Anniversary issue with League table and survey results

By Phil Shohet and Andrew Jenner, Directors, KATO Consultancy - 10.06.04

Of the top 10 firms ranked by fee income in 1969 not one name remains the same: they have all either merged into each other or disappeared altogether. The comparative league table shows how the biggest firms of the late 60s have become the megafirms of the early 21st Century. Price Waterhouse swallowed Coopers & Lybrand, who had themselves taken on the UK firm of Deloitte, Haskins & Sells; Peat Marwick Mitchell has become KPMG by way of Thomson McLintock; Whinney Murray is now Ernst and Young via merging with Turquand Youngs and absorbing Arthur Young Mclelland Moores. And so on, and so on up to the present day where we have recently seen some seismic upheavals as Andersens (who had previously acquired the principal offices of BDO Binder Hamlyn with the remainder going into Stoy Hayward) was parcelled out, with Deloitte and Touche obtaining the lion’s share.

Of course no league table such as this can be 100% accurate. The criteria for inclusion may have changed slightly over the years and there are always some firms that should undoubtedly register on the list but are too shy to appear in league tables.

However, the fact remains that in just a few short years the face of the accountancy profession has changed completely and that change is replicated through every level, from the giants at the top end through the mid-tier firms, the independent practices and the small practitioners at the bottom of the pile.

Globalisation, competition and the demands of the marketplace have reduced the top twenty firms of the 80s to a handful of mega-firms that dominate the scene nationally and internationally. The number of mid-tier practices has also shrunk as firms have looked to merger rather than organic growth to achieve the critical mass necessary to maintain growth and development. Of the top 75 firms in 1989, over 60% have disappeared through acquisition or merger.

However, although less obvious as they rarely feature in league tables and their growth or decline generates little interest in the professional media, it is the independent sector that has seen the greatest upheaval in recent years. Here many firms are struggling to bolt on an additional range of services to cope with client demand, whilst at the same time trying to grow the business and retain their independence.

To add to their woes, and what will eventually prove an insurmountable problem for many, is the ticking time bomb of succession that has been rumbling under the surface for several years and is now about to explode.

An ageing partnership profile, shrinking pensions; insufficient capital in the practice to pay out retiring partners; a dearth of high calibre new partners prepared to invest in the business; problems with client retention as partners retire; no hope of early retirement; no possibility of continuing independence. These are just a few of the retirement and succession issues revealed by the firms taking part in a recent survey undertaken by practice consultancy, KATO.

But perhaps the most shocking fact to emerge from this survey is that 28% of the respondents saw a sale or merger as the only way of solving their succession problems. Bearing in mind the number of partners now in their late 40s and 50s – and assuming that they will virtually all be working until they are 65 – this means that in ten years or less the profession will have lost over a quarter of the independent firms practising today. The consequences of a loss of this magnitude will be felt not only by the profession as a whole, but also by the entire business community; particularly the OMB and SME clients that constitute the lifeblood of this sector of the profession.

For some years now multi-national corporations have had to select their accountants from a dwindling pool as megamergers reduce the number of firms available. The same is now set to happen to smaller companies, and those who prefer to use local independent practices rather than a national or international firm are going to find that their choice is similarly restricted and there may well be areas where no substantial independent firms survive at all.

Another negative outcome for clients will be the inevitable rise in fees as the number of service providers gets smaller, and they may well find that the traditional personal service that the independents provide is replaced by the rather more clinical and detached attitude of a large practice.

Although succession problems will precipitate the demise of a proportion of the independent sector there will still be some new practices arriving as individual offices or specialist teams bail out of the top 20 firms. This is a relatively new phenomenon and has occurred as a result of disaffection within offices or where specialist sectors and teams (such as corporate finance, forensic or tax consultancy) find their profit shares too restricted by the compliance service results in their firms.

As for how the profession will be structured in the future; it doesn’t take a crystal ball to predict that there is an inevitability that the ‘big 4’ will become the ‘big 3’ within the next five years and that the residue of the top 30 will continue leaping into bed with each other – with varying degrees of success. As a result we will soon see more of the larger regional independent practices appearing in the top 30.

What is less certain is the fate of many of the smaller independents. Those that have solved their succession problems and geared themselves up to provide a service that is of real value to their corporate clients will succeed: the rest may well be doomed.