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    A Five Forces Analysis of The Accounting Profession

    By | July 15, 2015

    As a follow up from my first post “The End Is Nigh: Prepare Yourselves for the Accountapocalypse,” I thought I’d present my interpretation on Porter’s Five Forces applied to the accounting profession.

    These forces seem to vary between region (countries, states and even counties), service areas (audit, tax, advisory) and firm size (top tier, mid-tier and small). I’ve tried my best to keep it general, or highlight observed variances where possible. Keep in mind this is a mix of objective research and purely subjective crystal ball gazing. If you’re looking for hard data, IBISWorld has been the most relevant resource.

    Threat of New Entrants
    These new entrants are the 25 to 35 year old accountants, who have rage quit their corporate/practice jobs to founded their own firms or started freelancing. IBISWorld forecasts new entrants to increase at a rate of 2.7% per annum in the US. I fully expect this number increase, as it has in Australia. This is coming off the back of reduced cost barriers to entry, specifically, software and hardware costs. These new entrants have also addressed cash flow and collections, by billing monthly direct debit in advance.

    I was 24 when I rage quit in 2011; it cost about $50,000 to start my firm. Older friends in practice told me if I did it ten years ago it would have cost $250,000. Whereas if I were to do it all again today, I am pretty sure I could do it for about $5,000.

    While cost barriers have dissolved, there are still significant regulatory and quality assurance barriers in this industry. Not to mention the sheer cost associated with building out practice capacity such as training manuals, policies, procedures and precedents. Many of these factors seem to be an afterthought for new entrants (they certainly were for me).

    Simultaneously, there is a lot of merger and acquisition activity occurring in the top and mid tiers, as firms pursue economies of scale. This has been confirmed by IBISWorld's research,

    Over the next five years, the largest industry's players, are all expected to continue pursuing mergers and acquisitions to increase their market share in the industry.

    Meanwhile, we’re seeing an influx of new cloud firms entering the market (you know the type).

    Bargaining Power of Suppliers
    The three biggest costs in accounting are rent, wages and technology.

    Rent: The bargaining power of landlords is subject to the location, obviously. This is only an issue for established firms with substantial infrastructure installed on premises. Even these players can pack up and move if they want; location only offers limited competitive advantage. Conversely, the proliferation of cloud technology has translated to firms being location independent by setting up shop at home, in co-working spaces or the local Starbucks. This provides a significant advantage to new entrants in keeping overhead low. Either way, bargaining power of landlords is limited.

    Wages: Offshoring of processing work will reduce the bargaining power of the labor market. That said, there will always be demand for highly skilled, client facing accountants. Their bargaining power will increase, as firms move to entice these accountants to stay within the practice instead of starting their own shop.

    Technology: Despite the rapid entry of new vendors, the bargaining power of software vendors remains the biggest concern. This is due to the high switching cost associated with data migration and training.

    Bargaining Power of Customers
    This varies on the type of service the customer needs. While switching costs remain high, the proliferation of cloud technology improves the mobility of customers, particularly for small business, general bookkeeping and tax services. Conversely, switching costs in specialist areas and corporate clients remain high, and are showing no signs of abating any time soon.

    Risk of Substitutes
    Risk of substitutes in specialist areas such as audit and assurance are negligible on account of the regulatory environment. However, in the small business, general practice bookkeeping and tax space, substitutes such as self-service or online service solutions such as InDinero, Bench, Backops et al. are emerging as an alternative.

    Competitive Rivalry
    Accounting firms appear to compete in groups. Big 4 firms compete against each other for the corporate work with other top twenty firms nipping at their heels. Locally, I have seen top twenty firms starting to win more large audit tenders. The top 100 are mostly competing amongst themselves for mid-market business. Everyone else is either competing in market niches or in geographic areas. It is these businesses that are facing the brunt of completion from new entrants and substitutes.

    So that’s my take on the current state of play. The rest of this series evolve over time (much like the profession will), but so far will include:

    • Discussing the evolution of barriers to entry
    • Deep diving into each element of the accountapocalypse
    • Discussing their overlaps between each element
    • Making some bold predictions that will probably have me come off as a nut job

    I’m keen to hear your perspectives on it. It will all fuel my research into the Accountapocalypse.

    Image: "Elements of Industry Structure" by Denis Fadeev/Wikimedia Commons

    • Another exKPMGer

      I don’t buy the new entrants argument. We’re looking at accounting as a profession here, and some dipshit 25 year old doing taxes out of his mom’s basement, which isn’t a threat of a new entrant. He’s not even a threat to the guy next door working out of his mom’s basement. They both have to price themselves at below market value in order to pull business from H&R Block or Liberty Tax, and since those are businesses based on mass quantity, even they aren’t really being hurt since newly minted tax payers grow up/graduate every day. The primary threat of a new entrant only exists in the likelihood that several smaller firms partner up to challenge a bigger firm. This works at all levels, the Basement Dwellers PLC, can all merge and challenge the Attic Dwellers LLP. Several regional firms could merge to challenge on a national level. Hell, GT, BDO, et. al. could merge together to challenge Big 4. But that is the ONLY threat of new entrant in to any category within the profession. A truly new entrant doesn’t exist except on the outer most reaches of the accounting world, and their impact is null.

      I also disagree with Wages being its own category on the bargaining power of suppliers. Yes, demand for higher wages exists, but we’re working in a service industry where the wages are just part of the cost. You have to provide benefits, you have to have HR to manage them, you have to provide a knowledge base, legal support, reference expertise, etc. Basically, it’s the cost of having “people” as your product. You can’t just say wages and leave it at that because that is only part of the story.

      • N.E.R.D.

        Yeah, one of my first thoughts was to try and differentiate the caliber of players within the categories.

        @Chris Hooper said:

        “Accounting firms appear to compete in groups.”

        I believe a more accurate statement is that accounting firms appear to compete in tiers. I also think that the top tiers/inner tiers are insulated by legacy and brand name which keeps the new entrant “threats” completely out of view. I think this is what you’re getting at too.

        However, Chris does acknowledge that competition will be stiffer in the bottom, or outer tiers.

        “Everyone else is either competing in market niches or in geographic areas. It is these businesses that are facing the brunt of completion from new entrants and substitutes.”

        • I think another aspect is rivalry outside of accounting that
          affects these firms’ behaviors. For example, with 3 of the 4 Big 4 either having large consulting arms (PWC and the Dot) or ramping them up considerably (EY), the outside consultant competition is changing the landscape of how the big firms are viewing their audit business lines.

          In other words, problem child/small audit clients might be
          dropped in hopes of picking up some of consulting services with said client.

          Which just opens up the field to other smaller national firms at the lower tiers.

          • buthurt

            For some of my mid side clients (think 5B revenue), my firm could probably be making 2x $ if we drop the audit and do advisory work since other big4s/regions do a ton of IT/legal/consulting work. The only reason preventing audit being dropped is the audit partner of course who make all the decisions on the account.

            • Another exKPMGer

              The question becomes, could the advisory work provide a steady income stream for 5 years? 10 years? What if the markets go to shit again (not that they’re really out of it yet, but still)? If you have a solid audit client and a good relationship with them, it’s guaranteed money to keep the firm in the black. Short term profits lose to long term cash flow.

            • buthurt

              I’ve occasionally seen audit clients where the other big4s consistently pull in 2x-3x the audit fees every year, even when the economy went to shit (since audit fees also got cut during 08/09). I guess it’s the firm’s decision if they’d prefer a few years of high margin consulting/advisory fees or steady low margin audit fees in the long run. Classic case of high risk high return vs low risk low return. For some firms like Deloitte, the answer seems to be the former, while KPMG and EY to some extent seem to like the later. PwC is somewhere in between I guess

            • That question will shape the entire top tier.

    • buthurt

      I think the greatest threat to audit is the decreasing quality of new hires. Long hours, boring work (SOX/IPE), crappy wage (espcially when you have to own a car), and mediocre exit ops have turned a lot of the talents away, especially when economy is good. In the long run this will affect the partner ranks (it probably already have)

      • ne1care2lax

        firms with a 10 year partner track were definitely already hit. But I don’t think the talent is weak, after all the standards to make it through a BS in Accounting and the CPA have only gotten harder

        • buthurt

          Hmm..well I’ve only been in the industry for 3 years, but every year I feel like it gets harder to get good interns. A lot of them seem pretty clueless about excel/word, most of them expect high level/interesting/fraud risk work right away (seriously you can’t even get the tieout done right and yet you want the most challenging part of the audit), and apparently it’s now acceptable to spend a large chunk of the day texting (even with partner on site) or complaint about hours (aren’t you paid overtime?). There are some good quality interns but most of the good ones wouldn’t accept return offer.

          It’s one thing to pass all the education requirements and exams, but being successful in corporate america require more than just book smart.

          • keepin_it_real

            I’ve been in public accounting for nearly a decade and I’ve heard the same 2 things every year.
            1. The new start classes are getting dumber.
            2. Everyone is going to quit and the firms will be screwed.

            Neither is true.

          • Del

            Of the ten in my PwC intern group, four returned.
            One was Intl so should never have got in (she didn’t want to work in the country).
            One took an offer at mid tier claiming he preferred the culture.
            One went to Deloitte for Consulting as she couldn’t stand Audit.
            One went to a major bank for Insto Banking.
            One took an offer in Tax rather than Audit at the firm.
            Not a great return for what is meant to be the pinnacle of grad jobs in our field.

            • buthurt

              Not really, I befriended a few ex audit interns of my current firm during my senior year (I didn’t intern), I think about 5 out of 10 accepted a return offer, only one of them is left after 3 years

    • N.E.R.D.

      Now this is a real conversation starter article. 100x better than the “intro”.

      I could probably dive into any of these subtopics, but I’ll choose just one to keep my post from being longer than the article.

      “Technology: Despite the rapid entry of new vendors, the bargaining power of software vendors remains the biggest concern. This is due to the high switching cost associated with data migration and training.”

      I think this is exasperated further because there are so few established software vendors that produce comprehensive “road tested” products (e.g. Wolters-Kluwer and Thomson Reuters). I think, though, that the software vendors will end up like Coke and Pepsi, never quite able to fulfill the monopoly-pricing paradigm. After awhile, I’d expect to see niche software suites to start taking more market share (like Dr. Pepper!), but they’d be carving up a minority market share. Firms are attempting it now, but I don’t believe older accountants are going to trust new tax software because of brand familiarity and, as you noted, the cost of data migration.

      That’s my $.02 for now to try and get a discussion going.

      • LikeABoss

        I agree with what you’re saying, and I think that the problem here mirrors the problem with the B4: different flavors of the same crappy suggary beverages that aren’t really that good for you in the first place. A couple of thoughts:

        I’ve been through a transition from Wolters to Thomson, due to a firm merger, and it is PAINFUL (mostly b/c accountants aren’t good at managing things, especially mergers and internal changes). At the end of the day, the products aren’t that much different that a large national firm can justify switching between those two w/o a very good business reason.

        At the smaller firm level, I think there’s something else at play. I’ve worked for two types of regional firms. The first type, the partners treated their firm like a business, and they planned for the future, and wanted to grow and develop and use new technologies to make the firm better (you have no idea how rare this is). That firm was held back because they were just big enough that they needed the functionality of a Thomson / Wolters product, and there were no real viable options to replace them with something better.

        At another regional firm I worked at, the partners viewed the firm as their piggy bank, and had more of the traditional “our people are indentured servants here to make us money” attitude. They weren’t interested in running the firm as a business, but just bringing on more work and using less staff to get the work done to maximize partner draws, without regard to the future of the firm as a business. In this case, they really didn’t care that there wasn’t a better alternative out there, because switching would cost money and likely cause a disruption in peoples charge hours.

        • This last cohort of firms will be the hardest hit by all of this, and they represent a large number of firms (albeit a small % industry revenue). Their senior staff will rage quit and start their own thing. While the second to last you mention quickly adopt to newly available technology.

      • Good analogy re Coke/Pepsi. I have seen technology change/adoption of “Dr Pepper” in Australia follow the pattern of Rogers diffusion of innovation.

    • buthurt

      Can someone do a BCG matrix on the big 4 firms? I’d imagine audit is a cash cow moving slowly to dog

      • Good idea. I’ll add that to the list. I didn’t really touch on BCG, but it would be interesting to see where each LoS is sitting (Although I think we can all guess).

        • buthurt

          Do you think you can plot all big 4s on one graph so that we can compare between firms?

    • MIA CPA

      It might be interesting to note that consulting may be the newest big player in accounting firms. At Deloitte, consulting is now the biggest revenue (and I think profit) stream for the firm. I’m sure the others are experiencing very high growth rates in their consulting practices.

      For all intents and purposes, Deloitte is now a consulting firm. I’m sure the other firms will follow suit.

      • buthurt

        I’ve noticed Big D did not try hard to retain some of its audit clients that we recently acquired. They are probably making more $ on consulting projects with the very same clients.

        • MIA CPA

          Interesting. If firms cannot provide consulting services in addition to audit services, then it would make sense to opt for the consulting service since it’s usually more profitable. I guess the only problem would be that an audit is a recurring project whereas consulting is usually a one-time deal.

          • buthurt

            Yep. Whenever our clients want to re-negotiate fees (seems like that happens every year nowadays), one of the things we do is looking into what services the other big 4s are providing for the client. Assuming they have significant recurring advisory/IT/TAS work with the client, and that the client has to have a big 4 opinion, then it’s to our advantage since the client is stuck with us.

            The sad part is that a lot of times the non-auditing big 4s seem to continuously pull in significantly more money than us on some clients, especially since audit fees are getting lower over time.

      • Spot on. It came up repeatedly in the IBISWorld Reports.

        “Additionally, larger accounting firms are expected to increase advisory services to pursue higher profit margins.”

        “Over the past five years, demand for tax planning and consulting services has increased due to rising corporate profit and, thus, new business investment activity.”

        “Furthermore, the industry’s largest players have increasingly acquired smaller companies and made strategic purchases to increase their service offerings to include consulting services”

        While this factor is totally relevant I’m not sure where it should fit in amongst the five forces. It seems like a diversification play to shield against the aforementioned risks.

    • Step 0

      Sorry, Chris. I agree that this has less flash and more actual content than the last article – but I can’t take the “apocalypse” seriously when it completely omits any consideration of regulation. The effects of the PCAOB over the past 10 years have had a monumentally significant impact on accounting firms of all sizes (and their clients) across the globe. With increased international inspections and more challenges to the existing professional framework still in the pipeline, there’s no reason to think this would not continue to have a huge impact going forward. Of course, looking at PCAOB inspection and enforcement results over the past 5-10 years would refute a lot of your hypotheses about lowered barriers to entry, risk of substitutes, and bargaining power of customers – so perhaps, this omission was not by mistake.

      • What’s missing? Without explicitly discussing PCAOB or SOA, I think regulatory barriers have been considered.

        “While cost barriers have dissolved, there are still significant regulatory and quality assurance barriers in this industry.”

        “Risk of substitutes in specialist areas such as audit and assurance are negligible on account of the regulatory environment.”

        “Everyone else is either competing in market niches or in geographic areas. It is these businesses that are facing the brunt of completion from new entrants and substitutes.”

        • Step 0

          Exactly. I assumed that the phrase “Accounting Profession” in the title of the article referred to the entire profession. However, the “accountapocalypse” only affects firms that provide bookkeeping, basic tax prep, or other non-specialized accounting services to clients who are neither public companies nor otherwise subject to a high degree government regulation.

    • Geri

      Its scary to know that a computer can take over the career I want to get into… But when when that computer breaks down, and you need that report now! it won’t happen till its fixed. And don’t even get me started on starting your own firm… Oh boy