Industry Outlook 2001 -- Services
In the 1980s, eight national accounting firms dominated the professional services industry. Nearly two decades later, five remain--and in the interim, they have morphed into one-stop shops offering a variety of audit services, consulting, information-technology advice, and even back-office outsourcing. In 2001, this evolution will come full circle. Over the next 12 months, as many as three of the firms are likely to sell off their consulting businesses--one already has--leaving just one of the five still offering multidisciplinary advice.
The spun-off consulting businesses--along with better-known names such as Bain & Co., Boston Consulting Group, and McKinsey--face bright prospects. Blue-chip companies are hungry for guidance, and the only competition is a flock of scraggly Internet startups that seemed fierce last spring, but now now look like cooked geese. As for the Big Five auditors, they'll have the freedom to pursue accounting clients and to branch into other businesses.
The shake-up is happening now because new Securities & Exchange Commission rules make it more difficult for accounting firms to advise their audit clients. At this point, says Ernst & Young CEO Philip A. Laskawy, "there's no business rationale for consulting to be part of a Big Five firm."
Even more important, selling off a consulting business is one of the few ways that a Big Five partnership can raise major capital quickly. In 2000, Ernst & Young garnered $11 billion for the sale of its consulting arm to Cap Gemini. Hewlett-Packard Co. (HWP), meanwhile, bid $18 billion in September for the consulting unit of PricewaterhouseCoopers (PWC). Although the deal fell apart when HP's share price collapsed, PWC is likely to unload the unit this year. Another of the Big Five, KPMG is looking to sell off its consultancy and complete a public offering it had planned for 2000. Accenture, the consulting arm of Arthur Andersen that last year won its freedom, is also considering an IPO. The lone Big Five holdout is Deloitte & Touche, which plans to run its consulting business as a separate unit.
Whoever ends up controlling these advisory businesses should find 2001 to be a good year. Dean McMann, CEO of industry tracker Ransford, expects revenue growth of 18% for the professional-services sector, bringing 2001 revenues to about $138 billion. The growth comes in part at the expense of a shrinking corps of specialist Internet strategy firms. Five such firms--iXL Enterprises (IIXL), Lante (LNTE), marchFirst (MRCH), Scient (SCNT), and Xpedior(XPDR)--have recently cut 2,800 jobs. When the dust settles, McMann predicts, just one in four will be left. "The boutiques are going under," says analyst Tom Rodenhauser of Consulting Information Services.
For the tax and audit services left behind in the spin-offs, the challenge is to recoup lost consulting revenues. In recent years, each of the Big Five has gotten into dozens of new services, many of them now poised to explode. At Ernst & Young, information security services have grown at 51% a year since 1996. KPMG has discovered unexpected opportunities in auditing corporations' environmental and social performance, such as working conditions at overseas factories. Arthur Andersen expects its business-process outsourcing service to grow to $1 billion in five years. PWC CEO James J. Schiro says the industry's best growth will be in the assurance business, especially valuing intangibles such as brands, proprietary data, and ideas.LEGAL HELP? Further out, the Big Five auditors may expand into yet another area previously off limits. James C. Emerson, president of Emerson Cos., a market research firm, predicts that the auditors may add legal advice to their offerings, despite regulatory roadblocks. If that takes off, the trend will shake up the sleepy legal trade, which expects strong growth this year.
As the Big Five compete for business on new fronts, they'll also compete for an old resource: talent. Says Terrance R. Ozan, Cap Gemini's CEO for the Americas, "There is a shortage, and it doesn't appear it will go away." Adds Deloitte & Touche CEO James E. Copeland: "If you can't attract the best talent, you cannot grow." But at least for 2001, growth seems a sure bet.By Louis Lavelle in New YorkReturn to top