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Senior partners at PwC will have been spluttering over their mineral waters last month as they read the annual results of their closest rival Deloitte & Touche. They may have enjoyed a bit of schadenfreude over the last year as tales emerged of culture clashes between Deloitte staff and their new colleagues from Andersen, but Deloitte’s audacious takeover of a large part of Andersen UK’s former business a year ago this month has put PwC’s position as Britain’s biggest firm in danger.

The rise and rise of Deloitte & Touche

Five years ago Deloitte was the smallest of the Big Five. Senior partner John Connolly tells Chris Quick that it now expects to become Britain's biggest firm.

Senior partners at Price-waterhouseCoopers will have been spluttering over their mineral waters last month as they read the annual results of their closest rival Deloitte & Touche. They may have enjoyed a bit of schadenfreude over the last year as tales emerged of culture clashes between Deloitte staff and their new colleagues from Andersen, but Deloitte’s audacious takeover of a large part of Andersen UK’s former business a year ago this month has put PwC’s position as Britain’s biggest firm in danger.

John Connolly, Deloitte’s senior partner and the driving force behind the Andersen deal, has no doubt that his firm will knock PwC off its number one spot.

Connolly is not a man who is short on ambition, but the numbers appear to bear out his prediction. Deloitte’s revenues for the year to 31 May 2003 were £1.228bn – 33% more than last year, an increase mainly attributable to ex-Andersen business and the 3,000 or so personnel from the disgraced firm who joined Deloitte last August.

PwC is one of the profession’s last bastions of secrecy when it comes to sensitive issues such as UK fee income, but Accountancy’s Top 60 league table of firms (July, p26) estimates it to be around £1.4bn.

Deloitte is therefore hot on its heels, especially if you consider the fact that these results include only 10 months’ worth of post-Andersen deal business and the firm’s decision to ditch plans to follow the example of its Big Four competitors by spinning off only part of its consultancy activities.

However, according to Connolly, it’s not size that counts, but success, although he is quick to point out that one will lead to the other. ‘I have said to our people that our ambition is to be the most successful firm, which will mean we grow more quickly than our competitors, which will probably mean in the near term that we become the biggest firm in the UK.’

Integrating the Andersen intake
Connolly’s main emphasis as he talks energetically about the events of the last year is on how the firm has kept its focus on a tough market without being distracted by the massive job of integrating the former Andersen staff and partners into the firm.

‘We are pretty satisfied with our achievement,’ he says, commenting on the speed with which the firm undertook the post-Andersen deal integration. ‘The day the transaction legally occurred everyone was in their new area of business, the new shape had been fully communicated to everyone, every leader was known, the new executive was established, industry leaders were known and there were no double-headed businesses.’ He adds: ‘The last thing we wanted was to have everyone focusing internally when there was a tough market anyway.’

Connolly argues that the firm’s latest results – more about them follows – are testament to how the firm’s staff and partners have kept their attention placed squarely on the client. That’s not to say, however, that integration has been problem-free.

Deloitte took over what was left of Andersen’s business on 1 August 2002. Overnight Andersen’s bright orange brand was obliterated from the UK and was replaced with Deloitte’s dark blue. Shocked ex-Andersen staffers talked of the ‘brand police’ as they adjusted to their new environment. Stories emerged of disagreements and disaffection between newcomers and encumbents.

‘This is my least strong subject – I have advisers on this,’ says Connolly as the topic is raised. However, he does not shy away from the issue. The biggest culture clash, he says, involved what he describes as the Deloitte approach of ‘self-help’ – people having to find things out for themselves – and the firm’s openess to hiring outsiders, even at a senior level.

‘At Andersen the vast majority of people were developed and trained inhouse and outsiders didn’t necessarily do well. The firm’s style was to say: “You are the best people and we are going to do everything for you”. You only had to press a button to find out where this was and where that was – almost the opposite of the self-help system.

‘That is where we probably had the biggest clash. People came in and were interpreting it wrongly. Our guys were saying these guys want everything and the Andersen people would be saying this is
terrible.’

Connolly says five or six ex-Andersen partners left in the first few months – although mostly because other opportunities they had been chasing had come to fruition. Only one, he says, left because she felt she couldn’t fit in, and a ‘handful’ didn’t work out to the firm’s satisfaction.

He adds: ‘We would be foolish to feel that we have done a superb job of getting people to buy in. No doubt one of the reasons why not many people are leaving is because there aren’t many places to go. That said, good people can go anytime. High on our agenda is the task of retaining top talent and that will continue to be a big focus for us going forward.’

Connolly says there are no plans to mark the 1 August anniversary, although coincidentally the firm is converting to LLP status on that day.

Where the fees comes from
Connolly admits that the 33% increase in Deloitte’s revenues over last year is mainly due to the Andersen deal, but he says that the firm’s underlying peformance has been generally good in a difficult year.

Consulting, he says, has suffered from a quiet market with a decline in income of 10% or 15%. But he says the rest of the business has seen growth of between 5% and 10%. Corporate finance, in particular its reorganisation services arm which helps underperforming companies, has done well.

The firm’s tax business, he adds, has almost doubled as a result of the Andersen deal – and represented the area where Deloitte picked up most new business as a result of the deal.
‘Where we have really benefited from the transaction is where both teams happened to have a team in the same area,’ he says.

Andersen, he says, was much smaller in audit than Deloitte, but he defends Andersen UK’s audit record. ‘Its record in the UK was the equivalent of ours and we thought we were the best by miles,’ he says. Deloitte audit processes, however, have prevailed.

He responds to reports that audit fees are rising by saying: ‘I wish someone would tell our clients,’ although he concedes that some clients are commissioning extra work in the post-Enron environment.
Connolly admits, however, that clients are less willing to put themselves in a position where they are paying their auditors ‘multiples’ of the audit fee in non-audit fees. But he adds: ‘Whatever the market is, it is there for all the firms, so if less goes to the audit firm, then clearly more of it is available for the others.’

Size matters
The 1999 Accountancy Top 60 league table ranks Deloitte as the fourth biggest firm. The firm’s latest results press release includes a bar chart showing Deloitte’s fee income rising over the last six years – it has almost tripled. It is this to which Connolly – a lifer with the firm – refers to when asked about satisfaction. ‘Five or six years ago we were still towards the back of the pack. Now we are not there.’ Clearly, for Connolly at least, size matters.

This interview was originally published on accountancymagazine.com. Copyright 2003 accountancymagazine.com

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