Ernst & Young on Tuesday scrapped its planned breakup, exposing the shortcomings of the partnership model in professional services.
(Bloomberg) — Ernst & Young on Tuesday scrapped its planned breakup, exposing the shortcomings of the partnership model in professional services.
The Big Four accounting firm intended to spin off its consulting business and much of its tax practice into a stand-alone public company. But the plan, known as Project Everest, fell into jeopardy this year after its influential US affiliate balked, while partners squabbled over key issues like how to divide the tax practice.
Leadership of the $45 billion firm, known as EY, told partners Tuesday that an eventual split was possible, but that more time and investment was necessary to make it happen.
Partnerships, which define most professional-services firms including McKinsey & Co., are a selling point for both clients and employees based on the thinking that partners’ interests align with those of the firm. But large, strategic changes, with millions in potential payouts on the line, can quickly upend that equilibrium.
“The partnership model in essence is built on its culture — that’s how they reel you in,” said Tom Rodenhauser, managing partner of Kennedy Research Reports, which tracks the professional services sector. “They say it’s built on history, respect and trust. But when you get down to it, the partnership model is the partners, and the partners are business people, so at the end of the day, the motivation is about profit.”
EY didn’t immediately respond to a request for comment.
EY’s US business will instead embark on a $500 million cost-saving program over the next 12 months, the FT reported on Wednesday, citing a memo sent to partners after the split was shelved. The memo said that EY would for now focus on freeing up capital for investment and pursue governance reforms that had been put on hold.
Complex Approval
Audit partners could have taken home two to four times their typical compensation in cash, while consulting partners could have received seven to nine times their compensation through equity in the new business. That would have meant multi-million-dollar paydays for some partners.
The impasse pitted Julie Boland, chair of EY US, who was due to run the legacy audit practice, against Carmine Di Sibio, chair of EY’s global arm, who was expected to lead the stand-alone consulting business.
Rivals like PwC, Deloitte, and KPMG have all previously said they had no plans to replicate EY’s plan, with Bill Thomas, the global chairman and CEO of KPMG International saying in an emailed statement on Wednesday that the traditional “multidisciplinary model is the best way to serve” clients.
“Everyone in our industry knew the proposed EY separation would be a complex operation that was never going to be easy and so it’s not a surprise that the plans have been put on hold for now,” said Francesca Lagerberg, CEO of Baker Tilly International.
EY’s breakup plan required approval from its more than 13,000 partners in country-by-country votes. A defining characteristic of partnerships is that all partners are equal, but that can be a weakness in times of dissent. Partners in the US, EY’s biggest arm, held outsized influence and were slated to be among the first to vote.
“It’s a bit like NATO where the US has got more say over the end result because of its position,” Rodenhauser said.
A key sticking point was how to divide the tax practice, with each side arguing to grab the bulk of the business, Rodenhauser said.
Despite the failure of the plan, the business rationale for the split remains valid, and the firm could pursue smaller-scale alternatives, according to Fiona Czerniawska, CEO of Source, a research and strategy firm for the professional services sector.
“The fact that this deal, as constructed, now seems unlikely to go ahead, doesn’t mean that the thinking that underpinned it was wrong,” she said.
–With assistance from Irina Anghel and Tom Metcalf.
(Updates with memo in seventh paragraph and comments in 10th and 11th paragraphs)
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