Why Auditor-Generals don't sink black audit firms
1. Nkonki Sunninghill's exit - a tragedy for the South African Professional Services sector
On 16 April, the office of the Auditor-General announced the termination of contracts with KPMG and Nkonki. According to an article in EWN, Kimi Makwetu says "issues around the companies have been concerning and pose significant risk to the reputation of his office". The amount of advisorywork affected by the decision is estimated at R90m for KPMG and Nkonki combined. On 23 April, Nkonki Sunninghill, the firms's largest office with 180 employees decided to go into voluntary liquidation.
Voices in the the market spoke about "the Auditor-general sinking Nkonki", being "irrational and unsympathetic" to the firms and blaming him on negatively impacting the whole process of transforming financial services. Even if Kimi Makwetu had not taken the decision, was Nkonki's business model sustainable at all?
This article is NOT about whether the Auditor-General took the right decision or not but to look at the dependence and unintended consequences, our current approach to transformation by government contracts in Professional Services sector may cause.
2. Working for almost exclusively government - an unsustainable monoculture?
First of all, it is indeed very sad that Nkonki Sunninghill had to close its doors and I am sure that once the liquidation process is completed, a new firm under acting CEO Thuto Masasa’s leadership will rise again.
Let's look at Nkonki's business model which is very representative for a significant segment of the South African professional Services sector. In our daily consulting and training practice, we see many medium and small black audit, accounting and other Professional Services Firms, like attorneys, building their business almost exclusively on government work. It was and has not just been Nkonki's fate being caught in this trap: a "client monoculture" coupled with a high risk and considering the circumstances, not always offering a satisfying return. Just consider the mostly unfavourable payment terms.
International firms, such as KPMG who is also hard hit by the Auditor-general's decision, teach their partners and staff day-in, day-out to avoid such a situation. They will take a huge financial hit but won't have to cease their existence because of other (private sector) client business. Once that project or matter pipeline with a large parastatals or governments department disappears – for whatever reason – all those small and medium-sized Nkonkis of South Africa will disappear swiftly thereafter.
3. What is government attracting some much interest by small black PSFs?
I often hear two assumptions from our clients:
- It is easier to win work from government; and
- It is the only source of revenue that those small black Professional Service Firms can actually tap into as other market segments are not accessible.
Considering the first assumption, winning work from government is not easier compared to the private sector as tender submissions are quite time-intense, always very price-sensitive and it has to be an anonymous process whereas private clients are open to building a trusted relationship. Also, let’s not forget the budget pressures faced by government, a "Plan B" is highly recommended.
The second assumption weighs certainly heavier. Is government work the only source of revenue available? My answer is “not necessarily” but it is admittedly more difficult for newcomers to break into longstanding supplier networks and relationships. For example, some Sandton law firms have cultivated clients relationships for more than 100 years.
4. So, what needs to be done to address client portfolio imbalances and lack of private sector access?
Firstly, Professional Services Firms must from the first day of their existence consider a “balanced client portfolio”, long and short-running projects, clients from government and private sector, local, regional and international clients and so forth. The tools and skills to develop and implement such a practice management strategy need to be taught by the respective professional associations and there is definitely room for improvement for SAICA, the Law Society and others in that regard. A positive example is the significant leadership programme for female attorneys, run by the Law Society. But we need more of those programmes, rather today than tomorrow.
Secondly, beside useful government interventions, such as funding for small Professional Services Firms, there is a responsibility for senior (white) executives from the private sector with relevant expertise and networks to engage more in effective mentorship programmessuch as Shanduka Black Umbrellas and in return, more small firms need to join those programmes. Otherwise, we we never see the introduction of new market players - guarantee for increased competition, more innovation and better client services!