CHANGE MANAGEMENT
As They Mind Rivals and Regulators, Big Five Target OC in Hopes of Landing Next Broadcom
How do you send chills down the back of a partner at a Big Five professional services firm? Merely mention the Internet or the Securities and Exchange Commission.
Those two forces are causing the Big Five,Arthur Andersen, Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers,a lot of headaches these days.
The Internet has spawned scores of new consulting entities just itching to steal customers and employees from the Big Five. It’s also forcing them, just like the rest of Corporate America, to transform their businesses to the digital economy.
On the other front, SEC Chairman Arthur Levitt is cracking down on the Big Five, demanding they separate their interests entirely from those of the companies they audit. As it is now, most Big Five firms provide services like internal accounting and systems consulting to the same companies they’re supposed to be watching for investors.
So the Big Five are sailing a tight course these days between a modern day Scylla and Charibdys. On the one side, they’re scrambling to catch up with the Internet economy. To do so, they must transform themselves from traditional services firms to Web-savvy consultants, all the while fending off new rivals.
But then there’s the SEC saying that by providing exactly those types of lucrative services, they’re compromising their auditing integrity.
In Orange County, these issues are as salient as anywhere. Because of OC’s vibrant technology sector, local Big Five offices are on the front lines of all those issues.
The competition for talent may be the biggest battle of all.
Is recruiting by start-ups a problem for Big Five firms in OC?
“Absolutely,” said Jim Bowling, managing partner of Ernst & Young’s local office in Irvine. “Our people get recruited away, not just with compensation,we’re very competitive there,but with stock options. They have an opportunity to hit a home run and they take it.”
And all those start-ups are making college recruiting a lot tougher. The Big Five recruit heavily at local universities, looking for eager students with ambitions of entering consulting or accounting.
They look to California State University, Fullerton; the University of California, Irvine; and Chapman University, as well as the big schools in Los Angeles, among others. But students’ ambitions have changed with the Internet.
“The population of top students going into accounting is dwindling,” said Mike Puntoriero, managing partner of Arthur Andersen’s OC office, also in Irvine.
And when they do find a candidate, Big Five firms are finding the price tag a lot larger than it used to be.
“There’s no doubt that salaries are going up dramatically, and part of it is the competition for talent,” Puntoriero said.
Of course, all of the same Internet start-ups that vie with the Big Five for workers also are business opportunities.
“There’s a significant amount of activity from Internet-related companies,” said Robert Grant, managing partner of the OC arm of Deloitte & Touche. The Costa Mesa office added 50 dot-com clients last year.
Once they move out of the garage, start-ups find they need many of the services Big Five firms provide. Those include systems and tax consulting as well e-commerce services, Grant said.
Larger firms need help with SEC filings and mergers and acquisitions. “They need our consulting services as they build their businesses,” Grant added.
Over the past nine months, the Orange County Ernst & Young office saw revenue from technology firms grow 48%, compared with 28% overall growth. One of its biggest clients is Broadcom Corp. Like so many other tech companies, the Irvine maker of broadband chips has expanded rapidly, from $21 million in revenue in 1996 to $519 million last year. Such growth means a lot more business for E & Y.;
“Orange County tends to be an entrepreneurial business community, so a lot of the growth comes from that entrepreneurial spirit and the ability to have young companies that are growing fairly quickly,” said Bruce Stump, an Ernst & Young partner.
Most of the Big Five firms have a service that perfectly suits start-ups. Called business process outsourcing, it involves the client outsourcing all of its accounting duties to the professional services firm, which becomes the de facto accounting department for that client. Start-ups like the service because they tend to be thin on people and totally focused on their core businesses.
Does providing all those services, in addition to auditing, compromise the audits they perform? No, Andersen’s Puntoriero said.
His office audits many of the companies it provides consulting services to, he said. Among such dual-service clients are recreation vehicle maker Fleetwood Enterprises Inc. in Riverside, and Buy.com Inc., an Internet retailer in Aliso Viejo. So Andersen is helping those companies run their businesses, while at the same time making sure their finances are correctly reported to investors via SEC filings.
And the office has no plans to separate its auditing division from its consulting division, Puntoriero said. Consistent with Andersen’s national position, he sees no conflict and thus no need initiate divorce proceedings. But if proposed SEC rules now under review are approved, Andersen and other firms may find they have to do just that.
Ernst & Young, on the other hand, may have skirted the issue. Earlier this year the firm sold its entire consulting division,with some 18,000 employees,to France’s Cap Gemini SA for about $11 billion in cash and stock.
In Orange County, both arms recently moved to the Ernst & Young Center at Lakeshore Towers. But the two the audit and consulting units are no longer connected, except with regard to many clients they share. Of Ernst & Young’s former 600 employees in Orange County, 250 now work for Cap Gemini.
KPMG is taking a similar route in order to stay ahead of any new SEC rules. Later this summer, the firm will spin its consulting division off in an initial public offering that’s expected to raise $1 billion.
When it is officially separated, the new consultancy will have leeway to do many things the traditional Big Five cannot. Chief among them is taking equity stakes in clients in exchange for services rendered. Orange County will be a beachhead for that investment strategy. n
