Members that are interested in consulting will know that PWC snapped up BearingPoint in a bankruptcy. This is a
growing trend in service businesses. There are always risks in such deals because the only thing a services business really has is intellectual capital. As we know - that walks and talks. But in PWC's case I'm reckoning they've bought into something of a poison chalice. This is the firm's third acquisition this year and they're bullish:
"We aim to be the No. 1 consulting firm on the planet," says Joe Duffy,
strategy leader for the firm's U.S. advisory practice. "And we're using
the economic downturn to our advantage."
Fighting talk. But building a world class service company is a bit more than smashing two organizations together. People management is a large component of that yet in the Australian accounting practice, they're maybe not that good at setting priorities?
But there are other reasons to think that PWC might have issues. The number of failures as a result of the US banking crisis has left the Big 4 wounded. All are reducing workforce. The consulting wings are having a particularly tough time although some are adapting rapidly. That places a stress on the market and the Big 4 in particular. Now they get to play a fresh round of musical chairs as they try to avoid conflict of interest issues.
This will not be easy. Neither will the pressure of impending or likely lawsuits on the audit arms. For some time, it has been apparent that the large firms are all experiencing varying degrees of litigation pressure.
The case that matters most right now is Banco Espiritu Santo, being heard in Miami where the respondent is BDO International. They're on the hook for $521 million if BDOI loses although it may turn out to be a pyrrhic victory for all sorts of reasons. Even so, the case is really a test to establish whether the international partners in the large networks can be pursued for damages.
It has to be assumed that PWC India will be on the hook for at least $1 billion re: Satyam, quite easily more given the amount of value lost in the debacle. If that's the case then PWC faces two choices: throw the Indian firm under the proverbial bus, or, as is more likely, they'll need to put a call out to non-Indian partners. But there is more.
Writing in AccountingWEB, Francine McKenna, who is a close friend and colleague was reported to have said:
As previously reported,
the accountancy commentator and former Big Four employee Francine
McKenna has taken a close interest in PwC's consultancy activities on
her Re:The Auditors
website. Along with Ernst & Young and KPMG, PwC pulled out of
consultancy in 2002 following a spate of independence and ethics
scandals culminating in the Enron and WorldCom corporate collapses and
the introduction of the Sarbanes-Oxley Act. PwC sold its consultancy
wing to IBM for $3.5bn and signed a five-year non-compete agreement as
part of the deal.
Quoting from a 2008 report compiled by market
analyst Gartner, McKenna suggested that PwC wanted to get back into
consultancy as early as 2005, and partnered with its former audit
client, the scandal-ridden Indian consultancy Satyam, on several
implementation projects.
At a 2008 PwC "analyst day" meeting, the
firm's US advisory strategy leader Joe Duffy is quoted by Gartner as
saying, "We are full scale in the implementation and integration
business." With the BearingPoint acquisitions, PwC will be able to beef
up this claim with the addition of around 1,500 consultancy
professionals bringing Oracle and SAP expertise in important markets
such as financial services, utilities, and pharmaceuticals.
It's interesting that Duffy should mention Oracle and SAP because as far as I am concerned, that pipeline has pretty much dried up. Financial services is down the drain, utilities are battening down the hatches but pharmaceuticals goes on. Make what you will of that. But then I still attend meetings where the talk is more of 'Where's the 10x on the software then?' than it is of figuring out how to attend to customers' real requirements.The days of large scale multiples on license fees are over.
In my role as SAP Mentor I also know some of the problems with the consulting community. Quality is a nightmare. That goes for all the large consulting firms with some standing out as especially egregious in their failure rates.
Take the confluence of these events and factors and what do you have? By my reckoning it's a timebomb waiting to blow up. On this occasion I can't see any government wishing to come to their aid if - and I stress if - there is a catastrophic failure like we saw with Andersens.
The world is a very different place prior to Enron. It is much more complex. It is also much more 'available.' It is also possible to envisage a situation where in the US, audit suddenly becomes state controlled and operated.
Michael Izza's plea to members has for a long time been a message of innovation and excellence that builds confidence. I have to ask however: if one of the big firms really does get into dire straits then what happens next? At the risk of being accused of scurrilous rumour mongering, I genuinely believe there are issues here, many of which could significantly impact the profession and especially those who derive a significant living from audit and consulting.
Should the smaller firms be encouraged to up their game? Should the acquisition of modern IT skills be a prioritised requisite? What changes might such an event have on the way we are organized and regulated? Life will go on but will the Big ?? be forced to live on a more meagre diet? What about genuinely in-demand skills?
There are so many possibile outcomes and questions but I'm interested to know what members think. Even if that includes 'It'll never happen.'