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 |
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?
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.
The potential benefits of a partnership business model are:
Potential drawbacks in a partnership arrangement include:
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.
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: