as firms pursue m&a at any cost, who’s taking care of the clients?
by rick telberg
rosenberg survey
the many challenges tax and accounting firms face today can be daunting:
- accelerating changes in technology (now reaching beyond blockchain to the frontiers of artificial intelligence)
- staffing shortages (not just a rarity of professionals but too few up to speed on regs and tech)
- a new generation (young professionals who expect flex time, time off, telecommuting, fewer hours, and similar perks and benefits)
- an old generation (baby boomer partners working more years but getting older nonetheless)
- increased competition crossed with ever-evolving marketing media (a battlefield unknown to people trained only in accountancy)
- the evolution of auditing (or is it an ongoing revolution?)
- new client opportunities (maximizing potential of niches, it service, consultation, etc.)
practitioners in firms large and small are doing their best to meet the challenges, but meeting challenges can divert energy and effort from actually growing a business.
and merger mania may be to blame.
according to the 2018-2019 rosenberg survey, this diversion of energy may account for a disturbing decline in organic growth. don’t misunderstand. accounting and audit practices have been growing constantly, even during the recent recession. after the plummet in 2009, the rate of growth increased satisfactorily until 2015. the growth rate for companies with net fees over $2 million was 1.4 percent in 2009, 5.4 percent in 2012, 6.7 percent in 2014, and peaking at a heady 8.1 percent in 2015.
since then, however, the growth rate has slowed, dropping to 7.8 percent in 2016, and then just seven percent in 2017.
the rosenberg survey offers six reasons for the slowing of growth:
- heavy pressure to lower fees (especially compliance related)
- lack of partner and manager effort to really push for growth.
- a dearth of formal marketing plans (only 39 percent of firms have one)
- increased competition (some firms marketing more than others)
- inadequate training in non-accounting skills (communication, cross-selling, client service, etc.)
- shortage of professionals resulting in unwillingness to take on new business.
an increasing portion of the growth has been due to mergers and acquisitions, especially among medium-sized firms, those with $10-20 million in net fees. the increase in growth attributable to m&a portion was least among large firms, rising from 31 percent in 2015 to 35 percent in 2017. among the medium-sized, the m&a portion more than tripled, from 10 percent in 2015 to 32 percent in 2017. among all firms, it rose from 28 percent to 39 percent.
michelle golden, at fore llc, quoted in the survey, says that m&a growth might actually be holding back true, organic growth.
“firms continue to grapple with m&a effects long after the deal,” golden says. “while firms are making better choices about cultural fit, they still underestimate how the first few post-merger years impact profit, growth, and people. since consolidation isn’t slowing, merger integration merits more attention. with process and systems integration, more meetings and training, reassuring the team and clients, and dealing with predictable turnover—all on top of client work—there’s little energy for growth.”
the awkwardness of merging cultures is compounded by the reluctant exodus of top management. they’re often old enough to retire but unwilling to release the reins of management to the next generation. those millennial whipper-snappers are ready to move not just up but forward.
“this next generation of leaders is eager to embrace technology, pricing, service changes and more that will continue to evolve the profession and increase value to clients and the market,” says tamera loerzel, of convergence coaching. “the challenge is blending the experience and wisdom of current leaders with the future goals and aspirations of the up-and-comers to create a unified plan that the up-and-comers can sink their teeth into and execute.”
mergers are moving ahead at a maniacal clip, though there are signs of sanity emerging. if firms ever juggle their many challenges into a stable and productive position, they will have the time and energy needed to prepare to sell or gear up to buy.
more m&a may lead to temporary growth in firm size, but it will suppress organic growth until the intricacies of mergers settle out.
and if fee growth is suffering, it’s not hard to see that client service levels may also become sacrificed on the alter of mergers and acquisitions.