Deloitte Consulting 401

TECHNOLOGY BUSINESS RESEARCH, INC. 11 Merrill Drive, Hampton, NH 03842 Phone: (603) 929-1166 Fax: (603) 926-9801 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.

PROFESSIONAL SERVICES BUSINESS QUARTERLYSM

DELOITTE CONSULTING Fourth Calendar Quarter 2001

Second Fiscal Half 2001 ended May 31, 2001

PSBQ is the comprehensive analysis of professional services, such as management consulting, strategy consulting, system integrations, outsourcers and other IT consultants. PSBQ covers quarterly reports on IBM Global Services, EDS, CSC, Accenture, Hewlett-Packard Services, Compaq Global Services, PwC, KPMG Consulting, Unisys Corp., Cap Gemini Ernst & Young, Affiliated Computer Services, Deloitte Consulting and McKinsey & Co. The service also includes a quarterly benchmark report, analyst access and custom consulting.

Publish Date: Jan. 30, 2002 Author: John Caucis, Contributing Analyst Content Editor: Humberto Andrade ([email protected]), PSBQ Director

TBR ANALYTICAL SUMMARY ( = negative, = neutral, = positive)

TBR POSITION Deloitte Consulting is the consulting arm of worldwide accounting and auditing firm

Deloitte Touche Tohmatsu. DCs FY01 performance in the midst of a general economic slowdown, as well as more substantial declines in the consulting and IT services industries, speaks to the efforts to diversify its business model. DC posted FY01 revenues of $3.49 billion, up 11.1% from $3.14 billion in FY00. While far from the growth rates of 35% or more DC enjoyed prior to the deceleration in IT spending, DC has managed to maintain positive revenue growth, beating the PSBQ average of 9% for the period. TBR believes this is due to the relative success of DCs efforts to geographically diversify its business model, expand its portfolio of services and strengthen its brand the next logical steps after establishing a global footprint. While TBR certainly expects DC to continue its expansion into new geographies in the future, it appears DC has curtailed its expansionist strategy in favor of diversifying its range of services. This served to buffer DC against overexposure to the areas hardest hit by the IT spending slump and enabled it to respond to clients demands for a broader range of services from a single firm. DC may yet suffer a decline in revenues as corporate IT spending is still soft and strategy consulting is weakening. However, an even more serious threat to DC stems from the Enron debacle and its corresponding effect on the auditing industry. TBR believes that despite DCs ardent refusal to spin off from DTT, a disruptive separation will be inevitable.

STRATEGIC OVERVIEW .............................................................. Page 5 DCs primary strategic objectives of establishing a global presence and serving the worlds

leading multinational corporations have remained intact in FY01 from FY00, though the strategy seems to be evolving to its next stage. From DCs inaugural year in 1996 the consulting company has grown from a handful of practices to 34 worldwide practices at the beginning of FY00. This number has not grown since that time, and TBR believes DCs corporate strategy has shifted from an expansionist strategy to focusing on growing and strengthening its portfolio of global strategic alliances. However, TBR believes the slowdown in the consulting industry in 2001, especially in the United States, also had an impact on DCs efforts to expand its global footprint. FY01 revenues were $3.49 billion, up 11.1% from $3.14 in FY00. These results are cause for some optimism for DC as its 11.1% year-to-year revenue growth in FY01 edged out the 10% year-to-year revenue growth achieved in FY00. However, year-to-year revenue growth for FY01 and FY00 are far from the spectacular growth rates of 35% or more during the height of the IT infrastructure and services spending frenzy a few years back.

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PROFESSIONAL SERVICES BUSINESS QUARTERLYSM Fourth Calendar Quarter 2001 DELOITTE CONSULTING Page 2


MARKET STRATEGY ............................................................................................Page 10 It would seem DC has curtailed its efforts to expand its global footprint, as it has not increased its member

or subsidiary geographic practices since FY99. These practices numbered 34 in FY99 and that has remained unchanged. Despite this, DCs overseas revenues have continued to grow and become a larger portion of its worldwide revenues. In FY01, revenues from EMEA and Asia Pacific totaled $1.1 billion, up 19.4% from $926 million in FY00. Individually, EMEA revenues were $661 million, up 7% from $619 million in FY00, while Asia Pacific revenues were $445 million, up 45% from $307 million in FY00. Revenues from EMEA and Asia Pacific accounted for 31.7% of total revenue in FY01 versus 29.5% in FY00. Revenue from Latin America has grown 33.8% to $210 million in FY01 from $157 million in FY00. To supplement the Authentic Consultant branding and marketing campaign it launched in July 2001, DC recently published the first two in its Straight Talk series of books. DC hopes this effort will further distinguish itself from its consulting rivals in the eyes of current and potential clients. TBR believes this represents an effort by DC to strengthen its brand recognition, which it admits has been weaker than its consulting competitors. DC continues to target large enterprises, both as clients and strategic partners (the consulting needs of midmarket or smaller firms are primarily served by DCs parent company DTT). In FY01, DC established new or expanded relationships with Lucent, Siemens, BEA Systems and Hewlett-Packard.

RESOURCE MANAGEMENT ...............................................................................Page 14 FY01 saw the virtual end of the war for talent DC and most other consultancies were fighting during the

heyday of the e-commerce and Internet frenzy. The mass exodus of consultants who left their positions with consulting firms like DC, Accenture, McKinsey and the Boston Consulting Group to join or start new e-commerce ventures intensified the competition for talent during the e-commerce and Internet boom. But as IT spending on new projects dried up, so did the need for the architects and plumbers of the new technology, the strategy and IT consultants. DCs globalization strategy led to substantial growth in its worldwide staff and locations since 1998. Its worldwide staff has grown 49.4% from 8,220 in FY98 to 12,282 in FY01. However, most of this growth has been overseas, with staff in EMEA increasing 95.3% from 1,469 in FY98 to 2,869 in FY01. DCs staff in the Asia Pacific/Africa region has grown 79.1% from 1,454 in FY98 to 2,605 in FY01. In FY01, Asia Pacific became the fastest-growing region for DC both in terms of revenue and human resources directed to the area. An interesting development is DCs launch of Passport, the firms Web-based alumni program established at the beginning of FY01. In its first year, DC estimates the program already has more than 2,000 registrants on its Web site. DC also reports receiving more than 7,000 hits in one month from alumni looking for firm news and information. DC also has formed alliances with major placement firms to help track and place alumni. DC employs one full-time global director, one full-time Web manager, has temporarily employed some staff to build its alumni Web site and distributes a regular newsletter.

FINANCIAL METRICS...........................................................................................Page 19 DC sustained top-line growth during the recent slowdown in the consulting and IT services industries.

Revenues for FY01 grew 11.1% to $3.49 billion from $3.14 billion in FY00. Revenue growth, while still positive, has flattened since FY99, corresponding to the decline in IT spending. FY99 revenue growth was an impressive 37% from FY98, but the aforementioned slowdown has pushed revenue growth rates down in the two years since. FY00 revenue grew 9.9% from FY99 revenue of $2.9 billion, with slightly better growth achieved in FY01. TBR estimates DCs net income was $559 million in FY01, up 11.1% from FY00 net income of $503 million. DCs net income growth rate kept pace with its revenue growth rate, illustrating TBRs belief that it has succeeded in controlling operating and other expenses in the face of the slowdown in its business. DCs net margin of 16% in both FY01 and FY00 declined from the 19% net margin of FY99. The stabilization of DCs net margin in FY01 corresponds to DCs efforts to curtail recruiting and hiring, among other expenses. TBR believes the slowdown in FY00 caught DC somewhat by surprise, evidenced by the sharp decline in net margin from FY99 to FY00, but the company may have responded quickly enough to preserve its net margin and net income for FY01.



HIGHLIGHTS OF THE QUARTER ( = negative, = neutral, = positive)

NEW SERVICES AND PRODUCTS DC Announces Support for Siebel 7

10/15/01 DC announced its support for Siebel 7, the seventh major release of Siebel eBusiness Applications from Siebel Systems Inc. Through its Global Strategic Alliance with Siebel Systems, DC will now be able to incorporate Siebel 7 into its CRM technology service offering. During CY01, DC has solidified its position as a Siebel Systems partner with joint wins at major insurance, computer manufacturing and consumer good companies.

DC Research Finds PC Market to be Stable in 2002 10/5/01 According to recent DC research, all indicators point to a lackluster comeback in 2002 for the PC industry. The PC Critical Industry Trend Evaluator, an analysis tool developed by DC to track the health of the PC industry, provided the data for the DC study. PC-CITE is based on financial data from PC manufacturers, component and peripheral suppliers. It also collected data from distributors and retailers, as well as stock market indicators through calendar 2Q01.

NEW CLIENTS AND CONTRACTS DC Withdraws from U.K. Job Center Projects

12/10/01 DC has withdrawn from its contract to manage two flagship job center projects in Leeds and Suffolk, England because of business reasons. The announcement will come as a blow to the U.K. government, which has been seeking to bring private sector knowledge into the public sector. Under the agreement, job seekers in Leeds and Suffolk are able to visit one office for their benefit and employment requirements. Recently the Public Commercial Services Union claimed private sector companies managing job centers faced a high level of staff turnover because of poor levels of pay.

DC Partners with Lucent to Implement Billing System for U.K. Utility Company 11/7/01 Lucent is working with DC to implement its Arbor/BP billing platform for U.K. utility company npower. npower will use the Arbor/BP billing platform to support the introduction of new telephony services to its expanding customer base across the United Kingdom.

DC Assists Launch of Web Site for California Technology, Trade and Commerce Agency 11/5/01 The California Technology, Trade and Commerce Agency unveiled its new one-stop Web site, providing dynamic access for business attraction and development, job retention, and international trade and investment services online. DC worked with the TTCA to integrate and execute its agency-wide Internet strategy for the site. The firms services included redesigning the look and navigation of the TTCA Web site and building the new site using the My California portal technology.

ALLIANCES AND ACQUISITIONS HP and DC Establish Global Alliance

1/14/02 DC and Hewlett-Packard announced a global alliance to jointly develop and deliver collaborative solutions for customers in the manufacturing sector. The alliance will combine HPs technologies and complementary services with DCs business consulting and solution delivery. The alliances initial focus and solution development will center on product lifecycle collaboration, a framework to support collaborative product development and lifecycle management.

BEA Partners with DC 1/9/02 Software maker BEA Systems has entered a partnership agreement with DC, capping its strategy to compete against its No. 1 rival IBM. The partnership network is designed to give BEA access to customers around the globe and compete with IBM Global Services. The accord completes BEAs full sweep of computer service providers, Cap Gemini Ernst & Young, Computer Sciences Corp., EDS, Accenture, PricewaterhouseCoopers, Andersen and KPMG Consulting.



Siemens and DC Announce Agreement 11/29/01 Siemens and DC announced they have signed a teaming agreement to pursue potential business opportunities in the security and CRM marketplace. The agreement formalizes the existing relationship the two global companies have developed in security and CRM services since earlier this year. Under the agreement, Siemens and DC will jointly respond to project opportunities with clients that focus on the deployment and management of security and CRM solutions.

Asia Logistics Forms Strategic Alliance with DC 11/6/01 Asia Logistics Technologies has formed a strategic alliance with DC to provide ERP and SCM services and solutions to local and international clients.

DC Partners with Digital Detroit 10/24/01 DC is joining hands with Digital Detroit, a nonprofit technology association, to promote Southeast Michigan as a technology center and an area specializing in more than just automotive manufacturing. Digital Detroit is a high-tech networking association for business leaders in Michigan. The association provides educational resources to its members and the high-tech community via events, print and broadcast news and an online forum, as well as various networking functions. DC will work on the promotion with its parent company, DTT LLP.

DC Signs Services Provider Agreement with SupplySolution Inc. 10/15/01 DC has signed an agreement with SupplySolution, a provider of supply chain execution applications, to provide project management, implementation, support, maintenance and other services to SupplySolutions customers. DC will serve as an implementation ally for SupplySolutions fulfillment application, i-Supply, to automotive and manufacturing companies worldwide.

Nucleus Financial and DC Announce Alliance 10/1/01 Nucleus Financial Network and DC have announced an agreement to work together to market software and professional services for strategic processing environments to global financial institutions. Nucleus Financial and DC will provide financial institutions with a comprehensive technology solution for strategic processing and an outsourcing alternative for the onerous task of security master maintenance. These services will be backed by DCs enterprise-level integration services.

ORGANIZATIONAL CHANGES DC Deploys Saba e-Learning Solution

11/12/01 California-based Saba Software Inc. has supplied its Saba Learning, Enterprise Edition e-learning system to the professional services provider DC. DC will use Sabas system to deliver self-service electronic learning to its consulting professionals worldwide. The Internet-based Saba solution offers support for multilingual content and environments, as well as the ability to support business rules that are appropriate for the local business practices at each of the consulting firms worldwide offices.

FINANCIALS DC Reports FY01 Revenues of $3.49 Billion, Up 11% from FY00

5/31/01 FY01 revenues for DC were $3.49 billion, up 11%, or $350 million, from FY00 revenue of $3.14 billion. (Note: DC restated revenue amounts reported in prior annual reports for FY00 to include all revenues of DC instead of revenues only from professional fees in FY00. DC also restated FY00 revenues in U.S. dollars using FY01 exchange rates.)

For complete press releases, see TBRs Web site.



STRATEGIC OVERVIEW DCs primary strategic objectives of establishing a global presence and serving the worlds leading multinational corporations have remained intact in FY01 from FY00, though the strategy seems to be evolving to its next stage. From DCs inaugural year in 1996 the consulting company has grown from a handful of practices to 34 worldwide practices at the beginning of FY00. This number has not grown since that time, and TBR believes DCs corporate strategy has shifted from an expansionist strategy to focusing on growing and strengthening its portfolio of global strategic alliances. However, TBR believes the slowdown in the consulting industry in 2001, especially in the United States, also had an impact on DCs efforts to expand its global footprint. FY01 revenues were $3.49 billion, up 11.1% from $3.14 in FY00. These results are cause for some optimism for DC as its 11.1% year-to-year revenue growth in FY01 edged out the 10% year-to-year revenue growth achieved in FY00. However, year-to-year revenue growth for FY01 and FY00 are far from the spectacular growth rates of 35% or more during the height of the IT infrastructure and services spending frenzy a few years back.

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STRATEGIC OBJECTIVES l Expand its portfolio of services through alliances l Serve Global 2000 companies l Leverage relationship with parent company DTT to expand client base l Grow e-government practice l Grow its strategy consulting practice

Relating Strategic Objectives to Actions In the sections below, TBR relates recent actions taken by the company to the strategic objectives listed above.

EXPAND ITS PORTFOLIO OF SERVICES THROUGH ALLIANCES l HP and DC formed an alliance to jointly deliver solutions to the manufacturing sector. l DC partnered with BEA with to better compete with IBMs Global Services and Software groups. l Siemens and DC formed an alliance to pursue potential business opportunities in the security and CRM

marketplaces. l Asia Logistics Technologies formed a strategic alliance with DC to provide ERP and SCM services. l Lucent is working with DC to implement its Arbor/BP billing platform for U.K. utility company npower. l Nucleus Financial Network and DC have announced an agreement to work together to market software

and professional services for strategic processing environments to global financial institutions.



SERVE GLOBAL 2000 COMPANIES

l BEA Systems counts the majority of the Fortune Global 500 among its clients and its newly established partnership gives DC access to this clientele.

l Clients include General Motors, Hewlett-Packard, Cargill, Philip Morris and Microsoft. l Largest 40 clients represent nearly 50% of total revenues.

GROW E-GOVERNMENT PRACTICE

l DC worked with the California Technology, Trade and Commerce Agency to integrate and execute its agency-wide Internet strategy for its new Web site.

Changes and Developments to Strategic Objectives TBR will comment on a strategic objective only if there is some change in its status, such as its addition or removal, or if there is some development concerning it.

EXPAND ITS PORTFOLIO OF SERVICES THROUGH ALLIANCES TBR believes the decline in the consulting industry has highlighted the benefits of global diversification as well as having a diverse portfolio of services. Now that DC has completed its global footprint, at least for now, it is focusing on broadening its range of services. A corollary to this is the need to build a strong portfolio of strategic alliances by cultivating new relationships with hardware, software, infrastructure and services providers from a diverse range of industries and geographies. DC has the advantage of having a large multinational parent company with an extensive clientele as a source for new clients and strategic partners.

GROW ITS STRATEGY CONSULTING PRACTICE DC has recognized clients are increasingly expecting a broad range of services from their consulting and IT services companies. For example, CRM clients are demanding that services companies bridge the design and build phases of an IT project with the latter implement and operate phases. Furthermore, clients are no longer agreeing to invest in cutting-edge technology with unproven or uncertain returns on investment. Identifying the quantitative and qualitative elements of a return on an investment is a core competency of the strategy and management consulting discipline a discipline DC in which recognized its weakness just a few years ago. Since that time, DC has been aggressively building its strategy practice. In FY00, DCs strategy practice was among the fastest growing in the industry; TBR estimates it generated $1.4 billion in FY00, achieving a 26% year-to-year growth from FY99 revenues of $1.1 billion. DCs strategy practice is also accounting for a larger share of total revenue. In FY99, strategy consulting generated 39% of total revenue, while in FY00 it generated 45% of total revenue. While DC did not report strategy-consulting revenue in its FY01 annual report, TBR is skeptical DCs strategy consulting practice will be able to replicate its performance of FY99 and FY00 in FY01, though DC has a stronger position against the pure-play strategy shops and IT services rivals it competes against. For example, McKinsey & Company, long regarded as the consulting industrys most prestigious firm, has been criticized for its unwillingness to help clients implement its recommendations. DC has recognized the hyper-cerebral, pie-in-the-sky musings of strategy consulting elitists like McKinsey are less likely to leave clients awestruck by their prima facie brilliance, especially if not accompanied by a commitment to assist in their execution. Clients are still seeking strategic counsel to guide any project and insure there is a solid business reason for its initiation. But clients are increasingly demanding consultants work with clients to put the ideas generated into action. An example on the other end of the spectrum is ZAMBA Solutions, a small systems integration and implementation company credited with solid implementation expertise but lacking a meaningful consulting component in its service offerings. DC must continue to expand its portfolio of services along with its strategy consulting practice if it expects to compete with IGS, EDS and Accenture in IT services, as well as strategy consulting leaders like McKinsey, Boston Consulting and Booz-Allen & Hamilton.



CORPORATE STRENGTHS AND WEAKNESSES

Strengths l Owned by DTT l Privately held l Strong CRM practice

Weaknesses l Owned by DTT l Privately held l Weak in outsourcing l Overexposure to IT implementation

Changes and Developments to Strengths and Weaknesses TBR will comment on a strength or weakness only if there is some change in its status, such as its addition or removal, or if there is some development concerning it.

STRENGTH: OWNED BY DTT DC benefits from having a large multinational company as its corporate parent; DTT operates in 140 countries, employs more than 95,000 people and generated $12.4 billion in revenue in FY01. In the United States, DTT operates as Deloitte & Touche. Once the smallest of the Big Five accounting firms, DTT is now surpassed by only PricewaterhouseCoopers, which generated $24 billion in revenue in FY01 and employs 160,000 people. DC has leveraged this association and its extensive client base to build its own client base. Certainly, DCs role as a DTT subsidiary has strengthened its brand recognition. But DC has done its part to build a reputation for itself as well. For example, DC has been one of the fastest-growing segments of DTT since its launch, especially overseas. For example, in the United Kingdom in FY01, DCs revenue grew 30% to $289 million from $221 million in FY00, while DTT revenue grew 19.3% year-to-year. For example, the continued growth of DCs strategy consulting practice will enable it to offer a more comprehensive range of services and further strengthen its brand.

WEAKNESS: OWNED BY DTT DCs relationship with DTT represents a weakness as well as a strength. The impact of the Enron collapse on the accounting industry makes the future of this parent-subsidiary relationship unclear as DTT may be forced to divest its consulting practice on short notice. Senator Barbara Boxer of California introduced legislation in January that would ultimately ban U.S. accounting and auditing firms from providing consulting services to audit clients. In addition, the SEC is expected to tighten the regulations regarding auditor independence. The impact of such a separation on DC is unclear as the recent separations of KPMG Consulting and Accenture from their former auditing parents have had contrary impacts on both consultancies. KPMG has struggled through the early stages of its existence as an independent company. It is struggling to rebrand and expand its global footprint, but lacks the cash to fund these efforts and is still subject to the restrictions of the non-compete agreement with its former parent. KPMG suffered a 10.4% year-to-year decline in revenues in 1Q02 (calendar 3Q01), and KPMGs management expects a best-case scenario of a 13% year-to-year decline in revenues in 2Q02 (calendar 4Q01). On the contrary, Accenture has quickly become a leader in the consulting and IT services industries since becoming an independent company. It has successfully rebranded and completed the separation from Arthur Andersen LLP, and has enjoyed two consecutive quarters of year-to-year revenue growth since its IPO, achieving record revenues of $2.99 billion in its most recent quarter. Should the expected restrictions on auditing firms prevent DTT from upselling auditing and accounting services, DCs client base of shared patrons may shrink and the availability of potential new clients may disappear. This is assuming that DTT does not divest its consulting services. Should the two companies separate, the transition to an independent company may be financially and culturally disruptive.

WEAKNESS: WEAK IN OUTSOURCING Though they boast an outsourcing capability, DC does not posses the extensive outsourcing infrastructure of ACS, IGS or EDS (ACS, for example, has more than 500 locations worldwide while DC has but 19 outsourcing-capable locations). TBR believes DC poses no threat to these leading companies, and will only realize marginal financial



benefits from being a minor outsourcing player. DC must expand its outsourcing services if it seriously expects to gain a meaningful share of this growing market.

OPPORTUNITIES AND THREATS

Opportunities l Growing outsourcing market l Growing CRM market l Expand into Russia, Eastern Europe and other developing markets l Grow strategy practice

Threats l Fallout from Enron collapse l Decline in systems integration and IT implementation services l Consulting industry maturing

Changes and Developments to Opportunities and Threats TBR will comment on an opportunity or threat only if there is some change in its status, such as its addition or removal, or if there is some development concerning it.

OPPORTUNITY: GROWING OUTSOURCING MARKET In the face of a slowing economy, many companies have implemented cost-cutting measures such as outsourcing their IT departments or other business processes. IGS, EDS, Accenture and ACS have all reaped the financial benefits of this trend. DC operates seven Client Support Centers in the United States and Canada, and 12 other centers throughout EMEA and the Asia Pacific region from which they provide business process outsourcing, application management and remote development services. The potential client base available to DC through its subsidiary relationship to DTT is an opportunity for DC to capitalize on the growing outsourcing market, though it must first expand its outsourcing capabilities.

OPPORTUNITY: GROWING CRM MARKET IDC expects the CRM services market to total $148 billion by 2005, growing at a compounded annual growth rate of 25.2% between 2001 and 2005. In FY01, TBR estimates CRM services accounted for 13% of DCs total revenues, or about $454 million. DC has also been advertising its CRM capabilities through its Straight Talk series of books and was recognized by Gartner three times in 2000 and 2001 as a leader in CRM services. TBR believes DC is positioned to capture a share of this growing market.

THREAT: FALLOUT FROM ENRON COLLAPSE The Enron collapse is likely to lead to sweeping changes in the accounting and consulting professions. In fact, the very business model of accounting firms that cross-sell consulting services to their client bases may be challenged. DCs relationship with its professional services parent DTT may be at risk if regulators or governmental agencies tighten the restrictions on accounting firms. Though DC has vigorously denied any intention to split from DTT, it may have no choice but to pursue a greater degree of independence from its parent company. TBR believes the Enron failure and DCs peer review of Enron auditor Arthur Andersen LLP may impact DCs relationship with its parent company as well as its image. DC has leveraged its relationship to DTT to reach new clients, especially during its infancy as a consultancy. TBR certainly expects a stringent review of auditing firms that offer business-consulting services with their accounting and assurance services. TBR also expects the investigation to re-examine the value of the triennial peer review process among and between these firms, a process in place since 1978. Ultimately, this may impact DCs ability to share clients with its parent company, and may eventually force DC to reconsider its options as a subsidiary of DTT despite its ardent refusal to consider a spinoff or IPO. Furthermore, DCs current clientele may perceive the current uncertainty surrounding the auditing industry as a potential threat to the continuity and quality of their current relationships with DC, and they may migrate to DCs competitors.



THREAT: DECLINE IN SYSTEMS INTEGRATION AND IT IMPLEMENTATION SERVICES Systems integration and third-party implementation services have been hard hit by the slowdown in IT spending in 2001. These services comprise a substantial portion of DCs services portfolio, dangerously exposing DC to this decline.

CONCLUSION DCs FY01 performance in the midst of a general economic slowdown, as well as more substantial declines in the consulting and IT services industries, speaks to the efforts to diversify its business model. DC posted FY01 revenues of $3.49 billion, up 11.1% from $3.14 billion in FY00. While far from the growth rates of 35% or more DC enjoyed prior to the deceleration in IT spending, DC has managed to maintain positive revenue growth, beating the PSBQ average of 9% for the period. TBR believes this is due to the relative success of DCs efforts to geographically diversify its business model, expand its portfolio of services and strengthen its brand the next logical steps after establishing a global footprint. While TBR certainly expects DC to continue its expansion into new geographies in the future, it appears DC has curtailed its expansionist strategy in favor of diversifying its range of services. This served to buffer DC against overexposure to the areas hardest hit by the IT spending slump and enabled it to respond to clients demands for a broader range of services from a single firm. DC may yet suffer a decline in revenues as corporate IT spending is still soft and strategy consulting is weakening. However, an even more serious threat to DC stems from the Enron debacle and its corresponding effect on the auditing industry. TBR believes that despite DCs ardent refusal to spin off from DTT, a disruptive separation will be inevitable.



MARKET STRATEGY It would seem DC has curtailed its efforts to expand its global footprint, as it has not increased its member or subsidiary geographic practices since FY99. These practices numbered 34 in FY99 and that has remained unchanged. Despite this, DCs overseas revenues have continued to grow and become a larger portion of its worldwide revenues. In FY01, revenues from EMEA and Asia Pacific totaled $1.1 billion, up 19.4% from $926 million in FY00. Individually, EMEA revenues were $661 million, up 7% from $619 million in FY00, while Asia Pacific revenues were $445 million, up 45% from $307 million in FY00. Revenue from EMEA and Asia Pacific accounted for 31.7% of total revenues in FY01, versus 29.5% in FY00. Revenue from Latin America has grown 33.8% to $210 million in FY01 from $157 million in FY00.

To supplement the Authentic Consultant branding and marketing campaign it launched in July 2001, DC recently published the first two in its Straight Talk series of books. The first, titled Your Secret Weapon: How to Get the Most Out of Your Consultant, is intended to guide clients in deciding whether or not to hire a consultant. The second book, How to Eat the CRM Elephant, explores CRM from a customer service perspective, warning against becoming infatuated with CRM technology and losing touch with ones customers. This book series will detail the results of DCs research into what consulting clients are demanding in the current climate of cynicism toward the consulting industry. DC hopes this effort will further distinguish itself from its consulting rivals in the eyes of current and potential clients. DC also hopes this will lend credence to its claim that it has remained focused on its clients rather than on distractions such as talent wars and IPOs, distractions it claims have preoccupied many of its rivals at the expense of their clients. TBR believes this represents an effort by DC to strengthen its brand recognition, which it admits has been weaker than its consulting competitors.

DC continues to target large enterprises, both as clients and strategic partners (the consulting needs of midmarket or smaller firms are primarily served outside of DC by parent company DTT). In FY01, DC established new or expanded current relationships with Lucent, Siemens, BEA Systems and Hewlett-Packard. The recently established marketing alliance with HP grew out of HPs relationship with DC as a client, and represents a common evolution among DCs web of partners and clients.

TBR believes the publication of DCs How to Eat the CRM Elephant and its recent alliances with Siebel and Siemens illustrate its faith in the CRM market. In FY01, TBR estimates CRM services accounted for 13% of DCs total revenues, or about $454 million. DC has engaged in a number of marketing events to promote its presence in the CRM services market, such as its sponsorship of Davos and its sponsorship of Siebel Systems User Week in Europe. DC also sponsored Siebel Worldwide User Week 2001 in Chicago during September 2001. TBR expects DC to continue to pursue CRM-related partnerships and clients, as well as continuing to market itself as a leader in the development and implementation of CRM services.

In response to increasing client demand that a quantifiable ROI be established prior to the initiation of a technology project, DC has developed software tools to be used in conjunction with the CRM applications of its partners like Siebel Systems. Quantifying ROI has become an integral part of the selling stage of technology projects and TBR believes DC recognized this before several of its rivals. Another crucial part of the project-selling process is the establishment of project milestones to specify frequent ROI reviews for clients. Part of DCs CRM services includes a series of regular deliverables to clients, sometimes every three months, to provide clients with quick wins through frequent ROI updates. TBR believes this is part of a larger effort to broaden the range of services included under the CRM umbrella.

GEOGRAPHIES Asia Pacific revenue is becoming a larger portion of DCs total revenue, as illustrated in the above chart. Thanks to a 45% increase in revenue from FY00 in DCs Asia Pacific business, revenue generated outside North America grew to 37.7% of total revenue from 34.5% in FY00. TBR also believes DCs Latin American business is growing, as evidenced by its increase to 6% of total revenue in FY01 from 5% in FY00. Growth in EMEA has slowed as the slowdown in the United States has migrated across the Atlantic. In FY01, DCs EMEA business grew 7% from FY00 versus 20% year-to-year growth achieved in FY00 from FY99 and a phenomenal 56% growth rate in FY99 from FY98. TBR is not surprised to see DCs rates of non-North American revenue growth slowing as DC shifts the focus of its expansionist strategy from geographies to services.



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Source: DC 2001 Annual Report and TBR estimates.

SERVICES STRATEGY In FY01, DC claimed to have merged its industry and services practices to illustrate its stated commitment to and focus on meeting its clients needs. The reorganization resulted in the formation of the Markets and Services organization. While TBR believes this change to be more symbolic than an actual reorganization of its corporate structure, it further illustrates DCs efforts to distinguish itself from its rivals. TBR does not believe this represents a departure from the strategy of offering industry-specific expertise that DC and many other consultancies pursued in response to increasingly specialized client demands. Instead, TBR believes DC is enhancing its vertical and horizontal integration among its industry and services groups. Simply put, the reorganization may represent nothing more than increased collaboration among industry groups to more quickly identify and respond to cross-industry needs and trends.

It is important to note that DC recognized a lack of business process expertise among its services and industry groups and attributed this to the admitted weakness of its brand image against some of its rivals. TBR believes increasing business process expertise along each of DCs industry and services lines is, and will continue to be, a part of its overall services strategy.

DC retains the alignment of its service areas into 14 comprehensive and complementary units as follows.

Customer Relationship Management Services include: business solutions, technology integration and process improvement; transformation and integration of customer interaction channels including Web, wireless, e-mail, chat, contact centers, field sales, field services, customer portals and indirect channels; customer data consolidation; and integration of technologies related to marketing analytics, personalization, campaign management and marketing effectiveness into customer operations.

Supply Chain Management Services include: supply chain planning, collaboration and optimization technologies such as i2 and Manugistics; supplier relationship management technologies, including sourcing and e-procurement solutions such as Atlas Commerce, Ariba and i2; collaborative commerce/business-to-business/public and private e-marketplaces; product innovation and lifecycle management, including collaborative product commerce solutions such as Agile Software, PTC, Unigraphics, i2; and logistics operations technologies, including warehouse management systems, transportation management systems and e-fulfillment solutions such as Manhattan Associates, Exe, i2 and Nistevo.

Integrated Enterprise Solutions Services include: business solutions, technology integration and process improvement related to enterprise resource planning and related technologies/solutions; all ERP, CRM, supply chain management, business-to-business, human resource dynamics, SEM, financial management, business warehouse and portal solutions for Oracle, PeopleSoft



and SAP (also includes SAP/Commerce One); and all industry-specific solutions developed around Oracle, PeopleSoft and SAP.

eTI (e-Technology Integration) Provides technology solutions and services with primary capabilities in information dynamics, development services, enterprise connection services, enterprise systems management and security, technology architecture services, internetworking services and IT transformation; solutions and service offerings that package the capabilities into cross-industry, package-specific and industry-specific points of view; and includes all non-ERP industry specific package solutions such as FTI, Keenan and Amarta.

Emerging Business Solutions Services developed with vendor partners include Web design and development, creative/interactive eStudio services, Web presence and branding, user-centered design and personalization, enterprise portals (Viador, Plumtree, DataChannel, Epicentric), content management (Vignette, Interwoven), digital asset management, mobile commerce/wireless (724, WareNet, Nuance), e-commerce integration (ATG, BroadVision), collaborative commerce integration, e-payment integration services, e-transformation services, and innovative technology assessment and deployment.

Offshore Development Focused on providing offshore development capability with appropriate on-site development support in engagements across DCs services; skills include Java, C, C++ development, UNIX and Microsoft platform development, database administration, Web development, and selected software configuration skills; and leverages SEI CMM Level 5 development expertise to support development-oriented projects.

IT and Business Process Outsourcing Services include application management outsourcing; application services running on DCs servers; hosting services supporting some or all of a clients technology infrastructure, including servers, networks, desktops, computer operations and helpdesk support; IT outsourcing combining application management with hosting services to effectively become a clients IT department; remote development of ERP interfaces, conversions, reports, enhancements and functional configurations at DCs Application Support Centers; and business process outsourcing for functions such as payroll or human resources applications.

Performance, Learning and Change Services focus on issues of human performance such as organizational alignment, organizational design, culture, strategic transformation planning, leadership, communication, enterprise and initiative-related learning, and collaborative knowledge management.

Customer/Product/Market Services include analysis, strategy and implementation associated with the sales, marketing and service processes; customer-driven business strategies, including multi-channel strategies and channel conflict; marketing, branding and pricing analysis and strategies; customer value/performance metrics; customer-centric processes, organization and decision making; and transformation of an enterprises brand, customer service, sales and marketing capabilities.

Operations/Supply Chain Services include analysis, strategy and implementation related to areas such as supply chain, both within an enterprise and across enterprises; supplier relationship management, including procurement and strategic sourcing; collaborative commerce/business-to-business/public and private e-marketplaces; product innovation and lifecycle management, including new product development and collaborative product commerce; logistics operations, including inventory management, warehousing and logistics management; reconfiguration of work through the application of lean operations principles across an enterprises entire value stream (enterprise-level lean principles); merger and acquisition integration; operations improvement not categorized elsewhere.



Financial and Performance Management Services include analysis, strategy and implementation related to the financial and performance management business processes, including business planning, financial reporting, closing/consolidation, financial planning and budgeting, performance measurement and treasury management; business requirements and performance improvement strategies related to the CFOs arena; financial analysis and modeling; merger and acquisition analysis; value-based management and strategic enterprise management; activity-based costing and strategic cost management; and turnaround management.

Business IT Strategy Services include strategic use of information technology to impact basis of competition, performance, economics, and value creation; e-business strategy; digital strategy; IT organization and processes transformation; IT value analytics; and links to IT strategy in DCs technology competency.

Corporate Strategy Services include industry, market, and competitive research; alternative business models; complexity, scenarios and real options; market entry and operations strategy; links to organization strategy; and e-business.

Program Leadership Services include the alignment of programs with corporate and operations strategies; program and project prioritization (against strategy); portfolio and program benefits realization; portfolio and program management; program office management for major change programs; and links to M&A and all competencies.

PRICING DCs project revenue is directly related to the hourly rate charged to its customers. This hourly rate can differ due to size of project, different tasks, individual negotiations and status of customer, such as private sector or government. In addition to time, DC bills for out-of-pocket expenses such as travel, lodging, meals, report production and specialized software/hardware products. DCs out-of-pocket expenses typically average about 20% of fees. The company also is willing to propose fixed expenses on a project-by-project basis. The following chart details DCs billing rates for its labor categories.

DC Hourly Wages for Various Labor Categories Labor Category Estimated Hourly Rate Partner/Principal $395-$475 Director $315-$445 Senior Manager $290-$395 Manager $265-$370 Senior Consultant $180-$270 Consultant $85-$150

Source: www.state.fl.us/st_contracts.



RESOURCE MANAGEMENT FY01 saw the virtual end of the war for talent DC and most other consultancies were fighting during the heyday of the e-commerce and Internet frenzy. The mass exodus of consultants who left their positions with consulting firms like DC, Accenture, McKinsey and the Boston Consulting Group to join or start new e-commerce ventures intensified the competition for talent during the e-commerce and Internet boom. But as IT spending on new projects dried up, so did the need for the architects and plumbers of the new technology, the strategy and IT consultants. Rival KPMG Consulting slashed jobs three times during 2001. McKinsey scaled back its recruiting efforts, froze its hiring, and released 210 support staff during the year. Even Accenture, despite recently concluding four straight quarters of year-to-year revenue growth during 2001, implemented measures to match workforce size with business trends (though in calendar 4Q01 Accenture actually hired 2,400 professionals, illustrating the momentum of its business relative to its rivals).

DCs globalization strategy led to substantial growth in its worldwide staff and locations from the companys launch in 1996 until FY00, but has slowed since. Its worldwide staff has grown 1.4% from 12,116 in FY00 to 12,282 in FY01. This was following 9.4% year-to-year growth in FY00 and 34.7% year-to-year growth in FY99, which certainly illustrates how DCs hiring trends corresponded to the decline in its business. DC reported staff in the Americas decreased 1.6% from 6,916 in FY00 to 6,808 in FY01. DC includes Latin America in this figure, and TBR believes headcount in Latin America actually increased as business in the region did as well. Given this, TBR believes the bulk of the decline in staff took place in the United States. Staff in EMEA increased 1.3% from 2,832 in FY00 to 2,869 in FY01, illustrating the corresponding slowdown in DCs business in EMEA. Business in Asia Pacific has continued to grow, as has DCs staff in the region. In FY01, Asia Pacific became the fastest-growing region for DC both in terms of revenue and human resources DC directed to the area. Asia Pacific staff has grown 10% from 2,368 in FY00 to 2,605 in FY01.

An interesting development is DCs launch of Passport, the firms Web-based alumni program established at the beginning of FY01. In its first year, DC estimates the program already has more than 2,000 registrants on its Web site. DC also reports receiving more than 7,000 hits in one month from alumni looking for firm news and information. DC also has formed alliances with major placement firms to help track and place alumni. While DC seems to be just acknowledging the value of alumni relations, it is certainly a step in the right direction. A strong alumni network can also serve to boost DCs prestige as a consultancy, and consequently its brand strength. McKinseys alumni network is considered perhaps the most extensive and well managed in the consulting industry and is perhaps the most powerful sales building resource leveraged by any consultancy. DC has recognized the value of alumni networks as a way to cut costs by curbing headhunter and search fees, estimating that each alumni rehire can cost as much as $50,000 in such fees. DC employs one full-time global director, one full-time Web manager, has temporarily employed some staff to build its alumni Web site and distributes a regular newsletter.

DC Revenue and Net Income FY99 FY00 FY01

Total Revenue (in $ Millions) $2,861 $3,144 $3,493

Net Income (in $ Millions) $544 $503 $559

Revenue Year-to-Year Change 37% 10% 11%

Net Income Year-to-Year Change 42% -8% 11%

Net Income Margin 19% 16% 16% Source: DC FY01 Annual Report and TBR estimates. Note: DC restated revenue figures for FY99 and FY00 in its FY01 annual report from those reported in its FY00 annual report.



OPERATING UNITS AND ORGANIZATIONAL STRUCTURE DCs geographic emphasis is global and it claims to be able to serve clients in any industry, with a strong focus on e-business consulting. Although DC claims to have merged its industry groups with its services practices in FY01 to form the Markets and Services group, DC has retained its industry focus within the following seven industry groups.

Company Segments/Global Market Groups Manufacturing Energy

Financial Services Public Sector

Health Care Communications/Media

Consumer Business

Manufacturing Assesses current operations, recommending transformation strategies, implementing initiatives and coaching staff to become in-house change agents. Addresses issues like process reengineering, application development, technology selection and implementation, and improving the retail environment. Serves automotive, aerospace, high-tech and process industries, and life sciences manufacturing sectors.

Financial Services Provides enterprise transformation, ERP, CRM, mergers/acquisition/integration, strategy/financial management and systems integration services to financial service firms.

Health Care Works in conjunction with the tax, auditing, and accounting services of DTT to provide services in strategic transformation, mergers/integration, as well as service to improve clients market positions, service execution and market strength. Also provides services through Total Health Management, an integrated set of services and capabilities related to the management of clinical care across health care organizations.

Consumer Business Addresses issues of consumer relations, multichannel marketing, supply-chain management and business process management. Services focus on enterprise transformation and include strategic enterprise management, CRM, process enhancement, supply chain integration, ERP and systems integration, e-business consulting, and mergers and acquisitions.

Energy Serves clients in oil, gas and utility companies. Services include CRM, energy systems integration, mergers and acquisitions, and ERP.

Public Sector Offers services to enhance the access to and delivery of government services to citizens, business partners and government employees. Services include enterprise transformation, ERP, CRM and change leadership.

Communications/Media Provides communication companies with services, including scenario planning, increasing customer focus, operational efficiency, revenue stream architecture, e-transformation strategies and other IT services.



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Five of DCs seven global market units have grown since FY99, the two exceptions being the Manufacturing and Financial Services groups. TBR estimates revenues for these segments continued to shrink in FY01 thanks to continued weakness in the U.S. financial services and manufacturing markets. However, TBR believes these groups performed better in EMEA and Asia Pacific. Revenue in DCs Consumer Business segment grew in FY01, but only slightly. TBR expects continued erosion of revenues in DCs Financial Services, Manufacturing and Consumer Business segments. DC has enjoyed strong growth in its Energy, Public Sector and Communications segments since FY98, trends TBR expects will likely slow with the declining economy and consulting industry, although TBR expects DCs increased focus on the public sector will produce continued growth. DCs Health Care unit posted impressive growth in FY01, driven mostly by strong U.S. business.

DC Organizational Structure

John M. SullivanDeputy CEO

Robert A. GoDeputy CEO

Robert J. GlatzCFO

Richard H. MurrayGeneral Counsel

Tom FriedmanGlobal Director Deloitte Ventures

Brian FugereChief Marketing Officer

Graham BaragwanathManaging Director, Asia Pacific

Manoj SinghManaging Director, Americas

Ken ClinchyManaging Director, Europe

Douglas McCrackenCEO

Martin ShawChairman

SALES FORCE AND DISTRIBUTION CHANNELS TBR believes DC relies primarily on the efforts of its more than 850 worldwide partners to generate new and repeat business. The rapidly increasing number of partners worldwide since FY99 illustrates this, and this has generally coincided with DCs revenue growth. As revenue growth slowed in FY01, so did the number admitted to the partner ranks. DC reported 690 worldwide partners in FY99, which jumped by 128 to 818 in FY00, but then grew by 34 in FY01. Partners proactively establish contact with targeted prospects to identify potential sales opportunities and



work to establish awareness and preference for their services. DC also employs telemarketing, joint marketing relationships, seminars, direct mailings, advertising and client referrals. In addition, consultants are taking an increasing role in sales building as part of DCs recent Authentic Consultant marketing and advertising initiative.

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Deloitte Revenue per Employee and Growth

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DCs revenue per employee grew to $284,400 in FY01 from $259,492 in FY00. Year-to-year revenue per employee growth rebounded to 9.6% in FY01 from 0.5% in FY00 as DC scaled back its hiring while revenues continued to grow; employee ranks grew 1.4% from FY00 to FY01 while revenues grew 11.1%. This followed a 9% growth in full-time personnel from 11,076 in FY99. TBR expects this trend to continue, though FY02 revenue growth may not be sufficient to produce a jump in revenue per employee similar to FY01.



RECRUITING AND RETENTION While DC has not openly admitted to joining the ranks of consulting firms releasing, or counseling out, consultants in droves, TBR believes that at least in North America DC has been reducing its headcount. TBR estimates DCs North American headcount has declined 2% to 3% since FY00. (DC provided headcount by region for its operations in the Americas in its annual report. However, DC did not distinguish between North America, the United States, or Latin America, but TBR believes because the slowdown in IT services and consulting was most acute in the United States, headcount reductions took place mostly in that region and not in the growing Latin American market.) However, DC has openly stated it has moved groups of consultants between various geographies, mostly from the United States to EMEA and Asia Pacific where business was stronger. Given this, and given DC excluded support personnel in the worldwide headcount figures it reported in its annual report (which may in fact show an actual worldwide headcount reduction), TBR believes DC may be mimicking McKinsey and Accenture in managing its human resources. McKinsey and Accenture have been reluctant to dismiss consultants outright. Their preference has been to offer temporary workforce alternatives such as leaves of absence, in the case of Accenture, or to dismiss support staff, in the case of McKinsey. This practice in lieu of an outright layoff of consultants demonstrates a belief that the industry will rebound and the company should be prepared to respond quickly when the rebound occurs. Finally, TBR believes DC has also curtailed hiring and recruiting efforts again like McKinsey, which has also cut back hiring, suspended summer internships and associate programs, postponed start dates for new hires and even withdrawn employment offers.

DC has conceded a shift in its hiring focus, which may correspond with the aforementioned shift away from its corporate strategy of geographic expansion. Where hiring was once more focused on building general practices simply by increasing personnel, hiring is now focusing on meeting more specific strategic needs. DC continues to emphasize diversity in hiring, claiming that its diverse workforce enables it to better serve international clients with consultants acclimated to local culture and local issues.

PHYSICAL INFRASTRUCTURE AND WORLDWIDE LOCATIONS DCs aforementioned globalization strategy has resulted in substantial international expansion since FY97. In FY97, DC had offices in five nations, including the United States and Canada. It has since grown to include locations or subsidiary practices in 34 nations worldwide.

Africa Pretoria, South Africa; and Johannesburg, South Africa.

Americas Buenos Aires, Argentina; Sao Paulo, Brazil; Calgary, Alberta, Canada; Montreal, Quebec, Canada; Ottawa, Ontario, Canada; Toronto, Ontario, Canada; Vancouver, British Columbia, Canada; Santiago, Chile; Mexico City, Mexico; Monterrey, Mexico; New York, N.Y.; Boston, Mass.; Chadds Ford, Pa.; East Brunswick; N.J.; Parsippany, N.J.; Philadelphia, Pa.; Stamford, Conn.; Atlanta, Ga.; Marietta, Ga.; Washington, D.C.; West Palm Beach, Fla.; Austin, Texas; Irving, Texas; Houston, Texas; Chicago, Ill.; Cincinnati, Ohio; Cleveland, Ohio; Detroit, Mich.; Downers Grove, Ill.; Kansas City, Mo.; Minneapolis, Minn.; Pittsburgh, Pa.; Bellevue, Wash.; Foster City, Calif.; Los Angeles, Calif.; Phoenix, Ariz.; Sacramento, Calif.; San Francisco, Calif.; San Ramon, Calif.; Santa Ana, Calif.; and Seattle, Wash.

Asia Pacific Brisbane, Australia; Canberra, Australia; Melbourne, Australia; Perth, Australia; Sydney, Australia; Shanghai, China; Hong Kong; Jakarta, Indonesia; Osaka, Japan; Fukuoka, Japan; Tokyo, Japan; Kuala Lumpur, Malaysia; Auckland, New Zealand; Wellington, New Zealand; Makati City, Philippines; Singapore; Seoul, South Korea; Taipei, Taiwan; and Bangkok, Thailand.

Europe Vienna, Austria; Brussels, Belgium; Zaventem, Belgium; Copenhagen, Denmark; Helsinki, Finland; Paris, France; Berlin, Germany; Dusseldorf, Germany; Frankfurt, Germany; Hamburg, Germany; Hannover, Germany; Munich, Germany; Milan, Italy; Rome, Italy; Strassen, Luxembourg; Amsterdam, Netherlands; s Hertogenbosch, Netherlands; Oslo, Norway; Lisbon, Portugal; Madrid, Spain; Barcelona, Spain; Stockholm, Sweden; Zurich, Switzerland; Basel, Switzerland; Bath, England; Warwick, England; and London, England.



FINANCIAL METRICS DC sustained top-line growth during the recent slowdown in the consulting and IT services industries. Revenues for FY01 grew 11.1% to $3.49 billion from $3.14 billion in FY00. Revenue growth, while still positive, has flattened since FY99, corresponding to the decline in IT spending. FY99 revenue growth was an impressive 37% from FY98, but the aforementioned slowdown has pushed revenue growth rates down in the two years since. FY00 revenue grew 9.9% from FY99 revenue of $2.9 billion, with slightly better growth achieved in FY01.

DC does not report net income figures, but TBR estimates DC earned $559 million in FY01, up 11.1% from FY00 net income of $503 million. DCs net income growth rate kept pace with its revenue growth rate, illustrating TBRs belief that it has succeeded in controlling operating and other expenses in the face of the slowdown in its business. DCs net margin of 16% in both FY01 and FY00 declined from the 19% net margin of FY99. The stabilization of DCs net margin in FY01 corresponds to DCs efforts to curtail recruiting and hiring, among other expenses. TBR believes the slowdown in FY00caught DC somewhat by surprise, evidenced by the sharp decline in net margin from FY99 to FY00, but may have responded quickly enough to preserve its net margin and net income for FY01.

Deloitte Growth and Profitability

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The above graph illustrates the decline of DCs revenue growth in FY00 and the stabilization of revenue growth in FY01. While the systems integration and implementation segments of DCs business have slowed, TBR believes DCs diversified services portfolio has helped preserve revenue growth. TBR wonders if DC will repeat this in FY02, as the impact of the slowdown on systems integrators has been more acute in the second half of 2001, the first half of DCs next fiscal year.

The recent performance of rival KPMG Consulting illustrates this. KPMG posted 21% year-to-year growth for its FY01, which generally corresponds to DCs fiscal year (DCs fiscal year ends May 31, KPMGs ends June 30). But KPMGs pipeline of new IT services contracts began drying up during FY01, and consequently in 1Q02 revenues dropped dramatically; down 10.4% year-to-year from 1Q01. This was the first year-to-year decline in KPMGs quarterly revenues in the last 14 quarters it has reported revenue figures. These 14 quarters of consistent year-to-year growth represent the boom years in IT services, especially for firms with strong systems integration capabilities like KPMG and DC. Although systems integration and implementation is also a substantial part of DCs business, TBR believes the aforementioned diversification of DCs services portfolio beyond these areas served to mitigate the impact of the slowdown. DC did not enjoy the annual revenue growth rates of 15% to 20% KPMG did during FY00 and FY01, but it may also avoid suffering the substantial decline in revenue that KPMG did in its most recent fiscal quarter as it offers a more diverse portfolio of services than KPMG. However, though DC offers outsourcing services, for example, it is not a major outsourcer and does not possess the outsourcing capabilities of companies like ACS, EDS or IGS. Furthermore, while DC is attempting to build its strategy consulting practice, the strategy consulting industry is going sour with the current economic recession and the growing skepticism toward the consulting industry in general. Strategy consulting is becoming a more necessary element in DCs portfolio of



services, but the slowdown in the industry may not result in DCs strategy consulting practice making a substantial contribution to revenues.

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The above graph illustrates the deceleration in DCs revenue growth in FY00, and the stabilization of revenue growth in FY01. TBR believes this coincides with the deceleration of DCs worldwide expansion efforts, though TBR also expects DC to revive its efforts to expand internationally. In addition, the recent economic slowdown and the decline in the IT services market have contributed to this decline.

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DC has struggled to repeat the 50% net income growth it achieved in FY99 during the past two years. In FY00, TBR estimates DCs net income declined 7.5% to $503 million from $544 million in FY99. In FY01 DCs net income growth of 11% emulated the 11% growth achieved to the top line. Net income in FY01 grew to $559 million from FY00. TBR believes this indicates DC responded to the slowdown in its business by aggressively implementing expense controls, which ultimately resulted in the FY01 rebound in net income growth. Staff reduction was a part of these control measures, but TBR believes DC opted to cut support staff instead of consultants in the hope that it will be better prepared when its business rebounds. DCs revenue and net income figures indicate this rebound may already be underway.



FUTURE OUTLOOK 12-MONTH OUTLOOK TBR believes FY02 will reveal much about the wisdom and momentum of DCs business model. The outlook for DCs outsourcing services is optimistic as IT outsourcing is a growing industry. Large technology outsourcers like IGS and EDS reported impressive results in 2001, and this is expected to continue in 2002 as outsourcing continues to be a major driver of revenue growth. TBR does not expect DC to pose a threat to these outsourcing giants, but DC is still in the right place at the right time. DC should also pay close attention to Accenture, which is quickly emerging as an industry leader not only for its outsourcing services, but its other IT and consulting services as well. Accenture has also been able to successfully split from its former auditing parent and rebrand, something DC may soon be compelled to do. The ability to bundle strategy and management consulting services with IT implementation and integration services will help win new business from clients increasingly seeking a full range of services. The decline in IT spending and its corresponding impact on systems integration and implementation may hurt DCs FY02 performance, though TBR believes there are indications that the market for these services may be rebounding. Given this, the second half of FY02 may be better than the first half, though the timing of this rebound is still unclear.

The impact of the Enron collapse may substantially alter the services portfolios of many accounting and auditing firms if the SEC tightens the regulations regarding their ability to provide business-consulting services in addition to assurance services. However, the SEC and other federal regulators may simply throw down the gauntlet and demand the separation of consulting from auditing. TBR believes a separation of DC from DTT would be a severe disruption of DCs business. DC may have to make the transition to an independent firm on short notice and without a plausible or coherent strategy going forward. It is unclear if DC could make a smooth cultural transition from a partnership to a public company should the split involve an IPO. Accenture was able to while so far KPMG Consulting has been unable to. TBR believes DTT and DC will eventually be forced to retreat from their vigorous opposition to separating consulting from auditing. For example, DC may be forced to reverse itself from the spirit and language of its bold announcement in July 2001 the advertisement it ran entitled Deloitte Consulting Is Pleased Not To Announce An IPO. Ultimately, they may have to concede, and go their separate ways. Although DTT vigorously opposes separation and has argued passionately that providing auditing services with consulting services does not pose an independence problem, a separation may be inevitable as the outrage grows from the Enron debacle. TBR does not expect the auditing industry to fully realize the impact of these events during 2002, but the year may mark the beginning of the end for the bundling of business-consulting services with auditing services.



Deloitte ConsultingAnnual Statement of Income(in Millions)Fiscal Year 1999 2000 2001

Revenue 2,861$ 3,144$ 3,493$ Expenses 2,317$ 2,641$ 2,934$ Net Income 544$ 503$ 559$

As a Percentage of RevenueRevenue 100% 100% 100%Expenses 81% 84% 84%Net Income 19% 16% 16%

Year-to-Year ChangeRevenue 63% 10% 11%Expenses 60% 14% 11%Net Income 75% -8% 11%



PSBQ REPORT AND SCORING METHODOLOGY Report Sections Each PSBQ report contains four sections: strategic overview, market strategy, resource management and financial metrics. In addition, each company-specific report begins with the TBR position. All sections are summarized on the first two pages of each report and assigned a TBR ranking of positive, neutral or negative characterized by an upward, horizontal right or downward arrow. Furthermore, TBRs

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