it’s worth considering what happens if the surprise comes on the upside. An intense focus on reducing costs and working capital will leave many companies incapable of responding to a rapid pick-up in demand. Can they respond without either bringing back high costs or cutting the quality of their products? If not, CFOs should take time now to consider whether their companies may have stretched the supply chain a little too thin.

4. Do you have a short list of acquisition targets ready? This crisis, so far, seems to echo the experience of previous ones: equity market valuations are recovering a lot faster than economic fundamentals.2 Acquisition-minded companies that wait for clear evidence of recovery before moving on attractive deals may well find themselves preempted by better-prepared competitors and miss the opportunity entirely as valuations bounce back.

5. Should you restart conversations with potential alliance partners? Last year, many companies put discussions about strategic alliances and joint ventures on hold. This year, if the underlying logic of those deals remains sound, many potential partners are finding themselves under greater pressure to close them. Moreover, businesses that may emerge from the recession at a competitive disadvantage could find a quick and effective solution in joint ventures with companies in a similar predicament.

6. Are you ready to divest newly underperforming businesses? There’s no room for sentimentality in portfolio planning. The downturn changed many industries fundamentally, and once-strong businesses may emerge from the crisis in a weaker competitive position. Divesting them now may be better than spending the next economic cycle trying to fix them. Buyers will emerge as the market recovers—and companies can free up cash for better opportunities elsewhere.

7. Do you have the financial resources needed for an upturn? Growth requires capital. Companies may require more working capital or have to finance the development of additional products, distribution channels, and marketing programs or the acquisition of new businesses. Credit and equity have become scarce resources, and new financing may not be timely enough to support the market’s full recovery. To finance growth, CFOs should prepare a battle plan—including ways to line up new equity, as well as bonds and new debt—that can be activated if necessary. CFOs in countries where the volatility and uncertainty of the crisis have pressured the currency should understand how a recovery will affect the ability to raise capital.

8. Have you taken advantage of the buyers’ market for talent and other resources? In a recession, most companies focus on cutting costs—head counts, discretionary marketing expenditures, R&D, product development, and capital spending. But all of these now cost less than they have in a decade, especially hiring new finance professionals. Research on previous downturns shows that the future winners made disproportionate investments in talent, marketing, R&D, and capital spending at exactly this point.

9. Do you know what risks a recovery might bring? Risk management and contingency planning are typically better at highlighting day-to-day issues than at anticipating major shifts. Yet an economic turnaround could bring a number of structural changes, some relatively predictable and with far-reaching effects. How well, for example, do you understand your company’s exposure to major currency or commodity price movements? Do you know whether the health of channels, customers, or suppliers might create substantial structural change or whether your company is prepared to deal with high levels of volatility that may continue even as a recovery builds?

10. Can you sell your recovery plan to investors? Too many companies were unprepared for the downturn, lacking clear plans to communicate with investors or good answers to difficult questions from analysts. Don’t be caught without a response when someone asks you what you’re doing to capitalize on the upturn.

A few big ideas that become realities will be worth much more than a dozen that don’t quite get off the launching pad. Thoughtful CFOs will ask themselves which handful of bets could have the biggest payoffs and then mobilize the bulk of their time, capital, and resources to make those bets succeed