EY’s challenge begins only after leaders sign in historic farewell

A year since EY global chief executive Carmine Di Sibio began plotting to break up the potential Big Four company, its 13,000 partners will finally have their say on the plan.

Partners will start voting in November on whether to split EY’s consulting and auditing weapons, a bold gamble that businesses can forge a brighter future on their own but is also fraught with risk.

The blueprint for the breakup is initialed of the group’s top bosses last week after a tense summer in which EY member firms battled over the possible structure of the split and struggled to minimize huge tax liabilities. potential from an agreement designed to free businesses from limitations created by conflicts of interest.

But selling the deal to partners and keeping more than 300,000 employees happy will be as difficult as winning the backing of company leaders has proven, industry veterans say.

“The most complex transaction ever made in the world of professional services firms,” said Paul Raleigh, former head of global consulting at Grant Thornton.

Getting to the point where it can even be passed on to partners involves dealing with difficult obstacles, including eliminating potential $13 billion in tax liability EY According to people familiar with the matter, it was originally supposed to be triggered by splits but has since been dropped by additional jobs.

People with knowledge of the negotiations said the possibility of an alternative restructuring plan was also discussed between EY’s global executive team and the bosses of some of the following largest member companies. when EY’s US leaders resisted signing the deal in the summer.

The plan agreed by EY bosses last week will result in the audit business remaining in a partnership structure while most other service industries, including consulting, transaction advisory, service regulated services and the majority of tax operations will be decoupled and publicly listed, almost certainly in New York.

The transaction posed a series of challenges for the 2,000 executives and internal and external advisors working on it.

Dodge traps

The difficulty of managing the split across the roughly 150 countries where EY operates means that only the largest 70 to 75 member companies will be included in the split, according to people with knowledge of the plan. .

Consultants and auditors in smaller firms, which represent only a small fraction of total global revenues, will remain in existing country partnerships and will remain in the audit-driven business. dominate globally.

Column chart of Global Revenue ($ billion) showing how EY's non-audit businesses have grown rapidly over the past decade

As well as technical complexity, Di Sibio is having to manage competing interests in EY. Like its Big Four competitors – Deloitte, KPMG and PwC – EY is made up of a network of national member companies in approximately 150 countries.

“Unlike the parent company in a corporation that can authorize its subsidiaries to do as it pleases, EY [Global] Raleigh said.

Get “hundreds of leaders on board. . . took several months longer than we anticipated,” Di Sibio admitted this week.

Consensus-building has become so taxing over the summer that EY global executives and the bosses of several national member firms have been looking to see if they can promote it. the split even as EY US, its largest member company, refused to support the split, according to three people close to the talks.

Engineering segregation without the backing of EY US, which is responsible for about 40% of the corporation’s $45 billion in annual revenue, is unthinkable to many.

But as leaders at corporate America delayed the signing over concerns the split would resolve billions of dollars in unfinished pension debt, the prospect of an alternative restructuring emerged. .

According to two people familiar with the negotiations, the fact that other member firms were prepared to consider a different structure helped focus the minds of EY’s US leaders as it clearly showed the strength of craving for some form of far-reaching change.

European member companies, which face more pressure to change their structure After a series of audit scandals at the Big Four, it felt more urgent to deliver a radical overhaul, said another person with knowledge of the negotiations.

While US regulators were looking into potential conflicts of interest arising from Big Four auditing firms whose consulting divisions also consulted, the idea of ​​parting them did not arise. on the political agenda the way it has in Europe.

“If you look at the past 10 years, there hasn’t been any publicized failure in the US,” said Jeffrey Johanns, a former partner at PwC who teaches auditing at the University of Texas at Austin. “They happened in China, in England and in Germany with Wirecard. “

The threat of change

As EY leaders now look to sell their shares, they will need to convince both their audit and consulting partners that the split will result in a record $45 billion in revenue. annual is reasonable.

One person with knowledge of the plans said, “Usually you push for change when you’re in a pinch, we don’t,” said someone with knowledge of the plans. The plan said, adding that part of the challenge is that “people don’t like change”.

Audit partners are being asked to accept cash payments of two to four times their annual income in exchange for the ability to be the only major audit firm with limited consulting expertise. . The audit-focused company will have about 6,200 partners and 120,000 employees globally, according to figures presented to partners on Thursday.

Column chart of Global Revenue ($ billion) showing EY .'s Non-Audit Business Structure

At the same time, consulting partners will receive shares in the new consulting business and have their annual salaries cut, which will be more severe for higher-level partners. Whether they ultimately benefit financially from the split will depend on the performance of the shares in the business by the time they are allowed to sell off their shares for five years.

Under the plan, the independent audit firm will retain some tax and advisory capacity, which will initially generate about a third of the revenue.

The aim is to rapidly develop the firm’s consulting capacity, a strategy that echoes EY’s rebuilding of its consulting business following the sale of its $11 billion IT consulting unit. billion dollars to the French group Capgemini in 2000.

But EY is betting that the consulting business it plans to set up will outperform the one it sold to Capgemini, which has struggled to integrate the unit.

Unlike the Capgemini’s liquidation, the current split plans are not a sale, avoiding the risk of cultural conflicts if the consulting business is sold to another entity, Di Sibio said.

The 59-year-old insists his plan is also different from other troubles, such as KPMG’s rise in 2001 with the consulting firm BearingPoint, which ended in bankruptcy in 2009. and our scale is very different from BearingPoint,” said. Di Sibio.

Flight risk

The math of the split also threatens generations of EY employees against each other or pushing senior staff down to partner level to weigh their options.

“You might think, ‘I’m two years away from my partner,’ or ‘I’m following,'” says Kevin McCarty, chief executive officer of West Monroe, a 2,200-person consulting firm based in Chicago. chase partners”. . He said some non-partner employees would be unhappy with the plan.

EY’s plan to hire 740 external partners over the next 15 months will not reassure consultants, who fear their career paths will become less attractive once the consulting business is listed. One person briefed on the matter said the number was not significantly higher than the number of outsourced partners last year.

Di Sibio argues that the aggressive growth goals of newly spun out businesses create unparalleled advancement opportunities.

But even as EY comes close to hitting its ambitious revenue target – 21.5% year-over-year growth in the consulting sector over three years and 7 to 8% in the audit-dominated business – Raleigh suggested doubts may persist on both sides as to whether a better deal could have been completed.

“As in most divorce settlements, there is usually some lingering resentment that your ex did a better job than you,” he says.

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