The Top 50 - Time to knuckle down

The top line from this year’s Accountancy Age survey of the largest
accounting firms is that the growth rate of the Top 50 has slowed significantly.
After double-digit growth in the 2006 and 2007 survey, this year’s survey shows
that the growth rate has fallen back sharply to 5.7%, with firms earning £9.2bn
in fees.

Without an IFRS or Sarbanes-Oxley to drive the work, audit and assurance fees
have almost stalled, growing at just 4%.

Half of firms outside the Top 25 do not expect to appoint more partners over
the next 12 months, although almost all the top firms are looking to do so.

There is some encouragement for BDO Stoy Hayward and Grant Thornton, as the
Big Four’s proportion of Top 50 fee income has dropped from 79% to 73% during
the course of the last ten years.

But there are worrying times ahead for firms unless they are clever at
servicing clients.

Only 46% expect higher revenue growth over the next year; 28% expect their
fee income to remain static; and 16% predict it will be lower.

Mid- and lower-tier firms recorded slower growth in their 2008 year-ends but
still face the after-effects of the credit crunch on their SME clients over the
next 12 months.

Phil Shohet, director at professional services advisers Kato Consultancy,
says: ‘If SMEs are struggling, then the firms might do well if they get their
act together. The smarter firms will help their clients even more in tough
times.’

The biggest firms reported slower growth in their 2007 year-ends, and that
doesn’t take into account the effect of the credit crunch on financial services
and the transitions market since last summer, which will surely hamper growth
even more severely in their next results.

Peter Wyman, head of professional affairs at PwC, says: ‘I think we’ll see
the large firms tracking, to an extent, what happens in the US and UK economies.
With M&A activity coming to a shuddering halt, the top six firms can’t be
unaffected. We’ll see much slower growth, though, rather than falling off a
cliff.’

But there is a twist in the tale. Accountancy Age has learned that
Deloitte, which decided against estimating its figures for this year’s survey,
could scrape into double-digit growth for 2008, which would add around £200m to
our fee income table.

But even with that factored in, fee income growth for the Top 50 would be 8%
rather than 5.7% – still a dramatic slowdown on the 14% and 13.8% in the
previous two years.

Single-digit growth is not the end of the world. Fee income dropped in 2003
after the post-Enron boom and remained static until 2006. But uncertainty in the
economy could see growth fall further for all firms, especially without an IFRS
or Sarbox saviour.

The £10m barrier
A key barrier to entry to the exclusive Top 50 club has been reached. Number 50
in this year’s table, Berg Kaprow Lewis, posted £10.4m in fees – the first time
since the survey began that a firm has had to clear £10m to make the table. In
1998, Macintyre & Co took the 50th spot with £4.6m in fees.

Proportionality
While much is made of the Big Four’s dominance and the difficulties experienced
by other firms in winning business from their clutches, our analysis reveals
that the Big Four’s proportion of the total fee income has dropped modestly but
consistently.

In 1998, the Big Four (then, the Big Five) took 79% of the Top 50’s total fee
income: £3.7bn of a £4.7bn pie. Now they take 72.7% (a figure that would be
higher if Deloitte’s 2008 estimated fee income were taken into account).

Shohet says: ‘The Big Four are being challenged at the bottom end of their
market by Grant Thornton, BDO Stoy Hayward and others. I expect these firms to
continue making big inroads.’ And Wyman says: ‘The gulf between the Big Four and
next two firms, then the gulf between them and the rest, is not wholly healthy.
Seeing good growth rates last year from the next five or six firms was good, and
as long as the Big Four are growing that’s a good result all round.’

Wyman believes that the rolling back of the Big Four is ‘probably a good
thing’.

Missing from this year’s table is collapsed firm Wenham Major, which shone so
brightly during the past two years but ultimately crashed and burned. It entered
the Top 50 in 2006, posting a 248% growth rate through its tax service line. In
2007, 92% growth catapulted the firm into 23rd place.

But it has all ended in tears. ‘Financial irregularities’ pushed the firm
into administration and the core business has been sold off to RSM Bentley
Jennison.

Consolidation pressures
Other firms are on the acquisition trail too.

Nearly a quarter (23.7%) were buyers or sellers over the past 12 months, so
it looks like there is still plenty of room for industry consolidation.

Globalisation, the need for special skillsets and the continuing evolution of
technology will combine to force consolidation on the mid-tier, according to
Wyman.

Hire and fire
KPMG has already battened down the hatches. The market slowdown claimed around
90 jobs in the firm’s corporate finance and transaction services, and another
100 jobs went from marketing as a by-product of the firm’s merger with Germany
and Switzerland.

But the corporate finance market slowdown and merger issues do not appear to
be really hitting firms’ recruitment plans. A third expect graduate recruitment
to rise, with half predicting it will stay the same as 2007/08. Two-thirds (69%)
expect the professional staff headcount to rise in the next year, and 40% expect
to hire more support staff over the same period.

‘That’s a good sign for the economy,’ says Shohet, ‘as recruitment is a good
barometer for the UK’s economic health.’

A third of firms (32%) plan to centralise parts of their business over the
next year, which usually leads to support function job losses.

Seasoned pros looking to make it to partner level may have to wait another
year, or at least until things pick up. Over one-third of respondents do not
expect to increase partner numbers over the next year.

While the proportion of female partners was disappointingly low at 15%, it
was at least a rise of two percentage points on last year. Only time will tell
if this is the start of a trend.

Disclosure of the ethnic makeup of firms also continues to disappoint. Just a
quarter of respondents gave details of ethnic minority backgrounds, bringing the
total percentage of partners with an ethnic background to an average 4%. Last
year 30% of firms responded to this question.