The future of the Big Four: Will Ernst & Young be next to fall?

It wouldn’t be so hard to think, except that Accountancy Age is asking.

The always interesting and provocative news source wonders, in an op-ed piece by two marketing strategists: So does E&Y have the right strategy and leadership to withstand the market forces?

In the light of the firm’s current strategy, the answer is that, in the long term, it probably won’t survive. Their current strategy perpetuates the mistakes made in early 2000 when the firm sold its management consultancy arm to CapGemini. At the time, they pushed hard to recover the fees gone with the consulting arm, by focusing on growing its global accounts. The strategy flopped to a large extent though, as it lacked a key motivational ingredient – profit sharing.

E&Y’s recently announced EMEIA merger will not resolve the above pr oblems. Although operational savings may be achieved, real growth will only arise when the right financial incentives and global client profit/loss sharing processes are put in place.

The firm will only withstand the economic climate and the dictates of the Rule of Three if it pursues an external merger campaign that will give it access to the audit client base it needs to regain market share.

What’s “the Rule of Three?”

This rule postulates that for a market to reach equilibrium point, the point at which customers get the best value for their money and where competition flows at levels that encourage innovation, a certain balance of power needs to be in place. The balance is achieved when three top players control around 70% of the market, sharing the rest with smaller firms…

If you apply the rule based on revenues then the answer is simple ­ number four, E&Y, is the weakest link and therefore the one to go.

You don’t need to look far to can see the Rule of Three at work. Think: Big Three auto makers. Wireless carriers. or, tax and accounting software vendors.

To be sure, the authors add…

The rule is not linear and needs to be applied in the light of the two factors – strategy and leadership.

The questions swirl and the answers, of course, remain murky.

Could two Big Four firms become one? Could the mid market, especially Grant Thornton and BDO, step up by assimilation as opposed to organically? Could we see a Big Four firm merging with a mid market firm to create a two stream operation, where the mid market ‘arm’ would use the processes and innovation applied to larger companies, in order to help build strong UK mid market companies that would eventually become either large corporates, or part of existing large corporates?

The worst scenario is where one of the Big Four is taken apart and sold to a range of firms interested in different specialisms.

There is no question that changes are brewing in the accountancy sector and that the dominance of the Big Four as we have known it for the past few years will come to an end.

Finally, the authors suggest, “The question is whether one person or one team is capable of captivating the imagination of their staff to lead them into a new era; whether one firm will have the vision to write history and its own chapter in it.”

But the situation of any firm as big as any of the Big Four could well exceed the capability of one person or one team.