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How the Big Four have returned to consulting with a bang

WHETHER by acquisition, organic growth or the recruitment of experienced hires, the Big Four have established consultancy groups that singly and collectively are a force to be reckoned with.

According to analyst firm Gartner, spending on management consultancy services increased 6.1% to $125bn (£82.3bn) for 2014. The Big Four, says Gartner, hold the biggest share of global consultancy income, with a combined 40% of the market.

And for the Big Four firms, consultancy now represents much more than a decent add-on. It’s both an opportunity to provide a distinctive offering to their client base and a bulwark of the firms’ revenue streams. At PwC, consulting income grew by 16% to £571m over the past financial year, according to the firm’s latest results. Its acquisition of Booz & Company, now Strategy&, has been a key investment.

But, for a lot of commentators, the growth of consulting among the biggest firms increases the potential for conflicts of interest. Indeed, the Big Four’s current hold on the consultancy market presents a significantly different picture compared to 15 years ago when the majority shed their consultancy lines due to conflicts of interest relating to the audit of IT systems.

Between 2000 and 2002 EY, PwC and KPMG sold their consultancy practices to Capgemini, IBM, and Bearing Point. Over the intervening years, the top firms may have negotiated changing regulatory and reputational fortunes at times, but they have also gradually busied themselves re-establishing their consulting presence. Recently their collective acquisition programmes have not so much picked up gradual speed as much as they have thrown that prior programme of shedding consulting businesses into reverse.

At Deloitte, which unlike EY, PwC or KPMG, never divested itself of its consultancy interests, revenue growth for the UK firm overall has been driven by the robust pace of its consulting business. Deloitte posted revenues of £2.7bn for its year-end in August 2015, up 6.4% on last year, of which Deloitte Consulting generated £687m.

Deloitte UK has doubled its size in ten years, and it’s clear the role that consulting has played in that growth trajectory. EY has announced plans to grow its strategy consulting practice to over 2,500 professionals by 2020, while at KPMG last year, income from consulting (advisory) in the UK was £850m, well north of audit at £445m and up 6% on the previous year.

Acquisitions and alliances

The acquisition trail has been well-trodden by the Big Four, with some significant transactions in the past two years, of both niche and more mainstream consulting businesses. Deloitte bought US strategy consultants Monitor in 2013, while PwC acquired Booz & Company, now Strategy&, in March the same year. EY merged with Parthenon Group, another provider of strategic and transaction advisory services, last year.

This year has been similarly marked by acquisitions. In September, Deloitte bought boutique leadership firm Kaisen Consulting. The US and UK-based consultancy firm, which has 60 staff – including 30 occupational psychologists – has had a strategic alliance with Deloitte for the past five years. Due to be rebranded Deloitte Leadership, the acquisition reflects findings in the Big Four firm’s human capital trends research published last year that establishing a leadership pipeline is an urgent issue for board rooms.

KPMG bought into HR consultancy with the HR delivery service arm of Towers Watson. EY meanwhile, looking towards the technology requirements of its advisory clients, had picked up to technology players, Seren and Integrc.

Strategic alliances have become important too, PwC’s with Google being a case in point. Under the agreement, PwC helps clients evaluate Google’s cloud products and develops custom applications using Google technology.

For all that, the firms tend to be circumspect in what they say about acquiring other businesses. The impression that leaves is that if they could grow fast enough by doing so, they would prefer the softly softly approach of growing by taking on experienced hires and their teams

Harry Gaskell, head of advisory at EY, says the resurgence of consulting is about meeting client expectations, pure and simple. “We sold our consultancy business to Capgemini in 2000, then we re-started because our clients were asking for [consulting services]. What we’re trying to do is work with our clients on their most important issues.”

To do that takes scale and reach, he says. “We want to grow at this same fast pace. It’s important if you want to help big clients – the household names and government agencies – if you want to help them you need size. What’s most important to us is to work with leading organisations. And we grow if they grow.”

Asset hires

EY Advisory’s ambition was to create the biggest consulting firm among the Big Four in the ten years since the consulting arm restarted. It didn’t quite get there, Gaskell admits. It is just a whisker behind Deloitte.

Gaskell says he is firmly focused on growing organically. The recruitment engine takes on 200 graduates each year and advisory made around 400 experienced hires for the financial year 2014/15. “Where we buy businesses we do it not to buy the people, who can walk away after all, but because there is something else, an asset.”

Integrc is a case in point. The boutique consultancy provides governance, risk and compliance services and comes with RouteOne, the IP asset in the deal that integrates governance, risk and compliance analytics capability with existing IT platform for SAP users. As such it is a very specific offering aimed at an area that is a pressing concern in the boardroom.

Seren, a digital design consultancy, has 60 employees, but, significantly, has proprietary design labs at its Silicon Roundabout HQ where it puts together digital design solutions based on customer feedback and requirements. The Seren acquisition demonstrates the premium EY puts on being able to engage with clients on their most pressing and often customer-focused issues. Buying a company that is ‘digitally native’ sends an important signal about the firm’s readiness to build a practice with a skillset that mirrors client issues.

“Digital technology has changed every business. That’s what every one of our clients cares about. A subset of that is data analytics, getting data and analysing it for patterns and insight. Then there is the potential for cyber attacks. I don’t know of any board or chief executive who doesn’t want to talk about that,” says Gaskell.

For Nigel Slater, who recently took the role of head of consultancy at KPMG, moving from Deloitte, the distinctive feature of the acquisitions that KPMG is making is the fact that they retain their identify. “You’ll notice the brands are staying. The brands are important. The history of acquisitions into Big Four firms has not been successful. It won’t be unless you go about it in a very disciplined way.”

Regulatory climate and dividing lines

But the question this evolution begs is how do the Big Four square these moves with today’s exacting regulatory climate? For a lot of commentators, the growth of consulting among the biggest firms increases the potential for conflicts of interest.

It is a perspective perhaps exacerbated when the firms move from consulting projects to audit assignments at FTSE companies, or when fines are handed down by the FRC, such as the £3m Deloitte faced for failing to manage conflicts of interest during its role as adviser to MG Rover.

The firms themselves say that if anything the post-Enron, post-Sarbanes Oxley world is a pretty clear one on terms of engagement. “If you are a Big Four firm your audit clients are going to be roughly 25% – 30% of the market, so it’s very clear where advisory services should be played in,” says Nigel Slater. Audit rotation and the exclusion of other services from audit clients give a clarity that the sector hasn’t had before, he says. “There is a lot of regulation and legislation, not all of which is particularly synched up, but the direction of travel is very clear. There are clear dividing lines.”

And he points out that the management consultancy timelines can be closely watched so that they don’t run into the lead-in of an audit tender and, ultimately, audit work for a former or prospective consulting client.

It would need quite careful observation, however. FRC audit regulations say that a statutory auditor or an audit firm carrying out the statutory audit of a public interest entity cannot provide any prohibited non-audit services in the period between the beginning of the period audited and the issuing of the audit report and the financial year immediately preceding the period referred to.

And prohibited services include services that involve playing any part in the management or decision-making of the audited entity, and designing and implementing internal control or risk management procedures relating to the preparation or control of financial information or designing and implementing financial information technology systems.

Rebranding concerns

Stella Fearnley, a professor in accounting at Bournemouth University and a long-time commentator on audit and the Big Four firms, sees problems for the firms.

“In the middle of their growing variety of income generating services, is a huge public interest activity which is essential to our capital markets, and we have to ask ourselves how compatible that activity is with the other services they offer, the global ambitions and the determination for growth,” Fearnley says.

“I think it all went wrong when the Big Four stopped calling themselves accountants and became professional services firms. This makes them sound more like McKinsey and the like, when what has distinguished them in the past has been their high profile as auditors and that they can be trusted to sign off accounts. That [position] has been much watered down as audit is no longer the core business.”

The UK consulting market increased by 6.6% last year, according to analyst Source Information Services, while their Big Four grew their consulting revenues by 8.9% over the same timeframe. Where does that put them in the wider world of professional services? Not entirely head-to-head with the McKinseys, Bains or IBMs, according to Nigel Slater.

“The strategy firms are really strategy and operations now. They have moved more and more into operations, whereas the Big Four started [consulting] in the back office and is moving into strategy.”

Nor is it to do with growing that income stream per se, he says.

“It’s not about income streams, it’s about long-term client relationships,” says Slater. “That’s the currency in professional services.”

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