Monday, November 10, 2014

The Big Blue Blues (Part Two)


In the last installment to this deep dive I’ve been doing on development contractors I started exploring the idea that some company ownership structures may be better suited to development contracting than others. The first two contractors that I’ve written about, Chemonics International and Abt Associates, Inc are employee owned corporations (i.e. ESOPs). The next contractor that I will be writing about is AECOM International Development (AECOM). AECOM differs from Chemonics and Abt by virtue of the fact that it is a publicly owned company. 

Because I have a lot of experience managing USAID contracts from inside a publicly traded company I understand very well all the unique challenges that can be involved. And, as I wrote in the last installment, I thought it would be useful to share some perspective before reflecting on my experience working for AECOM.  In the last post I set the stage for today’s piece by describing the landscape and events leading up to IBM’s decision to acquire PwC’s consulting business. Now, here’s what happened next ...

On July 30, 2002 IBM announced that it would be acquiring PwC’s consulting business for $3.5 Billion. Two months later, on October 1, 2002, IBM introduced a new division called IBM Business Consulting Services which incorporated the 30,000 staff, 1,300 partners, and nearly $5 Billion in revenue that had officially become part of IBM that morning.

I’m not even going to try and sugar coat what happened when we became part of IBM. The acquisition, especially that first 12 months, was a very painful and destructive experience. Prior to the IBM acquisition PwC’s USAID development practice would have ranked somewhere in the top 10 of the USAID 50. One year after the acquisition our business had already dropped so precipitously that it would have probably ranked near the bottom 10.

So what happened? The explanation is simple. The acquisition completely disabled our project enabling environment (PEE).  Here are some examples.  On the day that the acquisition became effective many of us working in the field discovered that we were already in violation of company policy simply by virtue of countries we were living/working in. An implication of that was our location codes were invalid so we couldn’t fill out our timesheets. Then, within two months, the company closed down all of our imprest (bank) accounts. Once the funds were cut off in the field we were unable to pay staff salaries for months, and we went severely delinquent on property rental agreements all over the world.  We were also required to terminate all local staff employment contracts in every one of the countries we worked in because having them was a violation of company policy … it took months before anyone could come up with a solution to formally rehire them all. All of our procurement policies also changed overnight. Everyone from inside the practice was completely removed from the procurement process (even local/field procurements) and we were replaced by a small team of english-only speaking IBM veterans in Gaithersburg, MD.  The inability of that team to appreciate the environments they were stepping into, and their inability to communicate in any language other than English, meant that basically nothing went forward for months. Once it became clear that we could no longer deliver on even basic things USAID Missions around the world started reassigning the work from our projects to other contractors. It took about six months before we could even start issuing invoices to USAID because of contract novation complications. And, once the invoices started going out they all got rejected for at least two or three iterations because nobody from within the practice was allowed to review them before they were sent out to the clients.  I could go on, but I think the picture is pretty clear.

We lost a lot of great people that first year. And those of us that hadn’t already thrown in the towel were all very frustrated. IBM management was apparently frustrated too. As we would later find out, IBM had started shopping our practice around to other development contractors once things really started to buckle during the first year, but by the time our practice went up for sale none of our competitors wanted to touch us with a 10 foot pole. I was personally exhausted. I’d been fighting fires associated with the acquisition from the field while leading several large projects in Bosnia and Serbia and I had come to feel almost helpless in my role. IBM had become the butt of every joke in USAID implementor meetings around the world. It was embarrasing. Around October of ’03 I finally decided that I'd had enough and I submitted my resignation, effective the end of the year. My plan was to return to the US - after nearly six years of building out our practice’s business in the Balkans - and find a new job.

Then a funny thing happened at the end of ‘03. What happened actually reminds me of the phenomenon that equity traders talk about trying to determine the bottom of a bear market. The idea is that a recovery won't ever really start until you finally see everyone throwing in the towel all at once. Similar I guess to that saying "its always darkest just before dawn." Well, the sun finally started to come up over what was left of our practice in early ’04. It started coming up when the company finally decided to make some important decisions that it had been putting off for far too long.

The biggest decision was appointing a clear leader of the practice. Our group’s long time leader had left us right around the time of the acquisition for a great opportunity with the World Bank group. There were three solid candidates in our practice to step into her role, but rather than appointing one of them in charge, the company chose to establish a “triumvirate” leadership structure … i.e. management by committee. In retrospect I think the non-decision ended up being costly for us, but I understand why it was a difficult decision to make. All three candidates were terrific consultants with dynamic personalities, good judgement, great experience and strong leadership skills. All three candidates were also very ambitious, so there was never going to be a natural concession of power. When the company finally decided which of the three to put in charge, the other two were quickly snapped up by our competitors ... which I’m sure is exactly what the company was trying to avoid with its non-decision.

The appointment of a clear leader for the practice was important because it finally enabled the team to mobilize around a clear vision and approach for rebuilding the business. That decision was all it took to change my mind about leaving the firm. I remember the morning after I arrived in the US in December 2003 I drove in to the office expecting to turn in my computer and fill out a bunch of exit paperwork.  When I got there I found a bunch of senior partners that I’d known from my earliest days with PW. They sat down with me, explained what they were planning, and asked me to stay on in an elevated role to help rebuild the business. I agreed to give it a shot.

I was put in charge of practice operations, i.e. I became COO for IBM’s business with USAID. My job was to rebuild our PEE. I was surprised that I got selected for the role since I didn’t have any prior experience with operations. Looking back now I realize that the reason I got tapped for the job was because I knew the USAID business and I was someone that all the former PwC partners, who were then playing senior executive roles at IBM, knew and trusted. It didn’t take me very long in my new role to realize why we had been struggling under IBM. The company had a very different philosophy around internal business controls. We had all come in to the acquisition accustomed to the governance practices you typically find in a partnership model, which are a lot different from the governance practices you tend to find in a publicly traded company. The differences were most acute with the business support functions, specifically with Procurement, Finance and Contracts. What we had not understood, or appreciated enough, was the fact that IBM's support units were not there simply to support us, they were also there to regulate us … and they took that role very seriously.

The key to rebuilding our PEE was realizing that IBM’s approach to managing the risks they perceived with our group's business operations wasn’t bad or wrong, it was just different than the approach we were all used to. The solution was to re-engage with the support units on a different set of terms. I built some structure around our teams’ interactions with the support teams and established a clear and transparent process for flagging issues and tracking them from inception to resolution. Essentially what I did was implement a micro-level version of the World Bank's “doing business” solution for improving a country’s BEE. I also focused on changing the tone of the dialogue. I asked everyone on my team to change their titles to “problem solver” for a few months, and we agreed that for a while nobody was allowed to talk about problems without also offering a solution.

Slowly but surely things started improving. The time from issue inception to resolution started dropping. The relationships between the IBM support units and our practice became more cordial. Within four months we had successfully re-enabled our PEE and by mid ’04 we were back in business. And, thanks to all the terrific work that the rest of our practice had been doing with our prospective clients and partners in the industry, we finally started winning again.

Whenever I get asked about the experience now I focus on the 4 key lessons that I learned.
  1. It’s always important to remember that as a company becomes larger, and as the ownership of a company becomes more diffuse and disconnected, that company's internal controls environment is going to become more defined and rigid. 
  2. When the company you work for has been acquired you need to come to terms quickly with the reality that you are now part of the acquiring company. You are not the acquired company anymore ... that company no longer exists. It’s true that in the aftermath of an acquisition both sides have to adapt and change to some extent, but the heaviest burden to adjust and evolve always falls on the shoulders of the acquired.
  3. Development contracting activities expose a company’s business operations to significant additional risks and requirements that you don’t find with more traditional professional services work. Different companies choose different ways to deal with those additional risks and requirements and its important to overcome the instinct to label different approaches as "good and bad” or “right and wrong.” Different approaches are just different. 
  4. It’s sometimes hard to remember that there’s always more than one side to a story. You need to hear from all sides if you really want to get to the truth. 
By the third quarter of ’04 (two years after the acquisition) we had manage to rebuild our PEE and we started winning again. Unfortunately that’s not the end of the story. Because while we managed to figure out how to make the USAID business survive inside IBM, we were never able to figure out how to make it thrive.

Why?

It wasn’t our PEE that stood in the way. The key obstacle that we could never overcome was getting USAID to understand IBM’s approach to cost allocation and cost accounting. IBM’s approach to cost allocation was extremely transparent … it charged a lot of things as direct costs that USAID was accustomed to seeing as part of indirect costs.  As a result the indirect rates were much lower.  It was an approach that other Federal agencies really liked because it effectively shrank the size of the “black box.” Unfortunately we never managed to socialize it effectively with USAID in the field. I started to see the writing on the wall in mid ’05 … and in March '06, IBM unloaded the business to Abt Associates.

What’s all of this have to do with my blog series on Development Contractors?

I think there are a few important things to take away. First, there are a lot of folks out there who are skeptical that a USAID contracting business can be viable inside a publicly traded company because of what happened with IBM. As I’ve explained in this post, and as my forthcoming installment on AECOM will also show, a USAID contracting business can be viable inside a publicly traded company. Yes, there are more complications to overcome inside a public company than a private company, but it is definitely viable.

Second, I believe the severe difficulties that IBM had with the USAID business in the first year of its acquisition of PwC were a consequence of not being prepared. It’s important to keep in mind that the USAID business was just a tiny fraction of a percent of IBM’s overall acquisition of PwC's consulting business … you might even call it an accident. Had the USAID business been an explicit target of the acquisition I am convinced things would have unfolded much differently.

Finally, I think USAID’s overly ritualistic approach to contractor cost allocation is something the Agency needs to overcome if it really wants to start establishing contractual partnerships with more large, diversified, companies. I’d like to see more of an effort to enlighten folks inside the Agency to the idea that different ways to allocate costs are not “good and bad" or “right and wrong”, they are just different. The focus should be on overall cost, or better yet, value for money. It’s an example of how the Agency can sometimes be vulnerable to losing sight of the forest for the trees. In IBM’s case, I think USAID ended up losing a partner with tremendous potential to support mission implementation.

I think it was a particularly big loss for USAID in terms of its trade facilitation agenda in Africa. While all the usual players have been lining up to bid for contracts to run USAID’s trade and investment hubs in East, West and Southern Africa, I don’t see IBM anywhere on the radar and IBM could bring a lot more to the table than any of USAID's traditional partners when it comes to trade facilitation. A lot of folks at USAID don’t even realize that one of the key reasons IBM sold its PC/Think Pad business to Lenovo was the opportunity it created for IBM to play a key role building out the trade facilitation and supply chain infrastructure accross China … arrangements that I understand were done primarily on a commercial basis. IBM has also been playing a key role in customs and trade facilitation here in South Africa, the cornerstone of the Southern Africa regional economy. Given all of IBM's experience, tools, and commercial orientation around trade facilitation, a strategic relationship between USAID and IBM would make an enormous amount of sense.

- DS

Next up … Build It And They Will Come

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