While accounting firms are “going global”, their rationale for doing so does not apply to other industries.
The world market for accountancy has become polarised around six firms, American or Anglo-American in origin, operating worldwide. Does this mean that the number will inevitably reduce to five, to four and ultimately to one? Or that the same sort of polarisation will inevitably happen in investment banking, law, publishing, telecommunications and aviation?
The answer to these questions is an unequivocal no. Similar trends will emerge in some of these industries, although not all. And if they do emerge, they have quite different origins and rationale. Analogies are useful in understanding how businesses evolve. But their validity depends on identifying specific common features of the industries compared, not on handwaving generalisations about historic inevitability.
What people mean by globalisation differs from industry to industry. There is a major difference between globalisation as it is for Boeing, who produce for the world market from a single Seattle location, and globalisation as it is for Ernst and Young, who attach an international brand to output which of necessity is locally produced. Investment banks are like Boeing, and hotel chains are like Ernst and Young. The model of centralised production is driven by economies of scale, and the model of international branding by the doubts and hesitations of customers who need to buy worldwide in unfamiliar environments.
That is why there are no local manufacturers of jumbo jets but – since hesitant cross-border purchasers of accountancy and hotel rooms are only a part of the market – there are many successful small local accountants and hoteliers. And even these analogies need to be unpicked carefully. There are economies of scale in access to capital markets, which is why that side of the investment banking business is becoming more concentrated and going global. But investment banks also act as financial consultants, and there are no scale economies in that. So smaller boutiques will continue to thrive: large and small investment banks will just do different things.
Nor does the removal of trade barriers necessarily lead to bigger firms: only to industries based on competitive advantage rather than national preference. The growth of international trade and competition in the automobile industry benefited BMW and Honda as it damaged General Motors and Ford. In telecommunications and aviation, the restrictions which once aligned the boundaries of firms with the boundaries of nations are fast disappearing. But it is not obvious what follows from that. The rise of Southwest Airlines and Easy-jet, of Kallback and Orange, may be more significant pointers to the ways these industries will evolve than BT’s uneasy relationship with MCI in Concert. Or the Star Alliance, the new association of United Airlines with Lufthansa and others. Presumably the Alliance’s advertising agency intended no irony when they demonstrated that, in order to display the logos of all the participating companies, an aircraft would have to be so long and unwieldy that it could never hope to leave the ground.
How industry structures evolve depends, therefore, on specifics of technology and conditions of supply and demand. Audit – the product which remains the direct and indirect key to the profitability of accounting firms – is a very particular commodity. No one really wants to buy it. It is not even like washing up liquid, which no one really wants to buy, but everyone knows they need. You buy audit only because others require it of you, and therefore your incentive is to buy the minimum that satisfies these requirements. The only other commodity I can think of which is quite like it is motor insurance, and even there most people actually want the insurance. (There are also people who want the certificate that allows them to drive but do not care about insurance, and in the 1960’s companies like Fire Auto and Marine and Vehicle and General made a profitable business out of serving them until they were forced to close.)
It is this need for certification that explains why accountancy is characterised by tiers of firms with little to differentiate firms with the tiers. You can choose between Price and Young, Peat and Touche, Deloitte and Waterhouse, confident that each of them can do the job, and feeling no need to have more than the job done. And since audit is a function placed by the corporate head office, you want to entrust it to a single firm with global reach. Preferably one with a principal office in London or New York , the cities with the largest concentrations of corporate head offices.
But there is not one other industry to which that particular combination of factors applies. Insurance broking probably comes closest. Even law – an industry obsessed by the accounting analogy – is in reality very different. The distinction between the best and the good matters far more in law than in audit. And while there are some areas of legal practice – like multinational acquisitions – for which a single centrally controlled process is necessary and appropriate, there are rather more areas of law for which this is not true. That is why law is and will remain less international and less concentrated than accountancy: why major law firms are much more differentiated from each other than are major accountancy firms: and why their profitability is based not on size but on their specialist skills. The most lucrative legal services businesses – tiny measured by their share of the world legal services market – are the chambers of the leading commercial barristers.
Ambitious managers are so anxious to believe that everything is becoming larger and more international that everything is assumed to point in that direction. Yet if the changes in technology which increase scale economies in investment banking and aviation point towards greater concentration, it can hardly be true that the changes in technology which reduce scale economies in publishing and telecommunications have the same effect. The point is not that there are no valid generalisations about business. It is that there are no valid generalisations about business which are independent of facts about different industries.