Results of 2007 KATO Survey

Published April 2007

KATO SURVEY REVEALS CRITICAL SITUATION IN THE INDPENDENT SECTOR

The acceleration of the downsizing process in the mid-size sector of the accountancy profession is set to cause a major crisis in the next few years which could change the face of the profession for ever by taking up to 72% of independent practices out of the marketplace.

This was the most alarming in a generally ominous set of statistics we collected in our latest survey which we carried out amongst the Managing Partners of 262 accountancy practices during December 2006 and January 2007. Those polled included national, semi-national and independent practices in the UK, including Northern Ireland, as well as a small number of sole practitioners.

Our intention was to establish their view of the threats, challenges and opportunities that they perceive will affect the growth and development of their businesses in the next five years. We asked them to consider a number of subject areas covering every aspect of the ownership and management of an accountancy practice and to give us their opinion as to whether they will experience significant change (and the likely nature of that change) during that time.

Respondents were asked to ensure that their answers reflected the general feeling in the practice, rather than their own personal view. Interestingly, as was revealed by some of their more detailed answers, the two do not always coincide and not surprisingly these were the practices that felt they were facing severe difficulties.

When asked if they perceived a threat to their independent status an overwhelming 72% admitted that they did not feel secure. Their concerns focussed on outside influences as well as factors within their control regarding the general management and direction of their business.

Government legislation and the regulatory regime were seen as an increasing burden. A particular concern was the fact that because the rest of Europe does not have the same statutory protection as UK firms, the EC might take steps to change this.

Risk management and the prospects of an increasingly litigious society were also viewed as a problem, causing a number of respondents to consider the wisdom of accepting high risk work.

Increasing competition from outside the profession is viewed as a threat mainly by the smaller practices, but increasing competition due to consolidation within the independent sector was mentioned by several larger firms. However, this consolidation is set to continue as many of the respondents anticipated that the need to provide more services would drive them into a merger with a larger practice.

For many a major threat is still posed by succession issues. The difficulty of attracting the right calibre of potential partners is a big problem. Not only is this a threat to continuing independence, but it means that they no longer have the right mix of skills within the firm to offer the range of services that the most lucrative clients require.

And firms are not just having trouble finding new partners. For most of the respondents the general recruitment, retention and development of staff is a serious problem; one that they expect to get worse in the coming years. Competition for the best people from larger, richer firms is fierce and even growing their own is not seen by many respondents as the way forward. Indeed, some of our sample are considering cutting back on their chartered training programmes as the three year investment is not repaid in terms of output and their star pupils leave as soon as they qualify.

Several firms recognised the need to accommodate and fast track more ambitious people and, at the same time, to provide training in a wider range of skills that will turn their high flying technicians into well rounded individuals capable of leading the business forward in the future.

Judging by the blinkered attitude of many of the respondents these skills are sorely needed. In many instances the partners in a practice turn out to be their own worst enemies, ignoring many of the things that could really make a difference to their efficiency and profitability.

For example, we asked if our respondents thought that developments in IT would affect the management of their businesses or the delivery of client services. Despite the fact that information technology will undoubtedly continue to create the potential for huge improvements in both areas, a huge majority said no! This clearly demonstrates that a great many firms have yet to get to grips with the wider usage of IT or envisage the ways in which it has the potential to contribute to their business and the quality and value of the service they can offer clients.

The increasing legislative burden and the management of risk are also seen as major contributors to respondents’ problems. Furthermore many managing partners are acutely aware that their firms are not operating effectively as commercial businesses. Often this is because older partners are resistant to change and the managing partner is fighting a lone battle to persuade his colleagues to adopt more commercial attitudes and practices.

Despite, in some case, anticipated opposition from more conservative colleagues, a considerable number of respondents saw the need for future changes to the organisation and management of their practices: mainly because they are not running at maximum profitability and efficiency. Running the business on more corporate lines, divorcing ownership from management with fewer owners is the aim for some – although how they will achieve this other than through their existing retirement arrangements is not specified. Some firms are looking to house more specialised service lines in separate entities, with not all of the equity being shared by all of the partners in the whole business.

Those who recognised that changes will be required to cope with the challenges they face identified a number of areas of concern. In relation to the owners themselves there was a feeling that the partners/directors needed to accept the leadership of the managing partner. Several also expressed the need for greater emphasis at partner level on performance based profit share and partner appraisals.

A significant number also felt that their future ability to attract and retain work would become a problem if they could not provide a wider range of specialist services. Clients are becoming more demanding, but smaller firms do not have the resources to meet those demands nor can they afford the investment necessary to create them. This not only means that they anticipate losing clients to larger firms, but their ability to attract high value new clients requiring a broad range of services is greatly restricted. For some, the answer is to concentrate on existing specialist areas, some of which might be quite rudimentary such as payroll, management accounts, and accounts preparation if they can be managed profitably; effectively becoming a boutique practice. Others anticipate creating strategic alliances that will make them more competitive.

Even though our experience shows that many firms are struggling with the change process, the results of our survey make very unexpected reading. Although some firms have obviously accepted the need for change in order to adapt to the needs of the modern marketplace and are managing the process extremely well, the majority are floundering around, knowing they are facing a crisis but unable to avert it.

Many practices are struggling to achieve a reasonable financial return for the owners. In some instances this has meant that future investment in such things as marketing, IT and service line development has been sacrificed. There is little doubt that many of the firms responding to this survey will no longer exist in five years’ time. This is not only bad for the profession; it is bad for the clients as it reduces their choice and, inevitably in a shrinking market, means that they might have to pay more for services.”