Small- and Medium-sized Practices (SMPs)

Transition into Advisory Services – Leveraging Partnerships & Networks

Johnson Kong, Managing Director, BDO Hong Kong and a member of SMPC and Johnny Yong, Technical Manager, Global Accountancy Profession Support, IFAC

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Based on the 2018 IFAC Global SMP Survey, which received over 6,000 responses from 150 countries, the top challenges (rated high or very high) were the pressure to lower fees (at 48%) and attracting new clients and retaining existing clients (at 46%).

Pressure to lower fees usually arises from compliance engagements. Hence, one way for a firm to alleviate this pressure is to diversify into advisory services in which clients pay for the value that they perceive they will get from the engagement. Offering new services can also help the firm to secure new clients as it branches into a different market segment. There is also the tremendous benefit of cross-selling once a new client joins the firm—although firm will have to be cognizant of the potential threats to independence or over-reliance on any client or group of clients.

It is common for a small- and medium-sized entity (SME) client that grows to maturity to seek assistance from its trusted business advisor (often a small- and medium-sized practice [SMP]) to support its growth, arising from a lack of resources within the SME. Literature reviews conducted by IFAC have supported this notion. If an SMP is not able, or not willing, to offer more support as the SME client grows, the SMP will risk losing its client to other firms that can better support its economic progression. An SMP’s transition to advisory services could therefore be a strategy to retain clients in the longer term as the SME client’s operations become more sophisticated.

But how does a firm diversify into advisory services?

The Diversification Strategy

An SMP can diversify using various strategies.

There are traditional ways of investing in education and training in certain advisory fields to develop a competent workforce that can eventually serve clients in new areas. This is usually a long, organic process.

Lateral hiring is an alternative to expanding into a new service area with current staff, but this may be a relatively large investment, at least at the early stage, as the salary cost of an experienced specialist can be high. Firms would also be risking the specialist leaving the firm and disrupting the new service provision—just as the service is getting started.

Firms could acquire an existing advisory practice, but this is usually costly.

The third possible strategy is for firms to partner with someone with the right advisory skill set or join a network of people that can provide the advisory services the firm wants to provide. The Guide to Practice Management for Small- and Medium-Sized Practices offers good insight on Practice Models, Associations and Networks under its Chapter 2 and presents all the advantages and disadvantages of such a strategy.

Partnership Business Model

The potential benefits of a partnership business model are:

  • Splitting the workload. Two or more heads are often better than one. With partners, the responsibilities of running the firm can be shared. Advisory services can evolve quickly. By specializing, each partner can take care of his or her own professional development and continuous learning to remain relevant in their respective service offerings. This approach is also good in terms of client relationship management due to a more dedicated focus.
  • The ability of all partners to pool their resources in equal partnership is a great way for the firm to access adequate funds to diversify into new areas of service. These funds can be used to acquire intellectual resources, staff and technology as the firm diversifies.

Potential drawbacks in a partnership arrangement include:

  • As the number of partners grows, it can become harder to achieve consensus; ages of partners will begin to vary, and their financial resources and requirements will place different demands on the firms’ cash flows. Such factors can influence the way partners relate to each other. Varied views may spark off arguments among partners. Uneven distribution of profits and resources between partners and departments could become a source of tension over time.
  • A wider range of interests and abilities within the circle of partners, while a strength of this model, can also be a weakness. Some might gravitate towards certain roles while others avoid those roles, the workloads of individual partners may differ markedly, the contribution of some individuals to revenue or profit generation may vary, and even attitudes towards the amount and intensity of work time might diverge. These differences could cause tension among partners.
  • Decision-making can be slowed by the need to have all partners consulted (and possibly agree) before a decision is made.
  • Legal liability for errors or malpractice can be borne by all partners, depending on the nature of the specific entity being used.

Networks, Associations and Alliances

Entering an alliance or joining a network or association may be a simpler approach. It is less formalized compared to an actual partnership. It is also a great way to increase a firm’s capacity to offer new services and expertise. But like other approaches, it has advantages and disadvantages.

Advantages

  • The firm can concentrate on its core services and leave the networks, associations or alliances to focus on the technical requirements of services that the firm is looking to provide.
  • By working with networks, associations or alliances, the firm can avoid the fixed costs of setting up the equivalent services and hiring more people.
  • Generally, the firm and the networks, associations or alliances are responsible for having the resources to cope with the volume of their own transactions because they each fund their own operations. But in some network arrangements, resources can be shared.
  • Networks, associations or alliances can be changed relatively quickly: if a better provider appears, the firm can quickly start to refer work to that new provider.
  • The firm can offer a greater level of client services with the support of networks, associations or alliances—which would help the firm provide more value.
  • Ideally, if each firm in a network has a different focus, they can all create better outcomes by sharing the benefits of their specializations.

Disadvantages

  • A network rarely guarantees the same degree of control as offering a service through a small firm: a firm might rely on other people to implement a particular service. A lack of control could lead to service quality issues.
  • If arrangements are made between the owners of two or more organizations, the delivery often happens through their respective employees. Those employees, however, might not have the same degree of commitment to the arrangement as the owners.
  • There are also non-financial costs in creating and nurturing an alliance or network, such as time-intensive meetings to scope the “rules” and the service standards to negotiate preferred bases of operation between the firms. (The trade-off might be that it is quicker and easier to negotiate an alliance than it is to study the feasibility of, and subsequently implement, the new service directly through the firm.)
  • The ease of association and departure of firms within a network can be disruptive.

Conclusion

It is important for firms to decide which strategy works best for them. Each strategy will come with its own risks and rewards. There is room for creativity: some of the strategies can be merged. For example, a firm can join a network to start offering the type of advisory services its clients need while allowing its own staff to slowly build their expertise in that service. In the longer term, the firm may be able to offer a full array of services without needing to tap into the alliances or networks except when servicing a very demanding engagement. In this situation and others, trial and error might be necessary before the best solution is found.

The Global Knowledge Gateway includes many articles, videos and other resources on transitioning into advisory services. They include:

 

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