The exodus of our truly global buyers of ($600/hour) top tier consulting, like Fernz Corporation (now Nufarm), Lion Nathan and BIL is marginalising New Zealand into regional backwater. This may come as no surprise, but the gravitation towards globalisation which will see many remaining big caps follow suit, only accentuates the dilemma facing consultancies and chartered accounting firms alike.
Having the local market pulled out from underneath top tier consultancies adds to numerous global forces that are currently reshaping consulting as we knew it. So what are the key drivers, how are local consulting firms coping and where does all this leave chartered accounting firms? After all, they’re are about to (or have already) shed huge chunks (up to 40 percent) of their former total revenue.
Mounting US regulatory pressure is forcing top tier chartered accounting partnerships to split their consulting arms off into corporate beasts. And local counterparts have chosen to follow suit. Regulatory tightening by the US-based Securities Enforcement Commission (SEC) is arguably the single biggest driver of recent manoeuvres by consultancies globally. But greater catalyst in the consulting evolution has less to do with regulations than it is about meeting the market where it’s now at.
In other words, if IT firms and consultancies are going to be sitting in the same space looking at each other, why not share skills and clients? And even better, why not improve margins and lower overheads while they’re at it?
For starters, the gravitation into one-stop-consultancy-shops, plus the encroachment of e-commerce is responsible for the current wave of skill realignment by top tier consulting firms. In fact, it’s e-commerce says John Judge, CEO with Ernst & Young, that’s partly responsible for rendering old-fashioned consulting obsolete.
At face value, top tier consulting firms sacked up to 35 percent (around 300 people) of their staff in recent months. But in fact, says Judge this was no more than glorified skill realignment manoeuvre. Surprise, surprise… while these firms are now re-hiring, only those with e-commerce skills need apply.
Selling down consultancies
So what exactly spurred (chartered accounting) partnerships globally to selldown consulting divisions they’d built alongside their bread and butter auditing business? In word, says Judge it’s all to do with SEC pressure. In fact, chairman Arthur Levitt who retires in October, wants his re-writing of the rule-book to leave no doubts as to what services auditors can and can’t offer. The bottom line is they’ll no longer be able get away with preparing and implementing business strategy and then proceeding to audit the same clients’ books.
The auditing firm independence issue has been festering in the US for years. But what’s allegedly spurred SEC’s desire to move now, was mounting pressure from 20 of the world’s leading fund managers. They’re increasingly nervous about investing in companies that are having their consulting done by the same company that’s doing the audits. As result, prudent chartered accounting firms have decided to pre-empt what non-audit services they’ll finally be allowed to offer by selling their consultancies off completely.
“Not only do auditors have to be independent, they must be seen to be independent. And the way business was evolving, it had become more difficult to ensure the auditing and non-auditing business remained independent,” says Judge.
Partnerships being the separate entities that they are, Judge and co could have erred with US colleagues and decided the consulting division stays. But Judge knew that without access to greater capital expenditure, needed to maintain truly global knowledge base, develop global alliances and e-commerce products… the consultancy’s ability to offer multinational clients global solutions would wane rapidly.
Structural weakness
And therein lies dilemma number one, says Judge. The partnership model that chartered accounting firms operate under was designed to complement the independence required of their auditing services. It is not suitable structure for capital fund raising. The partnership structure also restricted consulting firms from using share options to command loyalty from their most promising staff.
What’s also raised the ante on going to capital markets to raise large amounts of money (or meta capital), says Judge, is final closure of the value gap. He says clients have grown wary of the typical client/consultant relationship (writing report and then bowing-out gracefully). “They now want consultancies to become equal stakeholders in major global business transactions they recommend. While consultants were always exposed to risk, by fronting up with an equity stake, they’re also going to share the rewards.”
Whether or not Deloitte Touche Tohmatsu saw the writing on the wall earlier than its competitors, it was the first one to make its move. The bottom-line conclusion that consulting firms need corporate structure, saw Deloitte Consulting spin-off into separate corporation four years ago. What this did, says Glenn Bittle, partner in Deloitte Consulting, was help unleash the underlying value in the consulting division (that was formerly locked-up within the partnership structure).
Following their naval gazing on core business, Judge and co decided to selldown Ernst & Young’s 200 person consulting division (at three/four times revenue) to publicly listed France-based consultancy Cap Gemini. Since its consulting division selldown, Ernst & Young’s annual revenue is now 40 percent lighter.
Having its feet loosened from former Ernst & Young (partnership) moorings gives Cap Gemini distinct first-move advantage within New Zealand’s consulting landscape, says the company’s senior vice president (formerly with Ernst & Young) Paul Cook. But ongoing synergies with Cap Gemini could be equally fruitful for Ernst & Young. In fact, while Ernst & Young has no remaining equity stake in its former consulting division, they share more than just the same building.
While Cap Gemini now operates as full service consultancy, its origins were firmly ensconced in IT. In acquiring the consulting practices of Ernst & Young, Cap Gemini gained the right to use the name Ernst & Young. Globally, the new group is now Cap Gemini Ernst & Young, and the local company is Cap Gemini Ernst & Young New Zealand Limited. Cap Gemini Ernst & Young also has continuing rights to appropriate parts of the Global Knowledge Management System developed by Ernst & Young, as well as Cap Gemini’s Global Knowledge Management System, Galaxy.
Going head to head
But not all deals have been carved up so sweetly. In fact, the bitter feud between the Arthur Andersen (chartered accounting) partnership and its estranged consulting division Andersen Consulting is being played out in US court rooms right now. Both companies now compete head-to-head in the consultancy market. But it’s understood Arthur Andersen wants the consulting arm to pay up to 10 times normal revenues before it will legally sever former ties.
Meantime, to Jack Percy (New Zealand) managing partner with Andersen Consulting, manoeuvres by chartered accounting firms to split off their consulting arms is yesterday news. When Arthur Andersen separated out Andersen Consulting in 1988, it had an eight year jump on the rest of the market. Funnily enough, Percy and co don’t subscribe to the view that consulting firms have to be corporatised for them to put their money where their mouth is on global deals. In fact, with access to capital being the least of their worries, they have no plans to change their partnership structure.
“Andersen Consulting has never backed-out or lost deal through an inability to raise capital. So why bother corporatising? Admittedly, the firm lost lot of people, [including its CEO] year ago to organisations pr
