Top 40 Networks 2014: More change around the corner

by Philip Smith

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07 Jul 2014

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evolution

AS THE ECONOMIC STORM CLOUDS continue their retreat around the globe, Accountancy Age can report that the international accountancy profession has maintained its modest growth rates. There have been winners and losers among the networks and associations, in part due to economic conditions, in part due to national firm defections, but the underlying trend shows movement in the right direction.

Our annual survey of the Top 40 international accountancy networks and associations reveals fee income has grown 3.5% since 2013. In fact, the sector has grown by $6bn (£3.52bn) to $177bn in the course of 12 months and now employs more than one million partners and staff.

Some $114bn of this total comes from just four networks; it is fair to say that if they have a good year, the sector as a whole will look just that bit rosier. But even within these Big Four networks, performance has ranged from good to merely satisfactory. Deloitte took the number one spot this year, having knocked long-time leader PwC off its leadership perch in 2011, with $32.4bn in fee income compared to its competitor's second-place earnings of $32.1bn.

EY, ranked third in terms of income, showed the fastest growth. With fees around the world increasing by 5.8%, the rebranded network is now beginning to pull away from fourth-placed KPMG, which increased its total earnings by a more modest 1.7%. It remains to be seen how the impact of regulatory changes, especially in Europe, will affect these giants of the accounting world, but there can be little doubt that the increased level of global audit tenders will keep them on their toes.

Mid-tier machinations

The tier of networks and associations immediately below the Big Four has also had an interesting time over the past 12 months. Competition is still fierce between these groups, and regulatory changes are also impacting the way they work. Although there were no full mergers between the groups, individual national firms have been changing their allegiances as they seek to gain an advantage over their domestic rivals.

While it is yet to be fully reflected in their annual figures, the tussle between RSM International and Baker Tilly International over the UK firm is a case in point. After Baker Tilly in the UK acquired RSM Tenon, it looked like RSM might have to follow PKF's example to rebuild its presence in the country. However, Baker Tilly UK instead elected to join RSM International. As Laurence Longe, Baker Tilly's senior partner in the UK, said at the time: "Roughly half of our newly-merged firm had commercial relationships with the RSM International network, so it wasn't a case of shutting down one relationship and going to an entirely new one." The UK firm carried out an extensive comparative analysis which concluded the US, where RSM is the fifth-largest firm, was a standout difference between the two markets, Longe said.

Geoff Barnes, chief executive of Baker Tilly International, is philosophical about this and other moves among the international groups. "The fact is that individual firms are merging to obtain what they perceive as a greater critical mass and to achieve strategic aims that may no longer be possible on their own," he says. "The market is going through a period of consolidation and as most firms are now part of a network or association, at some stage they will have to decide which network they want to belong to."

Where are the network mergers?

Barnes is by no means alone in thinking that mergers between national firms, with subsequent moves between international groups, will continue. Fewer, however, can see mergers at the international level. As Crowe Horwath International's chief executive Kevin McGrath says: "Conversations regarding network mergers will continue to occur, but it is unlikely that actual announcements will come about. Although on paper mergers of networks may make logical sense, the difficulty and disruption caused by them far outweighs any benefits in most cases. Instead, there will likely be a continuation of switching by members among networks as firms look to align themselves with global groups best able to assist them in accomplishing their strategy."

"For us, it is not about putting dots on the map," he adds.

The last significant merger at a network or association level was in 2011, when IGAF and Polaris came together under the new brand of PrimeGlobal. At the time, there was speculation other groups would follow suit, but so far this has not been the case. "We had expected a number of similar deals to follow our own 2011 merger, but perhaps entrenched relationships and geographical exclusivity, whether enshrined in bylaws or just a part of culture, lessened that impetus," explains Kevin Mead, PrimeGlobal's chief executive. "There seems to be room for the 40-plus players with differing costs and value propositions for firms at the moment, and perhaps what we are moving towards is a system of networks and associations with a clearer understanding of their vision and the types of firms that they seek to gain and retain."

James Mendelssohn, chairman of MSI Global, is not so sure, warning that there are too many networks and associations, which could see a couple of them struggling. As such, firms will be in the market to join "a more progressive" group.

"Interestingly, two firms have already joined us this year in exactly this situation," he says. It is a situation that is becoming more frequent, and perhaps the gloves are starting to come off. As Mendelssohn says: "The days of the network world being a ‘gentlemanly club' are long behind us. I think we will see greater volatility, with more firms switching their allegiance, and this will require all networks and associations to remain alert and ensure that their service offering is both fresh and focused."

But even in this context, "realignment" does not necessarily result in networks merging. "Any merger would be a very difficult deal to pull off successfully," he adds.

Of course, talk of mergers at any level can distract international groups from their day job. Networks exist to provide the best platform for their members, who in turn want to give clients the best possible service. As growth returns to the global economy, many networks and associations believe there are plenty of opportunities that can be exploited by their members, as well as recruiting new members, particularly among emerging economies.

New locations, new opportunities

"Geographically, we continue to build up our African representation and have had success by recently admitting several African firms," says Crowe Horwath's McGrath. "I expect we will continue to build this area as many of our firms have clients needing services in the region." But McGrath can also see growth opportunities in terms of the services his member firms offer. He says: "We expect to see growth from non-traditional sources; especially in advisory services. As the growth in audit and assurance continues to languish, firms are looking to augment their practices with consulting services, which carry a greater value proposition and margin."

It is a similar story at Grant Thornton International. Ed Nusbaum, the network's global CEO, is expecting big things from his members' advisory capabilities, having already witnessed considerable growth in this area. "We are executing a global advisory services business plan which has expanded our capabilities dramatically and will continue to fuel growth," he says. "In the last two years, our advisory services have grown revenue in excess of 20% each year."

But Nusbaum and his peers at other groups can see challenges as well as opportunities ahead, not least on the regulatory front. "The changes in the laws in Europe, India and other parts of the world have caused significant market changes in advance of the laws being effective," Nusbaum says. "We are already winning new audits as well as tax and advisory work for publicly listed entities. While we may not love every aspect of the new regulations, they are here to stay and they create opportunities for everyone. The profession must respond."

Regulators pushing for market evolution

It is clear that new regulations are opening up the market for the accountancy profession. Alongside the opportunities these changes bring, they present obvious challenges.

Baker Tilly's Barnes believes that EU audit reform is about to cause a huge shake-up as many firms will no longer be able to rely on their long-standing clients. "This shift will cause increased competition and everyone will need to work harder to keep their existing clients and work harder on targeting the right clients from other networks," he says. "However, strong organisations do not fear regulation. For some networks, this will be an opportunity to flex their muscles in new markets and win new clients. For others, this could make their revenue base unstable." More thought will need to be put into client strategies across the board, and the questions of what clients firms have and what clients they want to target will become of increasing importance, he adds.

It is clear Barnes and others are aiming high as a result of these movements. "There is going to be a shift in the audit profession, and mandatory rotation and restrictions on non-audit services that an audit firm can provide will give us the opportunity for developing business with new clients," he says. "Our strength in advisory services will allow us to pick up pieces of work that the Big Four and other firms are no longer able to perform."

It is unlikely the Big Four will lose their two-third share of the international market any time soon, but you cannot fault the ambition of those snapping at their heels.

CLICK HERE TO VIEW THE 2014 TOP 40 INTERNATIONAL NETWORKS SURVEY

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