By Alfred Romann
Alfred Romann looks at the state of the consulting business and how pure consulting firms and accounting firms are competing in the Greater China market.
Just as schadenfreude had to be borrowed from German to explain the concept of expressing delight at someone else’s misery, there is no precise English expression for turning challenges and difficulties into opportunity. But that’s what the consulting industry has been focusing on for years.
“In the past 10 to 15 years we have seen more problems,” says Joe Ngai, managing director of the Hong Kong office of McKinsey & Company, one of the world’s largest management consulting firms. “Every corporation we go to, we see problems. And problems are good for us because you need someone to solve those problems.”
Ngai’s optimistic candour – expressed at a recent business forum – is all the more remarkable because the consulting business is usually reluctant to talk about itself. While barely a day goes by without a consulting firm issuing an industry survey or business outlook, the firms are surprisingly averse to discussing their own sector’s prospects.
Spokespeople for two of the world’s largest consulting firms, Accenture and Bain & Company, said that their staff couldn’t discuss the industry itself, while Boston Consulting Group, another global giant, did not respond to a request for comment.
This reticence may be understandable. After all, the jury is still out on whether the consulting industry’s problem solving outweighs its problem creation. McKinsey famously advised U.S. telecoms giant AT&T in 1980 that there was little future in mobile phones, forecasting a market in 2000 that was less than 1/120th of its actual size.
Nevertheless, the consulting industry has continued to grow: Plunkett Research forecasts worldwide consulting revenues in 2012 of US$391 billion, up almost 7 percent over 2011’s total of US$366 billion.
The consulting industry suffered a setback as the global financial crisis took hold – 2009 saw a 9% percent decline in revenues over the previous year, according to Kennedy Information, an industry data provider.
But growth resumed the following year – McKinsey saw revenues rise 6% to US$7 billion in 2010 – as companies sought the services of consultants to oversee restructuring, mergers and acquisitions, turnarounds, corporate regime change and performance improvement. Concerns over complying with ever-tighter regulatory requirements also boosted the business.
The market potential did not go unnoticed by the Big Four accounting firms who have re-entered the market in a big way since the aftermath of the collapse of Enron, when regulator and media pressure forced many to spin off their consulting arms. For instance, Deloitte’s consulting revenue grew 15% in 2010, more than twice the pace of the previous year.
China sets the pace
The Asia Pacific, with its tight-knit family companies and established connections, has been a harder slog for the consultants but slowly doors are opening.
New York-based Alvarez & Marsal has invested heavily in Asia in recent years, especially in the China market. “Demand in China is on the rise,” says Olly Stratton, managing director and co-head of the firm’s Asian practice. “I think it will continue to evolve and there will be more opportunities.”
McKinsey, too, sees potential in China. The company is among the leaders in consulting for Chinese clients, who seek advice on managing strategy, operations, information technology and human resources. More recently, Chinese clients have used consulting firms to advise on restructuring, expansion and foreign investment, brand building, corporate governance and long-term growth.
When management consultants entered the Chinese market in the early 1990s, most operated from Hong Kong regional headquarters, but that has changed. “For most professional services today, there are no more Hong Kong offices – everyone is calling themselves the Greater China office,” says Ngai. “Most consultants today are spending at least 50 percent of their time or more on Mainland projects,” he adds. “Fifteen years ago, Mandarin was not a requirement. Today it is.”
Despite the apparent rush to the China market, some experts are wary about the reality of the Mainland. Fiona Czerniawska, founder of London-based Source for Consulting, which researches the consulting industry, cites a shortage of experienced Chinese consultants and fees that are often substantially lower than in other, more mature markets as two significant obstacles. “At the moment, they see easier, if not bigger, opportunities in Brazil and India,” she says.
Competing for clients
According to Czerniawska, the Big Four accounting firms might be in a better position than the pure consulting firms to grow their risk and advisory businesses in China because Chinese companies like having more services under one roof. Accounting firms agree, citing a combination of their consulting capabilities and traditional strengths such as finance and accounting expertise.
Babak Nikzad, partner in charge at KPMG’s China and Hong Kong consulting practice says Big Four firms possess a “breadth of experience we can bring to the client.” For example, he says, pure consulting firms usually lack experience in tax matters – an area in which accounting firms excel.
Norman Sze, managing partner of Deloitte Consulting China, cites a Mainland financial institution that commissioned IBM Global Services to design and implement the first phase of a financial management system. He says Deloitte was able to leverage its broader services to win the contract to implement the second phase of the contract.
Sze, based in Shanghai, adds that Deloitte can use its financial acumen to help the Mainland banking and insurance sectors implement international compliance standards such as Basel II or localized versions of global standards.
Already the figures are showing that the Big Four are expanding in the China consulting market. PwC employs about 1,000 staff in its China consulting practice and plans to grow it this year by about 20 percent. A joint venture between its U.S., China and Australia operations will see an influx of consultants parachuted into China for three-year engagements. Hong Kong partner Andy Watkins, who runs the new joint venture, says the prospects in China are particularly good. “We have experienced rapid growth in the past few years. However, we believe it is still relatively early days in China,” he says.
There are several reasons for the Big Four’s optimism. One is that companies are increasingly looking for consultants who can address industry-specific issues that the Big Four specialize in, rather than general business ones. The complexity of emerging challenges like risk management and regulatory compliance, both in China and globally, are also areas in which the accounting giants have experience. Finally, there are an increasing number of Chinese companies in need of services outside China, which requires global networks.
Like PwC, KPMG’s consulting arm has also been growing rapidly and, with 800 members of professional staff in the Mainland, has a much larger presence in China than pure consulting firms. By comparison, Boston Consulting Group, which has been in China for 30 years, has about 200 professional staff. Bain has about 150 consultants in its Greater China team. McKinsey, one of the largest, has about 350 consultants and 45 global partners in its China and Hong Kong practice.
For a decade, the accounting firms have been playing catch-up in the consulting market. After the collapse of Enron, the Big Four saw their consulting arms in the U.S. restricted by the Sarbanes-Oxley Act. The new rules limited the consulting services that auditors could provide to companies they audit, in order to avoid the conflicts of interest that led to Enron’s auditor, Arthur Andersen, overlooking accounting misdemeanours.
The subsequent sell-off of two of the Big Four’s consulting arms changed the industry. IBM absorbed PwC Consulting in 2002 and turned it into an industry giant, while KPMG’s unit became Bearing Point, now smaller and focused mainly on Europe. Ernst & Young sold its consulting unit in 2000 to what is now Capgemini, while Deloitte Consulting was never spun off. (Arthur Andersen’s consulting unit was spun off as Accenture prior to the accounting firm’s demise.)
As the spotlight of Enron dimmed, the Big Four started re-launching or re-building their consulting arms. By 2007, all the Big Four firms were once again among the top 10 consultants in the world in terms of revenue.
While U.S. regulators don’t appear likely to re-visit the issues, the Big Four’s moves back into the consulting business have not gone unnoticed by regulators in Europe. Last year, the European Commission proposed that auditing firms be banned from providing consulting services to companies they audit, or even be banned altogether from consulting.
Big Four firms say a decade of experience has enabled them to put controls into place to avoid conflicts of interest. Sze at Deloitte says avoidance of conflicts of interests is fundamental to his firm’s culture.
“We keep lists of audit clients who cannot be pursued as relationship clients and vice versa,” he says. Further checks begin the moment the firm considers a project or new client. The firm also takes into account the rules covering listed companies in China, Hong Kong, the U.S. and any other relevant jurisdiction.
Consultants say they are feeling the pressure of a crowded market. The large number of consulting firms has led to brutal price competition, especially in China. “My biggest challenge at the moment is the pricing in the market,” says Nikzad at KPMG.
In China particularly, not only are the firms vicious when pricing, but there are double the bidders. Where once four or five firms would bid for a particular mandate in China, the number is now seven or eight, says Nikzad.
Consultants say it also means that firms have to think a little harder about their offerings, such as providing better service for lower prices or providing niche services that others don’t have.
“Specialist business advisory firms are increasingly moving… towards event-driven consulting,” adds Mavis Tan, a member of the Hong Kong Institute of CPAs who is senior managing director at FTI Consulting.
By “event-driven” services Tan means areas such as forensic and litigation consulting, regulatory and fraud-risk mitigation, corporate restructuring and strategic communications. “As these firms get more traction in Hong Kong and the region, the markets gets more familiar with them and dependent on their services,” she says.
Fortunately for the crowd of competitors, demand in China is growing for new services, particularly as a result of the international expansion of Chinese companies.
“Much of professional services today is across borders,” says Ngai of McKinsey. “Even in China today, most of the work we are seeing has some element of going abroad, of thinking about the competition that is coming from all over the world.”
This article was originally published in the November 2012 issue of A Plus.