The history is ancient, but still relevant. Arthur Andersen shut down in scandal (most famously associated with Enron fraud) and birthed Accenture, now at more than $50 billion in revenue and 700,000 employees strong. The other Big Four came under investigation, too, with multiple accusations emerging quickly. To avoid audit conflict, the rest of the Big Four were pressured to divorce their consulting businesses from audit. EY sold its technology consulting business to Capgemini and PwC sold its to IBM, while KPMG’s spun its out as Bearingpoint. In the end, only Deloitte preserved its business technology consulting group, which has grown rapidly. Over time and once the noncompetes expired, all three firms — EY, KPMG, and PwC — rebuilt their tech consulting practices.
The regulations that came in with Sarbanes-Oxley limit an audit firm’s ability to do consulting work in two ways: 1) audit firms cannot do systems of record work (e.g., ERP implementation) for audit clients; and 2) they cannot have public partnerships or marketing agreements with audit clients (such as EY with Salesforce and Deloitte with Microsoft). They can still deploy the technologies of audit clients but are inevitably very limited in those markets due to their inability to have a partnership or a sales or marketing relationship.
Just recently, after years of rumors, EY announced a timeline and plan to split itself in two parts: one focused on audit and related services and the other focused on business technology consulting. The audit business will retain the EY brand. The consulting business Newco will be rebranded. We had the opportunity to speak with EY’s Errol Gardner and Andy Baldwin to dive into the details.
What does EY’s forthcoming split mean for technology leaders? We will see these major impacts:
- Newco will no longer be constrained in any technology work. Newco will be able to form formal partnerships and joint investments — including marketing activities — with major technology and business providers they are currently restricted from. For example, they will be able to boost capabilities around major players like AWS, Google, Oracle, and Salesforce.
- You will have another business strategy and technology service provider to consider. Once this shakes out, your audit status with EY won’t affect your ability to consider Newco alongside a small number of other service providers that can do transactions, business strategy, and solution implementation in a single transformation. As you continue to advance your business model for the modern, ecosystem-driven market, this combination of services will be important.
- The newly opened opportunities could become a double-edged sword. While the audit situation limited EY more than most because it had more of the big tech firms in its audit portfolio than any other auditor, it also was a blessing in some ways because it enabled the company to focus and rise to great heights, while other partners try to be all things to all people. While this will open up new opportunities, it also creates risk of digital sameness because investment and attention will inevitably be diverted to more places.
- It will allow Newco to be more credible in technology selection work. To date, EY’s severe limitations have made it hard to think of the company as a true advisory partner that can do technology selection work. Once Newco has a broader footprint of skills and partners and stands to make money off of a wider network of partners, it will have more options to do selection work (small potatoes to Newco, but often desired by clients whose business it knows and where there is strong trust).
This split is just one in a line of other unbundlings of service providers, such as IBM’s spin off of Kyndryl and Atos’s pending division. We believe that more service providers will spin off some service lines to sharpen their focus and execution attention and investments to differentiate and accelerate growth.
The EY/Newco split will ultimately be good for everybody. Why? Because more focused providers have more ability to invest in the things you need from them. It will certainly put pressure on Deloitte, KPMG, and PwC. It will also put pressure on technology service providers like Capgemini and Cognizant that have service portfolios with dramatically different margins, commercial models, and growth opportunities.
Give us a shout if you want to talk about it.