Analysis - We're not losing clients - are we?

Talk to any of the UK's mid-tier accounting firms and they will tell you that they are taking clients away from the Big Five. 'What's new?' you might ask. Haven't they been saying that for at least the last five years? But this time, there might be something in it. The mid-tier's bold claims may sound like a marketing ploy. But they reflect a trend towards polarisation in the UK accounting market that may have reached a decisive turning point.

Mid-tier firms claim that companies in the UK are terminating their Big Five contracts and turning to the mid-tier. They are unhappy with the Big Five's 'facelessness' and feel that the service-focused approach of a mid-tier firm will give them better value for money. Mid-tier firms say that some of their new clients were asked by their Big Five accountant to look for another auditor. These companies have been told that they no longer fit in with their Big Five auditor's client portfolio.

The mid-tier says it is also taking tax and corporate finance work away from the Big Five. They say that chief executives and FDs have, over the last two or three years, started to shop around for their non-audit accounting services. Some companies in the mid-tier's new client base will pay for a Big Five audit but look to a smaller firm for a package of other accounting or consultancy services.

The Big Five deny mid-tier claims that they assign managers to small companies so that their partners can focus on larger companies. They stress that client service is something they pride themselves on. They also deny that they neglect small national businesses in favour of large multinationals.

'The moment the Big Five start talking up “global”, it's the obvious line that they're leaving behind national companies,' says David Wilkinson, Ernst & Young's head of UK Entrepreneurial Services. 'This is why we have a separate team that is focused on small business - we recognise the danger that you can concentrate on bigger clients and bigger fees, and forget where the next generation of clients is coming from.'

PricewaterhouseCoopers also has small company units, and claims to be just as interested in the UK middle market as it is in large listed companies. 'Once you've got above £50m turnover, we've got 50% of the market in the UK,' says Rodger Hughes of PwC assurances services. 'We are serious players in the middle market. Because we have the household name clients, people don't tend to look much beyond that.'

However, the Big Five are selective about their smaller clients and manage their portfolios to generate maximum future revenue. And this is where mid-tier firms are picking up clients from the Big Five - they are effectively taking on Big Five rejects.

If a small company is considered to be a 'lifestyle company', where managers have little or no intention of growing the business, it will be encouraged to look for another accountant. A client may also be asked to look elsewhere if the Big Five firm feels that the fees generated by the client 'are not commensurate with the risk involved in signing off their accounts'.

The Big Five's ideal small business client is one that wants to use its accountant strategically in transactions, product development and IPOs. It's in those areas that big firms can add value. Strategic involvement means the client can be relied on to generate more revenue in the future, as it grows.

The mid-tier firms say they are succeeding in attracting non-audit clients because their sector specialisation allows them to offer better services than the Big Five. They say they've occupied industry-specific niches for such a long time that their senior partners have an intimate understanding of the sector that is unsurpassed by Big Five resources. Moore Stephens for example specialises in insurance and shipping, while HLB Kidsons concentrates on charities and the public sector.

The Big Five say their breadth of resources means the mid-tier can't possibly compete with them on sector specialisation. But firms such as BDO Stoy Hayward have recently recruited partners from Big Five firms. They prefer to work in a firm focused on a niche sector because they feel they can offer a better service than they could in a Big Five firm.

There does seem to be some truth to the mid tier's claim that it is taking business away from the Big Five, albeit unwanted business. This does not indicate that the Big Five are about to be displaced by the mid tier, or that the mid-tier is starting to compete with the Big Five on their own terms.

But what it does demonstrate is that the accounting services market in the UK is becoming increasingly complex. The big firms are not focusing simply on larger companies and listed multinationals - they will take on smaller companies if they think it's worth their while. Similarly, large and listed companies in the UK are not just the preserve of the Big Five. Mid-tier firms are also able to attract clients at this end of the market, based not on the company's size of operations, but on its strategic approach.

This complexity is the legacy of mergers in the 1990s between firms that became the Big Five. Ten years ago these firms competed with the mid-tier on more even terms. After the mergers they became geared towards international companies. Now they are finding a balance between the domestic and the international market. The mid-tier, on the other hand, are having to come up with new ways of increasing revenue and developing their firms while still focusing on the middle market.

This trend may have reached a decisive crossroads in the last couple of months, according to accountants in both Big Five and mid-tier firms. They say future developments will depend on the repercussions of the US economic slowdown. If its effects on the UK are minimal, then the trends we've identified are likely to continue. But if there is a recession, the clock could be turned back as scarcity of work forces the Big Five and the mid-tier firms to compete for the same middle-market clients.

John House

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