KPMG’s planned consultancy IPO ups pay ante for others of Big Five

The hardest job for management consulting firms these days may not be solving their clients’ organizational problems, but figuring out how to keep their own employees.

KPMG International, which lost 21% of its work force last year, has decided the answer lies in being the first major accounting and consulting firm to go public.

In August, partners at the firm voted to spin off the assets of its consulting business, the sixth-largest practice in the world, into a separate entity, called KPMG Consulting. It registered the new company with the Securities and Exchange Commission and is planning an initial public offering for as early as next spring.

While going public will raise funds for acquisitions and other purposes, the primary goal is to have stock and options available to retain and recruit workers.

“It will certainly help us,” says Shawn Huurman, director of consulting recruiting for KPMG. “All else being equal, it will be more intriguing to come to KPMG.”

Because of the long hours and travel involved, consulting firms usually lose about a fifth of their employees each year. For five years, the rate has been increasing, says Dean McMann, chief executive of Manhattan-based Ransford Group, which tracks the consulting business.

alL aBout pay

“It’s a compensation issue,” adds Janice Johnson, a professional services recruiter at Manhattan’s D.S. Wolf. “Everyone in the business these days seems to be making less than people at the dot-coms.”

To stem losses, McKinsey & Co. is considering letting its employees buy into a fund that takes equity stakes in the firm’s clients. Mercer Management Consulting allows employees to take up to two months a year off for everything from developing their own businesses to climbing mountains.

KPMG believes selling stock will turn out to work best. While it’s common for businesses ranging from groceries to strip clubs to be public, professional services firms have remained a partnership structure because conflicts of interest can arise from broad ownership.

Still, a number of large management recruiters have gone public in the past few years, as have some specialty consulting firms, such as Electronic Data Systems Corp. If KPMG goes through with its IPO, it will be the first of the Big Five accounting firms to sell stock.

KPMG hasn’t said how much it wants to raise and how much it intends to sell. It has hinted that the company will keep two-thirds of the proceeds and the partners will hang on to the rest.

Before proceeding with the IPO, KPMG needs approval from the Independent Standards Board, which decides whether a firm’s structure will infringe upon its ability to remain independent during audits, an SEC requirement for all accountants.

If the board were to rule that owning stock in a publicly traded management consulting firm would be a threat to KPMG’s auditing independence, it is likely that KPMG would drop the IPO.

KPMG will probably have at least one vote in its favor. Stephen Butler, the firm’s CEO, is one of the seven members of the board. A final ruling is expected in the spring.

Shares of KPMG Consulting may be very attractive. In its last fiscal year, ended June 30, KPMG’s consulting business increased its revenues by 41%, to nearly $2 billion.

The division’s most prominent investor, networking giant Cisco Systems Inc., has invested $1 billion for a 19% ownership stake, forming an alliance between the two companies that will allow Cisco to sell to KPMG Consulting’s clients.

Worth $5 billion-plus?

Cisco’s investment values KPMG Consulting at a little over $5 billion–a multiple of 2.5 times sales–but the market could be even more generous. Electronic Data Systems trades at 1.4 times sales, but its revenues grew by only 10% last year. KPMG could garner a much higher valuation, since investors these days reward fast-growing companies.

At the very least, KPMG has created a lot of buzz for itself.

Mr. McMann of the Ransford Group says he usually gets about four or five calls a month from consultants about compensation issues. In the last month or so, he has received 80 calls from partners of other firms who want to know how the IPO will affect pay at KPMG.

“If they’re calling me, that means they’re looking into it for themselves,” says Mr. McMann.