BY INCREASING FEE INCOME by $10bn (£6.4bn), the world’s top 40 international accountancy networks and associations have demonstrated remarkable resilience over the past 12 months.
The 6% growth between the 2014 and 2015 Accountancy Age International Surveys has come at a time of continuing uncertainty over the global economy; the financial crises of the last decade may be behind us now, but the aftershocks can still be felt.
This year’s survey shows how the top 40 groups have collectively seen fee income rise to $186.7bn from $176.6bn. Within these figures there have been winners and losers, but overall it is a solid performance, confirming the sector’s health.
But the groups have themselves confirmed that there are challenges ahead as they strive to serve clients through their constituent members and offer truly international services and support.
“With austerity measures continuing in many countries for several years to come, businesses may seek alternative providers as a means to obtain a reduction in their overall professional costs,” says Malcolm Larkos, chairman of GMN International, whose overall income dipped 1.7% over the course of the last year.
“In certain countries, the Big Four have had to significantly reduce the fees they charge to keep clients. As a result of this some companies have equally taken the opportunity to move to a Big Four firm when previously this was not economically viable.”
Big Four – Big News
And of course it is impossible to talk about the international networks and associations without reference to the Big Four – Deloitte, EY, KPMG and PwC. Between them, they account for nearly two thirds (64%) of the fee income of the top 40 networks and associations. The grip that they have over the international market, as well as domestic markets, is vice-like and explains why they have been subject to so much scrutiny in recent times.
All four of these giant organisations have displayed similar growth at around the 6% mark during the past 12 months, with Deloitte consolidating its position in the top spot, recording 6.5% growth to reach $34.2bn.
PwC, for so long the largest network, remains in second place for the second consecutive year, with total fees falling just short of $34bn. Third-placed EY scored $27.4bn with KPMG residing in fourth position having booked $24.8bn in total fee income.
But it would appear that these networks are not resting on their laurels.
“We have identified some specific areas we refer to as our strategic growth initiatives, where we are aggressively focusing attention and investment to ensure our capabilities are aligned with the needs of our clients,” says John Veihmeyer, KPMG’s global chairman.
“These initiatives include areas such as technology-enabled transformation, strategy, data and analytics, cybersecurity, regulatory change, and asset-based businesses that allow us to have a new operating model for the way we add value for our clients.”
Such moves among the Big Four have led to a spate of acquisitions, particularly in the consulting arena. At the international level, PwC bought Booz & Co, which has since been rebranded as Strategy&, while EY has taken on The Parthenon Group. These moves have been accompanied by a number of strategic tie-ups at the national level.
All the groups claim to be reacting to client demands and opportunities. “Businesses are looking for ways to grow their enterprises and to increase market share,” says Veihmeyer.
“They want to use trends like globalisation and digitalisation to their advantage.”
But he adds that regulatory pressures around the world are also causing businesses to examine their models. “We continue to have significant opportunities in helping clients not only design the systems, processes and controls to comply with regulation, but to also look at how they can evolve their operations in ways that can enable them to gain a competitive advantage.”
The hunt for such competitive advantages is having a direct impact on the make-up of the networks and associations themselves. This has been most visible in the number of moves between the groups at a national level.
Famously, Baker Tilly in the UK left its own international organisation to join RSM when it acquired the network’s UK member firm Tenon. This move helped to explain the 18% increase to $4.4bn in RSM’s global fee income, though the network’s firms posted growth figures around the globe.
The move equally left a hole in Baker Tilly International’s UK presence, filled by MHA MacIntyre Hudson when the UK firm moved from Morison International.
However, it is interesting to note that while there have been a number of moves at the national level, this has not been matched by such merger activity at the international level. “The stars really need to be aligned,” says Rob Tauges, chief executive of HLB ($1.9bn).
“Strong network firms might not want to share their territory. Even if there aren’t any formal territory restrictions, there will still be resistance, especially if they have adopted an international prefix. They might feel they have done the heavy lifting in a particular country, only for someone else to come along.”
But he adds: “We always keep the door open to discussion.”
“The big headline changes in affiliation have been mostly in the UK and the US, often coming out of the consolidation resulting from succession/baby boomer retirement issues,” says Clive Viegas Bennett, chief executive at MGI, whose own fee income dropped 3% last year.
“This churn has not yet stopped but there are signs it is slowing. Some mergers may result from this underlying firm level phenomenon. Networks and associations are also looking to grow through mergers in order to increase their cost efficiency and competitiveness, although we all recognise the significant cultural and geographical barriers to such mergers.”
Culture clash impediment
Cultural issues and geography are reason cited by a number of groups as they seek to explain why there have not been any significant tie-ups at the international level. As Micahel Reiss von Filski, chief executive of GGI ($4.8bn) says: “I am sure that there will be some movements, however for GGI, merging with another association or network makes no sense. Apart from cultural differences and overlaps with existing members, we believe that an organic growth with exceptional and independent firms is the best way forward for us.”
And he warns: “Mergers, however, force you to take the whole package, which can represent a jeopardy regarding quality. Clients of GGI firms seek exceptional service on a global scale. We would find it difficult to confirm that a whole organisation of professional firms would be synergetic fit for GGI without proper due diligence on literally all members that would be part of the merger.”
However, there still may be some movement in the future. When PrimeGlobal ($2.1bn) was formed four years ago by the merger of Fidunion International, IGAF Worldwide and Polaris International, Kevin Meade, PrimeGlobal’s chief executive believed they were at the front of a wave of similar mergers. “This did not happen,” he says.
“Realistically, networks and associations often lag their members, and so perhaps there is a wave yet to come. Having said that, factors such as exclusivity, the power of incumbency and entrenched leadership at a staff and volunteer level all argue against mergers. The recent switching is as a result of firms re-evaluating the value that they derive from membership and their alignment with the association or network. The associations and networks themselves should be conducting a similar review, and many are.”
New markets, new networks
One interesting development came towards the end of last year when Beijing-based Reanda International announced it had entered into a strategic cooperation agreement with UC&CS Global, based in Mexico City and New York. Reanda is currently ranked 19th in the Top 20 networks table with $144m in fees, while UC&CS just missed out on appearing in the Top 20 associations table, after recording a fee income figure of $125m. As commentators have said in the past, the next big network could well come out of China or Latin America, so this could be a development to watch.
As Mauricio Mobarak, president of UC&CS Global, says: “The most important thing is that the flow of money has changed from the usual players and leaders like the USA, the UK, France and Japan, to the new leaders, in the BRICs and MINT countries. That is originating a shift of power in the accounting firms, now giving to these countries seats on their boards or even giving to them the top positions as CEOs.”
It is perhaps by seizing these opportunities at a local level that the smaller associations and networks can continue to grow organically rather than through mergers.
And if it is right that economic recovery around the world will be driven by more entrepreneurial businesses, then there could well be additional advantages. As Robert Sattin, president of the TAG Alliances ($3.3bn) says: “The growth of the world’s economy will be fuelled by entrepreneur created businesses in a hundred countries. These businesses are best served by local independent firms that can advise and serve clients’ professional service needs at their start and as they grow internationally.”
And John Sim, chief executive of PKF International ($2.4bn), believes there will be some fall out from the Big Four. Putting it bluntly, he says: “The main opportunity is to take work from the Big Four, who are upsetting clients everywhere with poor service and high fees.” But he adds a caveat that could be the sign of things to come on the regulatory front.
“The biggest challenge will come when the regulators begin to insist that the mid-tier networks have the same checks and balances in place as the Big Four have.” And this in itself could lead to more consolidation.
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