The future for the small and medium sized firm

By Phil Shohet Fca And Andrew Jenner, Directors, KATO CONSULTANCY

CA MAGAZINE - March 2004

As Mark Twain once remarked: “Reports of my death have been greatly exaggerated”, and no doubt the partners in some of the UK’s smaller independent practices know just how he felt. In the last year or so there has been much debate within the profession regarding the future of the firms in this sector, and the general consensus of opinion does not bode well for them. Undoubtedly there are some firms that, despite their best endeavours, are doomed to perish. Others will probably give up their independence willingly, either for the greater security of being part of a larger practice, or because partners are tempted by the financial incentives offered by the consolidators or any other firm that is prepared to pay goodwill on an acquisition. However, for those firms that wish to retain their independence the future could be very bright indeed. The key to survival and prosperity will be their ability to adapt to the needs of the modern marketplace and their willingness to adopt working practices and business development methods that will make them more efficient, effective, competitive and, of course, profitable.

Business needs directing and managing. The partners get the practice they deserve and trying to run a business by consensus is ridiculous. Management is too often done in the partners’ spare time.

OMB and SME clients are the lifeblood of firms in the independent sector. This is where growth potential lies and a clear understanding of their requirements is absolutely essential if that potential is to be achieved. There is currently a considerable amount of uncertainty in this market which the independent firms, if they are properly prepared, can capitalise on.

The global nature of the top firms and the publicity they attract has ensured that the effects of corporate scandals are no longer localised, and do have an impact in the UK. In addition, there are the continuing mergers (and rumours of mergers) within the mid-tier with the attendant fall-out of partners and staff and closure of provincial offices. Unhappy or dissatisfied clients will not need much persuading to look at alternatives to their current advisers and may well be prepared to sacrifice being served by a national brand in return for the pro-active partner support of an independent.

These clients require far more from their accountant than compliance work, they are seeking true business partners who can make a very real contribution to their business growth and will need advice on a wide range of specialist issues. But no matter how comprehensive a firm’s range of consultancy services may be, unless partners know which are those each client needs – and which they don’t – neither side will reap the maximum reward. To become a truly indispensable ‘trusted advisor’ requires commitment and enthusiasm: a willingness to invest time and effort into developing a true understanding of the client, his personal and commercial aims and aspirations, his marketplace and business methods. For the OMB or SME client this attention to detail, coupled with the opportunity to develop one-to-one relationships at partner level gives a unique advantage to the independent practice.

Unfortunately many firms are not in a position, either structurally or culturally, to offer a real alternative. Those that do have the ability to give OMB or SME clients the best possible service often do not have the confidence to try and wrest them away from much larger practices. So what needs to change if they are to make the most of the opportunities open to them and continue to prosper as independent practices?

The traditional values of professionalism such as reliability, integrity and knowledge are as valuable today as they have ever been, but many of the accepted working methods are becoming less relevant to today’s business clients. Firms should ask themselves which elements of tradition continue to benefit the practice and which are obstacles to progress.

Essentially there are two types of firms; those that have clients managed by all the partners working together, and those where individual partners have their own clients in isolation from other partners. Firms that fall into the first category are more likely to be able to plan and implement effective strategies to survive and grow. Likewise, identifying and anticipating client needs in a pro-active manner is essential if a practice is to prosper. Some partners may be more proficient than others in this role – but only if they have a good knowledge of the firm’s client base.

The days are gone where partners are allowed to do their own thing. In the main partners should spend their time talking to clients, specialising and getting in new work. They should not dabble.

Crucially, senior partners will have to ask whether they have the right balance of value adding partners and compliance men. Most firms will find themselves top heavy with technicians and general practitioners and some hard decisions may have to be taken. Partners who can add value in a business sense will have to be rooted out and tasked to concentrate on doing just this whilst leaving the technical and compliance work to managers. However, a hard but necessary decision may be that some compliance partners have to go in order to make room for the people who can help make businesses grow, including their own.

There should be a very clear distinction between compliance and advisory work: very different teams are required and very different people. Look at the difference between hunters and farmers. The farmers look after the clients and this is where they spend their time.

The only way to achieve the highest levels of client service is to foster a cross-fertilisation culture within the practice with partners and departments working together in the best interests of the client. If several departments are concerned with a client’s business he is far more likely to view the practice as a true business partner and therefore less likely to look elsewhere for advice.

The skills clients may need to develop their businesses are not always related to financial issues. Human resources, IT and marketing (including market research) are all requirements the vigilant practitioner will be monitoring. Many smaller firms are not in a position to develop these specialist departments, but if this is the case they should invest time and effort in developing mutually beneficial relationships with service providers outside the profession. In this way they can greatly increase their influence over clients’ business - and thus their dependence on the practice.

Once a firm is geared up to take advantage of the uncertainties in the market, the partners must not sit back and wait for new clients to walk through the door; the prospects need to be identified, wooed and won.

Identification should not be difficult, it is simply a case of knowing the competition (local or regional) and exploiting their vulnerabilities. Every practice should have a good idea of the quality, or lack of it, within these firms. Regional offices of national practices may be no bigger or better than their independent neighbours and all it takes to compete with them is a little courage and confidence in the firm’s abilities. These are the crucial indicators that will reveal which firms have vulnerable clients.

• Succession issues due to elderly partners nearing retirement.
• High staff turnover.
• Service lines are undersold or underutilised.
• They have recently gone through a merger or takeover
• Some specialist services are shipped in from a remote HQ or other office on an ad hoc basis.
• Clients have attracted adverse publicity through financial or accounting irregularities
• The practice itself has been the subject of adverse publicity.

Firms should remember that an additional incentive for a change in advisor could be provided by fee levels. Most independent practices can offer a far more competitive pricing structure than national firms whose charge-out rates are often dictated or influenced by head office, and where the initial fee quote frequently gets ratcheted up for “other services”

Independent firms should take heart from the fact that a great many OMB and SME clients prefer the advantages they can offer. If they can provide a comprehensive range of services; if they can institute and maintain efficient practice management strategies; if they can promote themselves effectively; they will – probably to the great disappointment of the major firms and consolidators – continue to enjoy a profitable existence and a bright future.