Andersen Vs. Andersen: Next Stop, Splitsville

What a divorce will cost Andersen Consulting

George T. Shaheen, CEO of Andersen Consulting, stands behind a podium at the University of Chicago, fielding questions from MBA candidates. Most of the queries come from Andersen Consulting wannabes--students eager to impress the leader of one of the nation's largest, most successful, and highest-paying consulting firms. Then up stands a renegade: a woman, hired by Andersen Consulting out of Princeton University, who left to attend business school. She plans to return to the industry--but not necessarily with Shaheen's firm, in part because of concerns about Andersen Consulting's nasty separation battle from sister company Arthur Andersen & Co. "Wait a minute," Shaheen says, sensing a challenge. "You don't want to come back to AC?" When the woman shakes her head, Shaheen can't resist teasing her with an insult: "No wonder you went to Princeton."

That sort of cocky attitude has helped propel Shaheen and his army of 64,000 to the top of the consulting world. Hired out as experts on projects as diverse as managing purchasing systems for Texas Instruments Inc. and installing finance software for the DuPont Co., they have racked up 20% average annual revenue gains over the past five years. In calendar 1998, revenues exceeded $8 billion.

PIQUED PARTNERS. But now Andersen faces its toughest challenge yet: negotiating an ugly divorce from auditors Arthur Andersen in the coming months. The consultants have clashed with the auditors almost from the moment they became a separate division of Andersen Worldwide in 1989. But the squabbling boiled over 13 months ago, when Shaheen asked an arbitrator to decide how the two sides should proceed--as one bickering unit or two independent firms.

Shaheen wants independence, which could be expensive. The contract with parent Andersen Worldwide calls for exiting partners to pay 1.5 times annual revenue, or as much as $10 billion based on 1997 revenues. So far, Arthur Andersen has not demanded that payment. The consultants, meanwhile, are requesting the return of $500 million they've paid the auditing firm since 1994. They're arguing that Arthur Andersen broke the contract when it began its own consulting business. But Shaheen is running a risk: If Andersen Consulting is forced to pay anywhere close to $10 billion for its freedom, it would sap capital just as his firm is making a push into a hot new growth area: outsourcing the job of operating a corporation's computer systems and technology networks.

Like so many failed marriages, this one fell apart over money. The power of the Andersen name--an asset the consultants may be forced to give up in the split--opened doors for the consultants early on. But as the consulting practice exploded, the Andersen Consulting partners chafed at the stratospheric yearly payments they, as the more profitable division, had to pay to balance the firm's income and expenses. For 1998, they are scheduled to kick in some $200 million. Andersen Consulting expects the arbitration to be resolved by the end of the year, though it could drag out longer since Arthur Andersen has contested the arbitrator's jurisdiction.

Meanwhile, both sides are proceeding as if they were already on their own. "We have to be ready," says Arthur Andersen's worldwide managing partner, Jim Wadia. For his firm, that means expanding new businesses, including information-technology consulting. Though Arthur Andersen generally targets smaller clients than Andersen Consulting, this is already causing problems for the consulting firm. "We're experiencing more and more marketplace confusion and competition, which is frustrating and detrimental to our future," says Shaheen.

The confusion comes just as Andersen Consulting is moving into new areas of business and placing its biggest bet yet on its new outsourcing practice. DuPont was one of the first big clients to sign an outsourcing contract with the firm. Andersen employs about 400 people that manage DuPont's order-processing and finance systems under a 10-year contract. When the partnership dispute erupted, DuPont Chief Information Officer Robert R. Ridout worried that it would distract Andersen Consulting's employees and drain its finances. "Had we, in essence, picked a partner that could look at the long term, or could they only focus on the short term?" he recalls thinking. It took face-to-face meetings with Shaheen to calm Ridout's concerns. Still, DuPont has a clause in its contract to provide the option of pulling out of the deal.

Outsourcing is brutally competitive--especially in the area of electronic services. Unlike Andersen, computer-servicing giants Electronic Data Systems and IBM can actually buy and install very expensive hardware. And hordes of entrepreneurial outfits can offer narrowly targeted expertise. But Andersen Consulting's strength is its combination of technology knowhow and international reach--it has offices in 46 countries--plus a deep pool of talent. Sprint PCS, the Kansas City (Mo.) cellular-telephone carrier, uses about 150 Andersen consultants to run its internal help desk and other back-office departments. "They can really bring on the armies," says Sherry L. Browne, chief information officer for Sprint Corp. But it's expensive. Sprint pays up to 40% more for Andersen consultants than it would for technical workers hired off the street. So management plans to take back the business as soon as the expertise can be transferred in-house.

Outsourcing contracts now generate $1 billion a year for Andersen Consulting, or more than 10% of revenues. Shaheen hopes to increase that to 40% within five years. Although profit margins on outsourcing projects run about 15%, half the level made on traditional consulting jobs, it's a fast-growing area.

SHARK TANK. Shaheen, 54, is no stranger to risk. He pushed Andersen Consulting to its quasi-independent role under the Andersen Worldwide umbrella 10 years ago and followed in 1992 with a shift beyond the firm's traditional expertise in technology systems into business strategy and workforce issues. In late 1996, he reorganized the firm around worldwide industry groups such as financial services and communications, rather than geographical regions. Now, he's leading an E-commerce initiative. "It's the same thing Bill Gates did," he says of his switch. "The Internet will drive change that is fundamental to the way we do business."

Andersen sees a broader system of commerce shaping up in Internet-based telecommunications networks. More and more businesses--from car dealers to health-maintenance organizations--will provide services and information over the Net. "So you need a whole modification of business processes," says Shaheen. "Many will be designed and built by businesses like ours."

Shaheen has clearly staked a lot on his firm's technology consulting practice. But as Andersen expands that franchise it will have to wrestle with some fundamental limitations. Rivals such as EDS and IBM are, respectively, about 3 times and 10 times as big as Andersen Consulting. And unlike Andersen, they have the capital to supply hardware as well as advice. One obvious answer would be an initial public offering, but Shaheen says that is not in the cards. He disdains the notion of being accountable to shareholders and is confident Andersen won't need the capital.

Being a partnership also limits Andersen's ability to attract talent. It can't offer stock options to employees below partner--a prized asset for tech workers. Andersen consultants don't have ownership until they become partners, a cutthroat 12- to 15-year haul most young hires are unwilling to undertake. At other firms, associates are given authority earlier. "The market has changed, and they haven't figured that out yet," says an analyst who left for a job at a small public firm that included stock options. "The world is our oyster."

To address consultant concerns, Andersen has launched programs to reduce travel time and improve communication with partners, but the battle with Arthur Andersen also has taken a toll. Andersen Consulting's churn rate--the percentage of employees leaving each year--has edged up from 16% in 1996 to nearly 18% in 1998. The acrimony helped persuade one four-year consultant to jump ship to Arthur Andersen only weeks ago. "There's a whole lot of turmoil inside," the executive said, arguing that the auditing firm had remained better focused. "[Andersen Consulting] took their eye off the people side." What the firm needs now is a good divorce settlement--and to move on.

Before it's here, it's on the Bloomberg Terminal.