By Philip Thomas - Advisory
The answer could very well depend on who you ask.
With a number of major and mid-size consulting firms recently electing to evolve from traditional partnerships into corporations, debates on the pros and cons of such a move abound. The switch to corporate structure is seen as controversial, if not ill-advised, by many, yet touted as a path to significant growth and shared success by others.
Firms which continue to employ the partnership model will undoubtedly have keen eyes on how firms undertaking the transition develop, while some may even be persuaded into rethinking their own structures.
Below, we take a look at some of the major pros and cons for consulting firms considering the switch to corporation from a traditional partnership.
What are the potential benefits of changing from a traditional partnership to a corporation?
A change to a corporation could stand to benefit a firm, existing partners, entire workforces and future employees in a variety of ways including:
For the firm:
- Tax advantages.
- Possibility of additional capital for investments in growth and other investments, e.g. in Know-How.
- Additional financial flexibility.
- Efficient governance, e.g. allowing leaders to make difficult proactive decisions that otherwise may previously have been held off by the partner collective.
- Attractive means of enticing elite talent to join.
- A chance to realign retirement funding.
For the existing partners:
- Cashing in now, i.e. by selling portions of shares (especially advantageous for the more senior partners).
- Retaining influence.
- Reduction in legal requirements and administration.
- Preservation of limited legal liability.
For the entire workforce including future employees:
- Everyone has the chance to benefit from the firm’s success.
- The best talent will be in a position to benefit early.
- Working together under a ‘one company’ philosophy.
What are the potential drawbacks of changing from a traditional partnership to a corporation?
The prospect of changing from a traditional partnership to a corporation introduces of number of potential drawbacks, including:
- The risks of changing an already advantageous situation. Proven performance, continued growth and the longevity of the traditional partnerships should not be undervalued.
- Losing one of the key drivers of success, that being the enviable partner pay that results from equity-owned or profit-sharing.
- Adding new complexities and fear into the mix. Significant change itself is understandably daunting and often goes hand in hand with doubt and infighting. Not all people and groups deal with change well.
- Dropping a culture and mindset that may be desired by the current workforce. Many of those at the traditional partnerships chose to be there with reasonable knowledge of the existing structure. They may well not wish to work under an alternative structure.
- If the firm goes public, there will be a subsequent increase in administration.
There are also legitimate concerns around the opportunities for additional capital
Additional borrowing or private equity investment are not strictly speaking necessary in order to change to a corporation, however more often than not the opportunity to do so is a driving factor in the move. While the benefits of extra capital are easily deduced, the process can also bring detrimental effects. The concerns here are as follows:
For the taking on of debt:
- Taking on debt is, by its nature, almost always a controversial and divisive topic that may lead to fierce debate among stakeholders.
- Owed money must be paid by the firm (and therefore effectively by employees) at some point.
- Perceptions that existing partners, especially the most senior, are set to cash while other staff are left out.
- May create some level of suspicion and distrust within the firm.
- The firm’s next leadership teams could well feel hard done by leading to high attrition.
For a private equity investment:
- Relinquishing full control of the firm’s strategic direction.
- A period of difficult transition that may lead to dissatisfaction among employees.
- Uncertainty over whether the investors are the right group for the firm in the long-term.
- Financial implications of the new model for the existing workforce.
Time will tell
The change to a corporation could be the catalyst that some firms need in order to step-up and begin to significantly disrupt the status quo in their respective markets. The move is forward thinking, proactive rather than reactive, and bold. It could also find itself aligning neatly with the motivations, ethics and culture of the new generations of workforce.
However, there are clearly legitimate concerns and potential drawbacks that need to be appreciated and taken into consideration. These worries are only heightened when the burden of significant debt is part of the package.
With the pioneers of this transition still at the beginning of their new journey, a final verdict on the overall benefits of a change from a traditional partnership to a corporation will take time to reach. In the meantime, competitors will be keenly watching to see whether recent examples light the way or serve as a warning.
Vencon Research International is a leading provider of compensation benchmarking and research as well as of compensation and performance-related consulting services for professional service firms, especially for audit and tax, management consulting, and IT services firms. Vencon Research International provides services to a full range of clients in more than 75 countries worldwide and is proud to name more than 85% of the world’s major consulting and/or professional services firm its clients.