Called to account

Deloitte CEO John Connolly is undaunted by the credit crisis and its ramifications for the US and European financial services markets.
Called to account
By Andrew White
Fri 18 Apr 2008 04:00 AM

Deloitte CEO John Connolly is undaunted by the global credit crunch and its ramifications for the US and European financial services markets.

He tells Andrew White why it's not all doom and gloom - and why the Middle East has a key part to play in the immediate future of the world economy.

John Connolly clearly feels at home at Deloitte. He has spent his entire career at the ‘big four' accountancy firm, and now that he has risen to the very top, the US$9.3m-a-year senior partner and chief executive is determined to do things his way.

Six years ago, he persuaded his partners at Deloitte to take over the UK partners and staff of Arthur Andersen, the auditor shattered by the Enron scandal.

Connolly's decision to bolster Deloitte's consultancy arm, at a time when its rivals were dropping theirs, was a bold move that has paid off - and Connolly's grand design isn't finished yet.

"As the emerging economies of regions like the Middle East grow, they will become more significant globally because of the businesses they buy," he explains.

"We need to have relationships with a very reasonable proportion of the very largest companies in the world in order to be successful," he continues. "Five years from now, the map of where the largest companies in the world are either located or owned from will look very different from how it does today.

"So our growth is more strategic than urgent in terms of capturing revenues in the short-term. It's much more about getting strategically positioned for the future.

Deloitte's Middle East office currently numbers around 900 staff covering every aspect of the firm's business, from Audit to Consulting and Corporate Finance. According to Connolly, Deloitte's growth in the region is lies around the 30% mark year-on-year.

Additionally, as the market becomes more sophisticated, so Deloitte is bringing deeper skill-sets from different parts of the world into the region - whether hotel transaction experts, energy sector professionals, or oil and gas specialists.

"As larger things happen here, whether they're particular projects or just a scale change locally, then there's more complexity, and more need for specialist services," he explains.

If you think of the origins of a business like ours, in the Middle East you would have expected us to have mostly been in auditing. We would have been accountants, whereas now we're involved in a range of things.

Yet while the Middle East might be a growth area for the firm, the shadow of the credit crunch in the US and Europe looms large over the entire financial services sector.

The Gulf and other emerging economies may represent convenient ports as the global storm hits, but Deloitte will not be able to escape its impact. According to Connolly, however, there are silver linings amid the storm clouds.

"Like all businesses, if the markets and business world does slow down in a very significant way, then we should be impacted by that," he acknowledges. "However, it's interesting because if you look at the last 20 or 25 years, then the aggregate revenues in our market, the major professional services firms, have never fallen.

"Obviously we do well when there is affluence and prosperity, but we mostly do well when there's change," he continues. "What's not good for us is when nothing is happening, and although we would prefer that it was very positive change with lots of prosperity, in an environment like now a firm like ours can still do well.

So well, in fact, that Connolly is determined Deloitte should not have to shed jobs as the global economy tightens its belt. He points out that even in the core business areas of Europe and North America, Deloitte will continue to take in thousands of new graduates each year.

Total headcount growth may lessen, but it will still represent a real increase in numbers.
"Now that might change and of course the profile could be different, in terms of which businesses we hire into, but because we are great developers of very talented people, some of those very talented people will always be hired by our clients and the marketplace," he argues.

"Even in a high growth environment [such as the Middle East], we always have to be hirers of people as we always have to be feeding the boiler at the other end."

Of course, in brighter times the staff retained by Deloitte's US and European arms might be busying themselves with investments, mergers, acquisitions and staff expansions; just now they are gearing themselves towards helping distressed firms with refinancing, selling off businesses, downsizing and "dealing with human capital issues".

"There are businesses that still do very well in this kind of an environment, and we want to make sure that we are identifying which those businesses are, and making sure they're our clients," Connolly adds grimly.

Back in the Middle East, the credit crunch has presented Gulf firms with opportunities that might otherwise not have been available at an affordable price.

Cash-rich companies are taking advantage of lower asset prices, particularly in the US, and as a result Deloitte's corporate transaction activity - acting for corporate buyers - is growing "very quickly at the moment".

So will US equities dip still further? Or have they bottomed out already?

"You've got to be a very smart person to understand the markets' sentiments, because if you look at the profile of the markets generally, it's been a rollercoaster," Connolly insists.

"I think the question is not whether it's bottomed out, but more like whether we are now bouncing back up?

"People have been making positive statements but if you look at US markets at the moment in the non-financial sector, then they're factoring in quite a healthy growth in the profitability of businesses," he adds. "Does that mean the markets are too high, or does that mean it's a proper assessment of the prospects of business?"

Back in the Gulf, the notion of ‘proper assessment' is one that is on the lips of investors from the region, and further afield. As increasing numbers of Middle East firms elect to IPO in the region, so regulators are striving to build an effective corporate governance structure.

"Everywhere I have been corporate governance is being discussed, so it clearly is very much on everybody's agenda, which is good," he says.

"The most important thing is for the companies themselves to be doing something about it, and I think most organisations - and this is the same in the more mature economies of the world - have in place the structures and the individuals with the responsibilities for corporate governance.

As a major player in the financial sector, Deloitte is invited by regulatory bodies around the world to contribute to debate over legislation and policymaking.

"We're asked for our input and we get the chance to give it in lots of different forums, so we're quite close in the more mature markets," he says. "It's not uncommon to have meetings with the regulators, sometimes about specific companies, but mostly more generally about sectors.

So we do get that opportunity." Judging by Deloitte's performance over recent years, John Connolly doesn't look like a man to miss any such opportunity.

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