What's Dragging Down A.T. Kearney?

It's overstaffed and not really clicking with parent EDS

It was a dramatic moment for the New York-based members of A.T. Kearney Inc.'s financial-institutions industry group. Reeling from a slowdown in business and the cutting back of some key contracts, the consultants sat down on a Friday in October, 1998, to talk about their problems. Finally, one young associate cut through all of the consultant-speak and said what many had been thinking: Kearney lacked a clear vision of where it wanted to go and what it wanted to be. The room buzzed. "It was the first time someone spoke up and voiced publicly their concern that we didn't really have a strategy," says Ted J. Gooden, a fellow associate, since laid off.

The words clearly struck a nerve. After an industry-leading growth spurt following its acquisition by Electronic Data Systems Corp. almost four years ago for $600 million in cash and stock, the venerable management-consulting firm seems to be stumbling. Its revenue growth rate fell from 30% in 1996 to 16% last year, while rivals such as Andersen Consulting have held steady. In March, it laid off close to 200 consultants, about 5% of its total, and delayed the start dates for some of its new MBAs--a highly unusual move at a time when most consulting firms are hiring like crazy. And in an industry in which retention is a critical issue even in good times, many of those remaining are reevaluating options. "This is not the firm I joined four years ago," says one consultant in the New York office.

Although management points to everything from the economic woes abroad to the merger boom at home, some industry onlookers and insiders trace Kearney's problems to its acquisition by EDS--a deal that many feel has not lived up to early promise. The plan was that Kearney's work helping companies overhaul operations would lead to computer-services business for EDS and vice versa, but the synergy has been much less than expected, says Tom Rodenhauser, president of Keene (N. H.)-based Consulting Information Services. "There were such high expectations with this merger," he says, "and now there are extreme difficulties."

Meanwhile, industry observers say Kearney has struggled in its attempt to move beyond its nuts-and-bolts operations specialty into the more elite role of corporate strategist, frustrating new recruits who felt misled. "They sold it to me that they were trying to do more than just operations consulting," says Gooden. "I found out that that was the only thing financial-services companies were listening to them for." Kearney says its strategy business is healthy and growing.

The current slowdown is hardly a death knell for Kearney. Under the leadership of CEO Fred G. Steingraber, revenues have exploded at a compounded rate of 25% for the past 15 years, to last year's $1.2 billion. And to some extent, Kearney's woes may signal the start of an overall slowdown in the industry after years of torrid growth. A few smaller, fast-growing shops, such as Mitchell Madison Group and Renaissance Worldwide Inc., also are cutting jobs or delaying offers.

UNSETTLING NEWS. Kearney, created in the 1920s when Andrew Thomas Kearney, a founding partner of McKinsey & Co., broke off to form his own firm, has long had a solid reputation as a friendly yet hard-driving firm. It boasts such major clients as Federal Express Corp. and Prudential Insurance Co. In recent years, it has become a very hot place to work: A just-released survey of MBA students by Kennedy Information Research Group, a Fitzwilliam (N.H.) consulting specialist, ranks Kearney No. 6 out of 52 firms in desirability, up one place from last year.

But that may be changing, and fast. Kearney's slowdown seems to have caught the firm off guard. The layoffs, which cut across geographic and industry sectors, came just months after a new class of some 260 MBAs came on board. While some of those let go were fresh out of school, others were veterans. What's more, several MBAs who had accepted offers to join Kearney in the fall were asked to wait until January in return for a $10,000 to $12,000 bonus--an unusual and disturbing move, according to one B-school placement director. That's led to some highly unflattering online gossip on sites such as VaultReports.com, with headings such as "A.T. Kearney axes 1998 hires," and "It's a bloodbath."

ON HOLD. Steingraber characterizes the moves as normal pruning. "We continually weed out people from the standing of potential and fulfillment," he says. That's not exactly the sense he gave employees in a Mar. 8 memo. "I regret to report that...anticipated revenue has not yet materialized," he wrote. "In addition, the outlook does not yet show sufficient improvement when viewed relative to our capacity."

What happened to Kearney's high growth rates? The global financial crisis, which caused many multinationals to scale back overseas projects, was certainly a factor. With 55% of its revenues coming from outside the U.S., Kearney was more vulnerable to problems in developing countries than some rivals. Also, Steingraber says the merger boom led companies to put projects on hold until new management teams were worked out. That may be one reason why a major Citigroup contract came to an abrupt halt last year, according to insiders, leaving many of the 85 or so assigned consultants "on the beach"--consultant lingo for having nothing to do. Both Citigroup and Kearney say the project ended because its goals were achieved.

Underlying these problems has been a shift in the relationship with parent EDS. After buying Kearney in 1995, EDS used it for advice on everything from evaluating prospective contracts to employee training. Insiders say that until recently, EDS was one of Kearney's largest clients. Yet even before new CEO Richard H. Brown started in January, that work was falling off sharply--saving millions for EDS, which was under its own profit pressures. An EDS spokesperson says the work slowed because Kearney finished the projects. "They did what we asked them to," says Cecilia S. Norwood. "Dick [Brown] said we needed to execute now, and that's not Kearney's job."

Meanwhile, instead of feeding each other business, the two firms were struggling to connect. One ex-partner says the EDS culture was so focused on sales that a lot of Kearney's clients felt EDS offerings were being pushed down their throats. "We'd spend time trying to get the sales guys out of the way so we could do the consulting work," he says. "I'd have clients that would say, `I do not want to see any EDS people as part of this."' Steingraber denies that Kearney has not worked well with its parent, saying that business in which both have been involved has been worth some $375 million for Kearney and $7.5 billion for EDS over three years, and that A.T. Kearney is three times larger than it was when it joined EDS.

Now, Brown seems determined to achieve the full potential of the merger. Recently, he pulled the EDS directors off Kearney's board, saying he'd prefer more direct communications. And a global corporate memo from Brown, dated Apr. 12, implies more interaction between the two groups. "We must proactively market each other's capabilities in support of a strong EDS brand," it reads. EDS is set to launch a roughly $50 million marketing plan that will, in part, emphasize the offerings of both groups.

Meanwhile, Kearney must cope with the fallout from its growing pains. "I was a little bit surprised that internally we didn't have the foresight to predict and manage growth," says Guy M. Cote, a director in its executive search practice. "To binge and bulge like a bulimic is just unhealthy to existing morale." That's just the sort of wisdom you expect consultants like A.T. Kearney to teach you--not show you.

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