Growth Opportunities and Threats in the Accounting Industry in 2018
It’s common knowledge in many professional sports that championships are won in the off-season.
How well a team does when the season starts depends pretty much on how well-prepared and ready to win the team is, before the competition even begins
This is no different for any businesses who are looking forward to strong growth and significant business wins in 2018.
If you’re one of these businesses and want to step into 2018 knowing with certainty what to expect from your industry and how to be better prepared to make your mark and win your games, here’s a snapshot of what your playing field looks like…
Growth in the Accounting Services industry in Australia
3 trends in the industry:
- Annualised Growth of 1.8% over the five years through 2022-23, to reach $21.5 billion.
- Growth is driven by value-added (consulting) services and adoption of technology
- Despite increasing number of new companies in the market, the industry is in a merger & acquisition phase
Industry Revenue – Past Performance and Outlook
The accounting industry has grown by an annualised 1.5% over the past five years to reach $19.7 billion.
This modest rate of growth has been mainly driven by positive business confidence, increasing demand for industry-specific advisory services and advances in technology.
EXTERNAL GROWTH DRIVERS
The key external drivers of growth are: economic conditions, including business confidence, capital expenditure, competition and rate of consolidation in the industry, demand for specific industry services, technology innovation and adoption and industry regulation.
Business confidence in Australia has fluctuated over the past 5 years but has remained largely positive. This has supported a modest revenue growth of 7.6% of the industry (annualised 1.5%).
It is widely perceived that accounting firms tend to receive more work when business confidence is positive as businesses are more likely to undertake expansion activities, which require advisory services. But times of economic uncertainty also drive accounting clients to use accounting and tax services for better financial management, to keep costs under control and generate savings anywhere they can, including on tax.
Over the past five years, largely positive business confidence has driven demand for advisory services, such as financial advice on business structure and initial public offerings (IPOs).
Whilst the revenue from advisory services is growing at a higher rate, revenue from traditional accounting services, such as auditing, has remained stable due to legal requirements and the Australian Accounting Standards Board making changes to financial reporting standards.
Increasing competitive pressures from operating in a global marketplace have pushed accounting clients to look for advice on cutting costs and becoming more efficient in their operations.
This has provided revenue growth opportunities for both small and big accounting practices, which have updated their service offers in favour of higher value-add advisory services, offshoring lower-value traditional accounting services and making use of cloud-based technology.
As companies are embracing higher value advisory services the profit margins over the past five years have also increased. The current average profit margin for the industry sits at 23.7% (compared to 14% average for all other industries)
IT and telecommunications adoption are changing the industry’s operating landscape with both accounting firms and clients embracing new cloud-based and advanced reporting accounting software.
The real-time information and improved reporting capabilities of new technology has allowed accounting firms to improve their advisory services with better reporting and advice for clients. This is further supported by clients’ adoption of the same technology, which has allowed them to better understand their businesses, and appreciate the value of a higher-level accounting advisory services to improve their business.
On the other hand, bookkeeping and more traditional accounting services have been threatened by the wide adoption of MYOB, and especially XERO, which simplifies the bookkeeping work for business owners.
For firms who service the general population the increasing use of other systems, such as the ATO’s myTax system, is likely to remain a threat and negatively affect demand from individuals for tax services.
In summary, over the past five years, these technological advancements have required industry players to look past traditional revenue streams and diversify their offerings to remain competitive.
Whilst future technology developments are likely to maintain their impact on the industry, embracing advisory services is not the only and most profitable option for growth for accounting firms as this comes with its own challenges. For example, the ability to deliver complex advisory services relies heavily on being able to attract and retain highly competent staff (look for more information on choice of best strategy for growth in part B)
With regards to competition and industry players, consolidation is increasing across all professional service industries as companies are looking for opportunities to expand their client base and boost their brand and position in the market.
Larger firms have pursued acquisitions of smaller firms to gain access to their specialist product/service knowledge and expand their audit and tax client base beyond the traditional market of listed companies, which has become largely saturated.
Mid-market companies have also pursued acquisition of digital or other complimentary consulting services to add to their suite of advisory services.
However, not all acquisitions are successful especially if they are done on the basis of personal preferences/interests of one of the managing partners, rather than on a well-thought strategic fit with the client base and the firm’s capabilities. For example, a “marriage” of accounting and life-style coaching companies is not an outright success and may not work at all. The same is true for acquiring a business in a related industry (accounting + financial advisory) because buying clients is not the same as attracting and retaining clients.
Overall, despite consolidation trends in the industry, the number of enterprises has increased over the past five years due to a lot of sole proprietors and small businesses entering the industry, who generally service households and small businesses.
The Accounting Services industry’s outlook is positive, with industry revenue projected to grow an annualised 1.8% over the five years through 2022-23, to reach $21.5 billion.
The most significant driver of demand for accounting services is a rise in private capital expenditure as companies require due diligence services before they commit to capital outlays.
How is this affecting your business? How are you planning to use the opportunities and mitigate the risks?
There are different business strategies you can adopt for long-term growth. – They will be discussed in part B, coming soon.
In the meanwhile, let’s look at your company internal growth drivers:
Key Success Factors for Growth
IBISWorld identifies 250 Key Success Factors for a business. Some of the more important for this industry are:
- Provision of development programs for personnel:
Accounting firms that provide professional development opportunities for their employees are more likely to provide higher quality services, which helps with client retention.
However, this needs to be coordinated with the future growth strategy of the firm, the type of services it will provide, the markets it will service and what the needs of these new clients will be.
Just multi and upskilling staff as a risk management strategy (including retention) is not a guarantee for success.
2. Membership of an industry organisation:
Accounting firms that are members of representative organisations, such as CPA Australia, gain extra credibility and easier access to a variety of clients.
Of course the recent developments at CPA and their impact on the CPA brand have caused a stir amongst members of the organisation and an opportunity for growth to their “rivals” – CA ANZ, which they have been successfully exploring.
3. Establishment of brand power/influence:
Establishing and maintaining a congruent and authentic brand will help attract ideal clients by tangibilising and communicating in the client’s language the value that the company brings.
Many companies still rely on the personal brands/connections of key partners and employees to retain clients and attract new ones, which makes them vulnerable if those partners and employees leave to the company.
4. Maintenance of excellent client relations:
Accounting firms that maintain good client relations are more likely to retain clients and secure a steady income.
Again, investing in client service training or hiring people with the right client management skills is not the only option. A good balance of people and system-driven client service can result in an excellent service for your clients.
5. Having a diverse range of clients:
Accounting firms that have a diverse range of clients operating across many industries maybe better positioned to withstand changes in operating conditions.
This strategy is not universal, as targeting all types of clients may dilute your service offer and spread your resources thin.
This is a successful strategy if you have or are prepared to build a business model to support it (more on this in part B)
The original research and analysis has been conducted and published by IBISWorld Australia – www.ibisworld.com.au
Building and growing a professional services business can be harder than growing a “passion” service/product business. In other words, attracting clients who are eager to buy accounting, disputes resolution, financial planning etc services is different to attracting customers eager to buy new cars, shoes or golf memberships.
To grow your business (be it sales, profits and/or assets) you rely on people and businesses to hand you not just their money, but also their trust (open their business or personal lives) so that you can help them.
To grow, you need to be able to sell more of what you offer, which is largely intangible to an average client, who also needs to trust you implicitly before they get to know you and your team.
Given the involved nature of the relationship between a professional service business and its client base it’s not unusual to have some barriers and challenges to growing.
For this reason, we’ve put together a guide to growth specifically for professional service businesses to provide answers and a choice of strategies for growth in 2018.