Consulting Journal: Trends - The legacy of the accounting firms

Trends: The legacy of the accounting firms

by David Blakey

Accounting firms may be withdrawing from management consulting, but they have left some bad habits behind them.

[Monday 28 October 2002]

The big accounting firms are withdrawing from consulting, to some extent. Some have set up separate companies. Andersen set up Accenture; KPMG set up BearingPoint. Others have sold their consulting divisions to other companies. Ernst & Young sold its consulting practice to Cap Gemini and PwC sold its to IBM.

There are still some consulting functions within some of these firms, including their business advisory services units. On the whole, though, their main interests in management and technology consulting have moved out.

There is a habit that was introduced into consulting by the accounting firms, and that habit may now be so embedded in consulting that it may be difficult to remove. This habit is what I call “negative reporting”.

How auditors report

Auditors examine a client's accounts and prepare a report. These reports have two significant features.

The first is that they report only neutral or negative findings. An auditor's report may state:

In our opinion:
proper accounting records have been kept by [the client] ... ; and
the financial statements of [the client] comply with generally accepted accounting practice and give a true and fair view of the financial position as at [date].

The standards have, of course, been prescribed by the accounting industry itself.

An auditor's report will not state that the records or statements exceed the standards. To an auditor, there are only two possible conditions: either the records and statements meet the standards or they do not.

Also, auditors have designed the rules so that they do not have to seek out problems. Auditors can only look at the records and statements that their clients present to them. Auditors do not have an obligation to seek verification that these records and statements are, in fact, true.

How consultants report

Consultants have traditionally reported differently from auditors.

Criteria

First, consultants have used ‘industry best practice’ as their benchmark. The best practice within any industry or sector is what the leading companies are doing well. In order to determine what the best practice actually is, consultants conduct surveys. They find out what the leaders are doing and whether this is successful. Success depends on the return on investment. The leaders will be getting a greater return over time for the money that they have invested. The leaders will also be able to quantify - in dollars or pounds or euro - the return that they get. They will not use nebulous terms like ‘greater customer satisfaction’. They will have a way of translating that greater customer satisfaction to a figure that adds to their bottom line.

Unlike auditors, then, consultants do not define their benchmarks themselves.

The situations that consultants examine are dynamic. In addition, the criteria that we use - such as industry best practice - are also dynamic. Our reports encourage change whenever change will bring our clients a greater return on their investment.

With auditing, the situations remain the same: the same documents, prepared in the same way, are reviewed each year. The criteria remain much the same - although the generally accepted accounting practice may occasionally change slightly. Auditors' report are about the status of the financial reports and reports at a given point in time.

Measurement

Consultants measure their clients' efforts to determine how they fit with best practice: lower; equivalent or higher. This is different from the judgments of auditors, which are either that the records and statements do not meet the standards or that they do - at least - meet them. Auditors are not concerned with whether their subjects exceed the standards nor by how much.

Consultants often concerned with clients whose operations exceed best practice because that situation may mean that the clients are making marginal investments for a lower marginal return.

It has often been a source of amazement to management consultants that some companies encourage their employees to perform at 110% of their customers' expectations. What value does that exact 10% provide? At what cost?

How accountants changed consulting

The accounting firms changed consulting in a number of ways.

Criteria

The consulting practices of accounting firms generally established their criteria for best practice only when the existence of those criteria earned them revenue. These consulting practices would perform a survey of an industry or sector only when they could sell the results of that survey to the companies within that industry. So, new criteria for best practice within, say, the telecommunications industry or the energy sector would only be established if the consultants conducted a survey that they could sell to the telecommunications or energy companies. In some sectors, such as retail or process manufacturing, where there might be no demand for such a survey, the consultants' criteria for best practice became out of date.

Some accounting firms did establish specialist units in particular industries, but, again, this only occurred for those industries that generated sufficient revenue in consulting to make this worthwhile.

Measurement

The fact that auditors reported on failure to meet a criterion or success in meeting it meant that they disregarded excess. We can look at this as percentages. If the measurement gave a result below 100%, then that was a failure to meet the criterion. If the measurement gave a result of 100% or above, then that was a success. To consultants, however, there were three results: below 100% was failure; 100% was success; above 100% was excess.

In reality, there is a margin around 100%. If this margin was 5%, then a measurement below 95% indicated failure, 95% to 105% indicated success, and above 105% indicated excess.

Consultants need to report excess. If the criterion is ‘customer satisfaction’, then a measurement of over 105% can mean that the client is spending money on achieving additional customer satisfaction that will not be reflected in the client's bottom line.

If a customer is likely to make a future sale if their satisfaction is above 95%, then any effort to achieve a result of much over 95% is unnecessary.

Some consulting practices within accounting firms failed to work in this way. They still used the auditor's approach of failure or success rather than failure, success or excess. The example of customer satisfaction is useful here, as many consulting practices advised their clients to ‘exceed customer expectations’ consistently.

How accounting firms approached consulting

In addition to this, there were some other ways in which the accounting firms managed their consulting practices that differed from traditional consulting.

Use of low-level staff

The accounting firms used the same methods of recruitment into their consulting practices as their audit practices. They recruited graduates. If a consultant's cv showed that their experience was short and that it mainly involved following a methodology, then there was a limit to what that consultant could do within a client. It is unlikely that a corporate board would accept advice from a twenty-three year old with no experience on a board, with no management experience of any kind, and with a limited knowledge of their industry.

Retreat to IT

As the higher levels of their clients closed against them, the accounting firms shifted their consulting from strategy to operations. This also caused their retreat towards IT consulting. In some firms, this retreat went further: beyond IT consulting into software development.

In the late 1970s and 1980s several software companies built or acquired their own management consulting practices. In the 1990s, several accounting firms went the other way and shifted from consulting into software. Now, software companies such as Cap Gemini and IBM are buying the rump of the consulting practices of the accounting firms.

Loss of independence

With the shift towards IT, the accounting firms tended to offer services to install or enhance major software packages. This led to some of them specializing in particular software products. Some of them specialized in SAP and others in PeopleSoft. This meant that their consulting advice was no longer truly independent. If they recommended against a product that they sold, would the client have confidence in the product?

So where now?

For the next few years, it looks as if the trend towards software development will continue. It is probably that some other software companies will buy some of the consulting practices that formerly belonged to the accounting firms. Hewlett Packard and Unisys may look for suitable acquisitions.

What they are unlikely to acquire are older, experienced strategic management consultants. These people left the accounting firms to form their own niche consulting businesses. This is where I believe the future of management consulting lies.

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