Ric Payne's Blog

I was recently asked to comment on what services are most likely to be offered by CPAs over the next 5 years which is an interesting question to contemplate.  Here are my thoughts, what are yours?

I suspect all the services that are now offered by CPAs will continue to be sold during the next 5 years but their relative importance will change.  For example, we’ll likely see an increase in the importance of bankruptcy & insolvency, litigation support, business valuation and M&A, forensics/fraud.  On the other hand tax compliance and consulting will not likely to be as important as it has been in the past 10 years.

I think one of the very best opportunities for CPA firms of all sizes will be in the area of outsourced CFO services built on recession management consulting.  The boom times we have experienced for most of the last 10 years have disguised the brutal reality of under-performance that you can’t hide from in a recession.  A recession is a time when businesses of all shapes and sizes get sorted out and it’s a time when savvy business managers understand the need to seek (and follow) competent advice.  For this reason the next 5 years is a time when CPAs will be able to create and capture significant value as SME advisors, coaches and mentors.

Although every business needs the services of a CFO, SME’s don’t need that function 5 days a week and in good times many of them get by without it, but not so in bad times.  This is when an external CPA should step up as an outsourced CFO. Clients need advice and assistance with assessing the vulnerability of their business and help to stabilize it.  From that position it’s able to capitalize on its strengths to capture market share and profit.  These three stages form the framework for a recession consulting engagement.

Such a service will involve identifying the businesses’ underlying strengths and weaknesses, product/service line profitability analysis, customer profitability analysis, pricing strategies and revenue management, refining and articulating the business value proposition, developing a robust customer service strategy as the major source of differentiation,  cost management, cash flow forecasting and disciplined working capital management.  The quality and timeliness of the financial and non-financial KPIs is also a matter of great importance in tough times especially if the business is operating near to break-even–this is not a time when near enough is good enough.

One of the most valuable services external CPAs will provide in the next 5 years will be to give their clients emotional support when managing a business under stress e.g. giving them confidence that margin is more important than market share in tough times especially when everyone else seems to be hell bent on discounting; this logically leads to the need to improve the degree of financial literacy amongst their business clients and hence an educational role for the CPA.  This is a time when all businesses (including CPA firms themselves) need to get back to basics by focusing on (and only on) what they can do really well, pricing to reflect value and acting decisively and confidently in accordance with a very clearly defined and understood business strategy.

SME’s did not cause the global economic crisis but they’re the key to turning the world economy around.  They are major source of employment, they are a major source of innovation and they can act quickly in response to market messages.  However, the people who run them are not always sound financial managers.  Their “accounting department” is usually a bookkeeper or low-level controller which is why they need the assistance of their CPA for higher level CFO-type advice.

In my view, CPA firms that build a strong service offering around “managing your business in tough times” will not only provide an invaluable service to their clients, their community and the country.  They’ll also discover they can capture a fair, but significant proportion, of the value created and will have secured clients for life.  The next 5 years will indeed provide great opportunities for CPAs who see and seize them.

I’d love to hear your thoughts.

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It is simply amazing to witness the changes that are taking place in the world at the moment. Economic power is shifting from western countries to eastern countries as we see more and more products being described along the lines of “Designed in USA, made in China”. But this shift in not limited to manufacturing, professional services are likewise being delivered from these countries.

This movement will continue and while it may be a source of concern for some people, the impact that it’s going to have on the standard of living throughout the world will be profound and relatively rapid. I came across this you-Tube video that very elegantly summarizes both the threats and the opportunities this shift present for all of us.

Take a look and see what you make of it.

What do you think?

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In 2006 Intuit Inc., the giant financial software company sold US$700 million worth of TurboTax. That was a 25% increase of the previous year. TurboTax is just one of several tax preparation packages on the market today and they are all experiencing rapid growth.

Most CPAs that I hang out with (read Chartered Accountants for my friends in other countries) don’t seem at all phased by the growth in tax prep software and the trend towards DIY services. After all they’ve never really wanted to work with clients at that end of town. But I wonder if we’re missing something.

I have been taking a close look at the US Census Bureau’s 2002 Economic Census that was published in 2006. I know it is based on data relating to 2002 but there are some very disturbing trends that I think most people in our professional are choosing to ignore.

Let me share some thoughts with you.

Back in 1998 I suggested that there would not be consolidation in our industry. That’s turned out to be correct. Average firm size (from both a revenue/establishment and number of team member’s perspectives) has remained virtually unchanged in the 5 years ending 2002. It’s true that there has been a lot of M&A activity going on BUT new firms are popping up just as fast. In fact there was a 19% increase in new firms in 2002 alone.

I also suggested in 1998 that there would be an inexorable downward pressure on margins irrespective of economic conditions. That has also turned out to be correct and, as predicted, has been caused by competitive pressure from new industry entrants, payroll growing at a faster rate than revenue and clients having more choices as to how and where they get their services.

CPA revenue growth per employee has only been 13% in the 5 years to 2002 but payroll per employee has grown at 22% over that time. Margin per employee has therefore dropped by 9 percentage points.
But it’s even worse. This data is not adjusted for inflation which was 12% over the 1997-2002 period! Revenue has only just kept up with inflation.

In fact, my research going back 30 years to 1971 has shown that the average annual growth in net profit per partner in real terms (i.e. inflation adjusted) has only been 1% per year. The beneficiaries of productivity improvements in CPA firms have been clients partly because of ‘competitive’ pressure, partly because timesheets have been used for billing purposes but mainly because CPAs have not appreciated the value they bring to the table and have not been innovative in either their service design, their service offering or their marketing.

This is not what I’d call an industry in great shape.

Little wonder CPA firm owners have found themselves working harder and longer and using every bit of technology to help offset the migration of revenue sharing from owners to employees. Little wonder also, that employees are not lining up to become owners.

So is the industry as a whole in a hole? Perhaps not.

If we include in our industry, firms that are not CPA Offices but nonetheless are engaged in Tax Return Preparation (North American Industry Classification System Code 541213) then we see some impressive growth.

In fact the we see a 50% increase in the number of these firms, we see that their revenue per firm has grown by 66%, we see their revenue per employee grow by 35% and they have only experienced a 27% increase in payroll per employee.

Here’s one conclusion: the tax-only guys are doing a lot better than CPAs. They are stealing CPAs market share big time. On average they pay a lot less per employee and on average their prices are lower. They are largely responsible for holding prices down in the industry as a whole and as a result are causing margins to shrink in firms that are paying higher salaries to their team members. They are not going to go away.

One legitimate strategy that a CPA firm might adopt is to distance itself from the low-level tax preparation business. Frankly I think it’s game, set and match. If the software tax guys don’t get you, the low end tax preparation ones will.

The significance of this suggestion is quite simple. If you are doing any significant number of low level tax returns then you need to organize your business as though you are an H&R Bloch or Jackson Hewitt location – tell your clients that they can see you in Wal*Mart.

Interestingly the NAICS 54 series also includes Management Consultants. These are firms that are primarily engaged in providing operating advice and assistance to businesses and other organizations on administrative management issues, such as financial planning and budgeting, equity and asset management, records management, office planning, strategic and organizational planning, site selection, new business startup, and business process improvement. This industry also includes establishments of general management consultants that provide a full range of administrative; human resource; marketing; process, physical distribution, and logistics; or other management consulting services to clients.

It seems to me that there’s not much in this list of services that a CPA could not do and in fact many are doing. So what’s happening in the consulting sector of the industry?

BINGO!!!!!!

Management consulting firms have grown by a whopping 76% in the five years to 2002. CPA firm number grew at 6% during the same time. To put that another way, the demand for the type of services that management consultants offer (and which CPAs could provide) has grown 13 times faster than the services CPAs typically offer for sale.

There has been enormous growth in revenue in the management consulting sector – 83% over the 5 years ending 2002 and the number of employees working in this sector has also grown by 84% (the CPA sector had a 11% increase) — ever wondered where your potential talent might be going?

Revenue per employee was $148,000 in management consulting firms against CPA firms generating $113,000 and that number includes the big guys as well. Take them out of the picture and CPA firm average revenue per employee in 2002 was just $95,000.

My conclusion here is that the consulting guys are creating more value, therefore getting higher prices and even though they are paying higher wages to employees they are enjoying a higher margin spread.

Interesting stuff no matter how you look at it and this is why we have such a close relationship with Ron Baker and his passion for Value Pricing.

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