Implications and Attitudes As the Andersen's Split under the ICC Ruling: Consulting To Go for a Name Change
Written By: R. Krause
Published On: August 2000
Implications and Attitudes As the Andersen's Split under the ICC Ruling: Consulting
To Go for a Name Change
Andersen Consulting was set up in 1989 to more effectively split technology
consulting from the tax and audit accounting component. Andersen Worldwide
(AWSC) was intended to coordinate the activities of the two firms, and
ensure they did not cross paths, AWSC was a follow on from the Andersen
Worldwide Organization which had been in existence since 1977 to coordinate
the Tax / Audit division of Arthur Andersen with its management and IT
consulting arm, MICD (Management and Information Consulting Division).
on contentious problems arose between the two business units, since salaries
had to be kept on par across the organization. This led to either salaries
in MICD being kept below market value (resulting in a massive exodus of
personnel to competing firms) or to creating unacceptable inequities within
the company. The issue, among others , led to an agreement called the
Member Firm InterFirm Agreements or MFIFA and the creation of Andersen
Consulting. Andersen Consulting and Arthur Andersen were to operate in
different, complementary spheres with a minimum of overlap between their
respective lines of business - management and technology consulting in
the case of Andersen Consulting, tax and audit accounting for Arthur Andersen.
then, Andersen Consulting charged that AWSC and Arthur Andersen had not
lived up to their side of the bargain. Indeed, Arthur Andersen has continued
to build up its Business Consulting practice, from which it is experiencing
much of its growth, at times coming into direct competition with Andersen
Consulting. Since Andersen Consulting, the more profitable group, under
MFIFA, had to provide up to 15% of its revenues for distribution to Arthur
Andersen (the less profitable arm of the two), it amounted to Andersen
Consulting paying to support its own competition.
to the development of the internal competing business units was the fact
that overlap management was initially left to lower level managers who
were closest to the clients and the marketplace. This left executive direction
and the power of the AWSC weak in enforcing non-competitive rules. Various
attempts to resolve the problems among the business units were attempted,
but each time thwarted by the independent partnership nature of the organization.
has given Andersen Consulting the leeway to separate from Arthur Andersen
and Andersen Worldwide. In December 1997, following several years of reconciliation
attempts, Andersen Consulting applied to the International Chamber of
Commerce (ICC) Court of International Arbitration in Paris to settle the
dispute. The final judgment was delivered on August 7, with both sides
claiming (ridiculously) victory. In fact, it is clear from the judgment
that Arthur Andersen and Andersen Worldwide in particular, roundly lost
the increasingly integrated business environment, it was inevitable that
the issues surrounding these two business units would come to a head,
which it did in December 1997. The tax audit arm must become compromised
when it is combined with a business consulting practice / technology-management-consulting
arm. But the way Andersen had structured its partnership arrangement (more
political than sense at the time) was doomed to internal competition from
the start: tax and audit system and management consultancy were and are
becoming more tied to technological wizardry which is blurring the boundaries
of services required by clients.
division of tax and audit versus technology/management consulting is likely
imminent for most of the partnerships, one way or another, as we predicted
after Ernst & Young split its technology consultancy and sold it to Cap
Gemini (see Meiosis,
Mitosis: Cap Gemini's Mating with Ernst & Young), and PwC (PriceWaterhouseCoopers)
agreed to some separation of its internal divisions after the SEC ruled
on findings that PwC employees had investments in their client businesses.
Andersen may have some explaining to do with the SEC as to how it intends
to operate its arms independently. It seems Arthur Andersen partners don't
get the difference nor understand today's business models - i.e., having
a technology-partner where you need one and sticking to your core business
where you are good.
the years Arthur Andersen has attempted to obtain skill sets through acquisition,
much to the chagrin of Andersen Consulting. Andersen Consulting has openly
claimed that Arthur Andersen has engaged in business integration consulting
assignments similar to Andersen Consulting and contrary to the statements
it made to the SEC. And as for the SEC, it already has a very hard time
in knowing how and where the lines should be drawn to avoid conflict of
interests in these firms.
is particularly difficult when, in Arthur Andersen 's case, the company's
employees are given a stake in the outcome of client companies, and Arthur
Andersen has set up a $500M venture capital fund to invest in its clients!
We believe the SEC made a mistake in 1990, when it took Arthur Andersen
at its word and did not issue at least some operational guidelines. It
seems Arthur Andersen used the decision from SEC to begin its internal,
then external, competitive track against Andersen Consulting.
Arthur Andersen and Andersen Consulting claim victory - for Arthur Andersen
this is more a pyrrhic victory, if anything. Jim Wadia, worldwide managing
partner for Arthur Andersen, has resigned, presumably over the decision.
Andersen Consulting had offered to settle prior to going to the ICC with
a much larger sum than the $1.2B Arthur Andersen finally got. The $1.2B
consisted of $400M in transfer payments under MFIFA, and an outstanding
$830M was being held in escrow. It also lost all common intellectual property
rights to Andersen Consulting, except for old technology dating to the
time prior to December 1997, which consisted of general ledger and payroll
technology. Both these items can be obtained from other sources such as
from several ERP vendors.
ICC ruling effectively has created a new Andersen Consulting, free of
any hindrances from its mother accounting/audit firm. However, Arthur
Andersen also gained something it had been seeking all along - the freedom
to compete openly with Andersen Consulting and spread its wings from under
the control of Andersen Worldwide (not that Andersen Worldwide had any
real control particularly since the SEC ruling in 1990 gave a free hand
to the Andersen companies after it would 'take no action' on the separated
Consulting must change its name by December 31, 2000 - something it was
thinking of doing anyway. (You are probably already confused with the
names in just getting through this article!) According to Jim Murphy,
Marketing Head of Andersen Consulting, the cost is about $100M in terms
of broadcasting its new identity. As it is, the name "Andersen Consulting"
belies the more IT focused company's real role in building e-businesses.
Joe Forehand's (Andersen Consulting's CEO) words, "The name we view as
a small price in this (arbitration decision), it is fairly insignificant
in the overall scheme of things. In building our brand it is largely
about the significant client base we have worked the 65,000 people who
show up in offices over 48 countries and intellectual property which we
keep - all of this are the essence of what we have created we do not
have any concerns about moving to a new name, new identity to identify
Like other legacy (that is, those consulting houses with roots prior to
1990) consultancies of their genre, the Andersens, have been changing
rapidly. The joint Arthur Andersen / Andersen Consulting path has been,
however, less clear due to internal conflicts and competing interests,
much of which is market driven.
Andersen Consulting, since Global Managing Partner and CEO Joe Forehand
took the helm at the beginning of November 1999 (see our article "The
Empires Strike Back - Part I: The Big Guys Spin On A Dime"),
Andersen Consulting has been very busy developing a new management structure,
and new policies, trying to recreate itself to meet the new economy. By
comparison, Arthur Andersen has a lot of catching up to do in this area,
but its large resources will no doubt begin to play a noticeable part
in the creation and implementation of e-businesses.
continuing break up of the consulting partnerships into separate technology
consulting and tax/audit companies enables the technology consultant firms
to more clearly focus on their business, and should in theory liberate
them from any limiting obligations. This is true of Andersen Consulting,
but not Arthur Andersen. However, the presence of these two large behemoths
released completely in the marketplace is going to increase competition
with just about every serious Digital Business Service Provider (DBSP).
This should translate into more aggressive marketing and consulting practices,
putting pressure on the smaller consultancies in the mid- to high-end
marketplaces, and also with those partnerships that have as yet stuck
it out - namely mainly PwC, and Deloitte.
Arthur Andersen is intending to be a two-headed beast, it presents an
issue for the SEC, and until clear and strong actions are taken, the marketplace
should be aware of the dangers this represents. The consequences of ignoring
this can result in major issues for the consulting organization (see for
Roll at Consulting Giant in Wake of SEC Investigation" by our analyst
Steve McVey). Compromising the independence of any audit processes is
not something that should be encouraged, and may give cause for some consideration,
as the SEC is likely to rule shortly to ban these joint services. On July
26, Arthur Andersen, Deloitte & Touche, and KPMG issued a desperate plea
to the SEC not to rule against their ability to deliver technology consulting
services. In their defense they state:
we oppose any regulatory ban on services that is not grounded in evidence
or supported by facts, and where the consequences have not been fully
considered The Commission is rushing to judgment by means of a process
that is fundamentally flawed and without any factual justification. Moreover,
we are very concerned that the proposal will undermine audit quality and
have a number of other unintended consequences that will injure investors."
(reference: July 26, 2000 - " STATEMENT BY Arthur Andersen, LLP; Deloitte
& Touche, LLP; and KPMG, LLP regarding proposed
SEC rulemaking on auditor services"
do not think this position is particularly tenable, partly because it
lacks specifics, and because in today's world, big need not do everything.
In fact, Arthur Andersen itself has partnered with service providers such
as ProsoftTraining.com to provide JAVA training services for Arthur Andersen,
hence the concept is there, and should be extended to increase arms length
activities. Following Ernst & Young's example would also not be a bad
idea. They should learn to utilize these directions rather than sticking
with the 'go it alone and do everything' approach. Even IBM has partnered
where it lacks the technological capabilities and/or faces too much uphill
work for market penetration.
the breakup shows that attempts to coordinate two practices are at best
extremely difficult, if not in the end impossible. Andersen Worldwide,
according to the arbitrators report, failed to coordinate the practices
of the two firms, and this led to Andersen Consulting being able to claim
that the obligations among the parties had been undermined, opening the
gate for the management and technology consultant to go to arbitration
and formalize the break.
note: Arthur Andersen interprets this differently, saying the arbitrator
cleared them of all issues related to their obligations under MFIFA. Andersen
Worldwide was roundly criticized, and became the whipping post. Given
the worldwide nature of such organizations, and multiple divisions among
the branches of these firms, such events should not be surprising.)
rapidly expanding marketplace will soften any impact for other service
providers, particularly those playing in the lower mid and lower market
levels, at least for the next 12 months. If there is a slow down - due
to economic changes or simply a lack of bodies - these giants may well
play a stabilizing role.
Vendors on two levels are affected from this decision. First, legacy tax
and auditing companies cannot expect to retain Chinese walls for long
in their organizations between tax /audit and management / technology
wings. The politics and market pressures make it tempting for business
units to go their own way, rather than lose a piece of the action to another
business unit. Arthur Andersen started small, saying it would only service
small businesses that Andersen Consulting would not have been interested
in: trouble is, when does 'small' stop? In the end, these companies should
separate. The tax and audit companies need to align themselves with independent
technology partners, rather than continue into compromising territories.
for smaller service providers, it emphasizes the need that as the large
international organizations branch from their mother companies, they must
build out internationally and/or find their unique niches in the marketplace.
Their impact will be cushioned somewhat by the rapid expansion of the
marketplace, but the competition for business - and bodies - is going
to increase. However, the large consulting houses can be great training
grounds for your next crop of experienced workers. Arthur Andersen may
do a service in this respect yet. (It is a point to note that the ownership
of the St. Charles training grounds that both "Andersen" organizations
share was not clearly delineated by the arbitrator's ruling, and this
has yet to be worked out.)
For the users this may mean they should take a fresh look at these 'emerging'
super consultancies. Powered by new ideas, freed from obligations, and
including investment arms as well as technology development wings with
very large resources, will mean they could have a formidable impact on
the market in 12-18 months from now in the high-end market in particular.
the blurring of requiring technology and management consulting solutions
and audit processes, there is an issue that the user should consider:
the independence factor. Make sure your service provider meets SEC requirements,
otherwise down the road it could lead to difficulties.
user should consider these companies for their depth of technology and
business resources. However, it may be an expensive ticket, and a large
organization may not be your cup of tea. Further, bear in mind that Andersen
Consulting is more the Fortune 500 company's companion, and you need solid
financing to work with them.
the other hand, Andersen Consulting can provide venture capital and take
equity compensation through its venture capital arm AC Ventures where
it has about $200M to invest over the next year, and already has had significant
throughput at its 24 worldwide Dot-Com Launch Centres. Arthur Andersen
is more focused on providing traditionally oriented business services
in the new e-business environment, though it can assist in finding financing.
distinctions between Arthur Andersen and Andersen Consulting are, however,
Andersen is focusing in the lower to mid- markets, with an emphasis on
the mid-market. Its business practice is still centered on management
consultancy and tax / audit regime, and is still weak in the technology
sector. However, Arthur Andersen is hiring recruits with a composition
something like 65% new / raw technologists (programmers, network engineers
etc.), and 35% in the business development area (mostly experienced personnel).
It has catching up to do in the marketplace if it hopes to be a serious
player against Andersen Consulting. Andersen Consulting, in turn, intends
to hire 16,000 over the next year.
Consulting, on the other hand, with more of a focus on the mid and high-end
markets, has obvious strengths in technology implementations, and driving
e-businesses through from scratch at its 24 dot-com launch centers. In
terms of technology partners and technologists, it is a leap ahead in
the e-business building marketplace to Arthur Andersen.
Andersen has some 77,000 employees spread around 84 countries, and has
about $7B in revenues. We estimate it should add about another 6,000 people
- mainly technologists - to its retinue over the next year.
Consulting has 65,000 people in 48 countries, and earned $8.9B in revenues
last year. See our recent article"The
Empires Strike Back - Part I: The Big Guys Spin On A Dime") for
other details on Andersen Consulting's offerings. Andersen Consulting
plans to build out as well.
per capita show the significance of moving into a management and technology-based
rather than audit-based tax industry. The value proposition is incomparable
to clients, as figure1. indicates. The return we estimate is an extra
51% per capita on the business consulting/IT side. Part of the additional
value is derived from the fact that engagements in technology typically
run over $500,000, while those for a tax audit process are much lower.
1. Estimated per capita returns for core businesses practices of each
of the Andersen companies.
1997 for example, 54% of billings for Andersen Consulting came from engagements
exceeding $500,000, while for Arthur Andersen, 82% of it income was derived
from engagements below $500,000. Hence the sizes of projects each is used
to - and their nature - are quite different. For the next year or so,
as Arthur Andersen ramps up in the technology sector, users may want to
bear this in mind if desiring to select between the two Andersen's.
companies have venture capital programs. It remains to be seen what SEC
makes of Arthur Andersen 's venture capital and employee incentive programs.