War of the partners

Melanie Clulow reports on the battle between Arthur Andersen and Andersen Consulting - an everyday story of professional jealousy
Click to follow
The Independent Online
ON TUESDAY Andersen Consulting will announce financial results that are expected to confirm another year of strong growth. But behind the smiles there may well be snarls for the consulting firm is fighting its stable mate, the accounting firm of Arthur Andersen, in a bitter turf war precipitated by the sort of culture clash that can gnaw quietly at an organisation for years before the accusations start flying.

It is sibling rivalry writ large, and there are many elements at play: festering resentments, divided loyalties, outdated traditions and colossal sums of money.

On paper, at least, accountancy and consulting look complementary. Auditors are in a better position than anyone to identify a company's weak spots, so what could be better than to have a consulting arm that, for high fees, can go in and clean up the operational and strategic messes uncovered by an audit? But in the Andersen case, this rosy picture has been clouded by a territorial feud that could spell the end of its one-company-two- solitudes structure.

The two sides, separate businesses under the Andersen Worldwide umbrella, are deadlocked over competition and revenue-sharing. The dispute, under arbitration at the International Chamber of Commerce in Paris, centres on whether Arthur Andersen has, by moving into consulting, overstepped the boundaries mapped out for it when the two firms officially split in 1989. In that issue are rooted a raft of disagreements, ranging from who owns the Andersen name and how much it is worth, to how existing financial agreements should be settled.

The current crisis came to a head just before Christmas when Arthur Andersen's managing partner, Jim Wadia, and Andersen Consulting's George Shaheen set out their views at a company gathering in San Francisco. Mr Wadia's position was that both sides should be allowed to compete freely for fat consultancy contracts, while the system of transfer payments under which Andersen Consulting paid Arthur Andersen about $170m (pounds 103m) last year would continue in perpetuity. He added that if the consultants wanted to quit Andersen Worldwide, they could buy their way out - for a sum reportedly as high as $10bn. Mr Shaheen saw red. The next day he announced that Andersen Consulting would seek an arbitration that would in effect break up Andersen Worldwide.

Andersen Consulting alleges that Arthur Andersen breached operating agreements by establishing its own business consulting practice. Arthur Andersen argues that it has had to expand into consultancy to absorb contracts Andersen Consulting deems too small.

Although Andersen Consulting has stressed that the conflict is about honour, not cash, the dispute could be said to arise from the entrepreneurial drive of both firms. "Ultimately it's about money," says a former associate of Andersen Consulting. "Both entities are very entrepreneurial and find it impossible to stay within the little boxes they designed for themselves. Since they broke up they've been overlapping, stepping on each other's toes."

The territorial issue is complicated by the fact that the up-front, sales- led consulting side, incubated for decades by the buttoned-down accountants of Arthur Andersen, has overtaken its big brother in revenues and profitability. In 1997, Andersen Consulting's revenues grew 25 per cent to $6.6bn, while Arthur Andersen's rose 13 per cent to $5.2bn. And while Andersen Consulting ranks first worldwide in consulting revenues, Arthur Andersen, ostensibly an accountancy, ranks sixth.

Needless to say, Andersen Consulting is upset that a portion of its hefty profits is being diverted to less productive audit partners.

"Consultants know they are more profitable," says a freelance management consultant. "They look at the auditors and they think, 'what do those people do for us except generate risk?' Audit is a static business providing a boilerplate product with big risk. Consulting is a low-risk product with enormous profitability. On the audit side you've got accountants looking at all these people running around who aren't necessarily professionally qualified yet seem to make all this money."

He adds: "If I'm giving you a hundred million a year because I'm borrowing your name and making a lot of money, and then you enter the market and start wrecking my profitability even though I'm still paying you, I think I'd be pretty angry."

Traditionalists argue that sharing the wealth is what Andersen has always been about, but this line is hard to sustain when both sides, each with a staff of around 50,000, are focused intently on their own performance.

"It hasn't made sense for them to pass business back and forth because they are all very bottom-line conscious and determined to grow their side of the business, " says the ex-associate of Andersen Consulting.

Indeed there is very little communication between the two sides. "At the very senior level the top two or three guys in both operations might meet regularly in a formal way, but there are thousands of people on both sides and they just don't speak to each other," he says. "As a matter of fact, they go out of their way to avoid each other."

Since its inception, Andersen Consulting has evolved from an Arthur Andersen experiment into a giant with enough muscle to wage a separatist war. "When people think of Andersen they think of Andersen Consulting," says the freelance management consultant. "In the rest of the Big Six accountancy firms, consultancy is just a money-grabbing add-on. Andersen is at least 10 years ahead in understanding what a consulting organisation should look like."

With its top position has come a degree of arrogance, say industry insiders, partially attributing the current deadlock to the fact that Andersen Consulting is used to getting its own way. "Arthur Andersen is playing hardball in a way that is quite shocking to Andersen Consulting," says the freelance consultant. "It is not just going to roll over in the way Andersen Consulting manages to get its clients to roll over."

The Andersen civil war comes at a time when the big accounting and consultancy firms are in a consolidating mood. For other partnerships seeking to merge or split, it provides a model of what can go wrong. Coopers & Lybrand and Price Waterhouse are awaiting regulatory approval of their proposed merger, while the unravelling of the KPMG-Ernst & Young merger has been at least partly attributed to jitters related to the Andersen turmoil.

Andersen is playing out in public problems that the other Big Six accounting/consultancies are grappling with in private, throwing out into the open all the issues affecting any large partnership with an evolving product and customer base. "They all look like single organisations, but of course they're not," says the freelance consultant.

Ironically, Andersen Worldwide was once perceived as the ideal partnership, the one that others aspired to emulate. Now the best it can hope for is a grudgingly accepted arbitration result and a speedy divorce settlement that doesn't destroy client confidence.

And the worst-case scenario? The former Andersen Consulting associate puts it like this: "The two sides fight like cats and dogs for the next 20 years and make a lot of lawyers very rich."

Accounting for size

Top 20 auditing and accounting networks in Europe, by fees in millions of dollars

1996 fees Offices Partners

KPMG 4,012 401 2,723

Coopers & Lybrand 3,400 390 2,179

Andersen Worldwide 3,370 n/a n/a

Ernst & Young 2,853 327 1,954

Deloitte & Touche 1,973 299 1,258

Price Waterhouse 1,689 146 950

BDO International 635 234 752

Grant Thornton International 486 184 595

Moores Rowland International 431 269 738

RSM International 347 112 426

Source: International Accounting Bulletin, Lafferty Publications, Dublin

Comments