Amid a market downturn and shrinking tech company valuations, big-four accounting firms are buying up third-party technology services firms to fill critical skill gaps and chase high-margin consulting revenue.
Traditional MSPs – from large system-integrator companies to smaller boutique firms – might feel a squeeze as big-four firms market their technology enablement services within a bigger package of business process improvements, analysts say.
Managed services firms, or third-party firms that typically offer technology onboarding, enablement, and ongoing maintenance services, fall into three buckets: traditional large-scale global systems integrators – companies like Accenture, Cognizant, Infosys and IBM; big-four accounting and consulting firms; and smaller boutique firms.
“They are getting more into the space and they are putting competitive pressure on the global systems integrators,” said Craig Lowery, a vice president analyst at Gartner. It could also accelerate the challenges some smaller MSPs face.
“Market opportunities for a general-purpose, downmarket MSP are getting smaller,” he added. “[An MSP] that's a small company that serves other small companies, definitely is in this situation of having a declining market opportunity for infrastructure managed services, because the applications are coming more and more from SaaS providers.”
To be sure, the business case for big-four firms to expand their managed services offerings isn’t new. The difference now, companies say, is that the economic climate opens up the field for new acquisition opportunities.
“We are surgically looking to fill capability gaps that we may have that can be accretive and supplemental to the capabilities we already do have,” said Jenny Koehler, strategic growth and business development leader at PwC. “We have a lot of conversations [with acquisition targets] and I think the willingness to listen to whether or not PwC is the right place for them, is certainly higher in uncertain uneconomic times.”
PwC, like other big-four firms, has leaned into technical capabilities among some recent acquisitions, particularly in the cloud software provider field, with acquired firms offering expertise in AWS, Microsoft, MuleSoft and data management capabilities.
Consulting firms were always positioned to advise clients on technology strategy, but the advent of cloud platforms allowed them to take an “end-to-end approach,” moving from inception to run phases, said Lowery.
Combined market annual contract value for IT and business services was $94.6 billion in 2022, up 6.5% over 2021, according to ISG. The managed services segment was up 6% to $37 billion in 2022.
ISG expects the managed services market to grow by 5% in 2023, with the shift toward cost optimization providing “favorable tailwinds for this market,” according to ISG President Steve Hall.
Leaning in to business expertise
Big-four firms that spoke with CIO Dive – PwC, KPMG and EY – said their selling point as MSPs is their ability to look at technology holistically, pulling in expertise from risk, regulation, business process and related fields.
Rapid digitization across industries created opportunities for big-four firms to lead technology transformation initiatives through their consulting arms, said Liz Cowle, assistant professor of accounting at Colorado State University.
“The big four have historically operated as this kind of oligopoly within the audit market and it seems like they're trying to build that same business model within the consulting market,” she said.
Among the firms that spoke with CIO Dive, MSP priorities included cloud services, cybersecurity and risk management.
Going beyond the technology
With cross-cutting expertise, the biggest leg up for consultancies is their horizontal approach, said Lowery.
“The consultancies will compete with the global systems integrators and win when it has to do with long-term business value and having that vision something that's broader and affects the C-suite,” he said.
In practice, this means looking beyond traditional ways of rolling out technology. KPMG, for instance, said a bank client had a process that required around 50 questions to be answered in order.
Working with subject-matter experts saved the client time and effort, the company said.
“When we were looking at this, we had our forensic people with us who understand anti-money laundering and they said ‘Well, there's really only four questions in here. If the answer is no, you're never going to onboard the client,’” said Atif Zaim, national managing principal in advisory at KPMG.
While big-four consulting firms may have an apparent edge through business and technology expertise, one challenge they might face is how to integrate the MSP model into a consulting business, said Robin Ody, a senior analyst at Canalys.
“If you acquire a 10- or 15-person managed service provider, they have a very specific way of doing business incentives that will focus on different KPIs than [a big-four firm] will usually have,” said Ody. “I think it's actually a big problem internally about how you set expectations, how you set compensation, how you hire new people, and how you incentivize them.”
The bottom line
Managed services typically support big-four firms’ consulting efforts, which have higher margins than auditing, said Cowle.
Big-four firms are able to compete with smaller firms on price through economies of scale, she added. EY, for example, said it’s able to offer unit-based pricing.
Big-four firms that spoke with CIO Dive confirmed that they compete on price along with the breadth of services offered.
Like its big-four counterparts, embedded managed services into bigger-picture problem solving is a key selling point, said Marcelo Fava, Americas consulting and managed services leader at EY.
“We compete on scale and level of expertise,” he said. “In the life sciences, it could be in the area of regulatory compliance for cancer. In the financial services space, it could be anti-money laundering or know your customer rules and regulations,” he said.
“It becomes a win-win: for the clients because they’ve reduced the number of providers and for us because we guarantee our revenue streams.”