View the Top 20 International Networks 2017
View the Top 20 Alliances and Associations 2017
Proving that there is always money to be made during times of upheaval and disruption, the top international groupings of accountancy firms continue to grow. On average, the top 20 international networks saw their annual fee income grow by 3.5% since last year’s survey, with turnover increasing to more than $165bn (£125bn). It is a similar picture for the top 20 alliances and associations, albeit on a small scale, with fees now reaching over $31bn.
Of course, the networks league table is dominated by the Big Four of Deloitte, KPMG, EY and PwC, with combined fees of nearly $128bn, up 3% on last year’s £124bn. But even here there was a frisson of excitement when Deloitte once again leap-frogged PwC to claim the top slot. This was the result of a 4.5% increase in fee income posted by Deloitte, combined with a more lacklustre 1.5% at PwC. EY and KPMG recorded 3.4% and 4% growth rates respectively to maintain their third and fourth rankings.
But combined, these four networks account for more than three quarters (77%) of the fees generated within the top 40 groups. The next five international groups would have to combine to create a network in size similar to just one of the Big Four, a move that is not likely to happen any time soon.
That is not to say that some groups will not try to pull off a merger on a smaller scale. But such a path to growth is not an easy one to tread, as IAPA and Allinial Global found out last year. In May 2016, the two associations announced their intention to come together to create what would have been the third largest such association, with a potential $2.6bn combined fee income.
However, the deal was called off in November 2016. IAPA members had requested additional conditions that Allinial would not accept. As Stephen Hamlet, the then IAPA chief executive, said at the time: “It became clear that a middle ground between what IAPA members seek and what Allinial Global wants, was simply not achievable.” Hamlet is now chief executive of Russel Bedford International.
The failure of the deal, which on paper seemed to provide at least a good geographical fit, demonstrated why it is so difficult to pull off a merger at the international level. Morison and KS International came together last year to create MorisonKSi, while PrimeGlobal was born when IGAF, Polaris and Fidunion joined forces. At the time, more mergers were expected.
Liza Robins, chief executive of MorisonKSi, said: “Organisations will merge only, or should only merge, if each party gains a specific strength from the other party, rather than merge just to create a larger organisation with overlaps that will cause internal tension. The smaller networks and associations will be under more pressure to merge, as member firms are looking for specific benefits from an international organisation that will be difficult for smaller groups to deliver.”
PrimeGlobal’s chief executive Kevin Mead added: “I have been predicting more mergers of associations and networks since PrimeGlobal was itself created by a three-way merger five years ago. All things within associations and networks are driven by firm, and therefore client, demands. If an entity lacks the mass, scope or reach to fulfil those demands then merger is a possible way forwards.”
But further mergers have yet to materialise. Networks and associations are now focused on the impact of mergers and defections at a national level, and instead of the past fear of cross-border litigation, the threat of departing member firms appears to be the number one challenge facing many of the groups today.
As Ted Verkade, chief executive of Baker Tilly International, said: “While a merger at the network/association level cannot be ruled out, this would, I believe, give rise to a number of significant challenges, not least due to the cross-over in terms of coverage and locations that a merger on this scale would bring.”
Baker Tilly of course lost its UK firm to RSM three years ago, and has since rebuilt its UK presence by bringing on board a number of smaller firms, including MHA MacIntyre Hudson, Henderson Loggie and Broomfield & Alexander.
“I believe mergers between national firms will continue as firms strive to reach critical mass and develop strategic aims that it may not be possible to achieve on their own. As most significant firms are now part of a network or association, competition is fierce. I think we will also see firms more routinely evaluate their current membership to ensure that they are with the right network/association. Networks/associations have to offer a strong and compelling value proposition, and they have to deliver on that proposition,” said Verkade.
Julio Gabay is chief executive of Abacus Worldwide, an association that has nearly doubled in size over the last year. He accepts that mergers at the top end of the market could prove difficult to achieve due to geographical overlap as well as cultural and branding issues. However, he believes mergers are more likely among smaller sized groups as they are more manageable. Abacus itself is seeking merger partners but has yet to find the right candidate. “We have the specific strategic objective to accomplish this and whichever group we consider must be a match with our standards, culture and our vision for further development,” he said.
Michael Parness, president of CPA Associates International, believes that the market may still see mergers at the international level, but feels the emergence of young partnerships, born out of the consolidation witnessed over the last two decades, will affect membership at the country level.
“Yes, the industry is changing rapidly and with an increasing focus on consulting practices, firms are growing quickly and with evolving needs which require new capabilities from their associations than they did even two years ago,’ Parness said. “Because of this shift in the business, firms and associations will need to change quickly to adapt to their clients’ and members’ needs and remain competitive in an environment where others may be moving more quickly than they are. This industry shift will force the continuing trend of mergers both at the firm and association levels.”
Parness argues that the sector is beginning to see many high-quality partnerships develop from young partners who were “babies in the bath water” of acquired firms and had no intention of being owned by a larger organisation. “These firms of the future are looking, or should be, for affiliations with international associations to build a network for themselves that will empower them with access to a global distribution channel for both inbound and outbound work,” he said.
“We need to embrace the fact that great quality firms are going to remain attractive targets to the large regional and national firms as they look for quick growth opportunities. Where $2m to $8m firms used to be the prime targets for large firm growth, it’s becoming more commonplace to see $15 to $25 firms tucked in. Nobody’s safe,” Parness argued. “Also, complacency of association management resistant to market changes will cause members to seek innovation from upstream mergers or more progressive associations to obtain the capabilities that are necessary for their staff to evolve as quickly as their clients require.”
James Hickey, chief executive at Alliott Group recognises this trend. “There will always be movement between associations and networks. We occasionally see firms without a strong succession plan being acquired by the larger networks. I’m not sure associations should necessarily view this as a negative development. As one door closes, another opens. We regularly meet hungry new firms whose partners have exited the same big firm environment to set up medium-sized firms that are more agile and that can offer a more attractive service proposition that will resonate with today’s, and tomorrow’s, entrepreneurial businesses and private investors.”
Aside from hanging on to existing members and recruiting others into the fold, Verdake believes current global trends play a part in dictating where the opportunities lie for his network. “We are focused on ensuring that we are pro-actively positioning ourselves to take advantage of the opportunities that arise due to the changing economic, political, technological and regulatory landscape. Enhanced globalisation and increased business complexity; accelerating technological advancements; a shift of power towards the emerging nations; and global regulatory convergence and regulatory oversight will continue to dominate the market in which we operate,” Verdake said.
“For example, cyber-crime is one of the fastest-growing criminal activities facing both small and large businesses around the globe. Although some of our member firms, particularly in the US, have strong practices in this area, many are investing heavily in their capabilities in order to be able to advise clients on this growing need.”
He added that technology is a key challenge: “It changes the existing business models across many industries, including our own: it shortens the business cycle, transfers power to consumers, blurs boundaries between industrial sectors and reduces barriers to market. For those businesses that embrace these new technologies and successfully incorporate them into the way they operate, or shape them into commercially viable products and services, it opens up opportunities to increase growth and globalisation and, at the same time, improve efficiencies and remain agile.”
Alliott’s Hickey added that associations and networks that do not get on top of these challenges will not be around in five to 10 years. “One of the biggest threats to networks and associations lies in complacency, being out of touch with the challenges faced by their members and their clients. What works today won’t work in three years’ time, and certainly not in five years’ time.
“Firms themselves face huge challenges in terms of finding the right future firm leaders, retaining their best talent, attracting and retaining their ideal clients who will enable the firm to continue to achieve high levels of growth, achieving visibility in the crowded middle market place, and harnessing technology and AI effectively for the benefit of their clients. Only those associations and networks with a strategy to help their members to meet these challenges will thrive in the next five to 10 years.”
Kevin Arnold, chief executive of Nexia, reported that a combination of regulatory change and technological developments are creating both challenges and opportunities. “We still see firms reporting pressure on audit fees as a consequence of increased regulation,” he said. “If you overlay this with the advances in technology, artificial intelligence and digitalisation you have a challenge for all accounting networks and associations. Many mid-tier firms do not have the resources to invest in digitalisation, unlike some of the very large networks, so we need to keep abreast of the issues, but wherever there is a challenge, there is an opportunity, and we need to tap into this potential.”
Despite this focus on external challenges, the shadow of litigation still figures in how the groups organise themselves, with a clear distinction between networks on one side and associations and alliances on the other. As Michael Reiss von Filski, the chief executive of GGI Global Alliance, said: “GGI has clearly opted for the model of an association of independent firms. In view of potential vicarious liability, we do not want to change this approach. Although the leading cases might suggest that the challenges are low, we believe that already having to go through the aggravation of a lawsuit is cumbersome. Therefore, GGI has no intention whatsoever to become a network.”
However, Clive Viegas Bennett, chief executive of MGI Worldwide, takes a differing stance. “Associations that do not embrace the need for global quality assurance policies and systems and transform into networks will gradually lose market share to the networks,” he said.
This need to ensure global quality and consistency is in part behind the drive by some networks to set up firm “mentoring” schemes, to help them develop the capacity to deal with increasingly complex regulatory requirements. Arnold says that Nexia is working with ACCA in Africa on such a scheme. “We see Africa as a high priority, as there is room for growth there,” Arnold said. “We have developed a mentoring system for firms that don’t quite meet our admittance standards but have the ambition and ability to improve.”
Nexia is not alone in targeting Africa, with a number of other groups reporting that Africa, alongside China, SE Asia and Latin America remain growth opportunities. So along with innovation, it could well be geography that helps drive growth for all international networks and associations in the future.
View the Top 20 International Networks 2017
View the Top 20 Alliances and Associations 2017