The last few months has witnessed considerable restructuring of niche consultancies in the financial reporting systems and performance management arenas as specialist providers are snapped up by the accounting Big 4. Paragon Consulting has folded into PwC and more recently KPMG acquired Analitica to boosts its Business Intelligence offering. So what is driving this consolidation in the market and is it a good thing for corporates seeking to improve their core financial processes? Gary Simon, FSN’s managing editor takes a look.
Part of the drive to hire more consulting resources is that three of the Big 4, namely; KPMG, Ernst & Young and PwC have been playing ‘catch up’ with Deloitte having earlier jettisoned their consultancies when the previous government, noting the high value of consultancy fees paid to the consulting arms of premier league auditors, suggested that this jeopardized audit independence. Deloitte alone argued that there was no evidence of consulting services threatening its audit independence and steadfastly held onto its successful consulting practice and never looked back.
A few years ago KPMG, Ernst and PwC re-entered the consulting market, rapidly sweeping up all of the available resource in order to build critical mass once again. It is somewhat ironic that concerns about audit independence have once again re-surfaced but this time around the consultancies have not been deflected from their growth ambitions.
However the recent acquisition of niche players in performance management, business intelligence and financial reporting is somewhat different from the wholesale purchase of operational consultants from a wide range of generic disciplines such as cost reduction, strategy, and financial transformation. Mobility of resources between one broad discipline and another is commonplace in the large consultancies. None of them want to see unproductive consultants on the bench and so they are often deployed in other areas to help smooth out peaks and troughs in demand between functional areas, leaving it to chance that they will pick up the necessary skills on the job.
But financial reporting is different, requiring a unique blend of accounting, systems, process and change management skills. Very often these core skills in performance management are supplemented with deep product knowledge that can prove vital during the design and implementation phases of a project. These highly specific skills mean that ‘outsiders’ with only a broad set of consulting skills to offer are unlikely to be of value. Conversely, skilled accountants with a good knowledge of operational consulting can be deployed to a wide range of projects and are likely to be snapped whenever other projects are under-resourced.
So what does this mean for the recent spate of acquisitions? It all depends on whether the consulting practices are able to ring-fence their recent hires from other resource hungry parts of the practice. It is a difficult balancing act, especially as financial reporting projects tend to be rather small beer compared to the multi-million dollar consulting projects that normally hog the headlines. The position is not helped by the characteristic ‘feast or famine’ nature of consulting work. For example, it is difficult to justify doing nothing with under-utilised but highly specialised resources on the off-chance that a suitable assignment might come in when there are highly valuable but under-resourced projects elsewhere in the organisation.
The result is that specialists get deployed to other work – perhaps for months at a time and this can have hugely undesirable consequences. With limited exposure to specialist assignments, skills begin to decay and with the passage of time product knowledge also becomes outdated. Furthermore the Big firm environment is something of a mixed blessing. Certain individuals will thrive in the corporate culture whereas others will rue the day that they left the cosy confines of the small practice. The former may also be tempted by the broader range of work on offer and choose to join another area of the practice.
What started as the acquisition of a highly skilled niche consultancy can quickly become watered down. So where does all of this leave potential users of consulting services?
Well according to Noel Gorvett, of AMOSCA, an EPM consultancy providing Oracle/Hyperion financial and management reporting solutions the position is not so clear cut. He points to a world of increasing collaboration between niche players and the Big 4. rather than a stark choice between the two offerings.
“Compliance constraints can make this a difficult area for the Big 4 to play in. For example, firms such as PwC have to be careful not to provide strategy and implementation advice in financial reporting to an audit client. So partnering between organisations is becoming increasingly popular,” he says.
“It is not uncommon to see one of the Big four carry out the process and system design work, but the implementation is often ceded to specialists like AMOSCA. Added to which the large consultancies often do not have the deep technical skills in the product and supporting technology.”
According to Gorvett the client is the winner in these arrangements. “We get a well written statement of requirements and the client gets affordable implementation services. Overall the client benefits from one organisation taking responsibility”.
But Gorvett certainly sees dilution of skills in the consultancies as a potential risk. “As soon as personnel are under-utilised they will get dragged into other assignments,” he adds.
Theresa Clark of Trintech, a specialist in Financial Close Management suggested to FSN that the willingness of the Big 4 to do acquisitions again on both sides of the Atlantic is a healthy sign. “I think it shows that the market is doing something again and that activity is to be welcomed. But after Enron it indicates that the consultancies are returning to wanting to do more implementations again.”
“The Big consultancies will not suit all practitioners which is one reason why we will see more niche consultancies in the future. Also there seems to be a customer preference to select specific product skills and this will also encourage the survival of more specialist suppliers,” she added.
Herman Heller, CEO of Runbook Company International, a software vendor specialising in automating financial processes makes a different point. Heller told FSN he believes that well chosen technology is capable of supplanting consultants – at least in some areas of financial reporting. “If you look back over the last 40 years a number of highly desirable skills that were relevant at the time are no longer important. New technology makes certain knowledge and skills less valuable.”
Runbook itself is a good example of the trend. The company was founded as a consulting firm but some of that ‘know-how’ has now been enshrined in software solutions that automate and improve the financial close process. Customers benefit from processes that are easier to implement and manage as well as a reduction in consulting resource,” he added.
So while the Big 4 and niche consultancies battle it out for the best resources it seems that customers are the main beneficiaries. Market forces and compliance seem to be forcing consultancies to collaborate more whilst the impact of automation is focussing minds on the areas where consultants can really add value. Customers end up getting better value for money.
[If you are interested in the financial close process then do not miss FSN’s conference, iXBRL and Financial Close Management – a one day conference in London on November 4th.]
