How EY differs

Long gone are the days when the Big Four KPMG, PwC, Deloitte and EY were only associated with auditing. All four service providers have now built up a considerable consulting business and have thus become veritable competition for the major strategy consultants such as McKinsey and Bain.

But not every Big Four society has developed to the same extent. In the battle for the most lucrative consulting projects, the best minds and the most promising company acquisitions, some are better off than others, as the FINANCE analysis of business development in the consulting and advisory sector from 2019 shows.

The advantages of Deloitte

The new number 1 among the Big Four in the consulting business is Deloitte. While the Munich-based company was far behind in fourth place in 2015 with a turnover of 230 million euros, Deloitte has since grown in double digits and has made up one place year after year.

Overall, Deloitte grew by 19 percent in the past financial year to a total output of 993 million euros and is now even scratching the billion mark. Of this, 665 million euros (+24 percent) are accounted for by the consulting business and 338 million euros (+10 percent) by financial advisory.

Deloitte has two advantages on its side: On the one hand, the Big Four house, unlike its competitors, never sold the consulting division. On the other hand, Deloitte has by far the fewest auditing mandates of all four in the Dax family and can therefore acquire consulting contracts with these companies without any conflicts of interest. Especially in the first division, the Dax30, Deloitte has only one mandate with Bayer and thus opportunities for many well-known and lucrative consulting mandates.

Consulting clearly exceeds testing at Deloitte

But there is also a downside: Actually, Germany boss Martin Plendl wanted to win several new auditing mandates in the Dax as part of the mandatory auditor rotation, but the Munich-based company simply does not succeed. The companies may also prefer to keep Deloitte as a consultant and therefore opted for KPMG, PwC or EY as the new auditor.

In fact, the now high dependency on the consulting business also harbors risks: although the testing business has lower margins, it still ensures predictable income over ten to 20 years until the auditor change is due. The demand for advice, on the other hand, is much more volatile. At Deloitte, too, the boom seems to be coming to an end. For the current financial year, Plendl "only" issued a growth forecast of 10 percent - before the corona crisis occurred. However, this also offers Deloitte opportunities: The restructuring consulting business, in which Deloitte had recently invested heavily, could pick up.

PwC slips into second place for advice

PwC suffered from the rapid rise of Deloitte: With a total output of 903 million euros in the consulting business, the Big Four house fell back to second place. The growth of 5.3 percent in what is actually a very dynamic industry was surprisingly weak last year. In the previous year, PwC achieved 10 percent. This was now the lowest growth among the Big Four.

This is surprising, given that PwC made a large investment in the consulting business a few years ago with the acquisition of Strategy &. This makes PwC the only Big Four “with real strategic competence”, as Germany boss Ulrich Störk emphasizes again and again. Most recently, Strategy & contributed 218 million euros to the total output and grew at about the same level as the consulting business - also weaker than the competition.

"PwC is the only Big Four with real strategic expertise."

Ulrich Störk, Head of Germany, PwC

One reason for the weak growth in Störk's consulting business is that PwC deliberately refrained from low-margin implementation business. This includes, for example, programming or adapting interfaces when introducing software. Unlike Deloitte, PwC also has a large number of test customers in the Dax family and therefore fewer advice options. In the course of the examiner rotation, however, this picture could turn around.

EY becomes a competitor to strategy consultants

However, PwC does not have to worry about second place within the Big Four in the consulting business, because EY is still a long way behind with sales of 789 million euros. In contrast to its competitors, EY does not show total output, but rather sales, which means that the services provided from ongoing projects up to the balance sheet date are not included. Of the EY consulting sales, 403 million euros (+15 percent) are accounted for by transaction advice and 386 million euros (+7 percent) by management consulting. These growth rates are higher than in the previous year. But in the medium term there is a risk of the curve flattening out, after all, no other Big Four company has recently won as many new DAX auditing mandates as EY.

Germany boss Hubert Barth is still combative and announced that he wants to advise companies primarily on corporate restructuring and digital transformation. In these fields he explicitly wants to compete with classic strategy consultants such as McKinsey, Bain or BCG. The acquisitions made in recent years are intended to help: EY has strengthened its position with the digital consultancy Etventure and the strategy consultancy Parthenon, among others.

KPMG is again weak in advisory

As in the previous year, KPMG brought up the rear in the consulting business. Number 4 achieved a total output of 709 million euros in 2019 and for the first time generated more from consulting than testing - this was the case with the competition a few years ago.

The 6 percent growth is the second weakest among the Big Four. In 2018, it looked as if KPMG would finally take off: Back then, the Berlin consultants grew by 17 percent after the business had barely moved in 2017. Germany boss Klaus Becker justified this strong growth with the fact that the numerous investments in the consulting business would finally bear fruit. It is all the more worrying that the momentum slowed down again just a year later.

That's how much the Big Four generate in 2019 with advice

993 million euros (total output)

903.8 million euros (total output)

709 million euros (total output)

Similar to PwC, KPMG also has a natural growth inhibitor in the consulting business due to the numerous audit mandates in the Dax. KPMG now deliberately wants to use the rotation of examiners to secure consulting contracts with former inspection customers. Becker thinks that this has already been achieved “impressively”: of the 36.2 million euros in audit fees that KPMG had to surrender in 2019, 95 percent were recovered through consulting fees.

This could be a good omen for the next two years: KPMG will lose a number of audit mandates in 2020 and 2021. Should KPMG be able to maintain its high conversion rate, the company may no longer be bottom of the Big Four in the consulting business.

julia.schmitt [at] finance-magazin.de

You can read the first part of the FINANCE Big Four analysis on the auditing business area here. You can find more news about KPMG, PwC, Deloitte and EY on the Big Four topic page.