Tween june and december 2001 net revenue shrank by 9

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