|Global Knowledge Gateway||
Go Forth and Diversify
by Rosana Mirkovic, Head of SME Policy, ACCA | December 14, 2015 |
Any business must adapt as the world changes around it and accountancy practices are no exception. The environment in which firms operate has transformed beyond recognition in recent times, in every part of the world. Some of the changes are more visible than others—for example, deregulation and rising audit thresholds, particularly in Europe, have shifted the demand for traditional accountancy services, and IT innovation has transformed the way in which services are delivered.
It is plain to see that the larger firms have adapted their services to meet changing demand by widening the range of services offered to clients. The recent news that PwC has overtaken Deloitte as the largest professional services firm due to the rapid expansion of its consulting business is a case in point. Until now, however, there has been limited solid evidence of how smaller practices are adapting their business models.
The Association of Chartered Certified Accountants (ACCA) has sought to address this with a new report, The Global SMP Business Model Survey: Understanding a Changing Profession. While the IFAC Global SMP Survey (closed on November 30 with report due in January) looks more generally at the opportunities and challenges facing small- and medium-sized practices (SMPs) around the world, our report takes a closer look at the services offered by smaller practices, the source and value of the sector’s skills, and its future growth prospects. The report was produced in partnership with six other accountancy bodies: the Iranian Association of Certified Public Accountants, Institute of Singapore Chartered Accountants, Corpul Expertilor Contabili si Contabililor Autorizati din Romania (Body of Expert and Licensed Accountants of Romania), Malaysian Institute of Accountants, Chinese Institute of Certified Public Accountants, and the Vietnam Association of Chartered Public Accountants.
We found that at a global level, SMPs remain highly focused around their core services. Tax and compliance-related services account for 42% of SMP’s income, while assurance (including internal audit) accounts for 40%. The contribution of assurance to practice income, however, varies widely from country to country—from 4% in Romania and 12% in the UK to 70% or more in China and Iran.
The loss of audit fees as a result of deregulation, however, has been substantial in western countries. In the UK and Ireland, audit contributes just 12% to SMPs’ income, while in Asia Pacific it accounts for 50%. Those firms affected are making up the shortfall with other services: UK and Irish firms earn 20% of their income from tax-related services, for example, compared to 12% in Asia Pacific firms.
Non-core services accounted for 16% of practice income across the firms sampled, rising to 21% in the UK and Ireland. Firms in China were the least likely to stray outside the core service offering, with just 5% of their income coming from other services. Overall, the highest earning non-core services are risk management and the design of management controls (4% of income), growth-related services (3% of income), and financial management (2% of income). Even so, we see that “practitioners are well aware of the contribution of non-core services to demand for their core offering in the long run; the proportion of SMPs providing such services are far greater than what one would infer from their share of practice income.” For example, 46% of firms sampled offer payroll services even though it, on average, makes up less than 6% of a practice’s income.
The benefit of transferability of technical skills is a clear message emerging from the study, particularly as audit regulation affects other jurisdictions. At its recent meeting, members of the ACCA Global Forum for SMEs argued that the need for assurance services would remain regardless of regulation and a proactive firm does not need to lose clients as a result of rising audit thresholds. Even so, forum attendees argued for the need to explore other services and revenue streams.
There is strong evidence in the report that this is already happening. Over 70% of SMPs that took part in the study were planning to introduce a new service over the next two years. In particular, there is a strong interest in helping clients design and monitor internal controls, reflecting the demand for greater accountability and transparency in global supply chains.
Deregulation has clearly been a significant incentive for SMPs to innovate and build up their resilience in the face of rapidly changing markets. In countries where the impact of deregulation has been greatest, smaller firms have expanded their service offerings to their SME clients rapidly and are exploring partnerships with other organizations. In the UK and Ireland, for example, the study found that SMPs typically offered more than 20 distinct services, more than twice as many as similar-sized firms in Asia Pacific.
Six out of 10 firms studied described themselves as specialists, usually in terms of a service offering rather than by concentrating on a particular sector. However, this varied widely by region and country. SMPs in emerging markets were more likely to see themselves as service area specialists, while those operating in well-developed markets were more likely to develop sector niches.
Deregulation is more advanced in Europe but the rest of the world is following suit, albeit at varying paces. This suggests that diversification of services will continue globally—but SMPs will need to be very strategic about their investment in new services if diversification is to be sustainable in the long term. The core technical skills of an accountant are proving to be highly transferable and adaptable but planning and commercial discipline is required; there needs to be a strong emphasis on generating client growth, referrals, and repeat business.
Implications for SMPs
So what does the research mean for SMPs around the world? We see that SMPs in the most rapidly evolving markets have survived and thrived by adapting themselves and their business. They are transferring their core technical skills to higher value-added services, and are willing to form partnerships with other organizations in order to give their own practice and their clients access to a wider range of skills than is available in-house.
The report includes a series of recommendations for firms, professional bodies, and regulators. One of the most important for SMPs, I think, is to “close the loop that makes value-added services sustainable.” They rarely make money in themselves but are an investment towards greater, more regular income in the future.
Members of the Global Forum for SMEs agreed with this, saying that firms serving SME clients should be proactive in bringing in new clients and think of themselves as a business, focused on commercial discipline and profit. Services offerings around human resources compliance and financial management, which may not bring in significant income in the short term, were seen to be particularly important in positioning firms as trusted advisers to SMEs.
The Forum had a salient warning for SMPs: they need to manage the risks involved in the changing competitive landscape carefully. The threat from unregulated advisers remains very real, but at the same time greater automation provided by cloud services means that large practices are beginning to find the SME market more attractive. SMPs have several weapons up their sleeve—their ability to offer a personal service, consistency of staff, and a lower cost base to name but three—but with the world changing so rapidly, this is no time for complacency. And IFAC and its member organizations, like ACCA, have a suite of resources here on the Gateway to help (click Resources tab above to explore).
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