Part 2 of my conversation with Francine McKenna. Part 1 focused on independence issues at accounting firms.
The world has done over a million ERP, CRM, other enterprise software projects. With cloud implementations, it's like a second wave of projects. It still seems like there's very little automation of projects. You have many consultants who come on site, who fly a lot. It's not just the labor intensiveness, the travel expenses,the staff turnover when you have so many people, and the related quality issues haven't gone away. You'd think, as an industry, we'd be much smarter because we had such major overruns and failures around the '90s and early 2000s with ERP projects.
How automated is the audit side of the profession? Can the consulting side learn from it?
The audit side of the business has become much more automated. There's an enormous amount of effort being brought to applying technology, applying data analytics, applying all kinds of automation and, of course, the outsourcing trend has been going on for more than 20 years now in terms of looking at leveraging lower-cost locations to do work that's not necessary to be done on location at the audit.
They've been doing that for a long time. The reason is because an audit is almost always considered a commodity service, a necessary evil. Despite the firms trying to say, "How can we add value to the audit? How can we be more of a consultative presence when we're doing these audits?" in general, companies don't buy it.
They want to get the audit done. They want to get a good audit. They want to get the audit firm out of there as soon as possible and they want to keep pressuring the firms to, if not lower fees by finding efficiencies, at least not increase fees over a certain cost of living, inflation indexed annual increase. These are typically very strict contracts; multi-year contracts; very, very low, low, low tolerances for cost increases even when the scope of the audit has to increase.
On the other hand, companies still view consulting projects as these things that are special and unique. All of the firms that implement various kinds of systems implementation and integration projects are very good at selling that concept. Nothing can ever be plain vanilla. There's always a twist and the Big 4 can always find something additional and unique. “For you, company A, we need certain types of expertise or specialization because you are special. We need something special that we can only find in one of our practices in the firm that we have to fly in"
The large, global, public accounting firms are still organized very regionally, very locally. The reward structures for revenue and profitability and the accountability, are very individualistic, very local, and very practice-focused. Each individual partner, each individual practice is very focused on maximizing the opportunity of any particular project that they might bid or propose at a particular client. That's exacerbated in consulting. It's a very different business model than the partners who propose audits who follow very strict contract and pricing formulas.
I remember at PwC, when I was there in 2005 and 2006, and internal audit co-sourcing and outsourcing was newly viewed as a consulting project. Again, it was positioned that way for a while because of the new prohibitions against doing internal audit co-sourcing and outsourcing at audit clients. We had a lot of audit partners that didn't know how to develop a pricing estimate because they had never really been required to looked at a variable estimate of level of effort and what are costs of the right resources on a unique project and how do I calculate that in terms of what is the cost of my resources. They didn't know anything about that because audit projects were very formulaic in terms of, hey, this what we always do because it is required, this is what the client will pay; this is what we're going to charge them, profitable or not.
Audit is very commoditized. They did not know how to create and price out projects on a consulting basis. That is the significant difference, and the opportunity, for consulting practices —to create those sorts of unique situations and add-ons and those expansions of scope and also sometimes budget overruns on a fixed price project because of delays, other issues with the software, changes, or client issues.
From an individual client perspective, they do ERP projects only every 20 years, right? That is unique. But as an analyst, I know these firms do them over and over again because they do a few thousand a year. My question is, given the repeatability that they have within the firms, why the resistance to automate? You would think it would make it more predictable, more manageable, the quality would be better, and so on.
Well, I think that as long as they can charge the clients and they can get their margin, there's very little motivation to try to make the projects more efficient or lower costs. Again, that takes a special kind of person within the firms, within the consulting practices who know the business of consulting versus just the technology, who understands the client and contracting issues such as fixed versus variable contracts versus just having the technical software knowledge.
Trying to make the consulting projects profitable and make them the most efficient given the resources and the cost base within the firm is a unique skill set that I'm sure all the firms have but the Big Four firms are, again, still rebuilding even now since, 2007 or so when the non-competes with the firms to whom they sold all that expertise —to Capgemini and IBM and spun off to BearingPoint —got dispersed and then came back again.
I would say probably Deloitte has that expertise because they've had it the longest and been able to build it, but the other Big 4 firms, people come and go. They just don't have that expertise in all practices and locations at all times to do those things and they're not motivated if the clients are a captive audience willing to pay whatever they tell them it's going to cost.
I spent over a decade at PwC. This was in the '80s and '90s. We had a methodology group that focused on standards. Every type of project, they would have fairly elaborate, I mean eight, ten four-inch-wide binders on how to plan the data conversion or testing phase of the project. They had a group that would develop that, keep that updated.
It sounds like that discipline has disappeared in these firms because, logically, you would take a methodology and automate it a lot easier. Once you can distill from 100 projects, 500 projects some common processes, common techniques, you could start to automate that.
When I was at KPMG from '93 until 2001, KPMG to BearingPoint, we had that same thing. That was actually my area of focus because I was the accountant in the consulting practice whereas a lot of the people that were involved in the projects were more of the technology people. The project managers and the people who were managing the business of the projects, there were a lot of us around, mostly because you had brought people over originally from the audit firm and you brought the accountants over to start up those consulting practices.
When I got to PwC in 2005 and 2006, what had happened is, because they sold the whole consulting practice except for a few internal controls kind of people, some risk related, audit risk kind of people, they had sold everybody to IBM. None of those kinds of people were around anymore. Nobody who had done a consulting project for more than a year or more than $10 million had stayed at PwC. Maybe they had a few people doing some federal projects with the defense contractors but, in general, from a commercial perspective, they didn't exist anymore.
They've obviously, since, rebuilt those skill sets via hires and acquisitions, by acquiring the remnants of BearingPoint, by starting to do these things and rebuilding the partnerships with the software firms. But when the focus is on selling to a captive audience at audit clients, and the focus is on implementing from a technical perspective, there's no impetus to manage the business side.
I think that, between turnover and the fact that the Big 4 have so many people in consulting who don't have the audit firm and accounting perspective, coming in from other software and systems integrators, there are too many not thinking about the primary business model of the audit firm. They don't have an experience on the audit side, and they're just not focused on that.
I think the Big 4 firms see the money rolling in and clients doing those projects every 20 years. It's a big deal for the clients and they trust the Big 4 firms, in particular, if they're also their auditor, and they pay what it costs. When things go wrong, they complain but they don't complain too much. Many, many failed projects, ERP projects, and they keep their auditor on anyway and they rehire them for something else. They feel like they have no choice.
That's a great perspective. Any final thoughts?
I think, again, the growth of the firms and the fact that there is so much more movement of people between other companies, between the firms and the software vendors – I mean when you and I were coming up, if you joined one of the Big Four, Big Six, Big Eight firms, you mostly stayed there your whole career. Now, people move constantly. They move between vendors and the firms, and so you have this sort of dilution of the culture. I think that that just consistently invites problems and concerns, in particular, compliance, the special kind of compliance issues that a public accounting firm has.
That means there has to be good leadership to be on their toes because the fundamental is that they're supposed to be auditors first and maintaining the integrity of the audit process and the integrity of financial information going out to the public. If they let that get diluted in the efforts of selling any work to anybody at any time and forgetting their DNA as an audit firm, you're going to see, basically, a deterioration of the integrity and the quality of financial information going out to the public, including the information that's coming out of these financial systems.
Yeah, one thing I would try to emphasize is, I might be a journalist now but, remember, I was doing this work. I was on the consulting side of the firms that I was at and so I have this view coming from the inside.
Unfortunately, what I don't like is what the firms have become. We're missing that quality that you and I used to see at the beginning of the financial systems revolution
On the other hand, projects have become more complex, beyond just financials. They need to bring in different architects and different skill sets. Just the industry perspectives, the software vendors, I constantly tell them, "You need to verticalize. You need to verticalize," and they pay lip service, but the industries have become so complex now and you've got to factor all that.
