Accounting for change
20 November 2000
Ever since the merger between accountants PriceWaterhouse and Coopers & Lybrand in 1998, there has been an increased flux within the insolvency industry, particularly in the accountancy sector. But why has this manifested itself so strongly in recent years, and what effect is this growing instability having on the relationships within the industry as a whole?
This year alone has seen the highprofile announcements of mergers between Baker Tilly and Fraser Russell in June and Grant Thornton and the smaller HLB Kidsons just weeks later in July. But the situation is not confined only to the high-profile reports - for every successful merger there is an equally none-too-successful series of negotiations. Earlier plans in 1997 to merge KPMG and Ernst & Young, two of the glamorous big five accountancy firms, ran into highlypublicised difficulties. Also, Pannell Kerr Forster has had discussions with a number of accounting firms with a view towards pooling their respective strengths.
While views on the effects of these changes vary, among most lawyers and accountants agree that the reasoning behind any movement in this direction is complex. Ernst & Young partner Andrew Wollaston highlights the growing pressure on medium-sized and smaller accountants to keep in touch with the resources of those at the top. "The big five are getting bigger and bigger, attracting partners from the second-tier firms, which cannot always afford to lose partners. For them, merging is a way of maintaining essential critical mass," he says.
But it is not simply a case of having enough partners to keep the firms' business rolling in. Simon Freakley, senior partner in medium-sized Kroll Buchler Phillips' turnaround, recovery and restructuring department, believes that the smaller practices are consolidating to survive, with pressure to expand coming from all sides. He says: "Many banks now have national panels. In order to get on these panels the firms have to demonstrate UK coverage. Many smaller firms have found themselves in a situation where merger was their only way of getting on these panels and guaranteeing substantial work in the field." Kroll Buchler Phillips has itself had to react to client pressure by opening an office in Leeds to service banks.
And while it was not a motive in its own merger with the Kroll group last summer, Freakley is positive about the benefits of mergers, and in particular the advantage his firm has gained through its new link. "It gave us the ability to work on a more global scale," he says. "By improving our critical mass, it enabled us to compete effectively with the big five for international business."
Those who work in the insolvency industry are quick to point out that although these mergers do inevitably bring about some change in the industry, another factor has emerged as the most influential trend. The past few years have seen a noticeable increase in the number of partners jumping ship from one accountancy firm to another. And while some sources suggest that many of the movements are due to underperformers moving on, there are a few notable exceptions to this premise.
The major move of the moment is that of top restructuring accountant Aidan Burkitt and his team from PricewaterhouseCoopers (PwC). The team, which includes younger star Jerry Loftus, is moving to big five rival Deloitte & Touche, which has traditionally lagged behind PwC and KPMG on the larger workouts. Other defections include Jamie Gleave, a partner from Arthur Andersen's Manchester office, to Kroll Buchler Phillips, Ernst & Young partner Cedric Clapp to Baker Tilly's Bristol office, Robson Rhodes partner Ipe Jacob to Grant Thornton and Grant Thornton partner Bruce Mackay to Baker Tilly. Another high-profile move was that of John Newell from Ernst & Young, which has recently undergone some downsizing in its insolvency department, to the relatively smaller Pannell Kerr Forster.
According to Colin Haig, head of business recovery at Baker Tilly, these changes could be even more influential than mergers in an industry where "it is not unusual that people attribute skills to individuals". He adds: "Insolvency appointments, like trustees and liquidators, are to individuals, and so the person gains the reputation rather than the firm."
Wollaston points out that although people often do recognise individuals rather than firms, the two in essence go "hand in hand". This is a widely-held view; the close personal and working relationships that lawyers, accountants and bankers build up over many years working alongside each other do have some effect.
Keith Bordell, head of Berwin Leighton's business regeneration and insolvency group, believes that although relationships are not the key issue in deciding to pass work on, they do have some influence. He says: "If a partner moves to an equally good, or indeed an even better firm, then the decision of who to pass work on to depends on three things - the individual, their area of expertise and the context in which they work."
The movement of personnel between firms is closely linked with the notion of industry specialisations. According to Freakley: "The move towards specialisations has made a big difference. Although recruitment is always more about quality than experience in a particular field, there has been a move towards gathering good-quality people and teams to work in a certain area." As yet, though, insolvency accountants have not specialised in industry sectors too much, for the simple reason that there is not enough work to sustain such an approach. However, certain sectors, such as insurance, financial services and motor and motor retail have attracted repeat business.
Maurice Moses, managing partner of the business recovery group at Levy Gee, while stressing his own firm's continuing policy of organic growth, also highlights the use of gathering personnel and undertaking mergers for this growth in a certain direction. "It's not only a question of being able to provide more effective services, but being able to develop niches to serve particular industries properly and with increased resources," he says. According to many in the industry, the key word is "big", and use of the word "niche" is just another way of saying big in a particular area.
The medium-sized firms argue that when it comes to strength in depth, they can match the big five in local markets. Haig at Baker Tilly says: "Many organisations want to deal with a firm that has a more national focus, which has led to opportunities opening up for small and mid-tier firms."
The continued growth of the big five and the introduction of a minimum fee criteria has led to a perception among many businesses that the bigger firms are no longer interested in any case that does not involve seven zeros. In short, their businesses are simply incomparable with the huge charge-out rates of the large consultancy projects.
Haig sees the consolidation among the big five as good news for medium-sized firms. "It has pros and cons for the larger firms," he says. "It's good in many ways in that it creates a great big organisation, which is very powerful and has huge resources to focus on a particular sector. But mergers among the bigger firms create conflict issues, and through them opportunities for smaller firms."
According to Moses: "Levy Gee has certainly seen a marked increase in work in the last year. You'd have to ask PwC where they see themselves in the market, but people do seem to see them as dealing mostly with larger cases, so we have a natural advantage in competing in the midcorporate sector."
Another issue highlighted by mergers, particularly those among the bigger firms, is the danger of conflicting themselves out of particular cases. According to Mike Jervis, a partner in recovery and reorganisation at Grant Thornton, the danger is that "by merging, they've closed more doors than they've opened".
The insolvency industry has obviously been a hive of activity over the last few years, although there are mixed opinions as to the extent of change and instability this has brought. The next few months will no doubt continue this trend and bring even more major changes for partners from both sides of the insolvency divide. And inevitably, these will affect the way they work, where they work, who they work with and even the nature of the work itself.