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.
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.