This article originally appeared on June 3th, 2016 in Forbes.
Fast-Growing Consulting Firm Surprises Itself In Choosing New Ownership Structure
As long as there have been consulting and professional services giants, there have been split-offs — groups of experienced experts deciding to start their own firms and control their futures. In recent years I have witnessed this trend rapidly accelerating, aided by low-cost technology, clients’ growing acceptance that the highest levels of skill can reside in smaller firms, and the broad economy’s embrace of nimble startups.
A decade or two after the founding of these firms, however, there has typically been a vexing question: to whom do the founders sell? Certainly, it seems, not to one of the very large firms an upstart has successfully offered itself as an alternative to — for employees and for clients. (More on that below.)
Thus, the decision of one of the country’s fastest-growing consulting firms, 300-professional MorganFranklin Consulting, based in suburban Washington, D.C., stands as a valuable lesson for small- and mid-sized professional services firms everywhere. MorganFranklin’s choice offers a path to long-term sustainability for other professional services firms, one that also offers financial rewards for founders and employees alike.
MorganFranklin, founded in 1998, chose to remain independent and, after an exhaustive investigation of ownership structures, the founders, senior management, and equity plan participants sold the firm to an Employee Stock Ownership Plan, or ESOP. The move positions MorganFranklin to retain its impressive talent and recruit still more stars from successful consulting firms as well as large public companies and other sources. It also provides a platform for increased engagement and productivity by employees who are now owners.
Indeed, at each meeting to consider the firm’s future, each member of the senior executive team recalls expecting to finally hear the problem that would rule out the ESOP format. Instead, says CFO Jeff Pagano, “one by one, it checked every box we were looking for.” Adds Eric Reicin, the general counsel, of the team’s initial ESOP negativity: “We set aside our pre-conceived notions and, in the end, a group of ESOP skeptics turned into employee ownership supporters.”
This was not a case of a single ESOP enthusiast persuading the others, but of a senior executive team feeling duty bound to investigate every viable option. The episode helps explain why MorganFranklin has been so successful, gaining very large private- and public-sector clients and attracting top talent from around the accounting and consulting industry. They’re intellectually curious and honest. And they’re self-effacing. Just the kind of people everyone likes to do business with.
Co-founder Ron Morgan, 45, says the commercial- and government-consulting arm of the firm was founded, like many businesses, almost by accident. He and two partners, Robert Morgan (Ron’s brother and CEO of MorganFranklin from 1998 to 2013) and Robert Franklin (leader of the firm’s former National Security Solutions business), were starting a national security government contractor. Ron Morgan, who’d worked at PwC, was to be the startup’s CFO; the other two founders had applicable government experience. Before he left PwC, Morgan says, a client tried to hire him. Morgan demurred, but ended up taking on the work as a consultant, figuring the new startup could use the cash flow, even if the work was unrelated. Over time, other clients and consulting professionals came aboard.
The national security business was a huge success, growing to about 200 employees before it was sold to SRA International, Inc. in 2012.
That left MorganFranklin’s commercial and government consulting business, which had also grown rapidly with Ron Morgan as its leader. Early on, the Sarbanes-Oxley Act of 2002 loosened traditional public company auditors’ grips on consulting projects at their clients, channeling much work to smaller firms like MorganFranklin. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and additional regulations further accelerated these opportunities. At the same time, the federal government increased its use of outside accounting consultants, and the firm won large amounts of that work. MorganFranklin in recent years has also built a strong specialty working for financial services, consumer products, and technology companies, and shepherding initial public stock offerings.
The sale of MorganFranklin’s national security business provided an opportunity to rethink the consulting firm. And, in what I view as a sign of unusual modesty and unusual business savvy, the first thing the three founders did after the sale was to decide to go looking for a big-time CEO to lead the consulting operation. That’s right, the three founders stepped aside, seeking a replacement CEO with the experience of building and running far larger and distinctive business services firms.
Enter C.E. Andrews, former CEO of Sallie Mae, who had earlier led Arthur Andersen’s worldwide audit and business advisory practice. Most recently the president of RSM McGladrey, Andrews’ profile in the accounting and consulting world is such that, in recent years, when major executive vacancies occur, he’s among the rumored candidates.
Ron Morgan knew, after the sale of the national security business, that any sign that the consulting operation might also be sold could cause an exodus of talent. “It takes six seconds for people to say, ‘What’s next? What’s going to happen to me?’ ” And he and the other founders wanted the business to remain independent and to grow. Attracting someone of Andrews’ stature helped reassure and convince all hands that the aim was to expand MorganFranklin, not to sell it off.
The founders “wanted to do something,” Andrews recalls. How does a 300-person firm succeed in a world with so many high-quality brands like the Big 4, McKinsey, Booz Allen, and Accenture? “First, we view these firms as ‘partners,’ not ‘competitors.’ We want to earn their trust and respect, leading to their comfort with our presence at their clients, often from their referral and endorsement.” How does a firm earn such a role? Hire fairly senior, exceptional people from those very firms, for a start, a few capable of bringing business with them; offer clients a more experienced project team, absent the newbies assigned to big projects by major consultancies; move fast, and perhaps do the work a little more cheaply.
Without legions of inexperienced employees to keep busy, MorganFranklin can take a different approach on some consulting work. For instance, the firm hired Charlie Price, a 28-year veteran FBI Special Agent specializing in major fraud investigations, to co-lead its corporate investigations and dispute solutions practice. And while Price is capable of overseeing a massive document analysis, that’s not his preferred approach. Rather, he’s known as a highly skilled interviewer of witnesses and suspects who advises clients to seek to short-circuit what could be drawn-out investigations by turning such interview subjects into helpful guides to the workings of a fraud or other scandals. Quick yet thoughtful results, as opposed to turning over every piece of paper, can produce loyal clients.
What’s more, the significantly lower overhead of a small- or mid-sized firm can, at the same or even lower billing rates, make it more profitable. MorganFranklin’s 2015 revenue reflected a more than 50% three-year growth rate, and the firm is solidly profitable.
About MorganFranklin Consulting
MorganFranklin Consulting (www.morganfranklin.com) is a global management and technology consulting firm that works with leading businesses and government. The firm helps organizations solve their most pressing challenges and address critical finance, technology, and business objectives. MorganFranklin is headquartered in the Washington D.C. area with regional offices in Atlanta and San Francisco, and supports clients across the globe.
MorganFranklin Consulting is the brand name referring to the global organization of MorganFranklin, Inc. and its subsidiary MorganFranklin Consulting, LLC.