After Arthur Andersen: Back to Basics

Arthur Andersen, one of the most revered names in the pantheon of great professional service firms, has been indicted by a federal grand jury and charged with obstruction of justice in the Enron affair. Is this an isolated case? Not really, in the sense that large professional firms everywhere are facing many of the same difficult issues that led to Andersen’s downfall.

To begin, let’s understand the forces that are impacting professions such as law, accounting, and consulting. First, basic services are becoming commodities. The knowledge required to write a simple contract, perform an audit, or reengineer a company’s order entry system is well documented and increasingly embedded in expert software. Automation has reduced the need for hands-on teams to spend weeks and months onsite with clients, and many competitors vie to provide look-alike services. The result is maturing markets, increased competition, and pressure on fees.

Second, clients are far more sophisticated than they used to be, and they have access to unprecedented amounts of market information. Many large clients are reducing the number of outside firms they deal with—this is happening in almost every field, including advertising, law, consulting, and IT services—and some are demanding that their primary suppliers provide a broad range of integrated services.

Finally, outside capital is being attracted into the professional service industry. Following the trend in investment banking and advertising, large consulting firms like Accenture and KPMG have gone public, and others, such as Ernst & Young, have been purchased by public companies. Formerly fragmented markets are consolidating.

These trends have put enormous pressure on the profitability and culture of large professional service firms. They have reacted in several ways. They are:

 

• Developing more aggressive, sales-driven cultures (e.g., giving all partners “sales” training), and implementing goal-based, volume-driven compensation systems
• Broadening their array of services, and emphasizing value-added, consultative advice and transaction brokering (e.g., selling management consulting in addition to auditing)
• Undertaking outsourcing for clients—managing entire functions such as information technology, human resources, and internal auditing.
• Becoming directly involved in building out the infrastructure of our information economy (e.g., the Accenture/Microsoft joint venture called Avenade)

 

These actions are prudent from a strategic perspective, but they risk misaligning the interests of professionals and the clients they serve. They have created conflicts of interest and blurred the lines between giving objective advice and providing assurance to investors, on the one hand, and pumping products and services on the other. The frustrated client of one large accounting firm, for example, was recently quoted by the Wall Street Journal as asking his outside audit partner, “Are you my auditor or my salesman?”

Some new oversight and legislation is no doubt required, but the real answer is to return to the basics of professional excellence and client leadership. While researching my book Clients for Life, I did an in-depth study of the greatest client advisors during the last 3000 years of history. These individuals had to deal with many of the issues and conflicts faced by today’s professionals, and they did so with skill and aplomb. Let’s revisit some of the timeless qualities of these great advisors and see how they can guide us in the current crisis.

One of the foundational qualities of the successful advisors I’ve studied is the ability to empathize and listen to their clients. Unfortunately, much of what passes for “listening” today is an insincere projection of personal desires. I recall vividly an account development session I hosted when I used to be a senior partner at a major consulting firm. The client in question needed a narrow piece of strategy work done, but no one in the room with me would accept that a company could have such a “limited” set of needs. “This company needs our business transformation services” one of my partners explained to me. “Get with the program,” another told me. I was accused of being small-minded for not proposing a multi-year, multi-million dollar project to the CEO!

There are three preconditions for effective empathy: self-knowledge and self-control; humility; and keen listening skills. Unfortunately, many professionals either lack these qualities or they just don’t think they’re important anymore.

Another foundation of great advisors is selfless independence, which was the subject of last month’s newsletter. Whereas accountants and lawyers are taught very specific, legalistic definitions of independence (e.g., my third cousin can own stock in a company I audit but my mother cannot), client advisors who build long-term loyalty exemplify independence through intellectual honesty and emotional distance. They refuse to recommend or approve courses of action that are lucrative in terms of future work but not in the best interests of the client. They are willing to turn down work they don’t believe in.

During a conversation with Harvard Law School professor Alan Dershowitz, I was struck by his willingness to actually do these things. Some years ago he was retained by real estate heiress Leona Helmsley, who had surrounded herself with toady, smarmy advisors who only told her what she wanted to hear. After a day’s consultation, he said to her, rather bluntly, “If you keep being mean and nasty to your employees of course they will continue to turn against you and you will face more lawsuits.” She fired him on the spot! Although he lost the business, his reputation as a straight shooter was intact and it no doubt helped him earn important future assignments.

A third element of client leadership is the ability to make keen judgments. Skilled client advisors are always on the lookout for the many well-documented judgment traps that can ensnare their clients—think of the arrogant “groupthink” that bogged Microsoft down during the company’s antitrust trial in the late 1990s, or the “prior commitment” syndrome that allowed President Kennedy to launch the ill-conceived and ultimately disastrous Bay of Pigs invasion of Cuba in 1962. These professionals then carefully blend facts, their experience, and their (and their clients’) value systems to make sound judgments.

Judgments can get skewed and distorted by a variety of factors, especially greed. In the case of Enron, for example, its auditors approved what are now believed to be highly questionable financing mechanisms which no doubt generated a lot of tax consulting revenue. Similarly, I have seen large consulting firms recommend dubious mergers that they know in their hearts will create huge amounts of integration and implementation work.

Professional judgment has also been weakened, in some fields, by a lack of experienced, trained staff. Accounting firms, for example, have had difficulty attracting top graduates over the last decade, and some of the most experienced partners have retired. Developmental mechanisms such as mentoring, which are a crucial means for every organization to tap into the experience of established elders and cultivate younger staff, have suffered as the pressure on partners to “leverage” themselves has grown.

A fourth attribute that distinguishes extraordinary professionals from ordinary ones is the ability to build deep, personal trust. Unfortunately, trust has become one of the most abused and misused concepts in our lexicon. When we trust a person, we believe he will look after our interests. We believe he has integrity, and that in a business setting, he is competent to undertake the work we want him to do. All firms promise to clients that they can be trusted, but not all follow through—in reality, some only commit to a very superficial trust that is circumscribed by legal contracts. The kickbacks that several large investment banks allegedly took for preferential allocations of hot IPO shares come to mind. “You can trust us to successfully take you public” was the message to their clients, and in a narrow sense, they kept this trust—but in reality their integrity was shot to hell, and ultimately they raised the cost of doing business for these clients.

I have always been struck by the following definition of a promise, offered during a sermon by Lewis Smedes: “When a person makes a promise, he stretches himself out into circumstances that no one can control and controls at least one thing: he will be there no matter what the circumstances turn out to be.” Hardly what most companies have in mind, I think, when they run ads telling you that they will be your “Trusted Partner for XYZ.”

Professional excellence and client leadership are based on infusing your client relationships with these attributes—sincere, unbiased listening; client devotion balanced with great independence; objective judgment that sets aside your own personal interests; unconditional integrity that builds trust; and also one I haven’t discussed—synthesis, or big-picture thinking, which enables you to see patterns, reframe your client’s issues, and put his problems in a larger context.

Concretely, professional service firms (and independent practitioners) need to:

 

• Cultivate these attributes at the individual level, both through learning and development programs and by the example that management sets;
• Create unequivocal, well-communicated policies that unswervingly put client interests first and ensure that conflicts of interest are explicitly and rapidly dealt with;
• Adopt balanced compensation systems that equally reward quality, service, the development of intellectual capital, and growth in revenue and profits;
• Develop the means to identify and react to client needs in ways that are objective, scrupulously honest, and serve to build trust, not diminish it;
• Create stronger mechanisms to safely allow employees to raise ethical issues and concerns about conflicts;
• More firmly isolate and protect assurance-related services (auditing, due diligence, etc) from financial pressures that could lead to compromises or breakdowns in standards.

 

 

 

 

In the Wizard of Oz, after the wicked witch of the west is finally killed, Dorothy asks the good witch to help her get back to her home in Kansas. “Sometimes,” the good witch replies, “what we seek was right in front of us all along.” She then instructs Dorothy to tap her shoes together three times, repeating, “There’s no place like home.” A minute later, she wakes up in her own bed.

Sometimes, the answers do in fact lie right in front of our own noses.
Developing Client Leadership
I’ve been frequently asked, “Are the attributes that distinguish great client advisors the same qualities you need for leadership in general?” And the answer is that there is about an eighty to ninety percent overlap. The requirements for corporate leadership—setting a vision, building trust, listening, acting with conviction, and so on—are very similar to those needed for what I call client leadership.

There are a few differences, of course. For example, a corporate leader will often have (and perhaps should have) a more visible ego than a professional client advisor. And while advisors have to exercise keen judgment with their clients and help them make important decisions, it is ultimately up to the client to actually make the decision and face the consequences of his actions. Corporate leaders also have to manage and motivate large numbers of people, something that may or may not be required of a professional advisor depending on the size of her firm.

In a large professional service firm, strong “leadership” is usually associated with professionals who are great leaders with clients. Indeed, you have to motivate your clients just as you have to motivate your professional staff. I have always been struck by how the British General Bernard Montgomery described the effect of a good leader:

“The leader must have infectious optimism…The final test of a leader is the feeling you have when you leave his presence after a conference. Have you a feeling of uplift and confidence?”

We would all like to affect our clients this way!