EY’s Consulting Arm Could Struggle to Compete As Standalone Firm

PricewaterhouseCoopers, KPMG and Deloitte—the other Big Four accounting firms—have said they don’t intend to pursue a similar split. Deloitte is a sponsor of CFO Journal.

EY plans to raise roughly $11 billion through an initial public offering of a 15% stake in the consulting firm, as well as about $13 billion in net debt to fund the transaction. The plan now heads to a vote with the firm’s 13,000 partners, which is expected to begin later this year and wrap up by January or February. The company, which like the other Big Four is structured as an international network of private partnerships, would then prepare the consulting business for an IPO late next year.

The separation would free up EY’s consultants to seek a bevy of new clients they previously couldn’t serve due to independence rules that limit what kind of tasks accounting firms can handle for audit clients.

Under the Sarbanes-Oxley Act of 2002, accounting firms that audit a company’s books are prohibited from providing certain consulting services, for example implementing new software for a client. “Systems design and implementation is one of the most lucrative consulting opportunities,” said Elizabeth Cowle, an assistant accounting professor at Colorado State University.

The global technology consulting sector was worth $350 billion last year, while the professional-services market was valued at $1.1 trillion, advisory firm Source Global Research said.

The consulting business, once separate, will continue to invest in technology to expand its offerings to clients, EY said, declining to provide specifics. The consulting-only firm plans to focus on winning new clients in areas such as technology, financial services, private equity, government and life sciences, EY said. About 75% of its tax practice will become part of the consulting firm, while the remainder will remain part of the auditing business, which will also offer some tax and advisory services, EY said.

Setting up a separate consulting brand could cost EY hundreds of millions of dollars, according to estimates from researchers that cover the industry. Those funds would go toward marketing, new employees and office space, said Fiona Czerniawska, chief executive at Source Global Research.

The consulting firm, which doesn’t have an official name yet, has to make sure its branding doesn’t confuse prospective or existing clients, she said. “EY is going to have to carve out something that’s distinctive and different in an environment which is already very crowded,” Ms. Czerniawska said.

EY’s current consulting business is an “established brand,” with repeat clients making up over 95% of its revenue base, said

Steve Krouskos,

a global managing partner at the firm. “We’ll be able to do things more cohesively and efficiently because we will operate under a more global structure for the new company,” Mr. Krouskos said.

EY’s consulting revenue nearly tripled between 2010 and 2021, to $15.93 billion from $5.52 billion, growing at a faster pace than those of the other Big Four firms, according to Monadnock Research LLC, a research firm tracking the consulting industry. EY trailed Deloitte and PwC in both its total revenue, $39.96 billion, and consulting revenue in the 2021 fiscal year. EY started from a smaller consulting revenue base than the other Big Four firms.

The stand-alone firm could square off more directly with existing consulting giants such as

Accenture

PLC and Bain & Co. than before. EY’s planned split has drawn comparisons to when Andersen Consulting separated from defunct accounting firm Arthur Andersen in 2001 and subsequently rebranded as Accenture. Accenture, which spent about $175 million on the rebranding, reported $50.5 billion in revenue for the year ended August 2021, up from $44.3 billion the prior year. Accenture didn’t respond to a request for comment.

EY said it plans to spend more than Accenture on marketing the brand, but declined to provide an exact figure. The consulting industry is far larger than it was in the early 2000s when several big accounting firms spun off their consulting arms, EY said.

EY and other accounting firms grew back their consulting businesses over time, collectively exceeding the revenue they generated with auditing. EY in 2000 sold Ernst & Young Consulting to Paris-based

Capgemini SE

for $11 billion.

EY in 2014 acquired global strategy-consulting firm Parthenon Group, which boosted EY’s capabilities in the strategy consulting space, said Mark O’Connor, chief executive at Monadnock Research. That type of consulting usually involves advising clients on how to structure their organizations or allocate resources.

One of EY’s focus areas is early-stage companies that specialize in technology, Mr. O’Connor said. In addition to young tech firms, EY also audits Google parent

Alphabet Inc.,

Amazon.com Inc.,

Apple Inc.,

Facebook

parent Meta Platforms Inc. and

Netflix Inc.,

none of whom it can offer certain nonaudit services to.

EY had 101 U.S. IPO audit clients last year, up from 59 the previous year, according to research firm Audit Analytics. That is compared with 76 for Deloitte, 68 for PwC and 64 for KPMG. EY’s had more U.S. IPO audit clients than the other Big Four firms each year since 2019, data show.

A potential recession also could make it harder for EY to gain new clients, said Gerard Tellis, a marketing professor at the University of Southern California, as companies often cut spending on external consultants in periods of lower growth.

Companies could be inclined to stick with their existing consulting firm, rather than try out a new one, if they are uncertain about their outlook, Mr. Tellis said. “If what they have in mind is growth and expansion, it’s going to be very tough in this market,” Mr. Tellis said.

Write to Mark Maurer at [email protected]