Mid-Tier Firms: a question of strategy

A leading management consultancy advises mid-tier firms on how to exploit the current dramatic changes in the marketplace - and some leading firms react.
Alice Haythornthwaite

The accountancy profession has undergone considerable upheaval of late, presenting mid-tier firms with significant new challenges and opportunities. Accountancy approached PA Consulting Group, a leading management consultancy for the professional services sector, and asked it where these medium-sized firms should be heading strategically in order to reap the benefits from the shifting climate (shown in the red panel to the right). We then asked a number of mid-tier firms to assess how well PA Consulting's analysis fitted in with their own strategic plans.

Change is fast becoming an imperative, rather than an option for mid-tier firms to consider at leisure. Limited resources need not limit the benefits of change - but firms must focus on the essentials.

PA Consulting Group is a leading management, systems and technology consulting firm operating worldwide from over 40 offices in more than 20 countries.

What the firms think

Most of the firms we spoke to largely agreed with PA Consulting's summary of the current marketplace and its recommended strategy, particularly its points on developing a focused marketing strategy and maintaining focus on quality. Michael Cleary, UK national managing partner of Grant Thornton, approved of the analysis, saying he expected many mid-tier firms would already be working to a strategy which encompassed some of PA's points.

However, for BDO Stoy Hayward, the consultant's advice was nothing new. 'PA Consulting's suggested ''answers'' are those which we have adopted for many years,' pointed out Jeremy Newman, the firm's managing partner.

Laurence Longe, national managing partner of Baker Tilly, felt the analysis was aimed more at smaller mid-tier firms and therefore not particularly relevant to his firm. Although he agreed with PA Consulting's emphasis on the need to adapt to change and to have a focussed marketing strategy, he questioned the consultant's assertions that larger mid-tier firms have a technological advantage over smaller firms and that they are now more aggressive.

Some firms had some interesting points to add to the analysis - such as Cleary's emphasis on the importance of having a flexible structure to allow change, and the need to address public expectations of independence, as pointed out by Newman and PKF chairman John Wosner.

All agreed about the potential benefits of the current climate, however. 'For the mid-tier firms, the polarisation of the Big Four provides a clear opportunity for differentiation and is certainly not a threat,' commented Cleary.

TENON - Ian Buckley, chief executive

Having capitalised on our first mover advantage in acquiring some of the very best firms below the Big Four, our strategy is wholly consistent with the analysis in terms of its focus on the market place below them. Tenon has the advantage of access to capital to invest in 'added value' services for its clients. Our truly corporate management structure also gives an additional advantage in managing change and adapting to an evolving market place. The role of commercial auditors is not consistent with the Tenon model where there is no audit provision. Our emphasis is on the 'trusted business adviser'.

GRANT THORNTON - Michael Cleary, UK national managing partner

PA Consulting has summed up well the current opportunities in the marketplace and recommended strategy. I expect many mid-tier firms are already working to a strategy which encompasses at least some of the points outlined in the article.

We are only too aware that most firms of accountants around the world are likely to feel some fall-out from the Enron/WorldCom effect. It is now not enough to have probity: you must be seen to have it. For mid-tier firms which can demonstrate a good track record in probity, this can present an opportunity. For example, with conflicts of interest increasingly in the spotlight within the Big Four, more large listed clients are likely to push some of their specialist non-audit work towards those mid-tier firms they respect.

Furthermore, we see growing evidence among smaller quoted and larger privately-owned companies of a disenchantment with the Global Four and a consequent opportunity for firms such as ours to offer them a high quality and relevant service.

PA is right to advise a focused marketing strategy. No mid-tier firm would expect to succeed by trying to compete with the Big Four in servicing the audit needs of the world's largest businesses. And, while the larger mid-tier firms are probably capable of servicing the needs of all but the very largest businesses, they cannot expect to be regarded as market leaders across the whole spectrum of UK industry. To attract the attention of larger companies who have traditionally sought advice from a Big Four firm, any mid-tier firm needs to develop areas of deep expertise. In our case, we have developed areas of strength in corporate finance, insolvency and business recovery, and we are the most active NOMAD on the AIM market and a leading auditor to smaller quoted companies.

A focus on quality in the current shifting climate is also absolutely vital. While having a focused marketing strategy will help to deliver this, accountancy firms also need to offer clients the best quality and best trained staff. Fostering an appropriate culture, working environment and reward package is vital to retaining high quality staff in the long term.

It is also important that a firm's structure is sufficiently flexible to allow change. In Grant Thornton's case, over the past 18 months we have completely overhauled our constitution and profit-sharing arrangements along more corporate lines in order to allow management the freedom to manage the business (while offering protection to individual partners) and the flexibility to reward the highest performing partners appropriately. Without the ability to react swiftly to changing circumstances and to attract and retain the best people, at all levels, we do not see a long-term future for any firm.

The profession has seen immense change and there is little to suggest that the pace of change is likely to slow. For the mid-tier firms, the polarisation of the Global Four provides a clear opportunity for differentiation and is certainly not a threat.

PKF - John Wosner, chairman

The last year proved to be a challenging one for all professional services firms. The accounting marketplace has become more competitive and fluid in the light of recent well-documented accounting scandals and the global economic slowdown.

Merger activity and increased competition for client business has resulted in challenges but has also brought opportunities with many medium and large organisations looking beyond the Big Four accounting firms to provide them with accounting and business advisory services. Opportunities are available for midtier firms to play a more influential role and PKF has won new business particularly in conflicts of interest areas such as litigation and forensic work, which would previously have gone to the Big Four.

The shape of PKF's business has changed significantly over the past five years with a muchincreased focus on consultancy and business advisory work.

However, our main focus has remained constant throughout - working with developing businesses to add real value. We have always believed in relationship building in its widest sense and concentrated on delivering excellence - even more important attributes in the face of stiff competition or regulation.

Our marketing strategy reflects these values and focuses on positioning the firm as expert advisors to developing businesses as well as specific sectors such as hotel and leisure.

SMITH & WILLIAMSON - Jeremy Boadle, head of audit and business services

In my view, the move from Big Five to Big Four has increased the opportunities for a handful of strong mid-tier firms. The strategic focus of the Big Four on the very large multinational businesses will become more pronounced. This leaves substantial mid-corporates, with turnovers of up to, say, £250m, which are really below the Big Four radar, but where we can add real value.The reduction in the number of large firms is also likely to lead to more cases where all four firms are conflicted out of particular transactions. The Big Four may also increase their prices for audit services which may not go down well with clients. All of this should throw up opportunities for mid-tier firms, but this is nothing new - we have been competing successfully with these firms for some time.

Our experience has borne out the importance of focusing on key markets, such as professional practices, financial services, property, support services, media and housing associations and making sure we have the calibre of people and strength in depth to provide exceptionally high standards of service to these sectors. Many firms are investing in technology but the key is to have the critical mass in key sectors to be able to deliver the benefits to clients.

We are now separating our audit business into an entity, Nexia Audit Ltd, independent of the rest of the group, which is attractive in the post-Enron environment and equips us to take on the challenges the market might throw up in the future.

BAKER TILLY - Laurence Longe, national managing partner

Overall, I think PA has made some valuable insights - but the references to top-end mid-tier firms becoming more aggressive, for example, suggest that the analysis is really aimed at smaller mid-tier firms and therefore I'm not sure it's really relevant to us.

The suggestion that larger mid-tier firms have a technological advantage over smaller firms is debatable. Yes, it's easier for larger firms to make an investment in technology, but the dramatically reduced cost of technology is making it available to everybody. And with the next generation of IT literate kids coming up rapidly, technology is not the competitive barrier that it was. The reality is that technology may allow some smaller niche players, at relatively small cost, to provide a service that previously only big firms could offer. So technology actually enables smaller firms to compete with the biggest in a way they could never do before.

I don't think the larger mid-tier firms are necessarily more aggressive than we used to be. We're more noticeable by sheer size and we've got greater clout because of the impact we have in the market place. But I think, rather than being more aggressive, we're more focussed and more targeted, and maybe more effective. But has it got harder for smaller firms to compete against us? I'm not so sure - we're not aggressively going after their market.

There's often talk of mid-tier firms being squeezed at both ends by the Big Four and smaller, specialised firms. But really we get to take clients from the top four and the best clients from the smaller end of the market, so I don't think we're in danger of being squeezed out.

It is true, however, that mid-tier firms have to decide what they want to be - either specialised in a few things they're good at, or larger and more broadly based. And PA is right to stress the need to adapt to change, but perhaps greater emphasis should have been given to the regulation burden which is particularly heavy for smaller firms.

BDO STOY HAYWARD - Jeremy Newman, managing partner

While a number of firms immediately outside of the 'Fat Four' will have enjoyed success over recent years, clearly there are a number who have struggled or been content to accept relatively low levels of partner profitability. The disappearance of some firms in recent years such as HLB Kidsons is an indication of the problems that have been encountered.

It is also true that a significant number of midtier firms - particularly those with modest levels of profitability - will find it difficult to adapt to change and make the necessary investments.

PA Consulting's suggested 'answers' are those which we have adopted for many years. BDO Stoy Hayward has focussed on the growing business market place since our strategic review in 1995, clearly differentiating our skill sets and expertise from the larger firms.

We first launched quality initiatives in 1991, and have since invested heavily in the quality of our partners and people. As for recognising challenge and opportunity, we clearly have shown that we can respond in this area. We have invested considerably in IT and business change (with significant input from PA Consulting) as well as reviewing all areas of our working practices.

The reconfiguration of our Home Counties offices into four larger regional business centres within the South East and the creation of a Private Client Group, servicing high net worth individuals, are examples of us responding to market opportunities.

Our policy of recruiting partners and talent from the 'fat four' and other firms with specialisms which we do not have but which are of value to our market place is another example.

The key to this all is a preparedness, willingness and ability to invest. This is something that we have been able and continue to do while many other firms, particularly those with low levels of profitability, will struggle.

Change is not fast becoming an imperative - it has been one for many years.

The accountancy profession will need to address public expectations of independence and objectivity as well as concerns over the prevention of fraud. Firms will have to enhance their internal systems and foster a culture of integrity in order to prove their long-term commitment to maintaining these high standards.

As a firm, we will concentrate on what we do best - adding value and delivering excellence and will, we hope, continue to play an influential role in the development of our clients and the future direction of the accountancy profession.

The management consultant's strategy for the mid-tier: Shape your strategy to exploit the advantages of your size By Harriet Oppenheimer and Conrad Thompson, PA Consulting Group

Many mid-tier firms have enjoyed relatively steady, unchallenged success over a number of years in a stable market.

However, recent publicity over high profile accounting fiascos has rocked the market, bringing new pressures to bear on how all accountancy firms carry out their work. Audits must become even more rigorous and transparent as their validity is questioned, and there are greater associated risks of litigation.

These challenges are compounded by increasing competition. The market space traditionally occupied by mid-tier firms is being squeezed at one end by the Big Four generalists, and at the other by smaller, specialist boutique firms. Larger competitors, including top end mid-tier firms, are becoming more aggressive and using technology to gain efficiencies, which may be harder for smaller firms to emulate - and all competitors will seek to benefit from changes to the audit environment, such as internal and/or external rotation. And clients want more - it is primarily the large global clients courted by the Big Four who demand a global service, but most clients now expect more 'value-add'.

This creates a growing imperative for mid-tier firms to adapt to new market realities. However, delivery of such change is unchartered territory for most, who have few resources to spend on change, and little track record of successful change implementation. Moreover, the partnership structure in many firms more closely resembles an affiliation of sole-traders than a corporate firm, creating the particular challenge of ensuring the whole partner group recognises the need to change.

So how can mid-tier firms position themselves to take advantage of this shifting market place, rather than being damaged by it?

The answer is to adopt a targeted approach: View the threats to traditional accountancy work as an opportunity to deliver more value to your clients, and hence to your business

Don't try to beat the Big Four at what they do best - delivering very large pieces of work to huge clients.

Firstly, develop a focused marketing strategy: establish how and where you make profit, and ensure your strategy focuses on these markets and others where you can grow profits in future. Bear in mind that clients increasingly value the industry insight demonstrated by firms which organise themselves with a degree of sector focus, rather than purely by specialist function. And clients of a similar size and nature to your own firm may be far more attracted to you than to the Big Four - their custom is likely to be more significant to you, and this generally shows in how you treat them.

Maintain relentless focus on quality throughout your work, not allowing market concerns about Enron and other disasters to reduce the scope of what is understood by 'quality' to just rigorously applied client probity. Develop your role as 'commercial auditors', genuine advisors to your clients' businesses to build strong, value-adding relationships.

In all this, recognise the challenge and the opportunities presented by this agenda for change. Any shift in working style needs acceptance from all your senior accountants - and for most partnerships, this requires a high degree of consensus. Achieving such consensus is difficult without external facilitation. Careful use of specialist support, targeted effectively at supporting your internal change planning and implementation, can make achievable the seemingly impossible.

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