Finance: The Net closes on consultants

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The Independent Online
Management consultants have long been enthusiasts for change. They have made a fortune out of convincing clients of the need to embrace change and to do all the restructurings, mergers and other manoeuvres deemed necessary for survival. But even they must be amazed by the shift the consultancy sector itself has taken.

Two Christmases ago, the long-simmering dispute between Arthur Andersen and Andersen Consulting over the consultancy division's wish to become a separate company erupted in a stream of invective. In the industry, there was general incredulity that the one company which seemed to have come closest to achieving the Holy Grail of the fully-integrated professional services firm appeared to be breaking up. Now, nearly every member of the Big Five club of accounting firms seems to be headed that way.

Last week's news that PricewaterhouseCoopers was offering redundancy packages to 200 consultants because it wished to replace them with "e- business experts" was yet another step in developments convincing management consultancy insiders that their market will look very different by the end of 2000.

A resolution of the Andersen dispute, thought likely in the spring, will end the uncertainty of that particular row. But it could create many other questions. If, as expected, the accounting firm ends up receiving substantial compensation from its consulting sibling for the loss of revenues following the planned separation, the accountancy firm will suddenly have more cash for strategic investments in the professional services market. It might even be able to pull off the acquisition of a significant City of London law firm that has long been an objective.

And an emancipated Andersen Consulting could consider following Goldman Sachs and turning itself into a publicly-quoted company, making the already- wealthy partners far richer. Or it could link with, or even be bought by one of the technology companies whose systems it has done so much to implement in huge projects round the world.

It could take the KPMG approach and go for a combination of the two. In August, Cisco Systems, the Internet router equipment manufacturer, responded to the Big Five firm's plan for a partial flotation of its US consultancy arm by offering $1bn for a stake in the business. The move has been stalled by an investigation by the US Securities and Exchange Commission, which is worried about potential conflicts of interest between firms' audit and consultancy work and about possible problems from audit clients investing in the consulting arm. But it is expected to be cleared by the middle of next year.

Nor are these the only examples of a potential realignment. PwC's announcement of its increasing e-business focus followed news days earlier that it was reviewing its consulting practice. "While no specific solutions have as yet been determined, the status quo is not an option," said a statement. Ernst & Young has also undergone a rethink, though insiders say only: "Watch this space", when asked to detail what this involves. There have been reports of the consulting business being acquired by either EDS, the company that specialises in information technology outsourcing deals for the public sector and large companies and has already linked with the management consultancy AT Kearney. An alternative suitor might be IBM, which, like other computer hardware suppliers, is increasingly active in consulting. This speculation was hardly quelled when Nick Land, E&Y's UK chairman, recently said: "The shape of these consultancy businesses will change beyond a doubt."

Of the Big Five, only Deloitte & Touche claims to be unmoved by all the activity. A spokesman said the organisation was committed to maintaining an integrated professional services firm.

Such a jostling for position might seem odd in an area of business that has grown at a phenomenal rate in the past decade. At Andersen Consulting, for example, revenues have increased from barely $1bn when it became a separate entity within the Andersen organisation in 1989 to nearly $8bn last year. In 1998 alone, the revenues of KPMG's UK consulting practice rose 51 per cent to pounds 217m. But consultants have many examples of businesses that paid the price for postponing change because they were still prospering - and they are obviously not inclined to fall into the same trap.

Ostensibly, what has got the consultants so worried is the sudden explosion in e-business, a development they have been warning about for years. It already accounts for about 15 per cent of PwC's UK revenues of about pounds 2bn, and is expected to grow rapidly.

The ".com factor" is not just having an effect on the way the business must operate. It is also affecting those in it. The brightest MBA students increasingly want to start Internet businesses and get rich quick rather than become management consultants, where they can become moderately wealthy if they make partner after years of hard work. This trend can only have been strengthened by the recent decision of George Shaheen to give up his position as global managing partner of Andersen Consulting to join the young Internet company Webvan.

A KPMG spokesman claims that its US consulting firm's plan for a partial initial public offering was at least partly driven by a desire to make it easier to come up with the pay packages needed to attract and retain such people. The e-business world is immensely competitive, he says, adding that the move would enable the firm to offer stock options and other incentives to those with the right skills. Bruce Petter, executive director of the Management Consultancies Association, which represents most of the leading consultancies operating in Britain, agrees. Even top-rank strategic consultancies, such as McKinsey & Co and Bain & Co, are losing people to high-tech start- ups, he says.

But the changes are not just about e-business. The recent rapid growth in consulting has shifted the balance in the large accounting firms and, in the United States, created serious regulatory problems.

In a different age, the accountants might have put up more of a struggle against the technology companies trying to compete in consultancy. But the cash-rich computer kings offer an attractive way out.