What are consultants for? - Financial Times - FT.com

4 ★ FINANCIALTIMESMONDAYNOVEMBER 19 2007
Business of Consulting
Audit firms once again making ‘consulting hay’
ACCOUNTING
Conflicts of interest
have mostly been
settled, writes
Jennifer Hughes
Its official: The Big Four are
back. Figures published this
month showed that strong fee
growth at the consulting arms of
the top tier accounting firms
have pushed them back into the
top 10 of UK consultancy.
Three of the four – KPMG, PwC
and Ernst & Young – sold their
consultancy businesses in the
wake of the Enron scandal and
the regulatory scrutiny that then
turned upon perceived conflicts
of interest between the firms’
auditing core and their consulting
interests. Only Deloitte held
on to its operations.
Now, the non-compete agreements
related to the business
sales have all passed and this
year, according to Accountancy
Age, all four are back in the top
10 of UK consulting fee earners.
The returnees posted exceptional
growth: 25 per cent, 14 per cent
and 11 per cent respectively at
PwC, E&Y and KPMG, and 10 per
cent for Deloitte. The growth picture
is little different worldwide;
this has been a bumper year for
their consulting arms.
But they are keen to stress
how this time, it is different.
For one thing, no longer are
they the systems implementation
behemoths of the past – excepting
Deloitte, they tend to dismiss
that as low-margin “commodity”
work. Instead, they emphasise
their ability to bring together a
number of services from tax to
accounting and actuarial skills.
“Now we’re working with our
clients to figure out what is the
best business solution for them,”
says Aidan Brennan, head of the
advisory business at KPMG
Europe. “The market is saying
we want advice independent of
the solution – there’s been a real
demand for us to provide that.”
Streamlining
through trust
CASESTUDY
RIJKSWATERSTAAT
Rod Newing hears
how proven results
and a clear goal are
essential to success
“The politicians were saying
we were too large and too
fat,” says Hugo Kramer,
director of the new
corporate service centre of
Rijkswaterstaat, the
government body
responsible for managing
the infrastructure of roads
and waterways in the
Netherlands. “Overhead
accounted for 25 per cent of
our workforce and costs
and it had to be reduced to
15 per cent.”
Under pressure to put
more of its resources into
its maintenance programme
of the heavily-used road and
dyke infrastructure,
Rijkswaterstaat (RWS)
centralised 85 different
support functions in 17
offices in only 18 months,
reducing overheads by 40
per cent and achieving high
user satisfaction. This was
only possible by working
with a consultancy that had
already carried out a
similar project in London.
When it was founded
more than 200 years ago,
RWS had a branch in each
province of the Netherlands.
As a result, it had 17
separate offices, all
providing the same support
functions. To escape the
inefficiency of the old
structure, the organisation
decided to centralise these
overhead services. Based in
Utrecht, it would provide
support for human
resources, finance,
communications, legal and
facility management
functions.
“We needed to change
fast, but we didn’t have the
experience or knowledge to
plan and execute it
quickly,” says Mr Kramer.
“We needed consultancy
experience from a proven
project, so we looked for
successful government
organisations that had
implemented a similar
solution.”
London’s Westminster
City Council had
implemented a
multifunctional shared
service centre, with support
from PA Consulting Group.
RWS went through an
invitation to tender process
and PA Consulting Group
was appointed. “The
appointment was a matter
of trust, not cost,” says Mr
Kramer. “We wanted a
proven solution and there
are not many
multifunctional shared
service centres.”
The appointment was
made in March 2004 with a
plan for the shared service
centre to become fully
operational in only 18
months. This involved
defining new processes,
adapting systems, testing
them and training 800
people who then had to be
transferred.
The new service model
was designed to encourage
users first to seek an
answer to their query
themselves on the corporate
intranet. If this was
unsuccessful, they would
contact the call centre.
Only if it could not be
resolved at this stage would
they be transferred to an
expert. PA provided the
knowledge, but supplied an
average of only five
consultants during the
project. RWS wanted to
maximise the involvement
of its own staff and harness
their knowledge of its
organisation in applying
PA’s advice to its own
system of working.
“At the beginning we
came up with the problems
and PA came up with the
best proven solutions,” says
Mr Kramer. “Because of our
lack of knowledge we were
very dependent on them
and it looked at times as if
they were managing us.
However, they had the
expertise to train our people
and made it easy for us to
learn quickly and
efficiently. They soon
transferred their skills and
eventually we started to
take the lead.”
The result was a 40 per
cent headcount reduction,
saving 750 full-time
equivalents at a cost saving
of €45m per year. The call
centre dealt with 50,000
requests for support during
its first year of operation. It
resolved 85 per cent of all
questions and received an
average online customer
satisfaction score of 70 per
cent. The specialists no
longer waste time on easy
questions and can focus on
more complex work.
The contract with PA was
on the basis of time spent,
not a fixed price. It came to
less than a twelfth of the
first year’s saving.
“We have a lot of
experience of fixed price
contracts, and the cost is
always higher than we
estimated, because we
cannot specify the total
work in advance,” says Mr
Kramer. “There are always
changes that give rise to
unforeseen work that has to
be negotiated at an
additional price. It is much
easier to work on a trust
basis, where you manage
the consultant’s work and
balance their cost against
the benefits. A fixed price is
easy if you know exactly
what you want from the
consultant, but if you
cannot be certain you end
up paying much too much.”
Clear deliverables were
defined for each stage of
the project and reviewed in
evaluation meetings, but
the relationship was
characterised by trust and
continuous informal
communication. “When
there is trust you work in
less formal ways,” says Mr
Kramer. “It is much more
expensive if you mainly
communicate formally,
because you have to
prepare documents and sit
in meetings. Trust is a
better way to manage such
processes than formal
reviews of the contract.”
RWS had to change
radically and fast. PA
provided the initial skills,
but RWS did most of the
work itself. Its people
learned very fast and in a
short time were much more
professional in their skills.
“You have to have a clear
goal and find a partner
with proven results,” Mr
Kramer concludes. “It isn’t
the number of consultants,
but the quality of their
input. They must be quick
and effective at teaching
your own people, as that is
the best way to get results.”
The income data would back
that up. Accountancy Age has
PwC’s UK consultancy business
bringing in fees of £289m for
sixth position in the top 10 and
globally, the firm’s advisory business
income rose 15 per cent in
the year to June 30. Deloitte,
with its IT work, ranked third in
the top 10 with £403m. KPMG
brought in £243m for eighth, and
E&Y £198m at number 10.
“Clients are asking for someone
to sit on their side of the
table and get the best advice and
put the right people in front of
them,” says Steve Varley, head of
the advisory services at E&Y.
In some cases, they dispute the
very notion of a return.
“What we ended up selling off
was the big-ticket IT implementation
and what we held on to was
the group that did other aspects
of consulting, so we’ve always
been in this market anyway,”
says Jeff Thompson, head of performance
improvement consulting
at PwC. “Then, there were
500 of us and 30 partners, now
we’ve grown to 1,500 and 70 partners.”
Mr Thompson uses a building
analogy to explain the consulting
role played by the Big Four: “If
you’re going to build a house,
you commission an architect,
he’ll help you design it and
orchestrate the plumbers and
‘The market is saying
we want advice
independent of the
solution – there’s
been a real demand
for us to provide that’
bricklayers, but he doesn’t lay
the bricks,” he explains. “Clients
today want an architect. They
may have commissioned work
from a high-level strategy house,
but they’re not sure what to do
with it and that’s where we come
in.”
This is likely to incense other
firms who have derided the
return of the Big Four, focusing
on the inherent potential conflict
of interest between audit and
non-audit work.
“It’s proven to be a conflict to
have those two under the same
roof,” says Jonathan Burnett,
managing director of European
operations at Protiviti and a
former Big Four partner. “Fundamentally
an auditing and
accounting firm works for a company’s
shareholders. Advising
management is therefore an
inherent conflict.”
Richard Pile, managing director
at Parson Consulting notes
how non-audit fees for audit clients,
including advisory work,
often outstrip the actual audit
income. The firms counter that
they follow guidelines that mean
they cannot provide consulting
or advisory work for anything
they would themselves audit.
“Now, safely protected behind
newly-created limited liability
partnership structures, and with
more pricing power than ever in
a smaller oligopoly [since the collapse
of Arthur Andersen, the
Big Fifth], audit firms are once
again making consulting hay
from their audit relationships,”
says Mr Pile.
Mr Burnett believes that the
firms cannot offer the best advice
and talent either, since because
they are led by auditors the bulk
of investment and interest will
naturally flow in that direction.
“So as a consultant, you’re not
necessarily working with the
best tools,” he says.
They may not be working with
the best consultants either,
according to a new report from
Smart, the US consulting and
services group, on the growth
potential of the mid-sized niche
consultancies. It believes graduates
are becoming quickly disillusioned
with big-company life.
“They are now migrating to
the smaller firms where they can
get the opportunity to use their
full suite of skills and potential.
‘A’ team talent is fast becoming a
What are consultants for?
MISSIONSTATEMENT
Rod Newing asks
how organisations
should use them
Are consultancies
change-makers or
body shops?
C o n s u l t a n t s
believe their primary mission
is to bring about permanent
change in their clients’
organisations that they
could not achieve for themselves.
However, research suggests
clients see them more
as a “body shop” to fill skills
shortages.
A survey by the Management
Consultancies Association
(MCA) found that the
single most important reason
why organisations use
consultants (70 per cent) is
access to specific skills not
available internally. A similar
report from LogicaCMG
came up with the same figure,
with facilitating a significant
change programme
(65 per cent) trailing behind.
“Our research shows that
people want to access specialist
skills they need for a
short period of time,” says
Fiona Czerniawska, director
of the MCA’s think tank,
“and the management consulting
firms have those
skills. There are ‘economies
of knowledge’ because the
client gets the benefit of
using a consultant who has
worked for different businesses
in different places
within a particular field.
They can then use the skills
of these ‘warm bodies’ to
change their organisation.”
Lynda Purser, managing
director of the Institute of
Business Consulting, a professional
body, says an
organisation may be at a
point of strategic change it
cannot bring about on its
own because it lacks internal
knowledge and skills.
What they are doing might
not necessarily be leadingedge
in the outside world,
but is to them. “They may
not have invested in the necessary
skills and knowledge
in the past,” she says, “and
this is where consultants
can help.”
Hiring a consultancy just
for their skills is fine for a
short term where the organisation
will have no further
use of the skills afterwards.
However, longer term needs
are met at lower cost by hiring
an individual, either
onto the payroll or on a
finite contract.
Ms Purser points out that
the survey figures are likely
to include the public sector,
which has divested itself of a
huge number of people since
the Gershon efficiency
review. “As they reduced the
headcount, they found themselves
filling skills gaps with
consultants for quite considerable
times,” she says. “It is
entirely wrong and they
have begun to address the
situation.”
The same situation exists
in the private sector. Futurologist
and business angel
Peter Cochrane says that clients
are looking for just
skills because most are now
operating at very high efficiencies.
With people working
50 or 60 hours a week
instead of 40, they are often
working 110 per cent of their
available time.
“There are no lightly
loaded people and no slack,”
he says. “Most people no
longer have time to think or
keep-up with the latest
trends and changes. In con-
trast, consultants can devote
as much as 30 or 40 per cent
of their time to keeping up
to speed.” Richard Rawlinson,
a partner at Booz Allen
Hamilton says that it is
often impossible for an
organisation to maintain the
same range of specialist
skills or to provide the broad
comparative experience that
consultants develop.
David Thomlinson, managing
director at Accenture
warns of the danger that
weak management at clients
can cause them to become
used to having consultants
around. “In these convenient
relationships the consultant
become an expensive cost
and part of the scenery,” he
says. “If there are elements
of the consulting profession
that do ‘body shopping,’ they
bring the consulting name
somewhat into disrepute.
Consultancy is not about
providing people with skills,
but bringing the knowhow,
drive and capability to
deliver transformation.”
He says the way to avoid
incorrect use of consultants
is to create a continuing tension
in which the client continually
questions the value
of the work and the consultant
constantly justifies the
value they are bringing.
Alan Russell, head of con-
sulting at LogicaCMG, is surprised
by the number of clients
that do not formally,
and rigorously, assess the
value and business benefits
achieved.
An individual contractor
may be a good solution
where just one person is
needed for a finite period to
supplement internal
resources. “In this way, they
can meet demand and
reduce costs more easily
when the business requirements
change,” says Ian
Lever, director at NCC
Group. “Contractors and
consultants are not one and
the same, and consultants
should be used only for specialist
projects that have a
significant impact on the
transformation of the organisation.”
Mr Russell says that the
knowledge base and “horsepower”
of a consultancy is
more appropriate for largescale
or global projects. They
have the ability to mobilise
resources quickly and efficiently
wherever they are
needed and can work with a
consistent approach. This is
especially valid in Sarbanes
Oxley and other regulatory
requirement work.
“Hiring consultants to fill
missing skills is a misunderstanding
of the role of con-
sultants,” says Aidan Bocci,
chief executive of Commercial
Advantage, “and is the
best way to prevent them
from adding value. Genuine
value is added only when
consultants unlock the existing
capabilities within an
organisation.”
He argues that consultancy
is about working with
people to change their mindset
and working patterns.
Clients should not ask the
consultants for answers, but
to help them find answers
for themselves.
Gerald Dunn, a director at
Qedis, says that undoubtedly
there is the time and the
place for bringing in the
expert who has done a task
many times before. “However,
if you are using consultants,”
he says, “you are
usually looking for smart,
pragmatic, organised problem
solvers who can adapt to
what they find and deliver
value.”
A critical role of consultants
is to use their arm’s
length relationship to bring
objectivity to the client’s
problems. Even if the client
has the skills in-house, it
can be blocked by resistance
to change, turf wars, outdated
bonus schemes, obsolete
technology and many
other causes.
“Rarely does the chief
executive have easy access
to all the information they
need,” says Claire Arnold,
managing partner at
Maxxim. “One of our jobs is
to get that information
‘come hell or high water’
and to help them understand
why people might not want
to give it up or ‘spin’ it. Consultants
can help facilitate
and even force a decision,
because inertia is often the
cause of the problem.”
David Ketchin, lead practice
director at Parson Consulting,
points out that skills
alone are not enough.
Whereas technical skills are
required to challenge the
status quo, client companies
often lack change management
expertise. It is the
blend of the two that delivers
true value to an organisation.
“One of the most
important and enduring
rationales of a consultancy
is to bring external insights
characteristic of these niche
firms,” the report says, noting
the irony in the fact that these
smaller firms were begun by ex-
Arthur Andersen staff after that
firm’s famous implosion.
Deloitte is also dismissive of its
rivals’ strategy regarding information
technology work.
“We don’t see them very much
in IT, apart from IT assurance
and some high-level advisory
work,” says John Reeve, a partner
in the consulting practice at
Deloitte. “They haven’t rebuilt
capacity in development and
implementation [and] in our
view, this severely reduces their
credibility as IT consultants and
is reminiscent of the scope of
services of audit firms in the
mid-80s.”
Different strategies clearly produce
very different results with
growth rates in the UK top 10
consultants ranging from 2 per
cent (Accenture) to 25 per cent
(PwC). But with a healthy average
of 11 per cent, it would seem
there is currently room for all.
Asssesingtheblueprints:accordingtotheMCA,companiespredominantlyuseconsultantstoplugskillsgaps Alamy
‘Consultants can be
brought in, set
clear deliverables
and aggressive
timelines’
and experience in different
industries from around the
world,” says Mr Thomlinson.
“These insights are both
with regard to the ‘what’
and the ‘how’ of change.”
Another reason to use consultants
is because they can
speed up the process of
change. “Often the requirement
is for a burst of effort
to get something done by
people that do not have
other obligations or a day
job to attend to,” says Mr
Dunn. “Consultants can be
brought in, set clear deliverables
and aggressive timelines
and provide the catalyst
or momentum to get
things done.”
Another reason for a
broader use of consultants is
that projects take place in a
constantly changing business
environment, so the
skills needed may change as
a project proceeds. As Mr
Russell points out, very few
companies stand still for the
duration of even a six-month
project.
“Consultants often look
expensive,” concludes Mr
Cochrane, “but their flexibility,
dynamism, knowledge
and creativity come from
their low utilisation. Creativity,
problem-solving and
solution-engineering take
time!”