Big Four and other large professional services firms change their partners’ capital to increase
Some companies require partners to invest more, others capitalize additional bonuses, while a few that have favorable franchisee contracts with the global headquarters use the royalties to increase the partnership capital account.
The best companies have grown their revenue by 17-22% each year for the past 15 years, and most are predicting a similar rate of growth, even on a larger basis. Hence the need to invest in more people, processes, infrastructure and technology.
In the Indian branches of the best professional service firms, new financial partners must find “buy” money to be awarded points or units in the partnership. Points are used as a profit split formula. The amount of the buyback is called the capital contribution of the partners.
“For most companies, the partnership’s capital is used as working capital for whatever purpose – paying office leases, investing in the company’s future technology, or poaching partners from the rival,” said a senior partner. from one of the big companies.
Deloitte India recently surprised its financial partners by giving them a cash back or bonus, as it lowered the capital contribution requirements in an effort to motivate partners. Insiders tell ET that the company has seen strong growth over the past year and that the partner’s capital account is well funded, even after aggressive investments in technology and consulting services.
Rival PwC India asks its partners to spit more. This means that part of the income or bonuses that partners earn could go towards partnership capital, which would then be invested in scaling up operations. Under the leadership of new Indian President Sanjeev Krishan, the company is aggressively investing in technology and digitization with the aim of becoming a billion dollar professional services company over the next five years.
Deloitte, PwC, EY and KPMG did not respond to questions from ET.
“Large companies need a lot of working capital – from paying leases to paying salaries every month for thousands of employees, even when customer charges are delayed,” said Ketan Dalal, CEO of Katalyst Advisors. “For this reason, partnership capital becomes really important, because it is basically used as working capital.”
Most of these companies faced working capital issues last year at the start of the Covid-19 pandemic because their clients were unable to pay their fees immediately or halted work halfway. Some companies have cut partners’ salaries, while others have taken out loans from banks to meet working capital needs. “In large companies, especially the Big Four, the risk management and customer approval processes take quite a long time. adds to working capital requirements, ”said Dalal.
A leading company has now tied customer revenue to partnership money. If partners do not collect from customers, they are not allowed to make withdrawals.
The best professional services companies have found themselves in the right place at the right time as the growth of digital services and multidisciplinary solutions is at its peak, supported by the disruption of Covid-19, experts said.
With their wide variety of service offerings – tax, technology, consulting and transactions – at attractive rates combined with industry knowledge, they are able to implement client solutions better than pure technology consulting firms and companies. .
The global headquarters of these companies are also betting big on India. “We are committed to doubling our presence in India over the next few years,” Deloitte Global Managing Director Punit Renjen told ET in June. “It’s a good example of putting my money where my mouth is.”
“We are going to hire between 75,000 and 100,000 more people over the next few years,” Renjen said. “It’s about serving our global customers, but also serving Indian customers. Indian companies are taking their rightful place as world leader. We are doubling our commitment and we are actively developing.