Build It And They Will Come

In my last installment to this blog series on development contractors I reflected on my own experience managing a USAID contracting business from inside a large public company. I thought it would provide some helpful context for today’s post on AECOM International Development.

My last post concluded with the argument that, while there are certainly more complications to overcome inside a public company than a private company, a USAID contracting business can indeed be viable inside a publicly traded company. Today’s post completes the argument.

AECOM International Development

USAID 50 Ranking: #8

Average Annual Obligation: $111 Million

Imagine we’re having the following conversation:

Me: I read an article earlier this year that suggested AECOM might be the biggest company you’ve never heard of. Is that true? Have you ever heard of AECOM? 

You: It’s true ... I’ve never heard of AECOM. Who are they? 

Me: AECOM is the largest architectural and engineering design firm in the world, responsible for some of the most iconic building projects in recent history. 

You: Really. Any big projects that I might recognize? 

Me: Well, how about the tallest office tower in North America: One World Trade Center. 

You: Wrong! I happen to know One World Trade Center was built by the same company that built the original World Trade Center - Tishman Construction. 

Me: Nope. AECOM bought Tishman in 2010.

The conversation is a great example of why a lot of people have never heard of AECOM … it didn’t really exist until the early 1990s. The company’s growth has been mostly driven by acquisitions. It’s what securities analysts refer to as a "roll up.” In AECOM’s case, it’s the end product of over 40 firms being rolled together over the last twenty odd years.

AECOM International Development is just a small part of the larger AECOM. It was created back in 2004 by AECOM’s acquisition of Planning and Development Collaborative International (PADCO), and then expanded by AECOM’s acquisition of The Services Group (TSG) in early 2008. AECOM acquired PADCO and TSG in order to cultivate a special foothold for building up its business in emerging markets.  

From the looks of things today it turned out to be a smart decision. As I’ve already hinted at in the last installment to this blog series, AECOM International Development is living proof that a USAID contracting business can be viable inside a publicly traded company. According to data that I pulled off usaspending, it looks like before AECOM started the acquisition (~2003), TSG and PADCO were pulling in combined prime contract obligations of somewhere around $30 million annually. 

Now fast-forward ten years. In 2013, USAID’s obligations to AECOM totaled just over $170 million. So under AECOM the USAID contracting business grew from around $30 million to $170 million in 10 years. That’s an increase of over 500%, i.e. that’s some pretty serious growth. And, as I described in the last installment about my own experience managing a USAID contracting business from inside a publicly traded company, that’s not an easy thing for a public company to pull off. 

So what has enabled AECOM to succeed where IBM failed? 

First, it’s important to remember that all acquisitions start and end with people, so I think you’ve got to take your hats off to the folks at AECOM, TSG and PADCO that managed to figure out how to make the USAID business work inside AECOM Corporation. It’s some impressive work. 

Of course there were some important differences too. For example, AECOM’s acquisitions of PADCO and TSG were not accidental (i.e. not part of something much larger like IBM’s acquisition of PwC Consulting.) PADCO and TSG were both specifically targeted by AECOM for their work with USAID. And AECOM generally gives the companies it acquires a relatively large degree of flexibility and independence to continue running the company, i.e. AECOM has tended to focus less on integration post acquisition compared to a company like IBM.   

The regulatory environment has also been a bit less complicated. Remember that IBM’s acquisition of PwC Consulting came right on the heels of Enron’s collapse. As a result, the financial and capital markets were particularly nervous at that time about the possibility that companies were failing to properly disclose potential liabilities that could arise from offshore entities and subsidiaries. And, despite the fact that USAID field projects have nothing in common with the kind of off-shore entities that took down Enron, there were enough cosmetic similarities (e.g. foreign bank accounts, foreign hired staff, foreign procurements and sub-contracting) to trigger a lot of extra caution, due diligence, and general “noise” around the time IBM acquired PwC. 

But I think the biggest reason that AECOM International Development has succeeded is the fact that there are some real synergies between what AECOM does commercially on a global basis and what USAID has been looking for from its contractors over much of the last decade … particularly in countries like Iraq, Afghanistan and South Sudan, which is where most of AECOM International Development’s growth has come. AECOM has also been successful in securing USAID work around climate change adaptation and natural resource management, and these are also both natural extensions of AECOM’s commercial practice and corporate capabilities. 

Whatever the key reasons for its success are, there have clearly been a lot of things working in AECOM’s favor, and there are a lot of things that AECOM does well. So much so, in fact, that I have thus far been unable to pinpoint a unique signature that differentiates AECOM International Development from everyone else. And I’m not the only one struggling to figure it out. Daniel Safarik, the publications editor at Council on Tall Buildings and Urban Habitat remarked earlier this year that; "It's hard to find the heart and soul of what AECOM is … it's hard to get a grip on from an identity perspective because they're massive and acquisitive." Or, as Jacob Herson, an AECOM spokesman himself said, “AECOM is still a work in progress.”

I’m interested to see how this “work in progress” finishes its story. It could go a variety of different ways, and I think the path it takes from here will ultimately end up defining AECOM International Development's unique signature. 

Where do I see it going?

The optimist in me looks at all of AECOM's potential and my jaw drops. I think that if AECOM can start focusing more of its time, resources and energy towards organic growth, and towards integrating the firms it has already acquired, it would present a real opportunity for AECOM International Development to substantially strengthen its Project Enabling Environment (PEE), and its capacity to deliver results for USAID. I saw the potential for this first hand during my tenure with the company on its Southern Africa Trade Hub project. While I was there AECOM introduced its proprietary One Source platform to the project. I thought the introduction of that system, complete with its automated workflows for procurement and travel logistics, completely revolutionized those critical aspects of its PEE in the field. 

And, when you think about the fact that there are literally 40 companies that AECOM has rolled up in the last 20 years it’s hard to even fathom the kind of gold mine that now exists within the company in terms of useful tools, practices and knowledge. AECOM has the kind of in-house resources that, if harnessed and adapted effectively, could literally transform AECOM International Development into one of USAID’s best in class implementing partners in terms of applying the science of project management to international development engagements.

AECOM also has a secret weapon … something that none of its competitors in the development industry have. It’s called AECOM Capital. AECOM Capital is a unit that the company has established specifically to differentiate itself from its competitors. It's a mechanism that enables AECOM to make direct investments in real estate and public private partnerships (PPPs) that complement and support its traditional service offerings for clients. It’s a great concept and I think it would be awesome if AECOM figures out how to deploy it in support of its USAID programs. It would make a great unique signature ... something catchy. Maybe something like “AECOM puts their money where their mouth is."

Unfortunately, it looks like the road ahead may get a little bumpy for AECOM International Development, especially its business with USAID. One of the Wall Street analysts that follows AECOM noted earlier this year that AECOM had started restructuring its Management Support Services (MSS) line of business (which includes AECOM International Development) to make it more profitable. The report indicated that AECOM is looking to shift away from higher-volume, lower-margin international work towards more lower-volume higher-margin work in the United States. And, in a conference call earlier this month to discuss its most recent quarterly earnings, AECOM management reiterated its plans to reposition its MSS line of business away from higher-volume, lower-margin international work.

Now, I don’t think this means that AECOM International Development is going anywhere; I think the emerging markets are still very important to the company overall. But, I think AECOM's business strategy for international development work could change. I can imagine AECOM diversifying the business and shifting more of its focus towards the other big bilateral donors, and especially the multilaterals, many of whom take a more holistic "value for money” approach to development partnerships than you find at USAID.

It’s a good reminder of why running a business inside of a public company can be so unsettling. Companies like AECOM and IBM have tens of thousands of owners that aren’t even remotely involved in managing the business, but they all have expectations. At the end of the day public companies are ultimately going to do whatever they think is best to drive up their share price … If you're running a low margin business inside one of the companies you just have to keep hoping that things continue to break your way.

- DS

Next Up … Process Makes Perfect

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

The Big Blue Blues (Part One)

In my last installment to this blog series on Development Contractors, I wrote about what I believe is Abt Associates’ unique signature. I argued that Abt’s unique signature is the best collection of social science/policy minds that the private sector has ever assembled under a single roof.

In that last entry I also pointed out that both Abt and Chemonics have done outstanding jobs putting women into key leadership roles, and wrote that I thought both firms’ strong performance must be linked in some way to the fact that having women in key leadership roles has made each company smarter. I may have gotten a little carried away in that last post on the topic of women in leadership and my feelings about it. If so it’s probably because I had just watched my wife give birth to our son in less than three hours of drug free labor ... my awe and admiration of everything women can do has never been higher. (Mom and baby are both doing great!)

In my last entry I also pointed out that both Chemonics and Abt have employee-owned corporate models (i.e. ESOP), and I argued that I thought the ESOP model was also a key enabler of the strong performance that both firms have demonstrated in their contracting business with USAID over the last several years.

I did not spend much time in that last post elaborating on the ownership argument because I thought the discussion needed some more context, particularly before delving into my experience with AECOM International Development (AECOM) which is #8 on The USAID 50.  The reason is that unlike Chemonics and Abt which are private, employee-owned companies, AECOM is a publicly listed corporation which is traded on the New York Stock Exchange under the symbol ACM and regulated by the Securities and Exchange Commission (SEC).

I actually have a lot of experience managing USAID contracts from inside a publicly traded company which makes me one of very few folks in this industry that truly understand the unique challenges that can be involved. I thought it might be helpful for me to share a bit of my own experience on the subject before moving on to the discussion of AECOM. To get there we need to take a step back … a little history lesson.

Don't worry, it’s funny - I promise!

There must be a few folks out there that still remember what was going on with the management consulting industry in the late '90s and early '00s. For those that don’t, there was a lot of discussion taking place back then among regulators (especially the SEC) around “The Big Five” (now known as “The Big Four") audit firms regarding the issue of independence.

Here’s what the SEC was concerned about. 

Over the 1980s and '90s, the Big Five audit firms had been building up business consulting practices to complement their traditional audit services. On the surface it all made a lot of sense for both the auditors and their clients. Think about it. Let’s say the auditors find some kind of weakness in a company’s management systems or its business controls. In the old days the auditors would just log it into the work papers, discuss it with management, and maybe reference it as a finding in their opinion on the financial statements. Well, putting a consulting practice alongside the audit practice changed this dynamic for the audit firms; it enabled the audit firms to start helping their clients solve a lot more of the problems that came up over the course of an audit, rather than just writing about the problems in work papers and opinions.

As a management consultant working for Price Waterhouse back then, I got several opportunities to see how it worked firsthand.  I was based in the firm's DC office and therefore spent most of my time metroing back and forth between various Federal Agencies in the District and NoVA doing risk management and pricing analytics for different government credit enhancement programs. Occasionally, however, I’d get asked to go out and spend a week in places like Greensboro, NC; Columbia, SC; or Minneapolis, MN to help a PW audit team there resolve issues that had come up while going over credit accounts at banks and private finance companies that were audited by PW. Those were always fun jobs for me. For one, the per diems were higher and as someone fresh out of grad school it was pretty cool when you could order a steak for dinner and stay within limit! They were also great opportunities to experience first hand the differences between business practices in the public and private sectors.

The little advisory jobs that I was occassionally doing to help the audit side of the business isn’t what registered with the SEC, what the SEC was concerned about was the growing number of massive, multi-million dollar business transformation and systems implementation jobs that the Big 5 firms had started doing for their audit clients. The SEC recognized that consulting services were becoming more lucrative and potentially more financially important than traditional audit services to the Big 5. The SEC was afraid of the possibility that a Big 5 audit opinion might get compromised by the promise of a massive systems deal, or some other kind of deal that was lucrative enough to compel the auditors to "look the other way” when there were problems with the financial statements.  As a result, the SEC started taking steps to try and protect the veracity of audit opinions by pushing for more and more demonstrable evidence of independence between the audit and consulting sides of each Big 5 firms' business.

Now by that time our firm had already become PriceWaterhouseCoopers, or PwC, after our merger with Coopers and Lybrand in July 1998. Not sure if anyone out there remembers the goofy slogan that came along with that merger. It went something like this “Now The Biggest Name in Professional Services IS the Biggest Name in Professional Services.” I actually heard that some PR firm made a million dollars coming up with that slogan. I’m still not sure if it’s true, but I know I never liked the slogan.  

Here’s what I do know is true. The whole implementation of the SEC’s drive for independence between consulting and auditing was a huge pain in the a$%! The rules came fast, they were non-negotiable, and they made absolutely no sense (at least at the time). The firm actually lost some really good people (including from our little USAID practice inside the firm), because some folks just could't comply with all the SEC's ridiculous new independence rules.

I remember one of the silliest cases because it hit real close to home. As I recall, one of the guys on our team was married to a woman who worked for one of PwC's audit clients. Her 401K plan required her to hold some portion of her company's stock. However, the new SEC rules for us were that every employee of the firm had to be financially independent from every company that the firm audited, and independence included assets of the employees and their spouses. So, despite the fact that this guy had no connection at all to any of the firm’s auditors or the audits that the firm was performing, the decision came down that he had three choices: (1) His wife had to give up her 401K, (2) He had to get divorced, or (3) He had to resign from the firm. 

We lost that guy to the dark side … I think that was like early 2001.

Of course there is a silver lining to every story. I actually got a lucky break from the whole thing. I was becoming an aficionado of golf equipment at the time and decided in late 2000 to buy some stock in Callaway Golf (ELY). Well, you can probably imagine that I was not too happy when I found out that I had to sell my shares in ELY as a result of these new SEC independence rules that came into play. I didn’t even know that PwC was Callaway's auditor, let alone have any inside information about the audit! It turned out that being forced to liquidate at that time was a blessing in disguise. I’d bought the stock a year earlier for around 15 bucks a share and when I had to sell it the price was close to 20. And I think that's as high as it ever got. These days - almost 15 years later - it’s still trading somewhere down around 7. 

I would have gladly traded the $500 bucks I made on ELY to keep everyone on our team together. And of course the real silliness about all those SEC independence rules is that they ultimately failed to prevent what the SEC was really worried about. The whole issue finally blew up in late 2001. It was probably inevitable.

In October 2001 Enron Corporation - one of Wall Street’s darlings - reported a quarterly loss for the first time in over 4 years. A month later the company announced that it would be restating its earnings for each of the previous four years. That would have the effect of reducing the company’s net earnings by nearly $600 million. Later that month the ratings agencies downgraded Enron's bonds to junk status. Enron filed for bankruptcy in early December. The collapse triggered a massive rethink of corporate governance practices in the United States and ultimately led to the passage of the Sarbanes Oxley Act in 2002.

So what’s the relevance?

Well, as most people probably know Enron’s auditor, Arthur Andersen, admitted to making some key mistakes in its audits of Enron. Those mistakes ultimately fostered Enron's collapse. Arthur Anderson also collapsed as a result of its role in the fiasco, turning the Big 5 into what we know today as the Big 4. In the aftermath it became clear that Arthur Andersen’s extensive consulting work for Enron is ultimately what caused its judgment to be compromised on key aspects of its audit work. In fact, the records now show that Enron paid Anderson nearly $52 million in 2000, and $27 million of that was for consulting services. It turned out to be exactly what the SEC had feared about the Big 5 firms all along.

For those of us that were part of PwC consulting, 2002 was a very turbulent year. After the Enron meltdown and then Anderson's collapse the writing was clearly on the wall ... PwC's consulting business was up for sale. As I recall, the other Big 5 firms had already taken big steps by that time to deal with the inevitable need to separate. Most of Anderson’s consultants managed to escape the firm’s meltdown because Anderson consulting had already renamed itself “Accenture” before the Anderson brand became toxic. KPMG spun its consulting business off under the name “Bearing Point.” Deloitte and Touche had already created a separate company called "Deloitte Consulting” and Ernst & Young had already sold off its consulting business to the French IT company "Cap Gemini.”  

The only ones left were us … the consulting side of PwC. And the whole Enron & Anderson fiasco made the need to do a transaction much more urgent. Unfortunately, the urgency also drove down the value of the business. There are rumors out there that HP was actually very close to acquiring PwC's consulting business for around $18 Billion in mid 2001 but they walked away from the deal when the markets started reacting to all the Enron noise. 

For a very brief moment in time it looked like PwC was going to be spun off through an IPO under the new name “Monday.” Anyone remember that? We all suspected that it was a hasty decision when the announcement came out. We actually got emails to a link announcing the new company and branding philosophy. If I remember correctly that link was something like www.wearemonday.com. Our suspicions that it was a hasty decision were confirmed when it became clear that the firm forgot to register the corresponding UK domain www.wearemonday.co.uk.  And, as hundreds of thousands of people would find out over the following week, not only had that UK domain already been snapped up by some enterprising comedians, but there was already a website up on the domain with an animated film of two donkeys having sex while laughing out loud about a goofy new company called Monday.

Embarrasing start. But it didn’t matter because before they could find a way to get the animated donkey sex film off the new firm's UK web domain, news had already broken that there was a new buyer for PwC’s consulting business. All of us were about to find out what life was like inside a large, publicly traded company ... and we would all soon discover the unique challenges that created for contracting with USAID.

I actually found out about it through a phone call I received early one morning from my client at the USAID Mission in Bosnia. He wanted to know if the news meant that everyone on my team would be getting a brand new computer. When I told him that I had no idea what news he was talking about (not having seen the news yet) here’s what he said. 

“Congratulations are in order Drew. You guys are getting bought up by IBM!" 

- DS

Next Up … The Big Blue Blues (Part Two)

Extra Homework Please

In my last installment to this blog series about development contractors I wrote that large, diversified companies (i.e. companies that offer multiple services to multiple industries with multiple clients) can have a very tough time competing against well run, purpose-built development contractors like Chemonics.  I argued that large, diversified companies probably shouldn’t even try to beat a company like Chemonics at its own game and instead should craft business strategies around what they can bring to the table that Chemonics can’t.  I concluded by suggesting whatever that might happen to be would play a big part in defining the company's unique signature.

Today's post starts an examination of how well the logic holds up. Today we’ll take a look at #6 on The USAID 50

Abt Associates, Inc
USAID 50 Ranking: #6
Avg. Annual Obligation: $165 Million

For this one let’s shake up the format and make it more interesting.

Multiple choice question.

Which of the following characteristics represents Abt’s unique signature?

1. Abt does an outstanding job of putting women into key leadership roles.
2. Abt is owned (and therefore managed) by its employees.
3. Abt has the best collection of policy/social science minds in the business.

Let’s quickly explore each of these three possibilities.

(1) Abt does an outstanding job of putting women into key leadership roles

Yes it does. In fact, according to Abt’s webpage the company currently has 36 officers and 20 of them are women, including the current President/CEO. And by the way, during the current CEO’s tenure the company has literally taken off, nearly doubling in size (both in terms of revenue and full time staff).

Abt clearly does an outstanding job of putting women into key leadership roles, however that is not Abt’s unique signature. Why? Because its not unique. Who else does it? Well, for starters how about Chemonics? Last year Chemonics appointed its first women President/CEO and there are four women currently serving on the company’s senior leadership team.

Now I actually think this is all a pretty big deal so I’m going to get into it a little bit.

This may sound strange coming from a man, but women in leadership is actually one of the first things that I check now when I'm considering new opportunities. I really want to see that a company has a clear track record of, and commitment to, putting women in key leadership roles before I go to work for them.

Want to know why?

Because it looks good to clients/USAID? It does look good to USAID, but that’s not why I care. Because it’s the right/fair thing to do? It is the right/fair thing to do, but that’s still not the main reason I care. Because I have a three year old daughter that might rule the world someday? Yes, but that’s still not the main reason I care.

Here’s why it’s important to me. Putting women into key leadership roles just makes your teams smarter and that makes your company perform better. Don’t believe me? Just listen to the researchers from Harvard who found a few years ago through repeated studies that if a group includes more women its collective intelligence rises.

In terms of recognizing the importance of gender integration in the workforce I’ve come to realize that I got very lucky early in my career. I happened to start my professional career working for a company that was still dealing with the aftermath of having just lost the highest profile case ever involving sex discrimination in the workplace.  A woman in the Price Waterhouse office that I went to work for out of graduate school had been denied admission to the partnership even though she had an iron clad business case based on her performance. She sued the firm. Her case went all the way to the Supreme Court and the court found in her favor. After the decision (which came in May of 1989) she came back to the firm as a Partner and finished out her career.

When a company goes through something like that they have no choice but to start changing things about their culture. When I arrived at the company in mid-1993 the ratio of men to women in management and leadership roles had already started to rise.  Over the next decade (during which time PW become PwC) the company admitted dozens of exceptionally talented women to the partnership. I got the chance to work for quite a few of them, including the one that started it all.

I only got to work with Ann Hopkins a handful of times but I still remember each of them. She had a big personality and a great sense of humor. She was cool. She was also brilliant, and she commanded respect. The way you knew she liked you was if she ever asked you to join her in the parking garage for a smoke. I know she like me because I got invited for four of those sessions. She never offered me a cigarette, but I think that’s because she could probably tell that I didn’t smoke.

What I’ll never forget about Ann was how adamant she was about writing and structuring documents. If you wanted to work for Ann your writing had to be crisp and concise, and all your documents had to be in two column landscape format. Why?  So readers didn't have to flip the book around to see charts and exhibits.  To this day I still put documents in landscape mode whenever I can.  I’m not sure if its more because I agree with Ann that readers shouldn’t have to flip the book around (I do) or more because its a way to celebrate the important changes that she made happen in the company that so profoundly shaped my career. I guess its both. Here’s one thing I do know for sure. All of USAID’s  economic growth programs in Pakistan have been doing their annual work plans and PMPs in two column landscape format for over 5 years now. You’ve all got Ann to thank for that.

Given all that was happening at PW in the 90s and early 00s it’s probably also no surprise that the most influential mentor I’ve ever had in my development career is also a woman. I could go on and on and on about all the things she taught me and why she is so revered by everyone that’s ever worked for her, but for the purpose of this post I’ll focus on the thing that’s most important and relevant.

I was running a Corporate Governance program for USAID in Bosnia at the time - early 2002 - and she was in country for one of her regular check-ins with me, our team and the clients. At the time I was trying to write a memo outlining some things that we felt required a modification in our contract. I was struggling with the introductory text.

Anyway, my boss looked at what I’d written, thought for a moment, and then put it down. Here’s what she said.

Drew, here’s the thing. Companies in Bosnia aren’t going to adopt better governance practices because regulators try to force them to do it. The whole point of this project is to help companies realize that they should want to adopt better governance practices. Fines and sanctions aren’t going to get anyone’s attention in this environment. What you need to do is help these companies understand that good governance practices are ultimately whats going to enable these companies to attract capital, compete and grow. It has got to be a "want to" thing, not a "have to” thing.

That quick four-minute conversation got everything I was trying to say focused and it ultimately got us all back on track.  And btw, thanks again for that insight Tessie!

Here’s why I’m bringing it up here. I think grappling with the difference between “have to” and “want to” in that context of better governance has made it a lot easier for me to understand the transformation that our industry is now going through in terms of how to approach gender integration efforts. I know there are still a lot of folks out there that think gender integration is a box-checking, affirmative action, compliance sort of thing. Well its not. Integrating gender in this modern era of best practices is about getting project teams, counterparts, and host country systems to want to do it because it’s what will ultimately make their efforts more impactful and more sustainable.

Sorry for going off on a tangent, I just think its really important for our industry to start to move more quickly and more decisively to transcend the old bean counting concept of equitable participation when it comes to gender integration. It needs to be a "want to" thing, not a "have to" thing.  And, I guess there’s probably a good chance that development contractors who have figured out how to integrate gender effectively in their own back yard are going to have a lot more success integrating gender effectively across their programs in the field.
   
(2) Abt is owned by its employees

This is also true and I think it is an important reason that Abt has been so successful. However, just like the outstanding job that Abt does putting highly talented women into leadership roles isn’t unique, neither is its employee-owned company structure.

What other large development contractor is employee owned?  This is starting to sound like a broken record isn’t it? Nine letter word that starts with C. Anyone?

Yep. Chemonics.

In the next installment of this blog I’ll be sharing a few reflections on the experience I had working for IBM ten years ago to help contextualize what I think gives employee owned companies such a huge advantage when it comes to development contracting. So I won’t go into it too much today. But there is one thing about Abt in particular that completely intrigues me and maybe someone out there can help me understand how they make it work.

If you look at the data on USA Spending you’ll see that Abt’s partnership with USAID is much broader than just the obligations the company receives through contracts. Abt does a ton of work under cooperative agreement (i.e. grants) with USAID. In fact, if my calculations of The USAID 50 included both grants and contracts Abt would probably jump decisively into the top five.

Now I don’t know a lot about cooperative agreements (I wish I knew more) but my understanding is that “cooperative” pretty much means “co-funded.” In other words, not only can’t you collect a profit/fee on the work, but you’ve also got to put some of your own money or assets to work on the deal.

If that is the case, where does a company like Abt get the resources to put its share into cooperative agreements? Or more pointedly, are they using the fee they earn from contract work they do to buy back into the grant work they want to do? If so, I think that is absolutely remarkable.

In fact, it feels kind of like a grown-up version of students asking the teacher for more homework, doesn’t it?  Also sounds exactly like the kind of thing you’d expect from the best collection of policy/social science minds in the business, doesn’t it? Especially if those minds also happened to own and run the business.

(3) Abt has the best collection of policy/social science minds in the business

The funny thing is that I was first exposed to Abt over 20 years ago, years before I'd even started thinking about getting into development work. Here’s how I recall first learning about the company.

When I first started my career with Price Waterhouse I worked for a little group inside the firm’s Federal Government practice that built and maintained risk analysis tools for the US Department of Housing and Urban Development (HUD). Our job was helping two agencies inside HUD - the Federal Housing Administration (FHA) and the Government National Mortgage Association (Ginnie Mae) - figure out what would happen to their multi-billion dollar mortgage guarantee programs (i.e. how much would taxpayers have to cough up) if the United States ever experienced a serious downturn in the housing market.  (In case you’re wondering it turns out we were quite a ways off, just like everyone else’s!)

Well, one morning I'm sitting in my bosses office waiting to start a meeting. While I’m waiting the mail clerk pops in and hands me a document, asks me to put it on my boss' desk. I looked at it and noticed that it was an RFP from our client the FHA. (Yeah, this was back before people were really using the internet). Anyway, I start flipping through the RFP and realize that FHA is planning to commission a whole new set of risk analysis tools which would eventually replace the ones that our group had been building and maintaining for over five years.  When my boss finally showed up (he always had a fluid sense of time) I handed him the document.  Clearly he was expecting it because he didn’t even look up, he just asked if it was the RFP to build FHA’s Loan Level Microsimulation Model. I said yes and told him that I thought it looked really interesting. Then I asked him why none of us knew about it and why we hadn’t already been strategizing for our proposal.  I’ll never forget his answer.  Here’s what he said:

"No chance man … Abt wrote the book on that."

He was right. Abt won that one. We didn’t even submit a proposal.

I first went to work for Abt 15 years later as a consultant in Pakistan. Abt brought me out to help them establish some private sector alliances to leverage and scale the investments USAID had made in hygiene promotion through their project.  It was a fun assignment I think largely because I actually managed to get deals done with a couple of large multinational consumer products companies operating in Pakistan.  It was also interesting because it involved something entirely new for me: establishing dozens of community-managed water filtration plants. I ended up learning quite a lot about the subject while I was out there helping them on that project. Any guesses why? Abt’s project director wrote his PhD dissertation on the subject.

A year later I went back to work for Abt in Pakistan to help them out on a USAID-funded workforce development initiative. Guess who else was there? One of the original architects of the Americorps program who at the time happened to be directing all of Abt's work with the US Department of Labor. Abt brought him out to Pakistan for that first two weeks of the project for work planning meetings so he could share some perspective and let the client and resident project team pick his brain. He had some fascinating insight and some great ideas. When he left he gave everyone his card and said to call him if we wanted to brainstorm any new ideas that came up.

All development contractors try to provide those kinds of resources whenever they can, but what makes Abt unique is that they don’t have to use freelancers to do it. They’ve got these people on their full time staff.

How do they do it?

Simple. Chemonics and Abt both do health for USAID but Abt also does health for the US Department of Health and Human Services (HHS), the US Department of Veterans Affairs, Blue Cross/Blue Shield, the Bill & Melinda Gates Foundation and the New York State Department of Health.  Chemonics and Abt both do economic growth work for USAID but Abt also does it for the US Department of Commerce, the US Department of Treasury, and the Federal Reserve System.  I could go on but I think you probably get the point.

The bottom line is that contracting with Abt gets you access to the best collection of social scientists that the private sector has ever assembled under a single roof. There is no way you could ever put together the breadth and depth of technical/policy talent that Abt brings to the table if your only client was USAID. First of all, you'd never have the revenue that you’d need to afford them all. More importantly, I don’t think you’d ever be able to keep them all interested. Because it has such a diverse base of clients Abt can afford them … and keep them all interested at the same time.

Abt defines their unique signature as "Bold Thinkers Driving Real World Impact.” I like it. It’s true, and it definitely works for me. Also probably a much better way to capture it than the way I’ve always thought of the company. 

But I just can’t help it. To me Abt will always be “Scary Smart People Still Asking for Extra Homework."

Flip a coin for the catchier phrase ... either one is a great reason for USAID to love them.

- DS

Next Up ... The Big Blue Blues

The USAID 50