The drama continues at Deloitte. Their press release issued almost a year ago, in August of 2008, was a rare public acknowledgement by a Big 4 firm of what had been happening at Deloitte and the other firms, quietly, for at least a year – people were being cut and it wasn’t just for poor “performance.”
The Big 4 audit firms have been feeling the pinch for a while. The backlash against Sarbanes-Oxley costs finally caught up with them in 2006. Clients started taking the upper hand, controlling costs and giving firms ultimatums to get the same or more work done for the same or lower fees. No more 20-50% increases year over year. But the financial crisis hit already vulnerable firms, searching for the “next big thing” in XBRL and IFRS but only seeing regulator delays and clients resisting the pitch. By 2007, the beginning of the end of the mortgage origination firms, as well as ongoing poor results at such institutions as GM, (another Deloitte client), sent a signal that the coming recession would be a doozy, probably punctuated by failures, “sudden” implosions, forced takeovers by the government, and an ever dwindling number of companies with sufficient cash or credit.
Don’t ever let the audit firms, or anyone else, insist the stench of the failures wasn’t permeating the nostrils of a select few long before the fall of 2008, including the Big 4 auditors who are on the inside, on all sides. It was the triple whammy in the spring/summer of 2007 of failures/bankruptcies at American Home, New Century, and Countrywide, as well as the nationalization of Northern Rock, that forced me to realize the roof was finally caving in on the housing bubble.
Jonathan Weil, Bloomberg August 15, 2007:
“Think about the poor schlimazels from Deloitte & Touche LLP who blessed the books at American Home Mortgage Investment Corp., mere months before it went belly up.
Five months later, on Aug. 6, American Home filed for Chapter 11 bankruptcy-court protection, still brandishing the firm’s clean audit-opinion letter. There’s a reason why you don’t see auditors pursuing second careers as tarot-card readers. They wouldn’t be very good at it…”
Failures and forced acquisitions were starting to shrink the Big 4 audit services market. It wasn’t just belt tightening due to the looming financial crisis, but because the number of very large financial firms with Big 4 auditors, in particular for Deloitte, were disappearing.
By March of 2008, we had a crisis, even though it took the September meltdown for anyone in authority to admit it.
The firms, in particular Deloitte, saw it coming, felt it acutely, and began to act. Deloitte’s August 2008 admission of almost 1000 cuts due to economic circumstances was a watershed event for me, not only because a press release was issued, but because Deloitte PR gave me an exclusive statement on the actions.
Unfortunately, since then, even though Deloitte has continued to cut and make other changes such as finally slowing the recruiting pipeline to adjust to the new reality, they have not been as vocal. Maybe they think transparency did not help their image or morale. Maybe the volume of cuts became too frequent for public relations to keep up with. Maybe Deborah Harrington is busy responding to other Deloitte crises such as the Parmalat suit and preparing communications related to their acquisition of BearingPoint’s Federal Services consulting practice.
That doesn’t mean that the cuts and other human resources actions have stopped or subsided. On the contrary. With the recent loss of United Airlines as an audit client, as well as the effort at absorption of the BearingPoint professionals, new cuts and “rightsizing” are likely necessary. Those remaining are still waiting for official news of regarding promotions, raises and most likely announcements of “no bonuses.”
From a confidential source:
“People up for Manager have not received official communication and everyone is pointing their finger at the national office. It’s very late, even some Seniors did not know they were getting promoted until last week, and they found out because they were going to new Senior training this week. To put it in context, when I was promoted, I found out in end of May after the year end meeting for my office and went to training in August.”
And last week, professionals in the “Regulatory Strategy and Risk Services” line of business received this email from their Managing Partner Kevin McGovern:
“I wanted to provide everyone a quick update on our operations. Period 2 for us ended on July 25st and AERS (Audit and Enterprise Risk Services) finished ahead of plan by about $2M. Business Risk finished slightly below plan with hours being slightly ahead of plan and rate being the main driver of the revenue shortfall. Thank you all for playing your part in contributing to our performance thus far.
Over the next 3 weeks or so we will also reach a couple of Talent milestones that are extremely important – (a) communication on promotions, compensation and Annual Incentive Plan, and (b) goal setting which needs to be completed by the end of this month.
Now, as the summer comes to an end and we prepare for our annual busy season, we wanted to take a moment to communicate our expectations on utilization for all client service staff in Business Risk and Technology Risk, excluding Partners/Principals/Directors (P/P/D).
For our seasonal businesses we have to execute a lot of work in a short timeframe and in order to meet client demands we will expect all BR and TR professionals to work and charge 50 hour weeks beginning August 24th through March 5th (i.e., Period 4 through Period 10). This is simply taking what many of us experienced on a regional level in prior years, to a national implementation approach…what we need you to do, such as working closely with your Talent professional to adjust your personal schedule, and consolidating engagement team needs as soon as possible.”
Further details of expectations:
“..beginning in Period 4 through Period 10 (August 24th – March 5th) we will expect all Business Risk and Technology Risk professionals to support our operational goals by working busy season hours on all engagements possible. This will also allow us to more equitably distribute the work and project assignments across all of our professionals.
After considering the various legacy practices we have decided that during this period, each professional when assigned full-time to a client project is expected to work and charge 50-hour weeks. This is simply a consistent national implementation of what used to be multiple slightly different regional models with the objective of generating at least the same outcome on average across our practice this year as we have had in prior years. We realize that many of you will take some personal time off in Periods 7 and 8 and so our expectations for those weeks – typically 1 week in November and 1-2 weeks in December will be different.
…If you schedule less than 50 hours a week your Talent Professional will contact you to understand your situation… begin consolidating your engagement resource needs as soon as possible taking the 50 hour week requirement into consideration. ..not all budgets can handle 50 hour weeks, so work with the engagement P/P/D to consolidate work where possible, but this will be on an exception basis. If you plan to take PTO during the holidays please submit your request for approval as soon as possible so Talent professionals can place this time on your schedule. We would ask you to refrain from taking large extended PTO time during timeframes other than the holidays…”
Looks like a staffing firm to me. Do clients realize they may also see higher or compressed billing if they’re not on flat retainers? They will also see fewer people working longer hours in order to reach the utilization goals. Also more higher level staff will be looking for chargeable hours or perhaps doing staff work in order to attain those and therefore having less time to review work or, worse, end up reviewing their own work. Better scrutinize those invoices.
The reaction to these announcements by those in the firm I know has been a combination of disgust, bemusement, and resignation – not the actual kind, but the intellectual and spiritual kind, which is worse for a professional and for morale.
“1st years are going to get 1-1.5% increase from their base. No bonus (AIP).
2nd years getting promoted are going to get 2-6% increase. No bonus (AIP).
For seniors (and managers) who aren’t up for promotion: 1s and 2s – 1.5-3%. Those rated a ‘3’ are likely to get no increase.Annual Incentive Program –
If you are rated a ‘1’, $4,500, ‘2’ $2,000, ‘3’ for the most part (~50%) will get nothing but are up for a possible $1,000.New managers are going to start at approximately $80,000 with their raise. This is considerably lower than the average starting base of $92,000. No midyear adjustments. Also being discussed is the possibility extending the number of years before individuals are eligible for promotion to at least 3 years for senior’s and at least 6 years to manager, a change from 2 years and 5 years.. Deloitte partners are aware that new seniors are getting paid basically the same as 3-rated experienced seniors. The perception of those I spoke to is that experienced seniors who are 3 rated are angry because they’re performing as expected and getting the short end of the stick. In comparison all first years are likely to get a raise even though they are not that much more knowledgeable than a 2nd year. This jam-up is due to the fact Deloitte didn’t rescind the new hire offers in order to keep their edge on the recruiting scene and instead came back to them with lower salaries and sign on bonuses. One interesting comment is that there are still individuals within the firm that were rated a 4 – not meeting expectations, that may have been kept around to fulfil staffing requirements.
It looks like Deloitte will be short handed on seniors and staff this year given the recent cuts along with attrition that will result from the annual compensation. As the e-mail that was sent out above describes, those who remain will be asked to work harder and longer hours to make up for the difference. I was told that the number one and two driving factors for most people at this level is 1) the compensation 2) the dream of making manager and moving on… Something was also said on the call about shrinking in the upcoming year, but then the speaker would not comment on what this meant when those attending the call started asking questions. The speaker’s tone quickly changed into one of frustration at people’s questions and basically told them they are lucky to get anything in today’s environment while the competition is doing the opposite.
Since this reflects a call that took place in the northeast we can only imagine how it is for poorer performing regions.
Another source tells this story:
“I finished this past year with an overall 2 rating. I received a 4.5% increase in my own personal compensation. My office is considered a small to medium office (~100 professionals); however, prior to losing a big client and the recent layoffs we were much closer to 150.
The partner also told me that professionals receiving a 3 rating who were in a promotion year (at least at the senior level) would receive a 1.5-3% raise. But those receiving a 3 who were not in a promotion year would not receive a compensation increase this year. The firm strategically did not inform anyone on the staff of their compensation increases prior to the comp discussion for a reason. According to this partner, the firm decided that since so many individuals would not receive a raise in the current year, they would wait to disclose comp increases face to face. “
And to confirm my comments about forced ranking, another source gave this info:
“As for the “forced rankings,” there is definitely something to that. My peer group’s ratings were like this:
Of the total group as of six months ago,
14% individuals receiving a 2
57% individuals receiving a 3
28% individuals let go over the past 6 months.
Another group (currently being promoted to 5th year senior) were rated like this:
17% individuals received a 2
50% individuals received a 3
33% individuals let go over the past 6 months.”