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Booz Breakup

                                              Is Booz Getting Split?

                            In what must be the worst kept secret around in professional services, Booz Allen Hamilton is rumored to be selling off its government consulting business to the Carlyle Group. In this story, first-rate publications like the New York Times, Washington Post and others are reporting the impending sale.

In reviewing these reports, it appears that Booz may have:

• to sell its brand name along with the government business
• most of its workforce tied up in the government business
• its steadiest earnings from the government business
• more top executives in its commercial business than its government business

There seem to be a lot of people reporting that:

• the commercial sector accounts for as little as 20% of the firm's $4billion in annual revenue
• the commerical sector generates greater margins (although some persons have vigorously disputed this assertion).
• the company is facing an internal schism between the executives in the two business units

When the top executives within a service cannot agree on a uniform strategy or direction all heck breaks out. I know this well. I am intimately familiar with a situation where:

• partners in one business unit resented the higher incomes that partners in the other business unit made
• those concerned partners saw their ability to control the firm (and their destiny) slipping away as the other business unit continued to grow at faster clip. The smaller but growing business unit would someday have more partners and the balance of power would permanently shift away from the other business unit
• the concerned partners wanted to sell the more prosperous business unit while they still could and recognize a sizeable profit for themselves

For a time, the two partner groups created a solution that created an earnings pool that would transfer some percentage of 'excess' profits to the partners in the lower earning business unit. The two business units were then legally separated with only a miniscule connection binding the firm's earnings together.

That deal eventually unravelled as the lower earning (but well subsidized) business unit used its transferred earnings to create a competitive business to its better run and more profitable sibling. Obviously, this created substantial friction and distrust. Eventually, one Business Unit's leaders had enough and filed for a divorce. Actually, they requested an arbitrator to finish the severing of the two organizations and terminate the excess earnings transfer.

In the Booz scenario, I'd recommend:

• Bring in an outsider, a tough independent person, to arbitrate the issues between the two factions. If Booz really has a 80/20 split between government and commercial business, then the smaller firm may suffer mightily post-split. Booz needs an outsider as no internal executive can play the role of King Solomon or the Great Uniter without any taint of bias to one Business Unit or another.
• When one group of partners think they are going to receive a windfall from selling off one of the firm's business units, bring in a group of Wall Street bankers to explain to them how this really works. Rarely are the benefits as big as the dollar signs in these partners eyes.
• Make sure everyone understands that the both business units must be made whole so that each can operate independently.
• Understand which professional staff and intellectual property will go with each entity post-sale. A lot of career-minded, advancement oriented professionals will not want to work in the business unit you want them to follow. Moreover, don't be surprised when some of them only want to work with the Booz Allen Hamilton branded business unit whichever that one is.

Yesterday, I received my subscription renewal form for Strategy+Business, the excellent magazine produced by Booz. I think I'll wait on renewing until I see how this situation unfolds.

Powerful Analogy

                  The Dead Sea Effect - IT and IT Services

I saw a great analogy used to describe the effect of continued outsourcing, offshoring and staff reductions on IT organizations. It's call the Dead Sea Effect.

This phenomena occurs when all of the best and brightest evaporate (along with a lot of others who are forcibly displaced/jettisoned) and all that remains is a residue that is unable to support life. In the Dead Sea, so much water has evaporated over the millenia that the brackish water that remains is too salty to support hardly any sort of aquatic life.

This metaphor is a powerful descriptor and one that management teams need to consider whenever they are planning significant offshoring or outsourcing initiatives or forced layoffs. 

A Tool to Improve Audits

              Comparing What Execs Say to What They Report

CFO magazine reported on the efforts of an associate professor at Virginia Tech and others to develop a tool to help steer auditors to look for potential fraudulent activity. In essence, this tools compares what executives say publicly and where auditors ought to look for potential fraud.

In a test using a blind pool of business data/results, the database tool identified within a 60-80% accuracy those firms that had committed fraud.

A longer story about this technology can be found on this Virginia Tech website.

Directionally, this is the sort of technology that the audit industry sorely needs and rarely funds. My hat's off to Greg Jenkins and Patrick Fan for devising this.

Think Before You Do That Layoff

                       The Flight of Great Talent Post-Layoff

BusinessWeek (4/21/2008 - "Think Before You Fire") referenced an Academy of Management Journal study of 200 enterprises. The study showed that a layoff of 0.5% of one's workforce triggers an average turnover rate (attrition) of 13% versus a 10.4% turnover rate for firms that didn't do layoffs.

Professional service organizations must constantly prune underachievers/poor producers from their ranks as their continued payroll presence is a financial and morale drain on the company. Poor performers do more to demoralize their peers than any other single act by management save a massive layoff. Even in the face of massive PR problems, the people of Arthur Andersen were willing to publicly support their employer as they believed in each other and the firm.

Layoffs are toxic to morale and workers. That's very true and I'm surprised the variance in the study wasn't greater. One thing is for sure though, once a company lays off workers, the very best and brightest workers will leave for greener pastures. In fact, they'll leave first as they are the people that every other employer wants. Post-layoff, all a company has left are the lesser grade employees. The lesson from this is that layoffs are short-term fixes that create long-term/long-lasting distrust with the rank and file.

Oh, the Things Auditors Do....

    Take a Tour on the Public Company Accounting Oversight Board Site

The PCAOB was setup by the US Congress as part of a number of post-Enron, SarbOx changes. The website, www.pcaobus.org is interesting although the age of some of the documents on the site would leave one to believe that:

• it takes years for this august group to make a decision
• change is really slow in the world of auditing

There are some nuggets in there, though. If you'd like to read about a Deloitte case, it's there. There are disapproval notices (although the most recent is 2005). One disappointing section of the site is the News/Events page. Most of the announcements deal with speeches someone is giving or accounting pronouncements.

For a group that was spawned from the tumult of Enron, there seems little relationship between its origins, it's raison d’être, and what they are doing. I'm still not sure how pronouncements and board or staff appointments are preventing more Bear Stearn collapses. In fact, I didn't immediately see anything on the site that addressed SPEs (special purpose entities) or CDOs or other instruments found in the Enron and/or Bear collapses.

Is this group effective? I'm not convinced. Comments?

see also Forbes 4/21/2008 "Auditing the Auditors".

Ouch - The Cost of Roaming

                              $693/Trip Roaming Charge

Vinnie at Deal Architect loves to chide service providers/systems integrators and outsourcers for their high SG&A costs. Likewise, Jason at Spend Matters is all about helping companies get a better grip on their expenses. When I saw this piece in the March 2008 issue of Communication News, I just about fell out of my chair.

The story reports on a Harris Interactive study that found businesses paying $693 per trip per business traveler for overseas cellular roaming. Worse, 61% of responding firms indicated that they had no plans to switch their overseas providers to reduce this cost.

If my employees submitted a bill like these, they'd be unemployed. Far lower cost options are available and should be used. Since almost any office or hotel they stay at will have internet access, Skype is clearly a lower cost option. Second, local SIM cards can be acquired for those essential calls that must be made locally. But, any employee that plans to use his/her cell phone overseas needs to do some homework in advance of the trip. Some carriers in the US will not allow calls to originate overseas. Some phones promise GSM compatibility but those claims are often in error. Some networks, I've discovered, don't work with anything we could pre-purchase in the United States.

Still, I've managed to survive just fine overseas without incurring bills of anything like those mentioned in this article. This is coming from a fellow who has logged as many as 48 international round-trips in a single year.

This looks like a ripe opportunity for sourcing pros to get involved.

Accenture: Acquisitions and Layoffs

I accidentally posted this story to my other blog.

Accenture Adjustments

The Houston Chronicle reported last week that: "Accenture LLP plans to cut 95 jobs in the Houston area on July 1." On the same day that this broke, Wachovia Capital Markets, LLC reported that: "Accenture (ACN, Outperform, $37.79) agreed to acquire AddVal Technology Inc., a privately owned provider of shipment management products and services. The acquisition is expected to close within 45 days. Financial terms were not disclosed."

While any job loss is tough for the person(s) affected, 95 people are not significant in the total view of Accenture's workforce. However, if these cuts are part of other cuts or are a result of the loss of a major customer(s), we will want to follow this story very closely.

When Employers Choose H-1B Workers Over Domestic Workers

              Prediction: Expect More Actions Against US Employers

The United States Department of Justice issued a press release earlier this month detailing actions it took (and the settlement it received) from iGate Mastech. It stated:

"The settlement stems from the Department’s finding that, between May 9, 2006, and June 4, 2006, iGate placed 30 job announcements for computer programmers that expressly favored H-1B visa holders to the exclusion of U.S. citizens, lawful permanent residents, and other legal U.S. workers. Such preference constituted citizenship status discrimination and is prohibited by the Immigration and Nationality Act."

The amount of the settlement was only $45,000 which one magazine thought was too cheap a price considering the economic loss 30 US job holders would have suffered. I have a different take, though. When US Federal prosecutors go after firms, they often offer the first firms to settle the best deal and progressively stiffen their position and raise their settlement stakes thereafter. I suspect that this case will be just the beginning of many more, and more public, cases like this.

KPMG Out $80 Million

                             Xerox and KPMG Settle

KPMG LLP, a co-defendant with Xerox and certain executives,  agreed to pay $80 million (USD) to litigants of a class action suit. This is an old case that dates back to 2000 but is just now being settled. To read more on this, see:

http://www.webcpa.com/article.cfm?articleid=27255 for a quick recap on the story

http://securities.stanford.edu/news-archive/2005/20050815_Dismissal100819_Writer.html for a quick summation of a 2005 order involving this case. It's worthwhile as it describes the original complaint in some detail

http://www.gilardi.com/pdf/xerx1preord.pdf for the court document

http://www.businesswire.com/portal/site/home/email/headlines/?ndmViewId=news_view&newsLang=en&div=-436697347&newsId=20080425005003  for press release about the settlement

http://www.gilardi.com/xeroxsettlement/ for the settlement firm page

Fascinating Comments on Public Accounting and KPMG

                      Lots of Feedback re: New Century/KPMG Report

If you didn't see this NY Times column, please check the extensive comments posted at: http://norris.blogs.nytimes.com/2008/03/26/when-auditors-cave/?hp  regarding the New Century audit by KPMG. Apparently, a lot of Times readers posited their thoughts about this situation. A very interesting read.