Consulting shakeout predicted

The scandal surrounding Arthur Andersen LLP’s handling of Enron Corp.’s finances could lead to the breakup of fully integrated consulting firms, putting more than a billion dollars of IT services work up for grabs, according to a Gartner Inc. report.

Frances Karamouzis, an analyst at Stamford, Conn.-based Gartner and author of the report released on Feb. 4, said companies like Andersen, Deloitte & Touche Tohmatsu and PricewaterhouseCoopers LLP will have to break up their auditing and business consultancy practices to remove potential conflicts of interests.

“I think what enterprises are scared of is a perceived sense of impropriety even if nothing’s going on,” she said.

Gartner expects the U.S. Securities and Exchange Commission to make the splitting of such unified consulting houses a priority, perhaps going so far as to regulate against firms providing business consulting services to the clients for which they perform audits.

The report noted that Ernst & Young’s sale two years ago of its consulting practice to Cap Gemini and last year’s spin-off of KPMG LLP’s consulting practice were partially in response to SEC pressure on this issue.

Karamouzis added that IT consulting already stirs plenty of controversy over failed implementations without adding further tension over that consultant’s review of the corporation’s finances.

Karamouzis expects “over a billion dollars to be redistributed — and that’s conservative.” Pure consulting firms are expected to pick up some of that business, but Karamouzis also believes that services aggregators will emerge.

Those aggregators might sell something like Deloitte auditing and KPMG IT consulting as part of a preconstructed package.

Karamouzis also thinks technology companies might look to buy consulting firms.

Hewlett-Packard Co. aborted an attempt to buy PricewaterhouseCoopers consulting in November 2000, but Karamouzis noted that IBM has done well for itself with its Global Services consulting division, and others may look to follow.

“Microsoft’s making a play for the enterprise market. They might want a consulting firm to help them achieve that,” she said.

She added that SAP AG and Oracle Corp. project far more license sales in the future than their current in-house services divisions can support.

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