tween June and December 2001, net revenue shrank by 9% vs. the same two quarters of the prior year, according to the latest SEC filing. Perhaps more alarming is the drop in gross margins. In North America, which represents roughly half of the firm’s global revenue, gross margins fell from 43% in FY00 to 33% in FY01. In the last six months of 2001, North Ameri- can gross margins rose slightly from 31% to 34%. The firm blamed the economic downturn for reduced demand for its services and increased competition for a reduction in billing rates. “Approximately 93% and 92% of our revenues for the six months ended Dec. 31, 2000 and 2001, respectively, were recognized primarily on the basis of hours worked. For these revenues, the number of hours charged by our client service staff to clients decreased by 7%, while our average rate per hour de- creased by approximately 2%,” accord- ing to the filing. Another disturbing admission is that PwC appears to be the only former Big Five firm materially hurt by the SEC in- dependence ruling. Others are giving the impression that the independence rules have resulted in the redistribution of clients, with no other firms reporting material gains. For example, KPMG Consulting recently revealed that its so- called “Gladiator” task force has netted 35 small wins from rival Big Five firms, but they are not expected to add much to the bottom line. Accenture estimates it is gaining “tens of millions of dollars” in new revenues from consulting clients leaving their for- mer auditors. Even Cap Gemini Ernst & Young, which has talked up its wins at the expense of former Big Five consultants, admits that new business will be measured only in tens of millions of dollars. PwC stressed that separating the con- sulting practice from the legacy audit and tax units could drag revenues down further. “Our business historically has benefited from referrals from the audit, tax and other businesses within the PricewaterhouseCoopers network,” ac- cording to the S-1. Kennedy Informa- tion Research Group estimates that PwC generated 20% of its consulting fees from public audit clients in FY00, down from 31% in FY99. PwC Consulting could also face heat from Wall Street over its failure to get buy-in from all of its international partnerships. “Because our business currently is part of the businesses of separate firms, which have their own governance and management, we may experience diffi- culty in implementing our growth strat- egy as we transition to a corporate struc- ture,” according to the SEC documents. We don’t think this is just a boilerplate warning. Given last year’s surprise defection of the Price Waterhouse partnership in Paris, PwC is likely not the cohesive global player that it will need to be to compete effectively with other publicly owned consultancies. KPMG Consult- ing has been heavily criticized because it was not able to bring its European partnerships into its IPO last year. ( See story, p.3. ) Keeping the international partner- ships on board was one of the biggest frustrations of former PwC Consulting CEO Scott Hartz. Tom O’Neill, who
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