Why holding its nerve has paid off for Britain’s top accountancy firm
LOOKING out of the window of his Embankment office, Ian Powell points at the sky above the London Eye. “It’s a bit cloudy,” he says. “But there’s sun on the horizon.” The same could be said of the outlook for PricewaterhouseCoopers, the largest of the “big four” professional services firms, which Powell has chaired since he was voted in by the group’s 850 partners in July 2008. Although net revenue in fiscal 2009 was up slightly to £2.25bn from £2.24bn, it’s nothing compared to the seven per cent revenue growth it booked in the previous year.
Profit per partner also fell three per cent during the period, from £797,000 to £777,000, as the group continued to invest despite the downturn, while Powell – who is dressed in a sober charcoal suit with a white shirt and blue-grey tie – trousered £3.3m. Nonetheless, he says he is “reasonably upbeat” about PwC’s prospects. “Of course, it’s been tough for our clients, which means it’s been tough for us. But it’s also tough to grow revenue in this environment, and we’ve managed it.” The firm has also managed to outperform its closest rival Deloitte, which saw turnover slide two per cent to £1.97bn in the year to the end of May. Analysts expect the others in the “big four”, KPMG and Ernst & Young, to report modest revenue declines for 2009 as well.
When the recession began to bite, Powell decided that battening down the hatches would be the wrong move. “We took the decision that, as number one, we would continue to invest in the downturn. Internally, we talk of ‘holding our nerve’, and that’s exactly what we’ve done. Instead of laying people off, we redeployed them across the practice and protected jobs, which means the mood seems pretty positive and morale is pretty good.” That said, around 200 staff have left in the last year as part of a voluntary redundancy programme.
STILL RECRUITING
The group made a £15m investment in the Middle East, buying 100 per cent of the ordinary shares in PwC MEG, a holding company for various PwC practices in the region. It also bought Sustainable Finance, a consultancy that gives advice on climate change and social responsibility, for £3m. It now count the co-founders, who include London Mayor Boris Johnson’s brother Leo, among its partners. Powell, who is raring to go having just returned from a fortnight’s break at his Devon property, suggests that his appetite for acquisitions hasn’t yet been satisfied: “If we don’t invest, we mightn’t be relevant”.
The group also decided to continue recruiting graduates at a similar pace to previous years, and has taken on over 1,000 fresh-faced ex-students who start in the next few weeks. Again, Powell thought that putting the skids on recruitment in the middle of a recession would actually be counter-productive. “Of course, we always take on good calibre graduates,” he explains. “But because of the massive increase in the number of applications, we’ve had an even better pool to select from this year.” PwC is still adding partners as well, albeit at a slower rate than in 2008.
Thanks to the downturn, the biggest driver of revenue in 2009 was PwC’s advisory business, where turnover jumped £34m to £737m (its assurance and tax businesses saw revenues shrink). Handily for Powell, who became a restructuring partner at the group in 1991 before leading the division in 2001, he is more than comfortable in this space, having handled huge restructurings like Marconi, NTL and Drax Power. But it was his leadership of the MG Rover restructuring that catapulted him into the limelight in 2005, when he impressed partners with his deft handling of the media. Many partners say that it was his performance then that earned him their vote in 2008.
Powell says PwC made a conscious decision to invest heavily in its advisory business during the good times in preparation for the inevitable bust. “If you look at something like the administration of Lehman Brothers, we were the only business in the world that was ready to go, that could deal with it immediately. From a reputational perspective, it’s been great for us”.
The lean Lancashire man says the firm’s reputation is the main reason it won’t have to compete in a price war with its competitors, something that KPMG seems keen to start; last month it snatched PwC’s lucrative internal auditing contract with Rentokil by undercutting its fees by 30 per cent. “At the end of the day, clients want great value,” he says. “But that doesn’t necessarily mean the cheapest. Although we are market competitive, we don’t sell on price alone. If you drop quality, then a firm’s integrity is at risk.” Auditing, he adds, is not an area where you want to be cutting corners.
To cope with less auditing and tax work from private firms, PwC has also been getting an ever-increasing amount of business from the public sector, which accounts for around 40 per cent of work in its consulting division.
“The margins might not be as good in the public space,” Powell explains. “But the contracts are much longer-term, which means we can plan our business better.”
TOO MUCH REGULATION
Despite doing more work in the public sector, Powell is clearly uneasy about the direction of government policy, especially in relation to the City and the financial services industry.
“We shouldn’t underestimate the financial service sector, nor how key it is to the economy as a whole,” he argues. Although he accepts that mistakes have been made, he says there is a tendency in government to refer to the whole industry as one, “which is worrying because some businesses are phenomenally successful, and generating huge amounts in tax.”
Powell is less concerned by the 50p tax rate and says that over-regulation is a much greater threat to the UK’s competitiveness.
“I’m worried that it could end up damaging the businesses that are providing the tax revenue this country needs to stage a recovery.” He adds that major companies are already leaving the UK or deciding not to come. “I’ve spoken to a lot of chief executives across the world who are deferring investment commitments here.”
Even if the government doesn’t hit financial firms with new, burdensome regulation, Powell says the UK’s recovery will be slow. “The signs in the services sector suggest that the next twelve months will be very similar to the ones we’ve just had, so we’re not budgeting for growth in fiscal 2010 at all. We think there will be an up-tick in the next half as the calendar year, and growth as we move into fiscal 2011.”
You get the impression that if you were to cut Ian Powell down the middle, the PwC logo would run through him as though he were a stick of rock. Like his contemporary at Deloitte, John Connolly, he is a “lifer”, having spent his entire career at the partnership since joining its Birmingham office in 1977. Although he admits that he’s been tempted to move into industry at times, he seems content where he is. “Something about the culture of a partnership is really different; it takes time to develop an understanding of the business.”
But where does he take the firm when it is already the biggest professional services player? Powell is adamant that PwC can’t afford to take its top dog status for granted. “We need to do something truly different to others,” he explains “We need to be iconic, which means being at the top of everyone’s mind whenever financial services is mentioned”. Iconic. It’s a big ambition, but I suspect Powell won’t give up on it easily.