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Is a Consolidated Accounting Industry a Possibility?

August 23rd, 2013

The failure of the UK accounting firm consolidator RSM-Tenon Group sad though it is does not surprise me.  In the last 90’s early 2000’s all the buzz was about how the the profession is inevitably going to consolidate and there were some major players in the market including some big accounting firms, American Express and a handful of half-baked start-ups and a few well funded entities.

The prevailing idea was that it made sense to create big firms quickly through consolidation. This, they thought, would lead to management and marketing economies because accountants have always been seen as trusted advisers and gatekeepers to their clients so there was a view that with a “bit of training in cross selling” it would be possible to leverage sales in areas such as financial planning, insurance, legal, lending, HR, IT ….  you name it the list goes on.

When I first saw American Express get into the play my first reaction was “this could be the thin edge of the wedge.”  I thought when companies of that size got into the game with the resources they had available and the global distribution channel they had in place it could spell disaster for smaller firms.

At the time I was the CEO & President of Results Accountants’ Systems. We had the privileged of working with literally thousands of small to mid sized accounting firms around the world and we had created the world’s largest network of independent accounting firms called the Results Accountants’ Network (RAN). My first reaction prospect of a consolidating industry was that it would seriously threaten or network (in fact several of our member firms did sell to the consolidators in all the countries we had a presence.)

But then I thought deeply about what was happening and concluded that for fundamental economic reasons the industry would not and could not successfully consolidate. My views were set out in a White Paper titled The Challenges Faced By Consolidators are Going to be Huge. A summary of this was published as an article in the Australian Business magazine BRW at the time. I also distributed a copy of it to our member firms.

If this made long term economic sense—as opposed to the opportunity for short term entrepreneurial profit for the promoters—my own company would have done it two years ago when it started in the US with Century Business Services (Cbiz) and American Express Tax and Business Services.  We looked very seriously at doing a roll-up of the 3,000 firms in our global network and came to the conclusion that the concept of consolidation flies in the face of the fundamental economics of the industry and it will not work.

If you are interested in the more detailed explanation of why a consolidation will not engulf our profession you can download the original white paper. There may be a few things I would change if I were writing it today but not much. The paper also covers some interesting discussion on the keys to practice profitability.

I believe all this all happened before Tenon got going in the UK and some of the companies that were involved in the consolidation play in the US (CBIZ and American Express Tax & Business Services – now part of RSM McGladrey) and Australia (WHK) have managed to survive but in a dramatically different form to what was originally envisaged. But consolidation is a far cry from the tsunami of acquisition activity that some people had predicted.

My views about consolidation do not mean that I believe there will not continue to be active M&A activity in the profession. That will always take place but soon after a couple of large firms get together, a few partners or others inevitably go out and start their own firm with a handful of clients and some other clients of one or both of the merged firms take the opportunity to move somewhere else and another firm gets a little bigger and the game of musical chairs continues.

How to create a world class firm: The Dip Decision

August 23rd, 2013

In April 2013 I wrote a blog post called What Got You Here Won’t Get You There: Lessons for New Leaders. That post is worth taking a look at if you’re interested in really developing your practice but  I’m mentioning it because in it I refer to a book written by Seth Godin called The Dip that contains a message that is the subject of this post. Read more…