Mantra for global consultancies in India: Heal thyself!
Sapna Dogra Singh / New Delhi Mar 10, 2009, 00:23 IST
On September 6, 2001, a crack McKinsey team led by Indian-born Rajat Gupta, its global CEO at that time, made a presentation to the NDA government on how to double India’s GDP growth rate to 10 per cent. Legend has it that at the end of it Atal Bihari Vajpayee, the prime minister at that time, sighed: “Woh to theek hai Guptaji, lekin yeh sab hoga kaise(This is all very good, Mr Gupta, but how can all this be done)?”
At that time, many thought the remark odd. Old timers recall that in the mid-1990s, Indian companies’ stock prices used to move up when they announced that their next restructuring plan would be by McKinsey. Where was the room for doubt? In the light of the numbers Business Standard has unearthed, Vajpayee was prescient.
The truth is that for all the advice McKinsey and other big management consultancy firms have dished out, they are themselves in need of some serious consultancy, insofar as their Indian operations are concerned.
Data collected from the Registrar of Companies, or RoC, show that The Firm, as McKinsey is reverentially referred to, has been making steady losses in India since 2004-2005, except in 2006-07. It ended 2007-08 with a loss of Rs 2.26 crore, which was a lot better than the figure in some of the earlier years.
When contacted, the McKinsey spokesperson said: “As a matter of our global policy and as a private firm, we do not publicly discuss our workings.”
When it comes to dismal financial performance in India, McKinsey is not alone; it has the company of its global peers.
Accenture, which has been in India for two decades and considers the country one of its largest developing markets, has a profit and loss account that shows a net loss before tax of Rs 18.6 crore for the year ending March 31, 2007, which was an improvement over the Rs 48.8 crore in the previous year. The firm did not reply to an email query.
Bain & Company, which has grown from four consultants in 2006 to over a 100, made a loss of Rs 15.9 crore in 2007-08. An email sent to the firm remains unanswered.
Deloitte and Boston Consulting Group (BCG) are better placed, though their profits are measly — Rs 15 lakh in 2007-08 for Deloitte and Rs 5 lakh for BCG in 2006-07. In the earlier years, they, too, were in the red. While BCG declined to share their financial statements, since it’s a private partnership, Deloitte also didn’t offer its comments.
SOUND ADVICE? (Figures in Rs crore)
(How the Indian operations of global consultancies have performed)
Financial year
2003-04
2004-05
2005-06
2006-07
2007-08
MCKINSEY
Income
147.3
163.5
245.3
N.A
N.A
Profit/loss*
-8.7
-23.9
-11.3
17.3
-2.26
ACCENTURE
Net loss before
tax as per profit & loss
N.A
-48.8
-18.6
N.A
DELOITTE
Income
(NA)
15.9
25.8
35.2
95.1
Profit/loss
(NA)
-0.0016
0.9
-0.35
0.15
BAIN & CO.
Income
(services fee+other income)
35.1
59.2
Profit/loss
-0.518
-15.9
BCG
Income**
NA
35.2
58.64
83.19
NA
Profit/loss
NA
-3
2.02
0.05
N.A
*Excess of revenues over expenses including taxes (Figures in brackets are losses)
** Professional charges alone Source: Registrar of Companies
An executive of a large public sector company, which has been advised by one of these firms, was surprised to hear that they were not really well off themselves. He said it was ironical.
Rajeev Karwal, founder of Milagrow, which focusses on advising small and medium enterprises, said, overstaffing, overpaying and a matrix style of working ailed consulting firms. While they advised companies to be lean, they did not live by the principle.
There could, however, be a twist in the tale. According to the head of a global consultancy firm, the financial position may have a bit to do with the imperative to evolve a tax-efficient model.
“All consulting firms,” he says, “make 25 to 30 per cent profits, and losses are unheard of. There could be many factors if a firm is showing losses, which could include issues such as at what rate revenues are coming or the cost of manpower.”
There are two main reasons for the 'losses' or lack of profit:
1. The profits are expected to be distributed to the partners and hence there should not be any residual 'profit' to be reported. The company does not pay tax though the partners have to pay full tax.
2. In case there is residual profit, its repatriated to the parent company as corporate expenses (technical charges/ royalty). It is then distributed to the partners of the parent company any the parent also does not declare a profit. Neither the Indian company nor the parent pay tax.
I think a reputed newspaper like BS knows this. I wonder why his story was published despite the knowledge though. Someone trying to send the Tax guys to these companies?
I believe that the India centers are the cost centers for all these consulting majors and use them as back office for research purposes. Hence these centers are not expected to generate revenue and its great if they do so, howsoever small that may be.
All these companies should petition the Indian Government for much needed bail-out funds, as they are clearly in deep trouble on account of helping so many Indian companies do better. The government surely has a responsibility towards these companies. Thank you and warm regards.
Why should these consulting companies show high profits and to whom would the profits go? Their primary costs are 'salaries' for the employees and all the other costs are majorly taken care of under their engagement contracts. So I am not surprised that they pay off their earnings to retain the best talent and minimize any tax burden through losses. Whats the news here?
There are chances that the interpretation are not right. The profit / loss figure being quoted is probably post - bonus payout, which is nothing but profits being distributed among employees. Add those back and you get will probably get a profit range of 25-30%. Even otherwise, take a look at the numbers. If revenues of Mck were 250 crore in 2005-06, then even assuming 200 people as employees (a gross exaggeration, the number would be nearer 100-120) then if there are no profits, the expenses come out to be ~1.25 crore per employee! For a business with no physical assets, that's just not possible. The inference then must be that these figures are not the true profits of the firm since they are probably post bonus payouts.
I suspect in the case of foreign consulting snd IT firms, many a time the rates they charge for overseas assignments, is at quoted at cost to their foreign principal/parent company, the latter making the profits, while the Indian outfit shows a measly profit or loss, acting merely as a body-shopper. I think eveny large companies like Big Blue was working in India in the same mode a couple of decades back.
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