The Disruption or Demise of Management Consulting?




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The Disruption or Demise of Management Consulting?


 

My career was shaped by the collapse of ENRON in 2001.  For those that do not remember ENRON was the largest bankruptcy ever losing $74b with the primary cause being a massive fraudulent accounting scheme that was not reported by the auditors.  With the collapse of ENRON came the downfall of Arthur Andersen LLP, after admitting that its employees had destroyed company documents.  Then the regulators and others got involved and set guidelines on how much advisory work the audit partnership could do for a company that they performed the financial audit.  This created significant strategic challenges to the “Big 5” (PwC, Ernest & Young, KPMG, Arthur Andersen and Deloitte) regarding the conflicts between audit and consultancy services.  And in 2002 Deloitte & Touche became the last of the “Big 5” to announce they were going to break consultancy from audit.  In less than 12 months the ENRON scandal had caused all of the Big 5 to rethink their strategy of management consultancy.

 

 

I was a partner in PwC Consulting, and we announced in January 2002 that we would spin off the consulting arm.  We were going to IPO, but there was the market crash of 2002 and making it high risk to do an IPO.  In October 2002 IBM announced they were buying the 30,000 PwC partners and staff for $3.5b.  Consulting no longer was part of PwC.

 

 

OK, so what happened?  Each of the Big 5 split off their consulting business and are now the Big 4 (Accenture is a listed company and does not do audits, and Arthur Anderson no longer exists)  Now, more than 15 years later, all of the Big 4 has rebuilt their consulting businesses. For example, PwC in 2016/17 had revenues of $37.7b of which only $17b (circa 45%) were from the audit.  And not to pick on PwC, a second example is EY which had global revenues of $31.1b of which $12b (circa 38%) were from audit.  The Big 4 depends on the non-audit portions of their business for growth, both organic and inorganic.  And the acquisitions are mostly in the non-audit parts of the business such as the acquisition of Booz & Co by PwC and the Towers Watson acquisition by KPMG to name a few.

 

 

And like everything in life, there are cycles, and I am sensing another significant transformation in management consultancy due to both new regulations but also new technologies and other business disrupters.  First, let’s look at the potential for new regulations.  In a recent Economist article, they discussed the reaction to the “Big 4” due to the collapse of Carillion, a British contracting firm.  A report on the failure, overseen by British MPs, released in May, savaged everyone from the firm’s executives to its regulators. But the MPs reserved special bile for the Big Four accounting firms—not just KPMG, which audited Carillion’s accounts for 19 years, but also its peers, Deloitte, EY and PwC, each of which extracted fees from the company, before and after its fall. The MPs have called for a review of the audit market and asked it to say whether the Big Four’s British arms should be broken up. The row is local, but concerns about the industry are global.

 

 

And it is not just the collapse of Carillion, a series of accounting scandals have occurred and there is a call for the Big 4 (at least in the UK) to spin off their audit practices.  The EU is investigating the audit industry and how to help ensure that fraud and the subsequent costs of collapse are reduced.  In addition to removing perceived conflicts of interest, the European legislation would, among other things, require auditing firms to work with a client for a maximum of six years, after which time they would only be able to work for the same client after a four-year “cooling off” period.  Most crucially, auditing firms would be unable to provide non-audit services to clients whom they were auditing.  (from Big4 Blogger).  The last point is deja vu with what happened in 2002. 

 

 

And it is not just Europe.  KPMG has been fined over $6m for accounting failures with respect to reporting the value of an oil and gas company, PwC for failure to notice a $2b fraud by a bank and Deloitte & Touche agreed to pay $149.5m to settle claims arising from its audits of failed mortgage lender Taylor, Bean & Whitaker.  With the size of failures, the cost to taxpayers and the fines involved it does not take too much imagination to see that governments and regulators may step in again to provide a strategic “push” to the Big 4.

 

 

The second force that can disrupt the management consulting industry is technology and business change.  CB Insights published a very insightful article on the factors that can disrupt the industry.  They broke down management consulting into four areas and for each what could cause major disruption. 

 

 

The four functions CB Insight divided management consultancy into are: -

 

 


  •     
  • Information

  •     
  • Expertise

  •     
  • Insight

  •     
  • Execution


  •  

 

 

Different forces could disrupt each of these functions. 

 

 

First Information, being challenged by self-serve analytics from a variety of start-ups that are producing information sliced and diced for a company’s use.  No longer do you need a management consultant to find you the information you need to make a business decision. 

 

 

Second Expertise, you can now find expertise on YouTube videos, through MOOC (massive online learning course) or “pay as you go” knowledge on a wide variety of topics. 

 

 

Next Insight, small boutique groups are being engaged to provide much-focused insight that companies internal teams can use to help facilitate a recommendation, especially with it comes to targeted acquisitions. 

 

 

And finally Execution, with the army of gig works and other experts who no longer want to work for McKinsey or PwC and hire out to help companies execute their chosen strategy.

 

 

Whether it is regulators, governments, technology or a team of gig workers, it feels that we are on the cusp of transformation for management consultancy.  And who is going to consult the consultants?

 

 

Article by Mary Sue Rogers

 

 

References

 

 

ENRON Time Line - CNN

 

 

ENRON impact on the Big 5

 

 

IBM announces the acquisition of PwC Consulting

 

 

Big 4 Figures


 

 

Posted on : 2018/09/06





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