The New Commandments of Change

By taking equity from some of its clients in lieu of fees, a Boston consulting firm thinks it has hit upon a win-win formula. Others aren't so sure

In the 1980s, Microcom emerged as a high-flying maker of modems. But by mid-1993 the company, based in Norwood, Mass., was crashing to earth. The market was turning modems into a commodity, eroding profit margins. Desperate, the company's management called in a Boston consultancy, the Parthenon Group, which had been founded in 1991 by two refugees from prestigious Bain & Co.

No need to worry, counseled the Parthenon partner in charge of the project, Todd Collins. Microcom had good technology and talent, and its market still looked robust. "We knew they knew how to make modems," says Collins. "They just didn't know how to get them competitively to market." Microcom had nearly $5 million in cash but in the just-ended second quarter of 1993 had lost $10 million on $12 million in sales. Its stock, which once traded as high as $20 a share, had plummeted to $1.50.

While Microcom was willing to part with some of its precious cash for Parthenon's expertise, the consultants had a different idea: pay us in stock. Microcom agreed, granting Parthenon options on 195,000 of its shares with a $2 strike price. "That sent a good message to the midlevel managers at Microcom," Collins recalls. "It said that the outside guys believed in the company and were willing to put some skin in the game."

"Putting skin in the game"--it could be the slogan of a new era. If the 1980s were the decade of the junk bond, then the 1990s are the decade of equity ownership. And it's clearly the latter decade from which Parthenon springs. From the start its mission has been to seek equity, in part or in whole, in lieu of fees, assuming that the practice will produce not only bigger paydays for itself but a stronger bond with clients. That is what has come to pass, the company submits, although more often than not Parthenon doesn't succeed in obtaining equity from its clients. Still, it defines itself as a seeker of equity, and that image is paying dividends. For example, Parthenon has become a highly popular destination for graduating M.B.A. students. "There's a lot of cachet around the firm right now," says Paula Throckmorton Zakaria, a consultant who recently left the firm to start her own jewelry-design company. "Getting an offer from Parthenon is like being asked to join the president's cabinet."

Parthenon's business model runs counter to the trend in a traditionally risk-averse industry. One person who tracks the management-consulting industry is Tim Bourgeois, vice-president of research at the Kennedy Information Research Group, a company based in Fitzwilliam, N.H. Two years ago Bourgeois's outfit studied variable-fee structures in the industry and found they were used only about 5% of the time. (Variable fees refer to either the payment of equity in lieu of fees, or fees contingent on the consultant's hitting certain performance targets.) He says that there is "not a hue and cry" for variable fees, because "price sensitivity is not apparent." In other words there is no need for the consultant to assume undue risk. In most cases the client will readily part with cash.

Parthenon has the opposite inclination. It seeks out the high wire. It seeks equity as payment to differentiate its practice from that of its peers and to energize transactions. Parthenon cofounder Bill Achtmeyer sees a "disconnect" between managers under pressure from shareholders to build value and consultants breezing through to dispense high-priced advice. "Companies pay out a lot of money to kids in suits and Hermes ties, and 6 to 12 months later feel that they didn't get very much," he says.

To repair the purported breach, Achtmeyer created Parthenon. If he, the consultant, assumed greater risk, if he were motivated, like his client-CEO, by the stock price, then he would do a better job and his clients would trust him more profoundly, Achtmeyer reasons.

Noble as it sounds, many in the consulting trade see Achtmeyer's tack as falling just shy of roguish behavior. After all, McKinsey & Co., the biggest and bluest chip of strategy-consulting firms, has publicly stated that it sees taking equity as ethically dubious in most cases, although it does so in rare instances. Many consultants have more than one client in the same industry, which could create a conflict of interest should they take equity in one company but not in its competitor, says Wayne Cooper, publisher of Consultants News, a well-regarded newsletter. "Some consultants feel that once you're a shareholder, you lose your objectivity. It gets harder to call it like you see it," he says. "The client might really need to take some bitter medicine in the short term that would affect the share price, while the consultant might want to cash in some options for the bonus pool next year."