Future of the Big Four: three is the magic number

PwC, one of the Big Four

PwC, one of the Big Four

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,
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

  • Fast food restaurants: McDonald’s, Burger King, Wendy’s;
  • Petrol suppliers: ExxonMobil, Texaco, Chevron;
  • Baby foods: Gerber, Beech-Nut, Heinz.

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

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

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

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