A recent article about private equity in the medical field raises important questions about the evolving landscape of the accounting industry, particularly concerning consolidation and private equity.
While the questions about maintaining quality and client focus should be asked, the article paints an oversimplified picture of the challenges driving this shift and misses important nuances and context vital to the conversation.
As someone who grew up in my family’s boutique accounting firm and has seen firsthand the value these local firms provide to clients and communities, I think it’s important to talk through these questions with facts, data and a true pulse on the industry, as opposed to fear or nebulous concerns that may not align with reality.
The accounting industry has been struggling
The accounting industry has faced a confluence of pressures that have necessitated change for a long time:
- Talent shortage: A significant decline in accounting graduates and increased competition for talent from other sectors are creating an acute shortage of qualified professionals. This shortage strains capacity and impacts service delivery, especially for smaller firms, who don’t have dedicated recruiting resources or processes to source, keep and develop talent.
- Leadership development: Similar to the talent shortage, and in part because of it, most non-national firms are limited in their ability to provide management development training. Firms’ capacity has been redlining for more than a decade, resulting in limited capital resources and time dedicated to developing the next generation of leaders, which has had significant implications that we see playing out today.
- Technological disruption: The rapid advancement of technology, including AI, automation and data analytics, requires substantial investment. Many firms, especially smaller ones, lack the time, expertise and resources to implement these technologies effectively, hindering their ability to compete and provide modern services.
- Increasing complexity: The regulatory environment and the complexity of business operations are constantly increasing. Clients demand a wider range of specialized, collaborative services, which smaller firms often struggle to provide.
- Succession planning: Many accounting firms are facing a wave of partner retirements, with insufficient plans in place to ensure a smooth transition of leadership and client relationships. This threatens the continuity of many small firms.
How consolidation helps address these issues
Consolidation, when done with intentionality and expertise, offers a powerful mechanism to address these critical challenges:
- Talent shortage: Larger, consolidated entities can offer more competitive compensation and benefits packages, enhanced and expanded career development opportunities, flexibility, access to offshore talent, and modern work environments with enormous opportunities for growth and networking. They can also offer much more robust recruiting functions.
- Leadership development: Consolidators can put in the significant upfront time and lend expertise supporting firms organizing in a way that diffuses information, rewards and relationships more broadly than the traditional pyramid-shaped partner model, with more systematization. When executed well, consolidation not only provides the next generation of leaders more opportunity, but also the firm itself with shared best practices, stronger insights and data analytics, and centralized operations support. Additionally, consolidation means bringing together experts from other industries that can bring innovation, operational expertise and management strength that support and enhance firm models and provide a “platform” on which the next generation of leadership can stand.
- Technological disruption: Consolidated firms have greater financial resources to invest in and implement advanced technologies. This investment enables them to automate routine tasks, improve efficiency, enhance data analytics capabilities and give them valuable time back to focus on clients. They also have dedicated integration and change management professionals to push new adoption forward without being overly disruptive or “breaking things:
- Comprehensive service portfolio: Consolidation allows for the creation of specialized teams and service lines, enabling firms to offer a broader range of expertise that can deepen the client relationship by better serving the increasingly complex needs of clients. Collaboration across services improves efficiency and makes for a better work product for clients.
- Succession planning: With fewer junior people eager to run firms, many partners don’t have a great exit strategy. Consolidators can offer them a strong deal and succession plan that allows them to have a capstone experience to their storied career and phase out as needed, while helping create continuity and stability for their employees and clients for the long term.
But not all consolidation is created equal
I want to be clear: Consolidation can lead to lessened quality or client care, and it’s a valid concern. The first thing to note is that private equity is not a ubiquitous term. There are many forms of private capital in the market, and behind that capital are varying philosophies on how to build a good business. If consolidators or private equity come into a category like accounting focused solely on maximizing short-term profits to support the quick “flip” to the next buyer, or don’t understand the intricacies and value these firms bring, everyone loses. But the resources and collaboration that come with joining a larger group can have enormous benefits for everyone.
We don’t think we need to “fix” boutique accounting, but it does need to evolve in the face of the aforementioned challenges. We also believe we need to support the evolution in a way that preserves what has made it special.
Here’s what matters when it comes to consolidating accounting firms:
- Long-term vision: The focus should be on building a platform that supports the growth, connection and development of accounting professionals while delivering exceptional client service. That means investing for the long haul, prioritizing sustainable growth, data-driven processes and operations, and collecting data to help firms operate more efficiently and effectively.
- Investing in technology: We have spent a decade getting to a fully vetted, bespoke technology stack that we have seen improve efficiency, enhance service delivery and free up our professionals to focus on higher-value client interactions, and positions us to continually implement new and adaptive tools.
- Preserving culture: We understand the importance of preserving the unique culture and client relationships of our firms. Part of what makes boutique accounting great is the read they have on their local communities, and the relationships they’ve established over decades of service. This is in our DNA, and we believe we are here to support these unique cultures and preserve them even as partners transition and the next generation takes the reins.
- Focus on quality: We believe that by providing firms with the resources and support they need, they can focus on what they do best: serving their clients. For example, prior to joining a group, local firms don’t have the resources for internal quality control teams, risk committees, training and development programming, incident response teams and the list goes on.
A new model can mean accounting clients are better taken care of than ever
Consolidation, when done right and with clients and people at the forefront, is not about sacrificing quality for profit. It’s about creating economies of scale, expanding service offerings, providing growth opportunities and ensuring business continuity.
The accounting industry is at a critical juncture. Private equity is now a mainstay, and we can either vilify it and consolidation, or we can, with intentionality and a discerning eye, embrace a new model that has the potential to address the challenges we face and position us for future success.
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