The Math Behind Accenture’s Restructuring

Will more cuts come?Thursday, Accenture announced that they were going to reduce their senior executive ranks by about 7%.

Will more cuts come?

Thursday, Accenture announced that they were going to reduce their senior executive ranks by about 7%. The company stated:

Approximately $128 million of the charge is for severance and related costs of workforce actions, primarily at the senior-executive level, which are designed to ensure that the company’s global workforce is properly aligned to best serve the evolving needs of its clients and its business. Accenture said that these actions will reduce its senior-executive ranks by approximately 7 percent.

Global Services magazine estimates that a 7% reduction in Accenture’s senior executive ranks equates to 336 personnel who will be let go. By their math, Accenture would have 4800 senior executives. That number feels about right and a recent departee from Accenture pegged an almost identical number for me. Accenture would be setting aside approximately $350,000 per ousted executive. I made my own inquiry regarding that figure and learned that depending on the executive, severance packages could run from 20 weeks pay for more junior executives to 1 year for more experienced executives and maybe more for the highest level executives. Given the amount Accenture is reserving, the firm may be culling more of the middle to top level executives this time around.

Accenture stated:

“The realignment of our senior-executive workforce will help ensure that Accenture has the right people, skills and capabilities, at the right levels and in the right places. The affected executives are highly skilled and valued professionals, and we will be working with them, as appropriate, to help them find new opportunities outside of Accenture that take advantage of their experience and expertise.”

But what is likely to also happen is that the company will terminate a significant number of non-senior executives, if it already hasn't done so. In a firm like Accenture, when you ax a senior executive, these firms often ax those in the pyramids under those executives. For a large systems integrator, you can expect a staff to senior executive pyramid of 50:1. In an outsourcer, expect the ratio to be closer to 100:1 while a management consultancy might have a 12:1 or 20:1 pyramid.

In Accenture’s case, their 2008 annual report indicates that the company has 186,000 employees (54,000 of these were new in 2008). If my estimate of Accenture’s senior executives is correct, then Accenture has a staff to executive ratio of approximately 39:1 (i.e., 186,000 employees/4800 senior executives). If Accenture culls the full pyramids of these exiled executives then a total of approximately 13,000 employees will get the ax sometime. That’s a lot of people.

So, how many people will Accenture let go? It will likely be considerably more than the 336 executives but nowhere near 13,000 people. If they were going that deep, their financial reserve would have been significantly larger. My guess is that they’ll cull mostly from their senior ranks for now as these persons are the most expensive to carry from a payroll perspective. Lower level staff will be culled as they roll off chargeable work. As in any integrator, those persons who are not chargeable are the most vulnerable to being let go. The ‘involuntary’ or ‘managed’ attrition of these staff people will likely not incur high separation or severance costs that would be separately indicated in Accenture’s financial statements as the bloodletting will be continuous and gradual. The severance costs for these people, on a per capita basis, probably will not be as generous as that offered for the senior executives.

Also, note that the company may have been actively 'managing' its involuntary attrition for its non-executives throughout the year. If so, the senior executives may be some of the last cuts they'll make for now.

Wells Fargo (nee Wachovia Capital Markets) had this to say:

ACN Announced A $247mm Pre-Tax Restructuring Charge. $119mm relates to reducing real estate and $128mm relates to severance primarily for a 7% reduction in the senior ranks (~336 of 4,800). EPS impact is $0.24. Cash impact is $225mm with most coming in FQ1 (Nov.) 2010. Real estate charge is expected to provide $42mm in annual savings, or about $0.04 per share. No comment was made about potential savings from the headcount reductions. We interpret the RIF as a realignment and reshaping of the global consulting pyramid. RIFs happened earlier in FY09 that reduced excess personnel in weak geographies, as well as excess capacity at global delivery sites and within North American consulting. We note ACN had taken real estate charges during the last downturn (2002 & 2004).

Should readers care that Accenture is thinning its ranks? Yes. The company may be signaling that a broad based economic recovery is not showing up in their pipeline. They may be reducing their executive ranks as they don’t need as many executives to sell, deliver and manage the reduced workload they are anticipating. They hung onto these executives hoping the economy would be improving substantially by now but new client work is not trending in the way it used to do so. In fact, Accenture management may believe that some market changes may be permanent and no longer require the services of so many executives.

What should you do?

1) If your firm has a project underway with Accenture, make sure the company doesn’t wipe out your client executive or other project team members.

2) See if your firm would benefit from picking up some of this talent (see next post)

3) Try to understand if Accenture's market concerns will bleed over into your industry.

(Full disclosure: I was a partner with Andersen Consulting (the predecessor name of Accenture) and left the practice in 1999 after 18 years with the firm. I own a very small piece of stock in the company.)