The witch hunt is on in corporate America. With the collapse of Enron and the apparent complicity of its accountant/consultancy firm Arthur Andersen, allegations of dodgy practices and conflicts of interest have sparked a crack-down on auditing and consultancy firms alike. Fearing a stock-market backlash, major and minor corporations alike are rushing to appear as different from Enron as possible, desperately trying to look squeaky clean to their stockholders. And many have started re-evaluating their outsourcing and consulting strategies - not just their accounting.
Arthur Andersen has nearly been destroyed by the scandal. Besides being indicted for allegedly obstructing justice by destroying documents, it has been losing many of its clients, which anticipate that association with Andersen will have a detrimental effect on stock prices. Three of Andersen's top 10 clients have left, and more defections are possible. The firm's international branches have hastily been merging with other companies (in Australia, with Ernst & Young), while the US branch negotiates with the other "big five" consulting firms. Soon, the big five will almost certainly become the big four.
Conflicts of interest
Arthur Andersen (with Andersen Consulting) may not be the only member of the big five to suffer in the wake of the Enron disaster, however. As Enron's auditor and consultant, Andersen's apparent conflict of interest (which only caused ructions after the energy company fell in a screaming heap) has led to pressure on the other big accounting firms - and their clients - to separate auditing and consulting services over the same concerns.
The US Securities and Exchange Commission, in particular, has been making noises about the cosy relationship between supposedly independent accounting firms and their clients.
It has not yet placed a formal ban on combined consulting/auditing, but there is a rumbling that the US congress might yet do so.
As a result, all five have spun off their consulting divisions, the most recent announcements coming from Andersen Consulting, Deloitte Touche Tohmatsu and PricewaterhouseCoopers. Deloitte executives have made it clear, however, that they did so reluctantly, to appease corporations that wanted to see a split between the accounting and consulting divisions - even if only cosmetically. No doubt the public decisions of companies such as Unilever and Disney to cease using the same company for auditing and consulting hastened the decisions.
PwC Consulting, the spin-off of PricewaterhouseCoopers, meanwhile, is looking to change its name later this year to further dissociate itself from its parent company. Accenture, in splitting from Andersen Consulting, renamed itself last year and goes to great pains to dissociate itself from its former owner. In fact, the Accenture Web site does not even mention Arthur Andersen once - even in its history' section.
According to consultant Andy Zaple, the face of the consulting and outsourcing business has been shifting. He points to a growing cynicism among business leaders about the practices of the big five. The cultural change was well in the works before the Enron disaster, says Zaple, with the fiasco merely highlighting it. "The attention paid to the Enron collapse was symptomatic of the fact that the fat five have long been under suspicion," he says.
Zaple is also looking forward to what he describes as a "level playing field" between the big five and independent operators. "There are a number of the fat five that get a significant proportion of their revenue from the auditing/consulting crossover," he says. "A combination of that and the current cynical view of the big five is changing the market."
The big five aren't alone, however. Heat seems to be falling on anybody with a conflict of interest.
In March, Compuware took it upon itself to sue IBM Global Services, claiming that IBM provided poor service to its clients because, among other things, it tended to push the company line to the exclusion of potentially superior solutions. That is, according to Compuware, IBM GS consultants generally recommended IBM hardware and software to their customers.
The court case could not have come at a worse time for IBM. With the furore over Arthur Andersen, any potential conflict of interest is being scrutinised. IBM, while not the only provider of both consulting services and products - consider Compaq, Lucent and Nortel, to name a few - has been caught in the crosshairs. IBM, for its part, claims it has long since moved away from the days of product tie-in, and that any decisions to recommend IBM's own products are made in good faith.
According to Brendon Riley, managing director and CEO of IBM Global Services Australia and New Zealand, the exposure to the rest of IBM's business gives the company an edge in terms of knowledge and product familiarity. "The reality today is that all of the major consulting firms resell hardware and software," he said in a statement. "IBM's services business manages all types of technology and our consultants get great leverage from this experience in knowing which technologies are real and capable of producing the results our customers need."
Of course, IBM is not the only business suffering from a perception of conflict of interest. The world of consulting comprises a dizzying array of partnerships and arrangements that make a fully independent operator hard to find. Gartner's Rolf Jester perhaps sums it up best: "Nobody is truly independent."
With expected fallout from the big five in particular, other outsourcing companies are eagerly anticipating the opportunity to steal a piece of the action.
EDS, sniffing a major shake-up of the market, has quickly repositioned itself to take advantage of any fallout from the big five. Earlier this year, the company re-sorted many of its divisions, including merging its Business Process Management and Information Solutions departments. The Business Process Management division has also been beefed up, with EDS moving more resources into that area - not surprising since it is the fastest growing market segment and a key money-maker for the big five.
According to EDS's Brian Finn, the changes are a deliberate strategy following the consulting fallout. "It's definitely a move to position with respect to that market. We're aggressively going after that business," he says. "I think the changes in the US have created opportunities to compete against [the big five]. Our independent position gives us a real competitive advantage right now."
Finn says they expect the changes in the market to flow down to Australia in the longer term. "It's too early to say what flow-on effect it might have down here, although we expect the changes to flow from a macro scale in the US to a micro scale, if you like, in Australia."
Australia's Kaz Group is also looking forward to a windfall. "We're in for quite a shake-up and consultants like Kaz can only benefit from this," says Kevin Ryder, Kaz Group strategic marketing manager. In particular, Ryder expects gains in IT outsourcing and consulting, although given the highly specialised nature of Kaz's BPO operations, he doesn't expect big gains there. While Ryder cannot point to specific initiatives in Kaz to take advantage of the situation, "with these changes, we have to evaluate these opportunities", he says.
Gartner Analyst Rolf Jester believes that these companies may be getting ahead of themselves, however, and does not expect huge changes to the makeup of the industry in the short term. "I don't think there's much fallout, certainly not in the immediate sense. All of this has not had a big impact on how the market shares their clientele yet," he says. "There may be a little nervousness among clients and consultants, but that can easily be overcome. Certainly in this country it's not a serious problem."
The impact of the Enron/Andersen affair, according to Jester, will be, if anything, to accelerate what was already happening in the industry. "There are probably too many players out there. Market consolidation will continue," he says. "The big IT service consumers are becoming more conservative. They want to deal with large, well-known entities. If not outright mergers, we're going to see serious alliances."
For the smaller players, the ramifications are similar - not extra business, says Jester, but mergers and alliances. "Smaller players are becoming part of what we call a value chain. They won't necessarily sell directly to clients, but to other service providers who will act as a kind of aggregator."
In response to concerns that Arthur Andersen has given consulting a bad name and that more companies may once again close up shop and seek to do everything in-house, Jester says he still expects outsourcing to continue to grow. Indeed, after a flat 2001, he says the business will start to grow again in 2002, although not in the high teens percentages as was the case several years ago.
"I still think that the trend is towards using external services. We have seen some of the big contracts go back in-house, but that has always gone on. It's just now, with recent events, that we have been focusing on them," he says.
It's a truism for the entire consulting industry, where an industry shake-up had been building long before the Enron scandal. Enron, says Jester, has merely focused our attention.