Why bigger is not always beautiful

The union of Price Waterhouse and Coopers & Lybrand has created a mega accountancy firm. But Roger Trapp wonders if it's a case of more is less
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The formal approval given by the European Commission last week to the merger between Coopers & Lybrand and Price Waterhouse means that from 1 July the Big Six becomes the Big Five. And we cannot be certain that there will not eventually be a Big Four, or even a Big Three or Big Two. In accountancy, as in just about every other field of business, consolidation is the name of the game. Somebody, somewhere has decided that in most sectors there is room for only two or three direct competitors. And so the rush for takeovers and mergers goes on.

Fittingly, given that the pressure to consolidate typically comes from financial types worried either about the return on their investments or about their need for fees from deals, financial services organisations are showing a special keenness in this regard. Barely a week goes by without an insurance company or investment bank changing hands somewhere in the world. And, while Barclays' eagerness to find a partner in, if not NatWest, an organisation of similar stature is well-known, the investment community was shocked a few weeks ago when Citicorp, the large US banking group headed by John Reed, announced it was hitching up with Travelers Group, the financial services operations built up by Sandy Weill.

Now that the dust has settled, it is widely expected that the pace of consolidation will quicken. Even the Bank of England, whose former deputy governor, Howard Davies, has been among the most vocal opponents of the accountancy mergers, acknowledges that there will need to be more mergers in the sector.

But why is there such widespread agreement on this phenomenon? The urge to merge seems to be challengeable on a number of counts. Just as somebody has said that consolidation into "national champions", "key players", call them what you will, is inevitable, so it is said to the point of tedium that a good proportion of the wealth and job creation in developed economies such as Britain and the United States is down to small and medium- sized companies.

In other words, any problems that Barclays might have are less to do with the annoying presence of NatWest than with the arrival of new entrants such as Virgin or the various direct sellers of financial services. Through their small size and entrepreneurial approach they are better able to respond to the needs of an ever more sophisticated and demanding customer base. It is difficult to see how getting bigger is going to help.

Admittedly, the large accountancy firms have not been subjected to competition from more agile competitors in the same way as the high street banks. The sheer scale and complexity of the work they do mean that only a few of the very largest international firms compete among each other for assignments. But there is a clear danger that by getting so much bigger - the combined Coopers/ PW boasts that it will be the world's 61st largest employer with something like 135,000 staff - both staff and clients will fall away out of conviction that their interests are not best served by hanging around.

For the moment, both firms claim they remain wedded to serving clients that, while growing, are not yet at the multinational stage. But how are partners serving such clients going to collect the fees that will be deemed appropriate by what is almost certain to be a more tightly managed operation? Likewise, are not budding entrepreneurs likely to be put off this mega firm for fear that, even if they can afford the fees, they will get little attention from the firm's best people?

The senior partners of the so-called second-tier firms are so convinced that the latter will happen that they are marshalling their forces in readiness - among the steps they are taking is an attempt to wrest away dissatisfied partners from large entities.

Peter Smith, who will be UK senior partner of the as-yet-to-be-named new firm, and his erstwhile PW counterpart, Ian Brindle, have repeatedly asserted that they need to go down this route because they are currently constrained from growing.

The accountancy firm executives also claim that the cost of expanding into the emerging economies that are seen as such a dead cert for future riches that they - like many of their clients - cannot get there fast enough is so horrendous that it can only be borne by linking up with another party. But senior managers at Arthur Andersen, the accountancy firm which knows more than most about worldwide growth (as well as, as a result of its bitter dispute with Andersen Consulting, a fair bit about the perils of size), insist that the biggest factor in the costs of the information technology that Coopers, PW and - until they pulled out of merging - KPMG and Ernst & Young keep talking about is people. So merging will increase costs in this area rather than reduce them.

And then there are the not-insignificant diseconomies of scale. If it is generally reckoned that partnerships are hard to manage, then imagine how easy it is to run what will be the world's largest professional services firm, even with a powerful international executive.

Even before the deal was formally cleared by the European authorities, Coopers launched a recruitment campaign bolstered by advertising on the grounds that the combined firm would around the world need to find a thousand new faces a week to meet projected rates of expansion. Even if the much talked-about skills shortages enabled it to find people of the right calibre, just handling such numbers and imbuing them with any sense of what this new entity would be about would be a heavy management task. When challenged on this, a spokesperson explained that many human resources professionals would be among those taken on.

But perhaps the most compelling argument against all this activity is the likely attitude of clients. There might be a compelling logic behind building up an operation so comprehensive in what it offers that anybody needing anything vaguely financial goes to one or other of your outlets, but that does not make sufficient allowance for human beings' reluctance to put all their eggs in one basket.

As Strategos founder Hamel has pointed out: "Cross-selling works only when what is being sold really is a collection of the best. In today's world of sophisticated customers, even great products will not tug mediocre ones along."