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The Top 40 Networks & Associations 2016: Firms switching networks like a game of ‘musical chairs’

INTERNATIONAL accountancy groups are living in interesting times. Despite increasing their collective fee income by nearly $2bn (£1.5bn), the top 40 networks and associations have had what can only be described as a mixed year. In total, the Accountancy Age Top 40 International Networks & Associations Survey reveals that this year, member firms of these groups generated more than $189bn in fees. That compares with last year’s survey total of $185bn, a modest 2% increase.

But these figures hide a complex picture of networks and associations that are growing, both organically and by adding new members while others have suffered a fall in income, often the direct result of departing national firms. For instance, PKF International, having previously suffered the loss of its UK firm in 2013 also saw the departure of its North American member firm late last year. This US part of the network, which assumed the name Allinial Global and claims a fee income of $1.6bn, has subsequently begun the process of integrating with IAPA, a move that will see the latter organisation significantly boost its presence in North America.

At the same time, we have seen two similar sized associations, KS International and Morison International, come together to form MorisonKSI. This merger came about as the direct result of Morison losing its UK member firm MHA MacIntyre Hudson to Baker Tilly International. While looking at up to ten UK firms, Morison came to the conclusion that not only did Kingston Smith – KSI’s UK member firm – fit well in the UK, but also that its international association would fit as well. And thus was born a new association that can lay claim to more than $1bn in fees and at the same time demonstrate that mergers at the international level are not impossible.

 

Top 40 International Networks & Associations 2016Business as usual at the top end

Meanwhile, it appears to be business as usual at the very top end – the Big Four international networks jointly delivered $124bn; that is nearly two thirds of all the income generated by the top 40 groups. And there was also the now customary swap at the very top. PwC assumed its place at the head of the league table, with $35.4bn, up 4% on last year’s figures. Deloitte, having topped the poll last year slipped back to second place with a more modest 3% growth to reach $35.2bn.

EY, in third place, has begun to pull away from fourth placed KPMG. With 4.5% growth, EY’s fees now stand at $28,655m while KPMG saw its dollar fee total drop 1.5% to £24,440. However, in fairness to KPMG, its local currency fees actually increased by 8%, so it was not a case of the network going backwards.

The top group in the mid-tier remains BDO, which saw its fee income increase 4% to hit $7.3bn. It is at this level and below where the market is most likely to see merger and switching activity, as national firms look to either acquire other firms in their own country or move from one international group to another in search of improved global access. However, mergers at the international level are likely to remain few and far between.

“I expect that the consolidation that is ongoing in our profession will continue in the next 12 months and that as a result firms will continue to move from one network to another,’ says BDO’s chief executive Martin van Roekel, but adds: ‘The likelihood of mergers at network level I consider quite remote, unless the leading firms of such networks would decide, and agree, to do so.”

Crowe Horwath’s chief executive Kevin McGrath agrees. He 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 outweigh any benefit 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 serving their clients, accomplishing their strategy and from whom they can derive even greater value.’

 

Top 20 International Networks 2016Dots on the map

Looking at where he might find suitable firms to join his own network, McGrath says: ‘For us it is not about putting dots on the map… We have defined key economic cities where we need to develop and expand our presence.’

Kevin Mead, chief executive of Prime Global, steers a middle course. ‘When IGAF, Polaris and Fidunion merged almost five years ago, I expected this to be the start of a wave of similar mergers that would be reflective of a lessening of the importance of geographic exclusivity, as well as matching the consolidation trend in the industry itself,’ he says. But he adds: ‘This really did not happen at that time, and is only happening at a moderate level even now.’

There are of course enthusiastic supporters of a merger at the international level. As Liza Robbins, chief executive of the newly formed MorisonKSI says, the impact of increasing in size can have a positive impact on the clients the association can now attract. “Together, we have really taken a quantum leap, no question. We now represent just over $1bn in fees, and one of our member firms recently told me that they were invited to tender for a piece of work simple because MorisonKSI had reached the $1bn mark. It is a significant psychological barrier, and one that I might have underestimated,” she says. “For me, it has always been about quality, not quantity, but it does provide a context.”

But even here, the merger between Morison and KS International was not without its internal opponents. Robbins admits there was one member firm that was openly against the merger. But following their attendance at a recent international partners conference, the firm was won over. “They said to me that the most impressive issue was the manner in which the merger was executed, and they are now proud to be a member of the new association,” Robbins says. Indeed, it was a merger carried out in rapid time. It was announced on 4 February 2016, and became operational by 1 April 2016.

Network mergers are nothing new, observes Clive Viegas Bennett, chief executive at MGI World, pointing to the formation of PwC in 1998, Praxity in 2006, Nexia in 2007 and Prime Global in 2011. “The key factor now is the increase in recent years in consolidation among member firms in the US, Europe and other markets,” he says.”Newly combined firms have to choose between the two associations of which the separate firms were members.” This was of course the situation facing Baker Tilly in the UK when it acquired Tenon – the result was that the former chose to join the latter’s network, RSM, and consequently change its name to RSM in the UK, though MHA MacIntyre Hudson left Morison to plug the gap left in the Baker Tilly International network.

It will be interesting to see how the coming together of IAPA and Allinial progresses, the former North American representatives of the PKF network. If they succeed in bringing the two sides together by the end of this year as planned, the move will create an international group with a $2.6bn annual turnover, placing it fifth among its association rivals. “Our associations complement each other so well, from our strong global representation and diverse cultures, to our combined geographic footprint which will provide an extended global reach to resources from 300 firms worldwide,” says IAPA CEO Stephen Hamlet, who joined the association a year ago.

But Hamlet also adds that such opportunities ‘do not come along too often’.

Top 20 International Alliances & Associations 2016Musical chairs

However, while such mergers will continue to change the marketplace, other groups do not necessarily see them as a good idea. As Michael Reiss von Filski, global CEO of GGI says: “The challenge with mergers is that you have to take the whole package, which means that often enough networks or organisations merging cannot ensure the quality level they want. Additionally, mergers cause important overlaps in various cities and indeed some members decide to leave the “new” network or association.” However, he adds that there will still probably be more attempts by networks and associations to join forces ‘to achieve a higher business volume and higher rankings’.

Richard Attisha, CEO at the TAG Alliances, a multidisciplinary alliance that includes law firms as well as accountancy firms, describes the current wave of movement between groups as ‘musical chairs’, a situation that he sees continuing, especially as some networks and associations choose to merge with others or dramatically change their strategic direction. “Firms are continually growing and expanding and in most conventional networks, where exclusivity of network or geography is a strict demand, more and more firms are looking for flexibility and independence,” he says. “The biggest question facing firms when they find themselves at the crossroads of staying with their existing membership or moving to another association is ‘What about the years of investment and time that we have put into that group?'”

However, to bring us back to the big beasts at the top of the charts, Attisha observes that a looming threat to organisations such as his own is the continued expansion of the Big Four and other international firms that have the ability to invest massive amounts of resources into new technologies and emerging practice areas such as artificial intelligence, cyber security audits, integrated reporting and analytics. “Additionally,” he says, “the Big Four’s renewed interest in providing legal services is making waves in the industry.”

An interesting development has been the growth of networks and associations out of the emerging economies. UC&CS Global, which has its heartlands in Latin America, saw a 61% increase in its total revenue this year. “In current times, associations are emerging from non-developed countries, Russia, China, Mexico, Argentina,’ says UC&CS chief executive Mauricio Mobarak, ‘and they need to grow to cover all regions of the world. Competence obliges them to have members in the five continents.”

Reanda International, the China-based international network is also branching out, recently announcing that the London based Grunberg & Co had joined its network as its first UK member and fourth European member.

Conflict risk

Away from consolidation and empire building, the networks and associations face a number of opportunities and threats. Liza Robbins believes new auditor independence regulations will create greater risks of conflicts of interest among the Big Four, which will allow organisations such as her own to step in and provide niche services to major multinational companies. Tax advice will also come to the fore as the OECD’s Base Erosion and Profit Shifting (BEPS) regime gains traction.

“While each of our service lines grew in 2015, the strongest performer was consultancy, and I think this is indicative of where we will continue to see some of the strongest growth as we look ahead,” says Geoff Barnes, Baker Tilly’s CEO. “Our member firms are broadening their service offering to meet changing market demands, in particular in the areas of performance management, business valuations, risk management and IT services.”

Barnes adds: ‘Regulatory developments, such as EU audit reform, present real opportunities for a network like ours. 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.’

Barnes paints a picture of an increasingly competitive marketplace, largely as the result of regulatory changes. “Pending changes to the auditor rotation rules across the European Union and other countries, and the ongoing competitiveness of the audit market globally continue to pose opportunities and challenges to the profession,” he says. “Many firms will no longer be able to rely on their long-standing clients, which will cause increased competition. Greater emphasis will need to be placed on client strategies: the question of what clients firms have and what clients they want to target will become increasingly important.”

And there is no doubt that which international network or association you are a member of will influence which clients will want to work with you. It is set to be another ‘interesting’ 12 months ahead for all the groups.

Top 40 International Networks & Associations 2016

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