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Surprising as it might seem, the Big Four accountancy firms have lots to teach other companies about managing talented people.
Economist Staff, The Economist
July 20, 2007
Being interesting can be overrated. Accountants became suddenly intriguing in 2002 with the spectacular collapse of Arthur Andersen, because of its involvement in the scandals surrounding the fall of Enron. This added unwanted colour to a grey profession. Since then the surviving titans of accountancy—Deloitte Touche Tohmatsu, Ernst & Young, KPMG and PricewaterhouseCoopers (PwC), also known as the Big Four—have mostly retreated back into the shadows of public awareness. But interesting they remain, above all for the way they manage their people.
It is not just that they collectively employ some 500,000 people around the world. Many companies are as big as they are. Unlike most, however, the Big Four really mean it when they say that people are their biggest assets. Their product is their employees' knowledge and their distribution channels are the relationships between their staff and clients. More than most they must worry about how to attract and retain the brightest workers.
Time is regularly set aside at the highest levels to chew over how best to do this. Detailed goals are set: Deloitte's 2010 business plan includes targets for staff turnover, the scores it seeks in its annual staff survey and the proportion of female partners it would like to have. Partners are increasingly measured and rewarded as managers of people, not just for the amount of money they bring in. People-related items account for one-third of the scorecard used to evaluate partners at PwC. KPMG's British firm has introduced time codes so that employees can account for how long they spend dealing with staff matters. The idea is that those who devote lots of time to people-related matters are not disadvantaged as a result in pay rises and promotion.
The Big Four are by no means perfect. The sheer numbers they employ can still make them feel like sausage factories. Small firms are quick to take advantage of that when recruiting. Nevertheless, the big firms' evolving efforts to attract the best candidates and to encourage and keep the brightest people provide useful lessons for other companies.
The most intractable problem is that there are never enough skilled or promising people to go around. Just as competition for the best of the bunch is growing, the pool of available talent is changing. In America baby-boomers are flooding into retirement; in Europe the market is greying; and in India and China the large number of graduates masks low numbers of truly high-quality candidates.
There are added problems for accountancy firms. Job cuts earlier in the decade created a shortfall of people now. Regulatory changes, such as America's Sarbanes-Oxley Act, have boosted demand from clients not just for accountants' services but also for their staff. To add to their difficulties the Big Four are now aggressively re-entering the field of advisory services, necessitating a new burst of hiring. Ernst & Young is not unusual: it hired some 25,000 people in 2006, but expects to hire 30,000 this year and 35,000 in 2008.
Much of this recruitment is aimed at hard-to-find experienced professionals, especially important in the advisory businesses where corporate knowledge is highly valued. As a result, an old taboo is being broken and more outsiders brought straight in as partners. Robust selection procedures are used to ensure that they fit in. Programmes that help keep the firm in touch with former employees are also being strengthened so that people who leave can more easily find their way back (these “boomerangs” account for up to a quarter of those hired by the Big Four in America).
Former employees can also act as useful recruiting agents and help to drum up new business. For these alumni programmes to work “a massive cultural switch” is needed, says Keith Dugdale, who looks after global recruitment for KPMG. Few employers are used to helping people leave on good terms. But in an era of job-hopping and a scarcity of skills, loyalty increasingly means having a sense of emotional allegiance to an employer, whether or not that person is still physically on the payroll.
A similar change in attitude is needed to manage the careers of female employees. Each of the Big Four wants to promote more women, who account for about half of their recruits but around a quarter, at best, of their partners. Many women drop off the career ladder at some point (usually to have children or to care for an elderly relative) and find it difficult to get back on again. Options such as career breaks and part-time working are part of the accountants' response. “The Big Four are ahead of most in managing talented women,” says Sylvia Hewlett, author of “Off-Ramps and On-Ramps”, a new book on the subject.
Gaps in one country can be plugged with people from another. The Big Four have big plans in Asia, especially China. Deloitte aims to have 20,000 people in greater China by 2015, up from some 8,500 now. But like other firms it is finding that experienced people are thinner on the ground than promising but untested ones. One answer is to use member firms outside China to find experienced Chinese émigrés who want to return home, although they do not always get on well with local employees. Similar techniques are used to handle temporary gluts of work. Canadian accountants cross the border in droves during the American audit season to reinforce their American colleagues' efforts.
Mobility is seen as a useful way to retain and help employees develop. International assignments can be critical in attracting new graduates. According to Pierre Hurstel, Ernst & Young's global managing partner for people, new entrants want to work abroad: that's the biggest change in recruits in the past five years, he says. Recruiters at PwC are authorised to promise the best candidates on campus language training and an overseas visit at the end of their first year. International assignments can be pledged after two to three years. High-minded young people also want to work for companies with a decent ethical reputation.
Retaining good people is the biggest challenge. Turnover rates at the Big Four have historically been high—roughly 15-20% leave each year, compared with as few as 5% in some other industries. The cost of this is “astronomical”, says Jim Wall, Deloitte's managing director of human resources. Mr Wall reckons that every percentage-point drop in annual turnover rates equates to a saving of $400m-500m.
Even so, the accountant's goals are more nuanced than simply increasing retention rates. None of the big accountancy firms wants churn rates to fall too far, if only to keep the performance bar high. Mr Wall thinks a 10-12% turnover rate would be about right; Richard Baird, PwC's people chief, reckons that 12-15% is comfortable. Rather, the Big Four want more of their most talented people to stay.
The biggest staff exodus comes after three years, once recruits have been certified as accountants. Many never intend to stay any longer, aiming instead to parlay their qualifications into a new job and a fatter pay cheque somewhere else. That presents the Big Four with a particular problem: how to identify future stars among the mass of raw recruits. The trouble is, most talent-development programmes start at a later stage in people's careers.
One strategy is simply to persuade people to stay longer, which provides more time for employers to spot and seduce the best performers. The Big Four can point to research conducted among leavers that many would like to return and that even more wish they had stayed longer. Leaving after six years rather than three, say, means that people tend to go into better jobs with higher pay—which can also help the effectiveness of the alumni network.
Driving talent-management practices deeper into the organisation is the bigger priority, says Tony Osude, of the Association of Chartered Certified Accountants. Talent-spotting has traditionally been left to a middle-management layer of audit supervisors until people get closer to being a partner (partly because employees tend to be invisible to many of their superiors, working as they do in small teams at the offices of the client).
The effect has been to underutilise one of the big organisational advantages that the Big Four have: a large pool of partners who can help coach less experienced staff. That is changing. Rather than seeing junior staff as expendable drones, the Big Four's talent bosses want partners to view them as future assets. As well as tying reward schemes to the better management of people, the behaviour of partners is being changed in smaller ways. Deloitte's British firm asks partners to spend a minute with their staff immediately after client meetings to provide feedback so that they fulfil more of a training role.
Changing the way partners behave takes time and will not solve every problem. Audit work is not the world's most fascinating job and junior staff have limited influence over their assignments. But they can be given a clearer idea of how their career might shape up and greater control over it. Ernst & Young spent years asking partners to identify the skills needed for a gamut of roles, each of which carries a rating from one for beginner to five for a master. Using this, staff will soon be able to view not only a profile of their skills but also what capabilities they need to acquire in order to move up into more senior positions. Many of the training and development services are delivered electronically.
By giving people more control over their career development the big accounting firms are starting to recognise that an overly aggressive “up or out” approach is a risky strategy when skills and bright people are in short supply. “Not everyone will be a senior partner,” says Doug Jukes, KPMG's lead partner for people management. “But they can still be extremely valuable to the firm.” Deloitte is in the process of boosting the status and pay of principals, a grade between director and partner for senior people.
Even so, a partnership remains the goal of the ambitious. KPMG has a programme called Compass, which identifies 11 career milestones on the path to becoming a senior partner, each of which triggers development activities. PwC runs Genesis Park, a five-month residential course for a hand-picked group of would-be partners from around the world.
People are expected to keep learning and networking after they have been made a partner too. Mr Hurstel, at Ernst & Young, worries about how to keep long-serving partners happy and energised, especially after the Enron scandals have eroded their godlike status. “Great armies have the capacity to restore their wounded,” he says. One of the programmes he runs is called “leaving a legacy”. It is designed in part to help prepare partners for life outside the firm, perhaps as board directors, but also to help them pass on their expertise.
The scale of resources pumped into talent management by the Big Four may be beyond most employers, but many of their ideas could still be copied. Building programmes that keep the company in touch with former employees, offering more flexible career paths to women and making people management an explicit part of the incentive system for senior staff are all useful tools for employers of people who think for a living. A more intriguing question is whether the organisational structure of the big accounting firms also has lessons for other companies.
More room at the top
Being a partnership confers some advantages. It is not just that a large number of senior people are available to help train and encourage junior ones—what Deloitte's Mr Wall calls an apprentice model—but that more people can succeed. Whereas success at a typical company means climbing to one of a few top positions—and probably elbowing others aside in the process—partnerships provide a broader top to the pyramid. Between them, the Big Four firms had more than 30,000 partners in 2006. Partnerships are also flexible: if someone is good enough, the number of partners can be expanded to accommodate them. They are also consensual in style, which is important when managing clever, self-regarding people. The principles of joint ownership help to encourage networking and co-operative behaviour. “It is easier to persuade people about the importance of talent management in a partnership,” says Mr Baird.
But partnerships also have their downsides. Decision-making and innovation can be a lot tougher when so many other people have to be consulted. And in big partnerships people cease to know each other personally. For the Big Four, these problems are reinforced by their unwieldy federations of individual member firms scattered around the world.
According to Lowell Bryan, a partner at McKinsey and author of “Mobilising Minds”, a new book on getting the most from people, the ideal corporate organisation would blend elements of the typical company, the armed forces and professional services firms. An expanded “partner-like” group of senior managers at the top of the company is one of the features that he thinks could usefully be borrowed from professional services.
Cynics may wonder if the Big Four's focus on talent is only cyclical. Will expansion in their fast-growing advisory businesses make them less concerned about nurturing people in lower-margin audit work? Would an economic downturn quickly send head-counts plunging again? The size of workforces at individual firms, and in the business lines within them, will continue to ebb and flow with demand. But the supply constraints faced by employers are more rigid. As the battle in the long-heralded “war for talent” is joined across industries and countries, it could be worth keeping an eye on how the Big Four are quietly leading the charge.