Guest posted this weekend on Francine McKenna's substack, The Dig -- to which, for the breadth and depth of her topics of interest and relevance, readers here are always referred and invited:
Don’t throw the past away
You might need it some rainy day
Dreams can come true again
When everything old is new again
-- Peter Allen (1974)
The skeptical half of a half-skeptical world has been waiting for details from Carmine Di Sibio, global chief executive of EY, on Project Everest, by which he proposes to bifurcate EY’s consulting and audit practices into, respectively, NewCo and AssureCo.
Di Sibio and EY Global are advised by Goldman Sachs and JP Morgan; EY UK partners have themselves engaged bankers from Rothschilds; Lazard, Evercore and Mercer are reported to be signed on as well. Others are sure to be announced in at least the US, France and Germany.
The interests of those partner groups are far from aligned either globally or with each other, although buy-in from them all is essential for a deal with global aspirations. Arm-wrestling already under way is certain to intensify –- of which early signals are spilling into public view.
Among other issues, comes word from the WSJ that the whole deal may be hung up on $10 billion in promised but unfunded pension payouts that could rest primarily on the shoulders of US audit partners, who would live in the much smaller entity after the split.
No surprise then, reporting from inside EY is “that the timeline for a decision on whether to proceed appeared to be slipping,” quoting an unnamed EY partner that its leadership “had ‘underestimated the amount of work required’.”
The business school case is now being written in real time: Di Sibio and his team look to be firmly in the grip of the “planning fallacy” –- simply put, as identified by Daniel Kahneman and Amos Tversky in 1977, it's the the natural human bias towards over-optimism that under-estimates the time, costs and pressures of a complex project.
The consequences can be grave, as projects on a timeline subject to slippage fall further into difficulty at each succeeding slip –- examples include the cascading delays in an airline’s flight schedule, the ten-year $ 100 million over-run of the Sydney opera house, or the multiple escalations in the futile American military effort in Vietnam.
For the nonce, Di Sibio himself projects confidence, if as yet little substance.
His model is plainly the breach between Arthur Andersen and Andersen Consulting (AA and AC), the re-branded emergence of the latter as Accenture as of January 1, 2001, and the success of its IPO that July. Tempting as the saga is for Di Sibio’s Everest-scale ambitions, comparisons suggest caution.
More than usual disclosure -- I was a member of the Arthur Andersen in-house legal group from 1982 to 2001, privileged to benefit from the firm’s unique global structure and to enjoy the profitability of its single worldwide partnership. I was there through the divorce, an outside observer of the Accenture IPO, and a retiree all-too-painfully affected by AA’s complex spin into collapse the next year.
That’s a discussion for another day and outside today’s scope. Today’s elephantine question is whether either proposed EY off-spring has the ability to be globally competitive, along with two questions that are narrower:
- How believable is it that the proposed break-up is done under pressure from the regulators?
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- Not very. The accounting regulators in the US and UK, two of EY’s largest and critically important markets, are more than pre-occupied elsewhere. There is no meaningful pressure beyond the large firms’ optics-driven and non-substantive push for “operational separation” in the UK.
- Is it credible that the EY proposal is not motivated by the pressure of litigation?
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- Nope. EY and its partners today face at least two sets of ominous litigation claims -- “bad case” exposures are in the billions, and either would threaten the viability of the EY local firm in the UK (NMC Health) or Germany (Wirecard), with implications for the cohesion of the entire global network. The existential anxiety of the erstwhile EY partners in a much-reduced, audit-focused AssureCo would be darkly mirrored by the enthusiasm of partners with the option of moving to the consulting-focused NewCo to be free of these and other legal claims and exposures.
Post its 2000 consulting split off to Cap Gemini, EY re-grew as an aggregation of separately built and purchased practices and country entities. By comparison, Andersen’s consulting practice had grown organically since the 1950s within its integrated worldwide structure, until the firm reorganized into two separate business units in 1989. AC’s consulting partners, employees and practice delivery capabilities had ten years of globally coherent operating history by the time of the divorce, identified under a single organization and strategy.
In particular, the transparency of the Andersen worldwide profit-sharing model -- long in place, uniformly applied and agreed by all its partners -- allowed for evaluations and compensation comparisons between and among partners across all lines and borders.
As a consequence, when the arbitration was commenced in 1997, leading to the August 7, 2000, ruling, the infrastructure was fully in place –- for better or worse, depending on individual perspective. All participants in the entire Andersen partnership knew where they fit, and how they were valued and paid. However distasteful the separation proceedings were, they served to manage –- indeed, to finesse and avoid –- questions or issues of individual loyalty, identification, or opportunity, all of which had been previously addressed.
Moreover, the arbitrator’s award in effect settled two key matters at a stroke:
- First, it set the consultants’ exit price -- $ 1.2 billion, paid by AC to AA –- eliminating any negotiating opportunity for the AA partners, or any further access to whatever value inhered in the freshly-organized consulting venture –- a value handsomely redounding to the AC partners as the new shareholders of Accenture.
- Second, it firmly lodged the issue of partner pensions, evidently the cause of some disturbance among the EY interests, directly as the separate responsibilities of the two newly-defined businesses.
To Di Sibio, the “success bias” of Accenture as a benchmark would be both unavoidable and irresistible. Accenture’s revenues have grown in twenty years from $ 10.8 billion to $ 50.5 billion, while its initial offering price of $ 14.50, peaking last December above $ 415, still remains above $ 300. The AC partners received Accenture stock with an average post-IPO value of $ 4.8 million each, with added sweeteners in the form of accelerated distributions of pre-IPO partnership earnings and re-payment of their previously paid-in partnership capital.
The picture was of course very different on AA’s audit side. Bereft of the consultants’ revenue and profitability, Arthur Andersen spun into disintegration less than a year later –- with financial damage reaching well into seven figures across its partnership by way of lost profits, evaporated capital, and dissolved retirement expectations.
As for EY’s Project Everest today, fully 2,000 people are said to be beavering away on such questions as these:
- Who goes to NewCo?
- Who stays at AssureCo?
- What are the incentives?
- What about the outside alternatives?
- Who has the scope, the wisdom, and the power to make and enforce decisions that will persuade and secure the votes of individual partners in separate local firms that span 150 countries, whose career-shaping decisions will have personal impacts measured in the millions?
Centrally, what ownership or benefits if any can partners in AssureCo have in NewCo, either before or after an IPO? Considering the accountants’ rules and constraints on independence, the apparent answer is “none.” What price then makes it worthwhile for EY’s audit partners to remain housed in AssureCo, an enterprise reduced in capabilities and capital resources, with global revenue shrunk from $ 40 to perhaps $ 18 billion? Do the partners have the strength and the savvy to pull together, negotiate, and then to vote to accept another break?
The culmination of the Andersen break-up was consequential for both sets of its partners: for those in the Accenture family, a major leap in immediate personal wealth -- for those left in the legacy practice, a wounded organization, a damaged ethos, and a rapid decline into collapse.
For the EY partners now facing their choices, the question of “what to wish for” must loom large, while the longer the process takes, the less likely its achievement. To outside observers, the plausible outcomes of Project Everest include either a break-down and failure of the entire deal, for reasons including those sketched here, or a globally patchy and uneven transaction that pleases nobody -- either of which would risk an unfortunate further weakening of the entire Big Four model itself.
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