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A New, Improved KPMG

Facing government scrutiny, arduous federal regulations and a stressed-out workforce, KPMG opts for a stronger HR to boost its reputation.

Friday, June 2, 2006
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There may come a time when taking strides to become an "employer of choice" becomes the only choice.

Such was the case at KPMG, the smallest, by employee size, of the nation's Big Four accounting firms, with about 20,000 employees.

The choice began percolating back in 2002 and 2003, when a few major developments -- tough new government-mandated accounting rules, a tenacious competitive landscape fueled by a war for accounting talent, a dynamic new chairman and a new, potentially lethal legal quagmire -- pushed the firm to improve its reputation and key functions of its organization.

Early in 2002, the firm had made some critical, competitive decisions. For one, New York-based KPMG, the $4.7 billion U.S. member firm of KPMG International, began constructing its "employer-of-choice" strategy, implementing new and enhanced programs in key areas such as compensation, career development, diversity, recognition and, perhaps most importantly, work/life balance.

In July 2002, Congress passed the Sarbanes-Oxley Act, or "Sarbox," which dramatically changed the U.S. corporate landscape regarding financial reporting and auditing for publicly traded companies. Sarbox, emerging in the wake of corporate financial scandals such as Enron and WorldCom (both of whose accounting firm, Arthur Andersen, eventually went bust because of those scandals, effectively turning the Big Five into the Big Four), increased the already staggering, and highly seasonal, workload on big-firm CPAs across America.

On the talent front, with Sarbox due to kick into high gear in 2004, KPMG and its competitors quickly found themselves struggling to train their current accountant workforce to meet expected workload demands. KPMG and its main competitors -- Ernst & Young, Deloitte & Touche and PricewaterhouseCoopers -- also had to find, add and retain talent in an increasingly talent-thin marketplace, as already overworked, and some newly minted, accounting professionals began seeking alternative career paths in smaller "second-tier" CPA firms, technology startups and on Wall Street.

J. Richard Dietrich, chair of the Accounting and Management Information Systems department at Ohio State University in Columbus, says that following the financial scandals of the late 1990s and early 2000s, companies and investors recognized the importance of high-quality external auditors. KPMG, like the other large accounting firms, has a very important role to play for those companies, but it requires high-quality talent.

"Being an employer of choice is very important for all of them," says Dietrich, who also is part of a 15-member accounting industry talent task force assessing current and future recruiting challenges. "In fact, it's a strategic issue. Today, overall reputation is important in everything they do.

"My experience working with KPMG on the task force, and with our accounting graduates, is they are doing an outstanding job along those lines," he says, adding that Ohio State graduates working at KPMG report finding great opportunities for themselves and are learning a lot at the firm. "The challenge for KPMG is they know what to do HR-wise, but they face very stiff competition from the other firms."

Also in 2002, the firm named Eugene O'Kelly chairman and CEO. O'Kelly initially set in motion the company's effort to ramp up its employer-of-choice transformation strategy -- this as part of his projected legacy to help meet the firm's growing need to increase employee satisfaction, drive down turnover and retain top talent in the midst of some battering forces. His success in launching this effort is especially meaningful to those now carrying it out, in the wake of his death in 2005.

While O'Kelly was at the helm, KPMG began formulating a more enlightened approach to work/life balance, an area that historically has been given short shrift by "hourly billing" professional-services firms in areas such as accounting and law. Of course, KPMG's competitors have also stepped up the pace on work/life in recent years, as both PricewaterhouseCoopers and Ernst & Young currently sit on Fortune's 100 Best Companies to Work For list.

Finally, as if Sarbox workload repercussions and a vicious war for talent weren't enough, KPMG faced another very serious situation.

In 2003, KPMG came under intense regulatory and legal scrutiny from the Internal Revenue Service and, subsequently, the U.S. Justice Department, for offering four separate tax-shelter products to wealthy clients from mid-1996 until 2002.

After much legal uncertainty and maneuvering, in August 2005, the firm agreed to pay a $456 million settlement with the Justice Department, while admitting that that some of its tax partners engaged in conduct that was unlawful and fraudulent. Under the terms of the settlement, which is called a deferred prosecution agreement, the charges officially will be dismissed against KPMG on December 31, 2006, if the firm complies with the terms of the agreement. (Two of those conditions are that KPMG must avoid the tax-shelter business and cooperate with prosecutors in related cases.)

In addition, 16 former KPMG partners and executives (some were fired, others resigned) currently are being investigated individually in the case. In May, the judge in the case refused to dismiss charges against those individuals.

Together, these events and developments presented KPMG and its HR department with huge talent and morale challenges -- all at a time when the firm was also trying to shift into an "employer-of-choice" mode.

New HR Direction

Early in the transformation process, the firm began the search for an HR executive who could help oversee such a dramatic shift from damage control to EOC status. That search took some time, but in 2004, KPMG named Bruce Pfau its vice chair of HR. The choice of Pfau, who came with 20 years of experience in HR consulting (he previously led the organizational-effectiveness practice at Watson Wyatt), signaled a new direction for KPMG. The company had historically filled the top HR job with someone from the business side. In fact, Tim Flynn, O'Kelly's successor and current KPMG chairman and CEO, had served in that capacity earlier in his career.

"In 2004, the entire accounting industry faced challenges in terms of attracting people and making sure people made their careers in the firms they joined," says Paul Platten, head of the Human Capital Group at the Rochelle Park, N.J., office of Watson Wyatt. "Bruce had expertise in helping his clients building morale and linking HR programs to business results, which is what KPMG needed.

"I have HR clients who look at things in silos, and try to figure out what can be cut. Bruce's approach is more holistic," he adds.

Pfau, who co-authored a 2001 book entitled The Human Capital Edge: 21 People Management Practices Your Firm Must Implement (or Avoid) to Maximize Shareholder Value, also understood how firms with a partnership structure work because he had been in one and had worked with several.

"I also was looking forward to helping KPMG realize the positive results of the things I'd researched and learned during all those years of research and consulting work with clients," Pfau says.

Phil Sollecito, KPMG's executive director of human capital management, who joined the firm a year before Pfau, believes the recent HR efforts have injected potent new energy into the KPMG HR organization.

"There's much more excitement in HR," Sollecito says. "It's not just me, but all the folks in HR. Before, we had a fairly standard path and pretty standard responsibilities. But now, there's a chance to take the lead in a firm-wide priority."

KPMG's novella-sized "Employer of Choice Summary" document -- it runs 83 pages -- is filled with dozens of programs and initiatives aimed at raising the firm's enlightened employer profile, both within the workforce and with potential employees.

A sample of those programs, all driven by KPMG HR, run the gamut of ways to improve a workplace, including:

* Diversity -- KPMG's new and growing Network of Women expanded from three cities to every major office in the past year. Also, KPMG now has Diversity Councils for several ethnic groups.

* Work/life programs -- Some key programs include Perks at Work (10,000 KPMG employees and partners have signed on for the employee discount program), Shared Leave (KPMG employees can donate personal time to others who need extra), and Shared Backup Childcare and Eldercare (employees can also donate KPMG Childcare and Eldercare Backup hours to colleagues in need).

* Career development -- Partner and Employee Career Architecture programs assist partners and employees in their career-pathing efforts and include detailed career information, such as role descriptions and development requirements.

* Communications -- Efforts includes surveys, focus groups, town meetings and other face-to-face events, an employee magazine, and a detail-rich intranet, dubbed KPMG Today, which also offers a daily, positive "KPMG Fact" about the employer of choice work environment.

* Education/training -- Tools include an easy-to-use online learning management system called Knowledger, which helps professionals in the firm manage professional development through a searchable catalog of course offerings. Knowledger targets learning content based on job/role level, enabling real-time enrollment and travel planning, and automated records management. Also, KPMG offers KLEARN Live, a virtual classroom that delivers training via instructor, slides, charts and other online training tools to all KPMG employees. In fiscal year 2005 alone, the firm allotted a $90 million budget for professional development and training for staff, professionals and partners.

The transformation relied on some key HR changes in particular, says Pfau.

For one, the firm immediately improved financial rewards for employees, including an enhanced base pay for some employees, enhanced year-end performance awards and, for the first time, in fiscal year 2005, year-end bonuses for all administrative staff members.

"Survey scores on satisfaction with pay jumped 15 points," Pfau says. "Across the board, people felt they were sharing in the economic gains of the firm, and that registered in their attitudes. Enhancing compensation is hardly innovative, but sometimes you don't have to be innovative to get results."

The company's Encore program is a new mechanism for managers and partners to provide "on-the-spot" recognition for KPMG employees. The awards range from simple notes of thanks and desk trophies to gift cards and prizes in $500, $250 and $100 increments. The program initially started on a local level, but eventually was rolled out nationally, Pfau explains. During the firm's fiscal year 2005, KPMG employees received about 35,000 Encore Awards, with around $8.5 million distributed to employees -- more than double the numbers of the previous fiscal year.

"It's had a tremendous effect," Pfau says of Encore. "We did a follow-up study and found that groups within KPMG that used Encore awards more saw higher employee engagement and retention numbers. It's been a very, very successful program because it gives our managers and partners the tools they need to meet EOC goals."

In terms of career development, KPMG offers two critical programs to the approximately 1,700 partners within the firm. The first, Partner Career Architecture, is designed primarily for newer partners to help them map out their careers within the firm. It provides guidance about the responsibilities and objectives they need to meet -- basically, what they need to do to move to more advanced levels, and increase earnings and economic potential.

"Partner Career Architecture has been very positively received, mainly because it's pragmatic and practical," Pfau says, adding the firm will roll out an Employee Career Architecture program in the coming months.

Work/life balance has been another critical component. In 2005, KPMG introduced its Fully Engaged Leader program, a day-long offsite workshop run by Dr. Jim Loehr of the Orlando, Fla.-based Human Performance Institute.

The program is a mix of morning discussions based on Loehr's efforts in managing energy, rather than time, that cover a range of issues, including nutrition, exercise and behavior change. Every participant then leaves with a personal action plan created during the afternoon session. Overall, the Fully Engaged Leader program is designed to help partners and high-level managers stay focused on what's important in their lives -- family, health and friends.

"So far, we've put 1,000 partners and their significant others through the program, which is focused directly on the work/life balance issue," Pfau says. "The workshops teach partners how they can better save, create and focus enough energy on the important things in life."

One partner was so inspired by the session and its messages, Pfau says, that after learning about the nutritional tips, he went home and proceeded to lose 75 pounds, turning that advantage into a much higher energy level both at work and with his family. Because the workshops improve the work/life-balance perspective of KPMG partners, Pfau adds, the effects also cascade down to the entire workforce.

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"I thought the Fully Engaged Leader workshop was a great experience," says Candace Duncan, KPMG's MidAtlantic managing partner for audit. "I've always believed the only real asset at KPMG is our people, so whatever we can do to make KPMG better for our people is fantastic."

Duncan, who joined KPMG in 1978, says the decision to move to the new people-focused strategy was a welcome one for her. "I fully embraced the Employer of Choice initially," she says. "In fact, I embraced it before Gene [O'Kelly] even announced it. I'm very proud of what's happened here in the past few years. It's something that is in the firm's DNA now, in the fabric of KPMG, and that's what it is all about. All through the ranks, I've never seen morale so strong."

Winning Hearts and Minds

According to Pfau, KPMG certainly needed to win the hearts and minds of the partners -- in other words, it also had to be a "partnership of choice" -- because partners are the core of KPMG leadership.

But KPMG HR also bolstered work/life conditions for all employees. One especially popular new program, Shared Leave, gives employees the chance to donate leave (vacation/personal days) to other employees who might need to take more time for a sick family member or other personal reason.

In fiscal year 2005, nearly 685 employees donated 6,800 hours of shared leave, with 31 employees taking advantage of the program.

"Work/life balance is a significant opportunity for the entire accounting profession," Pfau says. "When you add all the challenges, such as Sarbanes-Oxley and the talent shortage, plus the huge competition among accounting firms and the increase in client demand and workload during our traditional busy season, it's a major work/life challenge."

When O'Kelly died from a brain tumor in September 2005 at age 53, it was a very sad time for the entire KMPG family, says Pfau, yet it gave the firm's work/life focus a much more poignant, and potent, human face. And O'Kelly did get to see some of his legacy efforts in action before he passed away.

"We've done a lot, but we can do more when it comes to work/life-balance issues," Pfau says. "The book Gene wrote before he died [Chasing Daylight: How My Forthcoming Death Changed My Life] reminds us that there are more important things than work and business results. It's a very bittersweet book, especially for those of us who knew Gene. We had to go beyond simply stating work/life balance as a goal and implement some concrete programs to make it a reality."

Pfau doesn't believe anyone has cracked the work/life-balance code yet, but "from our surveys and feedback, we're getting into some pretty good numbers when you compare them to other employer-of-choice benchmarks," he says.

"In fact, we're over world-class benchmarks in a lot of cases," he says. "Our goal is to excel as a great place to work and build a career in the eyes of our employees. It's that simple."

To drive that point home, Pfau notes that in the past 20 months or so, KPMG's enhanced and accelerated HR programs, practices and strategies have garnered some very positive internal feedback, with one statistical trend standing out. In an October 2003 survey of KPMG employees, 53 percent identified the firm as a "great place to work." By 2004, that number had grown to 62 percent, and last October, KPMG hit the 75-percent mark on that same survey question.

Positive Feedback

It doesn't matter to Pfau if KPMG is currently on any "Great Places to Work" lists. For now, he believes what's really important is what KPMG's people are saying about the firm in employee surveys and through other feedback forums such as Town Meetings and special employee focus groups.

"If you talk to some of the consultants we work with, our overall survey numbers are great," Pfau says. "No one would have ever predicted that kind of jump, even with no challenges. But if you then take the challenges we faced last summer and before that, and then ask how our people were going to feel in October 2005, the results speak volumes about the programs we've put into place."

Was the enlightened employer strategy created mainly as a way to keep KPMG talent from jumping ship when things looked especially bleak during the tax-shelter scandal?

"I really believe the two are totally independent," Pfau says, adding that the focus on people stemmed from much more than a crisis. "Senior management didn't think, 'We anticipate some problems ahead, so we better build some new bridges to employees.' It just didn't happen that way," he says. "I mean, there were challenges, of course, but KPMG has done what it has done because it's the best and right thing to do."

He does believe, however, that every organization is going to have anticipated or unanticipated challenges or stressful situations at some point, and having a reservoir of good will is a key factor in a firm's ability to not just survive, but continue to thrive competitively.

"An organization that doesn't have that strong dose of employee good will is going to have a much more difficult time keeping morale and engagement high during tough times," he says. "The important element for us is that it's over. Clearly, some things happened that we regret and we settled the case with the government. Now, what people are doing is looking forward, and we in HR can back that statement up."

To that end, KPMG has reduced the turnover rate 15 percent over the past year, resulting in the lowest it has been for years.

The firm also started a formal mentoring program in 2004, with about 500 mentoring relationships in that year. By the end of fiscal year 2005, that number had jumped to 5,000, and it currently stands at 8,000. Also, in fiscal year 2005, 42 percent of experienced professionals (later hires) were hired through KPMG's Employee Referral Program (KPMG distributed about $4.5 million for those referrals).

Those numbers clearly are having an impact. When KPMG asked employees to rate their pride in the firm in October 2005, 85 percent said it was "high or very high." 

"We don't have any secret product formulas; what else do you see here but our people?" Pfau says. "Our people are our equity, so we have to give them the best possible workplace experience.

"HR is not separate from the business," he adds. "Our ability to attract top talent, to retain top talent, to motivate people ... is core to our business. It is critical for us to be a firm people want to join, stay at, and build a career."

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