Article in Accountancy magazine, May 2004

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This article, discussing the strategic pressure
on mid-tier firms, first appeared in the May 2004
issue of Accountancy magazine.
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Until the pips
As mid-tier firms find themselves increasingly
squeezed between the Big Four and local
providers, finding a niche is a matter of
survival BY MUNGO DUNNETT
squeak
The Big Four and the top end of the national
firms have, of course, been impacted by the
post-Enron fallout, although the impact has
perhaps been neither as extensive nor as
sustained as was initially predicted. Some
business was picked up by the middle tier, but it
could be argued that this was always the most
fee-sensitive segment of the client base, and
that the main movements were by clients
interested primarily in the more commoditised and
less high-profile accounting services. In other
words, Enron merely shook from the tree the fruit
that was ready to fall.   What the middle tier
cannot do, no matter their level of technical
expertise on their home ground, is match the
majors for depth of manpower, for the kind of
brand name that confers trophy status to image
conscious FDs, and for the range of Their
ability to recast themselves as national experts
able to take on and defeat the Big Four is
badly hampered by the relatively poor calibre of
most marketing, PR and brand positioning work
at this level business expertise that the Big
4 can call on. Whilst many middle tier firms
would no doubt protest to the contrary, the fact
is that they are fighting against this perception
of themselves and their capability. Buying
behaviour is grounded in matters of perception
and the Big Four will remain
The alarm bells are ringing for the middle tier
of accounting firms, and for those who flinch at
the word strategy, this is going to be a
difficult year. The ground rules that have
determined the local level of competition are
starting to change with real speed, and those
firms that cannot adapt to the changing
environment are running into trouble. Unless
firms get a closer grip on their own business
strategy, and consider how they are going to
compete against larger and smaller practices,
they are going to come under tremendous pressure.
  Battleground for middle tier Although the
speed of market consolidation is increasing, the
main trends are certainly not new. The
battleground has for some time been the middle
tier of firms the six to 20 partner level. This
is the heartland of the UK accounting profession,
where there is solid expertise, good back-up
across a range of specialisms, and an established
track record for delivery. The reputation is
local at strongest, regional with perhaps one
outstanding technical strength that has led to a
clutch of bigger clients spread nationally.
Most work arrives by word of mouth, client
bases tend to be relatively loyal, and the senior
partners are active figures in the local business
community. But the sand is shifting, and the
middle tier is coming under increasing pressure
from both sides.
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protected from a significant exodus of their
client base for so long as FDs typical
perception remains the same. This is primarily a
marketing challenge for the middle tier of firms,
but their ability to recast themselves as
national experts able to take on and defeat the
Big Four is badly hampered by the relatively poor
calibre of most marketing, PR and brand
positioning work at this level. In strategic
terms, the game is often won or lost through a
careful and pragmatic assessment of what you are
genuinely best at, what you can compete against
bigger players and win at and where you make
your stand. Whilst there are certainly ways in
which the middle tier can compete against local
offices of the Big Four, through a combination of
real focus and excellent execution, in general
terms there is a limit to upward growth. In this
regard, the market remains much as it was,
pre-Enron.   The game gets much tougher in the
battle between the middle tier and small
local The game is often won or lost through a
careful and pragmatic assessment of what you are
genuinely best at, what you can compete against
bigger players and win at and where you make
your stand practices. Unless a differentiated
value can clearly be delivered, separating the
local commodity provider from the middle tier,
the inexorable pressure on margins is going to
cause real discomfort to the larger firm.
Overhead costs, exacerbated by the need to hire
and retain local name
partners, create cost pressures that demand
higher fee structures. Audit threshold the
wake up call   In this regard, audit the core
service is potentially the most dangerous
commercial route. Audit preparation is
time-consuming, margins increasingly pressurised,
and the overall service difficult to distinguish
from that provided by smaller firms. This is why
In business terms, being in the middle is the
worst place to be the most exposed, and the easy
target that too often fails to survive the rise
in the audit threshold is the wake up call the
middle tier needs. The typical middle tier firm
could be losing up to 90
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of their audit business, which is both an
opportunity and a threat. Audit work is, in its
nature, a profoundly negative task, relished
neither by the accountancy nor by the client.
For the stronger and better-prepared middle
tier firms, the removal of a significant number
of statutory audits offers an opportunity to
replace the necessary evil of the audit service
with a much more proactive service that depends
on ongoing (not annual) reviews, an intelligent
probing for further client needs, and a widening
of the client dialogue into an advisory
relationship. The death knell On the other
hand, the audit threshold could well be the death
knell for those firms that have failed to
cross-sell, to establish wider client
relationships, and to seek every means possible
to add chargeable value to their clients
business. Where these firms cannot demonstrate,
with absolute clarity, that their service is
superior to that of their local alternatives,
they will not manage to charge the premium fee
they need to survive. This has been the story
of recent years and in many regards the
accounting profession has only itself to blame.
There is a cultural pattern underlying the
firms Accounting firms need to consider with
brutal frankness their strengths and
weaknesses that have disappeared or that have
fallen into the arms of a consolidator
over-dependence on traditional revenue streams
inability to move persuasively beyond audit work
inability to decide, at partner level, what is to
be done and who is going to be responsible for
it.   Management studies are littered with
clichés about the need for businesses to adapt or
die, continually evaluate their options, explore
their weaknesses, track their competitors,
consider who is going to take their lunch and
yet there is an The only issue is, which of the
existing firms are going to survive, and to do
so on merit? undeniable wisdom about all of
these things. Accounting firms simply cannot
expect that the methods of winning and handling
clients that have built their past reputation
will continue to do so. In business terms, being
in the middle is the worst place to be the
most exposed, and the easy target that too often
fails to survive. All the alarm bells are there,
for the middle-sized firm. There can be no
surprises about the continuing consolidation in
the
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UK profession the only issue is, which of the
existing firms are going to survive, and to do so
on merit? What the market is doing is exposing
those who cannot alter their historic way of
generating turnover and profit. It is going to
require that most essential of all business
skills focus. Accounting firms need to consider
with brutal frankness their strengths and
weaknesses. On what grounds can they compete
against and fend off both the national firms
and the small locals? What
is their unquestioned expertise in their local
market? What gaps must they fill in terms of
people, usually, but also in terms of their
marketing? And who is going to take charge of
the strategic decisions, and move the firm
forward?   Its a question of knowing which
battles to fight, and which ones to steer well
clear of. Because those that cant move into a
strong niche are going to be everybody elses
target.