Business Accent

IT: the consulting opportunity

Pushpam Chatterjee

IT companies are best positioned to replace audit firms as the vehicle for delivering broad-based consulting services.

Throughout the 1990s, major financial audit firms enjoyed flourishing consulting businesses. In 1975, consulting services comprised just about 11 percent of the then Big 8’s total revenues; by 1998, this average jumped to 45 percent for the then Big 5.

However, post-2000, glaring accounting scandals, associated conflicts-of-interest, and ensuing public scrutiny turned the spotlight on the model of both management and audit services provided by a single firm. Revised SEC regulations following the Sarbanes-Oxley Act, 2002, have resulted in severe restrictions on audit firms providing management consulting services. By 2002, the existing Big-4 audit firms (Accenture had already separated from Andersen), except Deloitte, exited from this business; Ernst & Young sold its consulting business to Capgemini, PricewaterhouseCoopers sold its to IBM, and KPMG spun it off as Bearing Point.

The exit of audit firms from the consulting space has created an opportunity for other business services firms. This translates to business potential worth $50 billion for ‘one-stop’ consulting services.

A set of common capabilities is required to deliver a gamut of broad-based general consulting services—spanning corporate and financial strategy, IT and operations—which audit firms were well placed to deliver. This article argues that IT services firms are best positioned to capitalise on the opportunity created by the exit of audit firms. Further, as almost 60 percent of the general consulting services provided by audit firms were in the area of IT consulting, this is a ‘low-hanging fruit’ (worth approximately $30 billion), which also gives IT services companies a foothold in the overall consulting market.

Why audit firms?

The prerequisite for offering general consulting services is competency along multiple dimensions—client relationship, knowledge of client strategy, client operating processes, competitor and industry information, and internal expertise (figure 1).

Figure 1: Interlinked axes of competencies to provide general management consulting

Let us briefly explore how audit firms, by virtue of their business model, were strong in the aforementioned dimensions.

First, audit contracts don’t come up for frequent changes. Besides, it is decided by the board of directors based on a tight oligopoly of the top few instead of a competitive bidding mechanism. Audit companies work closely with the top management (CEO/CFO) to prepare financial statements, and develop unbridled relationship access to the client’s top management, operating from a pedestal of trust and impartiality, spanning long periods.

Second, financials are central to the execution measure of a business strategy, and thus, audit companies, by virtue of auditing their financial statements, gain a much better understanding of client business strategy and performance.

Third, auditors, by the very nature of their jobs, are required to gain understanding of the underlying paperwork/computerised processes and gain familiarity with the client’s operating policies, procedures, controls, and so on.

Fourth, specialised professional auditing requires deeper understanding of the client’s industry and business. With most big firms organising themselves along the lines of industry competency, they often ended up serving directly competing firms and companies across industries and markets. Thus collectively, audit firms have in-house knowledge (even after ‘accounting’ for Chinese walls and confidentiality clauses) of significant benchmarking and best-practice synergy drawn over a range of related and unrelated companies.

Last, and most important, because of professional requirements of understanding underlying systems, processes and financials, audit firms are staffed with professionals, and were intrinsically suited to provide consulting services. Over the years, the consulting profession has evolved on its own, distinct from audit, reflecting the growth of the industry, and in turn, has developed expertise through the creation of a range of research reports, analysis frameworks and consulting methodologies.

Figure 2: Relative strength of various service providers along the identified competency axes

IT services companies—not quite there

Let us now see how IT services companies, through their traditional services (process outsourcing, IT support and maintenance, and often application development), may be best placed to capture the opportunity based on the balanced mix of competencies identified previously.

First, the IT services market is fiercely competitive, unlike the oligopolistic structure of audit firms. Contracts are not sticky—they are mostly awarded through competitive bidding and are re-negotiated at intervals. However, as more and more critical IT software and infrastructure is outsourced, IT companies are beginning to develop/invest in relationship access to the top management, with selected vendors gradually acquiring ‘preferred vendor’/partnership status and dealing with the CTO/CIO. As the level of coupling between IT and business tightens, CEOs/CFOs are increasingly more aware of their IT relationships. Here, IT has an advantage over audit in that it can legitimately leverage this relationship to cross-sell general consulting without generating any conflict of interest.

Second, IT is gradually gaining importance as the key enabler of business strategy in different industries. IT companies are thus gaining increased exposure to client business strategy. Although IT-led relationships do not provide a window to the overall strategy like finance-led relationships that auditors could address, much of the consulting work provided by audit companies are in the domain of IT consulting, and IT companies are more favourably equipped to address this growing market.

Third, designing and deploying IT systems require a thorough understanding of the client’s business processes, controls, etc, as the systems have to be tailored to these, and the client’s business processes often undergo changes to accommodate or leverage software characteristics. Thus, IT firms have a much better understanding of operating details than their audit counterparts.

Fourth, many IT companies serve multiple clients in the same industry, especially in financial services, manufacturing, airlines, and so on. Besides having deep industry knowledge in their domains of operation, they can draw on this experience.

In addition, talent-intensive IT companies also hire qualified professionals with domain knowledge, and are making investments in building expertise to deliver consulting services. Thus, IT services companies are the likely best overall replacement for audit firms (figure 2). Interestingly, as IT companies do not have inherent corporate finance consulting skills (M&A/valuations, market entry strategies, etc), investment banks might occupy this space left vacant by audit firms. While pure-play consultants may be collectively strong in all areas, no firm individually is able to cover a mix of the entire spectrum, and depending on specialisation, will continue to address areas related to strategy, corporate finance, sales & marketing, operations, organisation structure, and human resources. Also, semi-organised networks of self-employed professionals dominate a part of the consulting industry, but they lack the size and capability required to service large contracts for big clients. Also, audit firms would continue to leverage their relationship to provide tax/compliance-related consulting.

Figure 3: India-centric IT services companies moving up the value chain

The consulting roadmap

The opportunity in general management consulting, leveraging the aforementioned, is in multiple areas:

IT-led business strategy formulation: The model of ‘business strategy driving IT strategy’ is increasingly getting into a chicken-and-egg situation with IT potential/restrictions often driving the strategic choices available to the business. Further to business strategy being IT-centric, clients increasingly prefer end-to-end engagements, including successful implementation of the recommendations. IT services companies are thus better suited to address this domain.

Portfolio assessment: IT services companies can utilise their outsourcing experience in integrating fragmented legacy applications of IT departments, especially assessing the synergy between the IT investments for the acquired and acquiring firms in mergers, smoothly implementing the post-restructured consolidated IT topology, not to mention data conversion issues.

IT-enabled business process transformations: Often, as IT services companies outsource processes, they become knowledgeable about the process efficiency and quality parameters, which can then be used to assist similar companies to re-engineer their largely paper-based, inefficient processes. Also, IT services firms may complement their offshoring assignments with change-management and employee skill rationalisation programmes for their clients.

IT operational readiness and control assessments: IT process maturity is central to IT services firms and can leverage this knowledge to favour clients wishing to keep critical applications in-house.

Project management and quality processes: Software project management is the core competency for any IT services company, and most of them invest in quality processes. They can, therefore, assist clients with this expertise.

Hence consulting firms and IT services companies are expanding their offering to reap the dividends of these synergies. Gartner predicts that the growth (in 2005-08) in ‘discrete’ consulting services market will be only about one-fifth of the growth in consulting ‘bundled’ with other IT services.

The value proposition of pure-play consulting firms is to apply the basic generalist approaches to IT consulting, and they are positioned as independent and unbiased advisers, with no hardware or software to offer. They eliminate any conflict of interest that is inherent in IT services companies that provide some aspects of IT consulting, especially, in areas of vendor selection, negotiations and implementation oversight. While not directly engaged in process outsourcing, they are typically big champions of the macro-economic benefits of outsourcing.

Global consulting companies are expanding into outsourcing and offshoring, and are increasingly using these as loss-leaders to gain the aforementioned competencies. To protect the more lucrative consulting relationships, they use outsourcing contracts as a pull-through of their consulting engagements. Companies that offer general consulting without supporting outsourcing relationships may find it difficult to sustain their business model, unless it is in the area of specialised and advanced technologies. While most global consulting firms are integrating downstream into outsourcing, India-centric IT services companies are trying to move up the value-chain (figure 3), offering consulting services on the foundation of their outsourcing relationships, although size and branding remain major challenges for them.

Pushpam Chatterjee is a Senior Business Analyst with Cognizant Technologies.
He can be reached at pushpam.chatterjee@cognizant.com