Special Feature: The Gatwick Seven By Jack Sweeney
It's undoubtedly still a sore point for Fred Steingraber, and one he'd rather not revisit, particularly during an interview intended to spotlight the high points of a 36-year-long consulting career. But no matter how many years go by, a mention of the firm formed by 135 insurgent A.T. Kearney consultants never fails to evoke a response.
After some gentle prodding, the outgoing chairman of A.T. Kearney concedes: "There was a group of people who were what you might say innocent about the motivations of the leadership and, of course, we know now what's happened to them, and all the rest of it."
Like that of an outlaw relation long buried and best forgotten, the name Mitchell Madison Group never crosses his lips. This is one tomb Steingraber prefers no stone to mark, but like any rebel who once cradled a cause, MMG can't seem to stay buried. Whether it's the ousting of five of its board members, the bankruptcy of its Cayman Islands limited-life company, the ongoing lawsuits against the firm's hard-partying CFO, or the allegations concerning the firm's "in- house" shrink - the house of MMG appears to have more ghosts than any one firm can afford.
And while Steingraber's words may not have been intended as a eulogy, it's clear that the specters of MMG's past will be put to rest only when "all the rest of it" is known.
In May of 1998, twelve months before MMG and USWeb's wedding plans got underway, six of MMG's 14 board members and one senior partner arranged to meet secretly on the outskirts of London at a hotel near Gatwick Airport.
Together, the seven partners drafted a letter to the firm's shareholders beneath the heading "Renewing Our Shared Vision of the Firm." In addition to advocating the creation of a "transparent and collaborative management model" for the firm, the letter contained several admonitions.
The text read: "A large and growing number of partners have grown fundamentally to distrust the motives, actions, and competence of the firm's leadership. We are on dangerous ground. We must IMMEDIATELY ensure that there is an open environment for debate, including prohibitions against any efforts to inappropriately consolidate leadership by a few through deals or retaliation against partners who are staking their claim for change."
The letter advocated the formation of three task forces - one for governance, one for strategy, and one for compensation - to be installed at the next board of directors meeting to be held the following month. The new task forces were to be charged with developing strategic proposals for the partnership "to review, modify, and ratify" at a general shareholders meeting in September. Key among the group's concerns was that the partnership's board, and not the managing partner, secure the right to determine the makeup of the firm's different committees. In addition, they advocated changes to the firm's shareholder agreement that would ensure a separation of powers under which proposal, approval, signoff and audit responsibilities were never performed by the "same people." Finally, the letter requested a redesign of the firm's shareholder agreement and the election of a new board of directors.
The attending partners agreed that the letter would be signed by the three among them deemed to be the most trusted or least controversial across the partnership - board members James Parker and Clarence Hahn, and senior partner John Kocjan. The letter was mailed to MMG shareholders only days before a June 1998 board meeting that a number of MMG partners now describe as "the last stand."
A Management Trifecta
When the original 135 A.T. Kearney consultants exited the firm in 1994, the vision for the yet-to-be-named consultancy included becoming a 'type one' consulting firm - a broad-based consultancy on equal footing with McKinsey & Co., Boston Consulting Group, and Bain & Co. Having established its consulting credentials by helping Kearney clients lower their product sourcing costs in the automotive sector, the new firm now planned to take its sourcing "product" into large financial clients. Once it had established a beachhead inside the financial sector, the idea was to broaden the base of client offerings and introduce additional consulting products.
Sourcing proved to be far more than just a door-of-entry. As the firm's revenue and head count shot upward, it became clear that MMG was clinching the tail fin of consulting's latest fad. Sourcing's trajectory was closely monitored by MMG partners Arnab Gupta and Vikas Kapoor, the two men credited with being the chief architects of MMG's sourcing practice, and who in the aftermath of a boardrrom scuffle became part of a kind of management trifecta, when the firm's managing partner, Thomas Steiner, split the firm beneath him into two geographic groupings - one headed by Gupta, the other by Kapoor. Today, neither of the former MMG board members can be accused of being shy when it comes to taking credit for establishing MMG or even sourcing.
"When I started this thing which became a fad, it was a genuinely a new area. The 1980s was the decade of reengineering, so everyone was looking at labor and process improvement, and in the early 1990s I started sourcing with the very simple assertion that a very high fraction of everyone's cost is purchased," says Kapoor, whose visibility within the firm grew as he garnered such marquee accounts as American Express. Just how long the sourcing fad would last became a central question within the firm, and one frequently posed to Gupta and Kapoor, whose clients continued to ingest the lion's share of the firm's people and experience.
"We had, I'd say, about 500 people who had on-average five years apiece of experience in doing this stuff, so we had a very intense focus and a very strong skill base in doing sourcing - and I don't think anyone has had that kind of skill base since," says Kapoor. Today, while many MMG partners would likely challenge Kapoor's numbers, no MMG partner would deny that sourcing dominated the firm's portfolio of strategic offerings. (While analyst estimates peg MMG's 1997 sourcing workforce at below 400, a typical sourcing consultant was estimated to have had no more than three years' experience.)
Many partners suggest that sourcing sales accounted for more than two thirds of the firm's annual revenues, a percentage they say lopsided the firm's client portfolio, skewed the firm's decision-making as it related to new products and practices, and abbreviated its goal of becoming a 'type one' firm with a diverse portfolio of products. More to the point, having grown to more than $200 million in only four years, the firm found itself confronting a severe cash crunch.
"At some point in time, we had to weigh the long term and the short term against each other, and there just wasn't enough will to want to make that 'type one' firm across the partnership, relative to being able to harvest what we had built at that point in time but the original vision was still to create a 'type one' firm," explains MMG's former managing partner, Thomas Steiner, who in July of 1999 negotiated the sale of MMG to Internet consultancy USWeb.
But many MMG partners today argue that the failure of the firm to realize its goal of becoming a "type one" firm had less to do with the "will" of the partnership than it did with a management model that had become dominated by a singular product and an inner circle of partners. And this was a coterie whose heightened powers and compensation were obscured by a partnership that despite its ever- growing head count had been slow to adopt the transparent and collaborative processes upon which 'type one' firms are built..
The failure to adopt such processes led to a growing distrust of the firm's leadership, according to Warner Burke, a professor at Columbia University, who in spring of 1998 was hired by MMG to interview its partners about the perception of where the firm was headed.
"It was really Tom Steiner [who enlisted me]. We had an exploratory lunch together and we agreed on an informal contract, but from what I recall it was not anything warranted by the board," explains Burke, who was supplied a list of people to interview by Steiner himself. Burke would later be invited to speak at the firm's June 1998 board meeting - a meeting Burke describes as "a watershed" meeting for the firm.
The List That Lit the Fuse
Of those who attached their names to the "Gatwick" letter, James Parker, a partner from the firm's London office, had frequently voiced his dissatisfaction with the firm's governance and decision- making powers. Besides challenging the criteria used to determine the membership of certain committees, MMG partners say Parker voiced strong objections during a board meeting in late 1997, when board member Arnab Gupta and firm CFO John Hogan advanced the idea that the managing director's sister-in-law, Kay Dryden, be elected as the firm's first corporate counsel - a move Parker and others saw as somewhat flippant, given that the board had never seen a list of potential candidates, not to mention discussed the need for such an in-house position. More to the point, Parker confided to his colleagues that he was troubled by "the principle" Dryden's election appeared to ignore - one which ensured that the firm's management would remain free of relationships that could potentially trigger conflicts and undermine trust.
While few of MMG's board members are purported to have voiced their objections as loudly as Parker, the nomination and subsequent election of Dryden is today credited by former board members and senior partners as having inflamed a once-healthy seam that had conjoined different factions of the board. That seam would come all but undone in early 1998, when a list allegedly specifying the amount of each partner's 1996 bonus began to circulate within MMG's partner ranks. (In order to ease the escalating cash demands of the firm's rapid growth trajectory, the firm had deferred paying its 1996 bonuses until late 1997.) As more partners came in contact with the list, the numbers it put forth began gaining credibility as each consultant realized that his or her own particular bonus figure was correct.
While the list put different partners at odds with one another, much of the firm's inner rancor became focused on the consultancy's top brass, who, if the bonus list was authentic, collectively garnered nearly 60 percent of the total 1996 bonus pool. According to the list, Steiner allegedly had been granted a bonus of $2.8 million, while Gupta and Kapoor had allegedly been granted bonuses of $2.5 million and $2 million, respectively.
"What the bonus list revealed to most of us was that we were really employees and not partners at all," explains one board member, who says that Steiner later confirmed the sums at a board meeting, in early spring, when without any prelude he revealed the salaries and bonuses of each of the board members. Today, the consultant identified by multiple MMG employees as the person who first came in contact with the list admits to having found it "laying around" after a meeting of the firm's upper management. Later, the person claims to have asked a board member to confirm its authenticity, which the board member was allegedly able to do. "From there it took on a life of its own," the consultant explains.
The Professor Who Came in From the Cold
The validity of its numbers aside, the list had delivered a severe blow to the consultancy - one largely built using a hunter system, where riches are contingent on there being a trusted compensation system. As the firm advanced into 1998, the consultancy's board meetings became increasingly confrontational as board members sought to garner information concerning the firm's cash management. Given the size bonuses a number of the partnership's managers had allegedly granted themselves, a number of the firm's board members began to question whether the firm had been depositing funds into a "founders' fund," as decreed by the partnership's shareholder agreement.
No partner amplified the founder fund question more than board member Alberic Braas, partners say. As a member of the firm's compensation committee, Braas doggedly posed "the question" to Steiner and the firm's CFO, John Hogan, while underscoring the incompatibility of a board that while endowed with fiduciary responsibilities had no access to such information.
The founders' fund question also led to a schism between the board members raising the founders' concerns and the firm's more junior partners.
"The founding partners felt that they were due a return on equity, because they had taken risk early on, but some of the founding partners were really not carrying their weight in the eyes of the middle and junior people," explains Professor Burke, who certain MMG partners today believe unwittingly became a central player in the firm's escalating boardroom battle, when in the spring of 1998 he inadvertently helped polarize the firm's founding and more junior partners.
Asked whether he believed his interviews may have "fanned the flames" of discontent among the firm's more junior partners, Burke replies: "Now, I was not intentionally trying to do that. But I think that's a fair assessment. That did happen."
When it was alleged that the fund had not in fact been receiving funds, the firm's rank-and-file partners had little sympathy for the founding partners. Having had their bonuses deferred from year to year, they believed the firm's first order of business was not to pay a "founders' tax," but to compensate them for bringing in the business.
Among the more than 20 partners, who were collectively known as "the founding partners," the allegation that the fund was not being funded became a cause for alarm. Besides rewarding those responsible for creating the firm, the fund's financial obligations were meant to be a "disincentive" for selling MMG. In light of the firm's escalating cash crunch, and the hefty bonus sums certain partners were alleged to have extracted, a number of founding partners believe the firm's plan for building a "type one" firm was being subverted.
The Fall of the Gatwick Seven
In addition to the three partners who signed the "Gatwick" letter, the secret meeting in May of 1998 was attended by MMG board members Alberic Braas, Rolf Thrane, Will Riordan, and Ziad Sarkis. The fact that six board members had agreed to attend the secret meeting was significant because, when discounting the firm's managing director, Thomas Steiner, and CFO John Hogan (a nonvoting board member), the attendees represented half the board's votes. However, "the Gatwick Seven" was at best a fragile alliance. And not unlike the seven other voting board members, it could never be certain where each other's loyalties lay.
Within 24 hours of the "Gatwick" letter being sent to shareholders, a second letter, this one signed by 20 MMG junior partners, was mailed to the firm's shareholders worldwide. Not unlike the Gatwick letter, it advocated an updated set of governance structures and processes. Plus, the development of a shared vision for the firm worldwide.
Certain partners today believe the second letter provided an opportunity for the firm's managing partner to slip into the role of conciliator in the eyes of the firm's consultants. After listening to the concerns of both the firm's insurgent board members and its agitated junior partners, Steiner would introduce his own reforms. Unlike the task forces proposed by his fellow board members, those proposed by Steiner would largely bear the managing director's thumb prints.
At the June 1998 board meeting, sometime after a presentation in which Professor Burke revealed how partners within the firm felt sharing leadership was imperative to the renewed health of the firm, Steiner invited Jonathan Wainwright, the firm's outside legal counsel, into the boardroom, along with Harvey Pitt - a well-known governship attorney. Together, the two lawyers responded to questions relating to Steiner's authority to add and dismiss members on the newly installed task forces. The board members were told that MMG's shareholder agreement legally bequeathed Steiner such power.
Going forward, Arnab Gupta would head up the compensation task force, Vikas Kapoor would lead governance. And a third board member, John Pries, would spearhead the strategy task force.
Less than six months later, six of the seven partners who attended the Gatwick meeting would no longer be with the firm and one hardly ever heard the founders' fund mentioned.
Source: Consulting Magazine, 03/01