March 2001

Cover Story: Beware the Ides of marchFIRST
The Mitchell Madison Story (first of three parts)
By Jack Sweeney


Recalling his days as a consultant at McKinsey & Company, Thomas Steiner describes an encounter in the mid-1970s when one of the firm's directors took exception to the choice of words he had used to address a group of fellow McKinseyites.

Feeling a tug on his sleeve, Steiner explains how he turned to face IBM Corp.'s future chairman and CEO Lou Gerstner, who uttered the words: "'You guys' is 'us guys.'"

"Gerstner had a great concept of team," says Steiner, who claims to have worked side-by-side with IBM's future head while a consultant within the blue-chip firm's financial services sector.

Nearly 25 years later, Gerstner's words still stick in Steiner's mind, but what about the concept?

Where hunters thrive, teamwork and collaboration are always a poor substitute for opportunism and a flexible compensation system. Or so might read the epitaph of the Mitchell Madison Group, the meteoric but short-lived consultancy founded in 1994 by a renegade clan of former McKinsey consultants. The upstart strategy firm would be sold five years later to Web services kingpin USWeb/CKS as part of an all-stock deal, valued at the time at more than $300 million.

"I think it's hard to ask people to work for years and not harvest [the rewards] if there's a ready opportunity - now, the subsequent decline in the market is another story - but the USWeb transaction stands by itself as far as that point in time goes," says Steiner, who takes credit for spearheading not one, but two consultancy insurrections before helping establish MMG, where he served as managing partner.

Acquired by USWeb/CKS in September 1999, the gooey residue of Mitchell Madison's past had little time to dry before the firm became a lesser appendage of the much larger anatomy created by the merger of USWeb/CKS and Chicago-based consultancy Whittman-Hart - the combined firm later dubbed marchFIRST.

It was a merger greeted with a skeptical eye by Wall Street. Whittman-Hart shares would drop 31 percent to $54 the day the deal was announced, and ensuing snags, including last month's writeoff of $6.8 billion, have led the firm's shares to plummet to under $2. It's any stock owner's nightmare, but no group of shareholders now has more at stake in the aftermath of the stock's spectacular tumble than those feral but well-heeled consultants formerly of MMG.

When the Hunters Became the Hunted
Exactly one year after the newly minted firm's stock began trading, MMG LLC, the company responsible for distributing marchFIRST stock to Mitchell Madison shareholders, has had its board of directors ousted and its assets handed over to provisional liquidators by order of the Grand Court of the Cayman Islands.

It's a situation created by marchFIRST's stock's breathtaking nosedive and the hefty liabilities tallied by a strategy firm that had been riddled with acrimony. With the limited liability compa-ny deemed technically insolvent by the Grand Court, former MMG partners now say that marchFIRST stock would need to be trading at a value greater than $14 a share for the holding company to cover its current liabilities.

With marchFIRST's stock recently trading under $2, MMG partners have been given little reason to hope that the stock will rebound enough to keep the provisional liquidators from performing their duties. In fact, a number of former MMG partners fear that they could possibly lose their long-awaited third "tranche" - 3.2 million shares of marchFIRST stock that are scheduled to be distributed later this year to former MMG partners as the final payoff of the MMG buyout.

Even more frightening to certain former MMG partners, however, is the tax liability such a liquidation could trigger. The question numerous tax accountants are now being pressed to answer is whether the amount of debt forgiven in the liquidation process will be treated as windfall income to MMG partners - if so, the recipients could soon find themselves responsible for millions in taxes. Others say they have fallen victim to taxes levied on the original payout, when shares were valued near $50. For those, who didn't sell their shares early, the transaction is now a wash, or worse.

As one former MMG partner explains: "Not only has the sale of MMG to USWeb not been a money-making proposition for most of us, but it has put certain people in a position where they could potentially be facing personal bankruptcy."

To those familiar with the meteoric rise and subsequent fall of the fiery clan of MMG renegades, such a calamity may seem to be the only fitting epilogue for the upstart consultancy, whose appetite for growth ultimately abbreviated its vision and reduced its guiding principles to those grounded in the profession's "hunter model," where the central strategy is just "Kill meat!" The fate of the firm and its shareholders may now disclose a stunning reversal of fortune, when the hunters became the hunted.

But MMG's high-wire finale is far from the only cliff-hanger in this rebel tale in which a group of entrepreneurial consultants mounted consecutive insurrections inside both McKinsey & Company and A.T. Kearney before founding the firm they would dub Mitchell Madison ("Mitchell" for the street in upstate New York where the plan was hatched, and "Madison" for the firm's first Manhattan address).

In the years that followed, MMG would enjoy eye-popping growth, while dazzling on-campus recruits with its provocative vision of a strategy firm determined to liberate its consultants from a profession's growing bastion of hierarchical consultancies. MMG was meant to be a firm where creative thinkers thrived in a freedom-based culture. It was an inspired vision, but one MMG former partners say became stifled by a frat house culture and an unyielding drive for growth - a firmwide mandate that would ultimately lead to a boardroom scuffle and the exit of five of MMG's founding partners and directors.

MMG's story is one that speaks to the clandestine and clubbish nature of partnerships within an industry that's been slow to adopt professional standards. It's a tale in which MMG consultants become as much a victim of their firm's appetite for growth as they do an e-consulting stock bubble.

Hunters & Farmers
"We spent about two years at A.T. Kearney, and then we bought ourselves out to start Mitchell Madison, and there was one other person and myself who started the firm in 1994," says Arnab Gupta, one of the former McKinsey consultants who looms large in the history of MMG.

Gupta's words would likely be something of a revelation to the firm's 25 other former founding partners who helped establish a financial services practice at A.T. Kearney before breaking away to form MMG. But for those who run with the renegades, team spirit has never been ranked high among consulting's prerequisites.

As the chief architect of MMG's sourcing business, Gupta, along with MMG partner Vikas Kapoor, is credited with having built the practice responsible for capturing 50 percent of MMG's annual revenue - a fact that elevated his and Kapoor's stature within the $250 million firm. Asked about the necessity of instilling shared values or principles inside the professional services construct, Gupta prefers to boil down what he views as a firm's critical components.

"In professional services you hire good people, you allow them to control their own franchises and have them get the clients going, so they can build it," explains Gupta, who, like a true renegade, once again broke away from his adopted consutancy, marchFIRST, and last May established Zeborg, a marchFIRST spin-off specializing in business-to-business sourcing. Prior to the sale of USWeb, Gupta would play a central role in MMG's efforts to evaluate and enhance its compensation scheme.

Those who desire a better grasp on what some might call consultancy fundamentals may want to reach for the profession's noted primer - Managing the Professional Service Firm - and open to the chapter titled "Hunters & Farmers."

As its title implies, the text's author, David Maister, suggests that consultancies most often operate under two distinct business systems. While the success of the farmer system is built on firmwide collaboration and a set of shared principles or values, the success of the hunter system is built on entrepreneurialism, opportunism, flexibility, and quick response to client needs. And the author underscores the hunter model's dependence on a trusted compensation system - whose absence, he concludes, could put a firm's competitive hunters at odds with one another.

While successful consulting partnerships have been built leveraging the virtues of both the farmer and hunter systems, few observers of the profession would challenge that given its history, MMG was built on the latter.

The Bubble & the Cash Crunch
Nearing his late 50s, Thomas Steiner is silver-haired and wears spectacles. He could, perhaps, pass as savvy investor Peter Lynch, or maybe just his stunt double. But Steiner has never been one to loom in the shadows.

"The original vision was to create a 'type one' firm," he recalls, while applying the "type one" label to McKinsey & Company, Boston Consulting Group, and Bain & Company - three firms whose founders he seems to sense a kinship with.

"Bill Bain didn't have the option to sell his firm, frankly - or to sell it for a multiple of its revenues. The only market at the time was the other partners, of which there might have been only five, and the bank," says Steiner, quickly drawing a comparison with Bain & Company's founder when asked why MMG decided to abandon its "type one" vision and sell out.

"Now, if we were in the 1950s, like Marvin Bower, we could have gone for it," says Steiner, who believes McKinsey's founder enjoyed the advantage of having less competition.

"If we had not been in the dot-com era, it's an interesting question as to whether we would have sold," says Steiner, who describes the late 1990s surge in e-business consulting stocks as "the interesting bubble" - one Marvin Bower never laid eyes on - and one that would lead USWeb and Mitchell Madison to the altar in the third quarter of 1999.

While USWeb's stock price may have been the impetus behind the deal, it clearly was not the only reason why MMG was headed to wed. Having opened 14 offices around the world and grown from 135 to 800 employees within only five years, the firm had seen its cash requirements steadily escalate. To fund the growth at the end of its first year, the firm's partners deferred their bonuses. Today, certain former MMG partners recall the act as one of communal good will towards the firm - a stipend to help buttress the firm's early days. But many partners now agree that they might have thought differently had they known the trajectory of the firm's future growth. "Basically, we'd be told that the firm had just hired 120 people, and the idea was to now go out and hire a bunch of partners to bring in the business, so all these new consultants had something to do," recalls one MMG partner. Growth quickly became a divisive issue for the firm's board of directors, as well as for those partners who routinely asked the question, "Why not grow at a rate we can actually afford?"

By its third year, MMG had begun to fund its growth with a loan from PNC Bank. But by year four, partners were being asked to defer their bonuses once again.

By early 1998, the push for growth had begun to take its toll on the firm in other ways. Distrust of the firm's compensation scheme had spread, as more new partners were hurried into the firm using new perks and special arrangements. Moreover, as more partners were added to the payroll, a number of MMG's founding partners and directors sensed the board's powers decaying, as well as its efficacy as a vehicle of governance.

The Deal
It's doubtful that many of the stock-charting minions who fill the caverns of Wall Street's investment community ever heard the energetic buzz MMG created across MBA campuses and the consulting landscape - at least before July 30, 1999, that is, when Internet consultancy USWeb announced its intent to acquire five-year-old MMG for $154 million up front and performance-based kickers at the end of one and two years.

With USWeb's stock trading in the upper $50 range, the deal could have made MMG's partners millions of dollars. And Wall Street insiders offered the marriage their blessing, while emphasizing the virtues of a union that promised to house advertising, Web services, and strategy consulting under one roof.

"It sounded sexy, and it also sounded damn glib. When USWeb bought Mitchell Madison, they thought they were buying a strategy firm, but no one ever asked what the nature of their work was, even though it was in the green book - and I know, because I wrote it," says Bill Matassoni, referring to the text MMG doled out to prospective buyers after enlisting Donaldson, Lufkin & Jenrette to shop the firm around in the spring of 1999. For his part, Matassoni took charge of MMG's communications only four months before the acquisition was announced - a fact which led many to suspect that Matassoni, a 19-year McKinsey veteran, had been recruited to beef up the firm's public image as a means of attracting buyers. After 47 acquisitions in four years, USWeb/CKS could no longer stand bristling at the thought of being barred from consulting's lunch table for finicky dieters.

"Here was USWeb buying strategy with an inflated stock price and, at that level, the word 'strategy' meant nothing. So, I think you look back and say we were using language at a level of abstraction," says Matassoni. Two years after joining MMG and 18 months after joining USWeb, he has recently left marchFIRST to join Boston Consulting Group. He's not alone. More than two thirds of MMG's workforce has left since it tied the knot with USWeb, according to former MMG partners. A look back in time reveals USWeb's marriage proposal arrived after MMG wooed and failed to win an array of industry players - including IBM Corp. Perhaps Steiner's words - "You guys" - still stick in Gerstner's mind.

Source: Consulting Magazine, 03/01,