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Conflict of Interest

Preston Gralla

Today, those behemoths are going the way of the dinosaurs, done in by the very thing that made them such a success,the combining of consulting and accounting in the same practice. In the wake of the Enron/Arthur Andersen scandal, having the same company provide auditing and consulting services has been increasingly seen as a conflict of interest. And so, DTT, PricewaterhouseCoopers and Arthur Andersen, the only remaining companies in the Big Five that still offer consulting services, are remaking themselves by spinning off or selling off their consulting divisions.

The new companies being formed by the spin-offs of the consulting arms of Andersen, DTT and Pricewaterhouse-

Coopers face a triple whammy: They're being spun off into the most challenging IT economy in recent times; they face the problem of potentially being tainted by the Enron scandal; and they have to reorganize and refocus their businesses while potentially changing their corporate cultures. They face the loss of clients, as well as the potential loss of consultants, who may find it more profitable to jump ship rather than wait for the spin-offs to find their footing.

These final spin-offs could offer big opportunities for VARs, who could pick up a good deal of work and possibly qualified IT consultants in the aftermath. (See "Spin-Offs: A Mixed Bag," page 62.) But no matter the effect on VARs, the competitive landscape for consulting will never be the same.

How It All Started

To understand how the new consulting spin-offs from the Big Five will fare, take a look at the past. Although Enron may seem like a catalyst to the accounting firms spinning off their consulting divisions, those spin-offs, in fact, started years ago. According to Bobby Cameron, principal analyst for technology leadership at Forrester Research in Cambridge, Mass., pressures would have forced the existing Big Five holdouts to divest their consulting arms,Enron or not.

"Because of the partnership structure [of Big Five accounting firms, their consulting arms weren't able to raise capital for investment,and increasingly consulting firms need that capital in order to survive," Cameron notes. Beyond that, he says, because of the nature of the accounting firms' loose partnerships, it was difficult to create a centralized consulting organization with the proper command-and-control structure that allowed it to properly pursue consulting opportunities.

The other reason driving the spin-offs, according to John McAllister, professor of accounting at Kennesaw State University in Kennesaw, Ga., is that even in the days before Enron, there was a growing feeling in the business community that having the same company provide consulting and accounting services was a conflict of interest, and so "the SEC had been placing pressure for a number of years on the accounting firms to split off the consultancies," he says.

The result was that in the years before Enron, the Big Five accounting firms had already begun to spin off their consulting divisions. Ironically, the first to move in that direction was Arthur Andersen, which created Andersen Consulting as a separate division back in 1989. But after more than a decade of less-than-cordial relationships between the two, thanks primarily to the fact that Arthur Andersen formed a new consulting division internally that often competed with Andersen Consulting, the organization won its independence in an arbitration battle in 2000 with its former parent and went out on its own as Accenture VB3 in January 2001.

The first Big Five company to officially break ranks with all of its consulting business was actually Ernst and Young, which sold its consulting division to Cap Gemini in May 2000, forming Cap Gemini Ernst and Young VB28. And while KPMG created a separate KPMG Consulting division in February 2000, the split became official in early 2001 when the entity went public as an independent company.

That leaves three of the Big Five with consulting arms,Andersen, PricewaterhouseCoopers and DTT. In February, DTT announced that it would separate from its consulting arm, known as Deloitte Consulting VB20. PricewaterhouseCoopers has also announced it will spin off its consulting division, PWC Consulting VB7, possibly via an IPO. And KPMG Consulting has signed a letter of intent to acquire Andersen VB44, the business consulting unit of Andersen Worldwide. When the dust settles, not a single Big Five accounting firm will have a consulting arm left.

Where We're Heading

What does this all mean? The Enron scandal and consulting spin-offs of the Big Five consulting arms "will change the worldwide face of IT consulting services," says Julie Giera, vice president and research fellow at the Giga Information Group in Cambridge, Mass. Businesses that now give work to Andersen, Deloitte, PricewaterhouseCoopers and the other consulting arms of accounting firms may look elsewhere for consultants, she notes.

"There is no compelling reason for businesses to give work to these companies," Giera says. "They are all painted with the broad brush of Enron, whether they were involved or not. In a tight economy like we have now, companies want to avoid anything associated with controversy."

In fact, that was a primary reason that James E. Copeland Jr., CEO of DTT, provided for deciding to spin off his company's consulting arm.

"In the current environment, we cannot expose our clients to possible criticism because of the perception of problems surrounding the scope of services audit firms may provide to clients," he had said in an announcement about the split.

But simply spinning off a company may not go far enough to avoid damaging controversy. Some new consultancies are choosing to rename themselves to disassociate with their parent companies. As part of its renaming strategy, Deloitte Consulting even held a public Web survey, asking people what the company's new name should be. Results of the survey were not available at press time.

Ironically, when Accenture changed its name from Andersen Consulting in the aftermath of the arbitration battle, many believed it was a mistake because they thought the company would lose the luster of being associated with the Andersen name.

Right or wrong, finding the right name and using it as a tool for success is not an easy thing to do, says Arthur Bowman, editor of the Atlanta-based Bowman's Accounting Report newsletter. He notes that, in addition to finding the proper names, the companies will also have to find a way to maintain the existing relationships they built up while they were part of their parent accounting firms,all the while creating new identities for themselves.

Name changes may help, but the companies will have to do more than address cosmetic issues, Bowman says. Much more difficult decisions will be necessary, he says.

For example, they won't have the inside track on getting work because of their associations with Big Five accounting firms, and so "they're going to have to become part of the traditional consulting industry," and make the same kind of difficult economic decisions consultants are forced to make, Bowman says. He expects there to be layoffs in the short term as the companies restructure themselves. And he says they will have to look at major changes in their strategies as well.

"They will have to focus solely on tech consulting, and not on how to coordinate with their audit and tax partners," Bowman notes.

Been There, Done That

Probably the best way to understand what new spin-offs face is to talk to those who have already lived through similar spin-offs. One company that survived is Cap Gemini Ernst and Young. Terry Jost, vice president of business development, says that companies can expect difficult times in the earliest days of the spin-off.

The companies will also have to decide where to focus their consulting businesses. Jost expects his company to target technology. He estimates that half of his company's revenue comes from technology consulting, with 35 percent coming from consulting about operations and process improvements, and 15 percent from strategic consulting.

"[Spin-offs are going to have to plan for a new organization and also determine whether the split is going to be a divorce, or whether there will be integrated or shared services [with the former parent company," Jost says. And, given the difficult economic times, the spin-offs are going to have to "put into place a new cost model that's consistent with the economic times we find ourselves in," he adds.

Jost also believes spin-offs will have to face a potential loss of consulting revenue at first, as its customers jump ship because of the publicity surrounding Enron, and as the consulting firms reorganize and try to come up with their new strategies.

Chris Hagler, national director of IT services for Resources Connection, an earlier spin-off from Deloitte, agrees with Jost that, at first, the spin-offs may lose business. But then it will pick up. "We have already noticed an uptick in business," she says. "We specifically have received business from people saying, 'I can no longer have my auditing firm do [consulting work. We want you to do it from now on.'"

Where They'll Go From Here

Perhaps the biggest change the consulting spin-offs will face is in their corporate cultures, says Chris Falzarine, vice president of business development and marketing at Computer Design and Integration VB390, an IT consulting and integration firm based in Teterboro, N.J.

An accounting practice and an IT consulting practice are different businesses with different focuses, Falzarine says. "Technology is a fast-paced game; accounting is much more conservative and steadfast," he explains.

Falzarine believes that the culture clash between the two divisions of the Big Five firms became more pronounced in the past several years, particularly because the "boom in the Internet acted as a catalyst," forcing the split between the accounting and consulting arms of the firms. So while he believes the spin-offs were inevitable, he also says the spun-off consulting arms will have to readjust their corporate cultures to the fast-paced world of IT consulting,or else face severe economic consequences.

No one expects the spin-offs to go out of business, though, and most observers believe that despite short-term difficulties, in the long run they will do well. When the companies "are less focused on the spin-offs and refocused on their clients, they'll end up being very good at client services, and so will win back some of the clients," Resources Connection's Hagler predicts.

The big question is whether the spun-off consulting firms will be able to regain their lost luster,and, most important, any lost revenue. For now, the answer is as murky as what actually happened inside the walls of Enron and Arthur Andersen that led to the current crisis. n

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