Brave New Accounting World · Segment Leader Responsibility • A strong and effective manager and...

Brave New Accounting World

© 2015 Accountants Advisory Group, LLC

The Competitive Landscape is Changing Rapidly

Consolidation Retiring CPAs Quality CPAs

Crisis

Gender Increased

Competition Leadership

Unfunded Retirements

The “Perfect Storm” is Forcing Mergers


The Changing Landscape will Determine: • Positioning in the marketplace for types and size of

clients • The types of staff and partners to be recruited and

how to compete effectively for quality new hires • Types of niches and specialty services • Staff training and development • Compensation methods and techniques • Growth through mergers


Driving Value & Profitability

PRIMARY ACTIVITIES

Growth Driven Leadership

HR & Management Comprehensive Succession Planning

State of The Art Technology

Target Marketing, PR & Practice Development SUPP

ORT

ACT

IVIT

IES

Practice & Engagement Management

Training, Career

Development, Succession Planning, Partner & Staff

Performance Management

Leading

edge services, industry

specialization and niches

Efficient

and timely delivery

of service

Recruiting the

best talent possible at all levels either directly or

through M&A


Trends and Predictions in the CPA Profession


Predictions—More Mergers as a Competitive Strategy

• Marketing/Lead Generation and HR resources (recruiting, training, retention development)

• Additional technical and advisory resources • Expand geographic reach • Leadership & governance • Administrative resources • Defensive—competing against future consolidation

and larger firms with more resources in the local marketplace


Predictions

• The need for continued growth and competitive pressures will drive greater client specialization and expert niche services which will accelerate niche M&A transactions.


Positioning to Compete with Larger Firms

To Remain Competitive and Increase Growth, Firms Need to Develop Marketing and Selling Techniques Leading to New & Innovative Services


The Past—Inside Out

Firm Skill Set

Staff

Clients

Marketplace

Services


The New Order of Business—Outside In

Market Demand

Staff

Marketing

Services

Partners


Profitability Formula

Profitability


Outside-In

• What the firm did in the past may not make it successful in the future

• Build the services, staff and partners around the needs of the marketplace

• Train partners and staff in areas that the market demands

• Hire for in-demand services • Design outside-in targeted marketing and lead

generation programs • Use mergers to accomplish the outside in - strategy


Outside - In Services Thru M&A

Firm Newly Created Service Armanino Acquired Rose Business Solutions Carr, Riggs & Ingram Acquired an audit consulting firm—

”Auditeverx” and a Texas based wealth management firm

CliftonLarsonAllen Acquired MA based Bankers Advisory Inc.

Cohn Reznick Acquired real estate consultants—NOI Strategies


Diversifying Services Thru M&A

Firm Newly Created Service MountJoy Chilton Medely Acquired KY based HR consulting firm

Personnel Profiling, Inc. Prager Metis Merged in NYC based family office

services boutique Polakoff & Michelson

Wipfli Acquired Chicago based Regulatory Compliance Associates

Sikich Merged in Illinois based supply chain consulting firm, Achieve Consulting.


Diversifying Services Thru M&A


Firm Newly Created Service or Business Eide Bailey Acquired a NetSuite Solutions provider.

Glass Jacobson Merged in One Source Financial BKD Acquired Kacinsky & Associates, which provides loan

review services to Texas financial institutions.

Big 4—% of Firm Revenues

Deloitte PWC E&Y KPMG Revenue ($Billions)

$13.9 $11.0 $9.1 $6.1

Consulting 51% 31% 36% 22% A&A 31% 41% 37% 42% Tax 18% 28% 27% 36%


Top 100 Firms—Large % of Consulting Revenue

($Millions) % of Revenues

Consulting A&A Tax Crowe $665 50 28 22 Plante Moran $411 33 41 26 WIPLFLI $163 37 34 29 Armanino $113 53 21 26 Sikich $97 55 30 15 Horne $67 45 34 11 SC&H $58 40 17 43 WathensMeegan $49 56 22 22 Raffa $37 32 53 15 KLR $35 35 30 35 *28 Firms in the Top 100 have 25% or more Consulting Revenue


Firm of the Future


Top 10 Implementation Challenges

• Challenges in replacing the skills of departing owners (50%)

• Transitioning clients from retiring partners/ principals (41%)

• Partners’ reluctance to relinquish work relationships (41%)

• Challenges in training/mentoring internal staff for partner/principal roles (40%)

• Reluctance of partners/principals to retire (42%)


Top 10 Implementation Challenges

• Challenges on funding payments to exiting partners/ principals (20%)

• Loss of leadership (17%) • Remaining owners’ lack of shared vision on business

goals/governance/direction (15%) • Ownership conflict—partners taking large

compensation packages with less workload (14%) • Dealing with the unexpected (14%)


The Right Balance of Services


Firm of the Future—Revenues

40%

20%

40%

Integrated Solutions

Investment in Non-PABusiness

Audit and TaxCompliance


Inability to Retain Women in the Profession

• Adding to succession planning problems • Very few firms have been successful in designing and

implementing flexible and part-time career paths.


Predictions

• More partners will work beyond the normal retirement age due to lack of sufficient partner level talent and unfunded buy-outs. The new 65 is becoming 70.


Predictions

Larger firms will begin to incorporate more cash buy-outs in their merger deals to attract quality merger candidates


Predictions—Market Reversal

• In 5+ years, there will be a shift from a seller’s market to a buyer’s market as larger firms get more selective in M&A transactions and there are more baby boomer partner firms coming on the market with no succession plan.


Predictions

• Firms will outsource more work overseas (India, China & the Philippines) through outsourcing companies and international affiliations as fees become more competitive. Quality accountants will be used for more valued services

• Firms in high labor and rent areas will acquire firms in depressed and lower cost areas and shift compliance work to them to maintain fee competitiveness and increase profitability.


Predictions

More small firms will split-up due to a lack of a consensus on succession planning and the future direction of the firm


Predictions

50% of the firms below the Top 200 will merge upward, laterally merge, or split-up in the next 15 years due to succession planning problems and a lack of partner consensus on the vision of the future of the firm.


Partnership Structure “Franchise / Corporate-Type” Structure

Predictions—Partnership Structure

The partnership structure will fade away and be replaced by a “franchise / corporate-type” structure in the top 300 firms in the country.


Franchise

Chairman & Executive Committee

HR & Succession Planning

Managing Partner

Recruiting & HR Public Relations

Career Development & Tech Training

Benefits

IT & Workflow Optimization

Work Flow Management

Communications

Hardware / Software

Professional Marketing & Strategic Planning

Client Retention, Cross-selling,

Innovative Service

Practice Development & Sales

Advertising, Public Relations & Branding


Phases of CPA Profession Consolidation


Local

Regional

Mega-Regional

Small National

Large National

Consolidation of the CPA Profession

• Phase 8– (will accelerate in 2016) Mergers of 2nd and 3rd tier firms


Firm Classification

LARGE NATIONAL FIRM OFFICES REVENUE $M

McGladrey & Pullen (U.S.) 75 1,471

Grant Thornton 57 1,383

BDO (U.S.) 52 833

Crowe Horwath 29 687

CBIZ 103 600

Clifton Larson Allen 29 598

CohnReznick 26 575

SMALL NATIONAL FIRM OFFICES REVENUE $M

Baker Tilly Virchow Krause 29 475

BKD 34 446

Marcum 17 385

UHY Advisors 15 204

Novogradac & Co. 18 103


Firm Classification

MEGA REGIONAL FIRM OFFICES REVENUE $M

Plante Moran 20 433

Moss Adams 20 429

Dixon Hughes Goodman 29 338

EIDE Bailly 22 195

Wipfli 22 181

Carr, Riggs & Ingram 21 171

Rehmann 20 109


Firm Classification

LARGE REGIONAL FIRM OFFICES REVENUE $M

EisnerAmper 6 283

WeiserMazars 8 157

Cherry Bekaert & Holland 12 131

Citrin Cooperman 6 115

Warren Averett 14 114

Elliott Davis Decosimo 18 110

O’Connor Davies 8 108

Withum Smith & Brown 12 106

Sikich 11 106


Why Aren’t There More Same Size Mergers?

• Egos, leadership, management and control • Name • Culture • Leases • Location • Unreasonable expectations • Compensation, retirement benefits, and equity • Excessive time in negotiating the Term Sheet • Insurance • Previously undisclosed risks and liabilities


The Future is Now

Fastest Growing Firms in the IPA Survey

• On average derived 26% of total revenue in non-traditional services and these services increased by 22%

• Firms range in size from $5 million to $100 million in revenue (average size $35 million)


The Future is Now

Fastest Growing Firms in the IPA Survey

• Half of the firms have a business development (sales) professional

• Two-thirds have a niche strategy generating a minimum of 20% of all firm business

• Two-thirds have a strategic plan for each main revenue service


Firm Business Model

Business Segments

• Business Segment defined—a component of a business that generates revenues and costs related to operations

• Examples of segments in Public Accounting:


Assurance areas • Audit • Review • Compilations

Tax • Business • Individual

Niches • Family Office • Alternative Investments • Outsourced Accounting

Segment Leader Responsibility

• A strong and effective manager and leader, capable of attracting, mentoring, retaining and developing talented and productive staff

• A true team player and collaborator, translating knowledge and experience into strong and productive relationships internally and externally

• Goal minded and able to motivate staff to accomplish segment objectives


Segment Leader Responsibility

• Effectively and constructively lead change • Work with the MP & Marketing Director to

determine activities and actions needed to implement business development programs that generate leads and increase segment revenue

• Collaborate with segment partners and managers to increase realization rates by enhancing efficiencies, work flow optimization, scheduling techniques, timely billing of out of scope work, etc.


Partner Leadership Teams


COO

Managing Partner

Goals & Objectives Oversight

Practice Growth

Strategist &

Visionary

Succession Planning & Talent

Management

Mergers & Acquisitions

Budgeting Personnel Costs

• % of compensation to revenues at all time highs • Budgeting the firms personnel costs will force

partners to make better business decisions as to the use of professional resources

• Will force firms to: • Cull low profitable clients • Make greater use of efficiencies and work flow

optimization • Delegate work to the lowest level possible • Terminate career comfort zoners and underachievers


Using Talent and Leverage to Build a Firm of the Future


Delegation


Managers

Staff

Partners

Supervisors

Historical Pyramid Structure


Profitability Formula

Profitability


Partner & Staff Structure

• Are partners being held accountable for delegating work and increasing profitability on their engagements?

• Do we have enough “quality” staff in the appropriate positions to have a successful delegation process?

• Are we properly developing and coaching our staff? • Is the firm’s scheduling process taking into account

the proper matching of work and talent and career development?


Aligning Business Strategy With Performance Management

Plan

Acquire

Engage

Develop

Deploy

Lead

Retain


Measure & Align

Business Strategy

Human Capital Strategy

Talent Results

Business Results

Interaction Between Marketing & HR


Recruiting Promoting the Firm

Training & Development Niche Talent

Projected Growth

Niche Development

New Services Public Relations

The Time to Change is NOW

“It is not the strongest of the species that survive, not the most intelligent, but the ones most responsive to change.” —Charles Darwin


Comparative Statistics—IPA Survey

Description IPA Average

IPA Best of the Best

Net Revenue Growth Rate (Organic only) 5.7% 8.5%

Net Revenue per Charge per Hour $154.20 $190.50

Net Revenue per Partner $1,054,933 $2,549,660

Net Revenue per Professional $217,026 $262,405

Net Revenue per Employee $174,234 $217,455

Net Revenue per Square foot $564 $732

Firm-wide Utilization (All Prof. staff incl. equity partners) 65.4% 66.2%

Charge Hours per Prof. (Excl. equity partners) 1,410 1,406


Comparative Statistics—IPA Survey

Operations IPA

Average IPA Best of

the Best Firm wide Utilization (All Prof. staff excl. equity partners) 69.2% 67.1%

Percentage of all charge hours by Prof. Staff 83.3% 89.8%

Personnel Costs as Percentage of Revenue 45.8% 43.8%

Professional Staff: Administrative Staff Ratio 5.0 5.4

Professional Staff: Equity Partner Ratio 7.6 9.8

A/R Management: Days of Production Locked Up 55.0 45.0

WIP Management: Days of Production Locked Up 25.2 24.1


Brave New Accounting World · Segment Leader Responsibility • A strong and effective manager and...

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