Twelve months ago the idea of another Big Four accountancy firm disappearing from the map would have perhaps been far-fetched.

The pole-position firms, PricewaterhouseCoopers, KPMG, Deloitte and Ernst & Young are, on the face of it, financially sound and with strong regulatory processes to prevent another Andersen from happening.

Together they control just over 70% of a market worth more than £9bn in the UK alone. But factor in the current economic climate, poor strategy and the consequences of ‘The Rule of Three’ (more of that later), and this gloomy proposition becomes all of a sudden very real.

One could argue that the large accountancy firms should, to some extent, be sheltered from the current crisis.

Their type of client, the large private and public multinational company, will invariably have a legal requirement for an audit. This type of client is usually large enough to withstand economic downturns so audit fees from such companies should, in general, remain stable.

Balance of power

Firms, however, live off fees from non-audit services ­ and these are not selling. Clients are simply not buying them to the same degree.

As the majority of firms do not have the right balance between audit and non-audit clients, the deficit created by the sales decrease in non-audit services is just too wide to be bridged by new audit clients alone, especially as there is little to no market to grow into as the crisis deepens. The real impact of all this will be seen in the 08/09 and 09/10 results.

To accentuate the problem and perhaps expedite the ultimate outcome, in comes a market law called The Rule of Three. This rule postulates that for a market to reach equilibrium point, the point at which customers get the best value for their money and where competition flows at levels that encourage innovation, a certain balance of power needs to be in place. The balance is achieved when three top players control around 70% of the market, sharing the rest with smaller firms.

This structure can be seen in a wide range of industries, for example in the US:

In the UK, the mobile network suppliers market has reached equilibrium point with O2, Orange and Vodafone as its dominant players. The current climate will accelerate the process in other markets as well.

The UK accountancy market is not immune to the gravity pull of the Rule of Three. It’s a certainty that consolidation will take place and that it will affect the top players. The unanswered question is which three firms will prevail? If you apply the rule based on revenues then the answer is simple ­ number four, E&Y, is the weakest link and therefore the one to go. However, the rule is not linear and needs to be applied in the light of the two factors - strategy and leadership.

So does E&Y have the right strategy and leadership to withstand the market forces?

In the light of the firm’s current strategy, the answer is that, in the long term, it probably won’t survive. Their current strategy perpetuates the mistakes made in early 2000 when the firm sold its management consultancy arm to Cap Gemini. At the time, they pushed hard to recover the fees gone with the consulting arm, by focusing on growing its global accounts. The strategy flopped to a large extent though, as it lacked a key motivational ingredient - profit sharing.

E&Y’s recently announced EMEIA merger will not resolve the above pr oblems. Although operational savings may be achieved, real growth will only arise when the right financial incentives and global client profit/loss sharing processes are put in place.

The firm will only withstand the economic climate and the dictates of the Rule of Three if it pursues an external merger campaign that will give it access to the audit client base it needs to regain market share.

For the other three firms the time is ripe to also re-evaluate their positions and decide whether to stay put or instead to take advantage of this window of opportunity to challenge the market and push it to its equilibrium point.

For instance, could two Big Four firms become one? Could the mid market, especially Grant Thornton and BDO, step up by assimilation as opposed to organically? Could we see a Big Four firm merging with a mid market firm to create a two stream operation, where the mid market ‘arm’ would use the processes and innovation applied to larger companies, in order to help build strong UK mid market companies that would eventually become either large corporates, or part of existing large corporates?

The worst scenario is where one of the Big Four is taken apart and sold to a range of firms interested in different specialisms.

There is no question that changes are brewing in the accountancy sector and that the dominance of the Big Four as we have known it for the past few years will come to an end.

The question is whether one person or one team is capable of captivating the imagination of their staff to lead them into a new era; whether one firm will have the vision to write history and its own chapter in it.

Competitive advantage

Answering these questions will require re-evaluation of the strategy of each firm: What customers do they want to serve? Which services do they want to offer? Can they provide new and innovative services in addition to the traditional ones? How can they create a differentiation and a competitive advantage for themselves?

To continue to do ‘more of the same’ is probably the best way to lose their dominating market position, or to be swallowed by one of the other big fish.

Dr Michael Perry is the founder and president of Mitzuv, a marketing strategy consultancy with operations in the US and the UK. Rute Pinto is a freelance consultant at Mitzuv Israel and UK