IN OUR OPINION,PERSPECTIVE #73— December 10, 2018
(A Continuing Series for Leading CPA Firms)
TIME OUT! CHANGE YOUR PLAYBOOK. ADD ADVISORY SERVICES OR YOU ARE GOING TO LOSE THE GAME.
“The relevant question is not simply what shall we do tomorrow,
but rather what shall we do today in order to get ready
for tomorrow”.
— Peter Drucker
In Our Opinion,the greatest growth and margin opportunities for mid-sized CPA firms are with the advisory and consulting services as mid-market companies with revenues between $400 million and $2 billion outsource specialized, non-core skills to deal with business challenges that they cannot handle internally.
Presented below is a summary of the most typical CPA firm service offerings, including cybersecurity (which has the greatest potential for growth), together with opportunity triggers.
TYPICAL MID-SIZED CPA FIRM SERVICE OFFERINGS:
Bankruptcy and Restructuring
- Distressed companies
- Creditors/lenders
- Law firms
Computer Forensics and eDiscovery
- Organizations with fraud or litigation support-related matters
- Regulated organizations
- Firm clients
- Law firms
- Corporate counsel’s office
Forensic and Litigation
- Companies with regulatory or fraud-related issues, including cybersecurity
- Companies experiencing economic damage
- Law firms
Governance, Risk and Compliance
- Public companies
- Public sector
- Larger not-for-profit organizations
- Private companies with annual revenues greater than $100 million
- Financial services
Public Sector Advisory
- State, local and federal agencies
- Port Authority
- State healthcare
Management Consulting
- Public, private and not-for-profit organizations with annual revenues greater than $100 million
- Private equity groups and their portfolio companies
- Firm clients
- Law firms
- Investment bankers
Transactional Advisory
- Private equity groups and their portfolio companies
- Law firms
- Investment bankers
Valuation Advisory
- Larger companies/transactions
- Private equity groups
- Institutional real estate (sponsored and managed)
- Commercial litigation
- Bankruptcy/turnaround
Wealth Management
- Protection of family wealth
- Financial plans
- Investment monitoring
- Personal insurance products
OPPORTUNITY TRIGGERS:
Bankruptcy and Restructuring
- Company in financial distress
- Government regulation
- Fraud
- Changes in social mores
- Changes in technology
- Industry consolidation
Computer Forensics and eDiscovery
- Fraud
- Litigation
- Changes in regulatory requirements
- Changes in technology
Forensics and Litigation
- Fraud
- Damage claims
- Litigation
- Government regulation
- Transactional Advisory
- Companies making an acquisition
- Companies wanting to sell
- Purchase price disputes
Governance, Risk and Compliance
- Regulatory changes and the compliance risks that they create
- Need to evaluate Board risk appetites
- Capability of client’s internal staff in the face of project need
- Overall perceived benefits of outsourcing (talent pool, removes staffing concerns, overall costs, managing fluctuating demand)
- Control breakdown resulting in financial restatement, fraud or regulatory compliance issue
Government Advisory
- Launch of major programs and contracts that require project management and/or compliance monitoring
- Occurrence of natural and man-made disasters
Management Consulting
- Client profitability and growth
- Implementation of new technology
- Organizational dysfunction
- Specific areas of concern (i.e., supply chain, excessive inventory levels, lack of strong financial reporting)
- Legacy IT programs not providing management with needed information
Valuation Advisory
- Tax regulations
- Transactions
- Financial reporting requirements
- Litigation
- Bankruptcy
- Demographics/succession
Wealth Management
- Succession planning and stock ownership transfers
- Business sales
CYBERSECURITY/ SERVICE OFFERINGS
It is obvious to everyone that technology has become crucial to business success, as it allows businesses to feverishly collect vast quantities of data, qualify the value of that data, and employ that information to benefit their customers. Businesses are forming relationships with their customers and, in turn, are being entrusted with even more information that translates into fine-tuned marketing approaches with greater returns.
Because so much of this data is transmitted through the internet and stored digitally, it is subject to cybercrimes and cyber errors and the damages can be huge. A company’s reputation is tarnished and its commitment to its customers is called into question. Customer trust, once lost, is difficult, if not impossible to regain. This, of course is independent of the huge financial costs incurred upon making an appropriate response to a cyber-attack.
Regrettably, many mid-market businesses believe that they are too small or obscure to warrant the interest of professional hackers. The FBI has noted, however, that cyber criminals are aggressively targeting mid-market businesses and, according to a study performed by Symantec, over 30% of all cyber-attacks are targeted toward these companies. Since these companies in the mid-market typically have less sophisticated security systems, cyber criminals see these businesses as easy targets.
The comprehensive nature of the initiatives required to adequately address cyber threats requires multiple experts with varying capabilities. The knowledge, experience, and skills required to address these challenges stretch across several disciplines: strategy, risk management, operations, IT, compliance and legal. Since most companies do not have the people or the resources in-house to effectively deal with these challenges, a mid-sized CPA firm is a very natural “go-to” provider and the opportunities are enormous.
Typical cybersecurity services are presented below:
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One of the greatest benefits to offering these services is that cybersecurity is industry agnostic, and thus applies to any industry, and therefore does not limit a defined target market. In addition, a majority of these services do not present independence conflicts to current or future clients.
The 2018 worldwide information service consulting market is in excess of $15 billion; a substantial over 2017. While numerous firms are providing cybersecurity services, the majority share, approximately 65%, of the market is limited to the very largest consultingfirms including the Giant Four. The remaining 35% of the market, or a potential of approximately $5 billion in market share, is represented by national and regional CPA firms and boutiques that currently provide less thorough and established services.
We have discovered that many mid-sized CPA firms, however, do not have a truly successful Advisory practice – just wishful thinking surrounded by an ad hoc service offering. These less than successful Advisory practices share a few common characteristics:
- A well thought out plan that plays to their strength and creates an integrated future vision.
- Investment in a leader who knows how to build a successful Advisory practice
- Investment in talent understanding that, without talent, there is no Advisory practice.
- Investment in marketing to create market exposure to build “First to Mind”.
Building a Comprehensive and Successful Advisory Practice.
Here are some tips to consider as you start building out an Advisory practice. First of all, CPA firm leaders need to understand the state of their Advisory services that are usually scattered around the firm with different partners:
- Discuss current leadership and organizational structure.
- Discuss talent.
- Discuss current services, revenue, profitability, client demographics, industry focus, firm integration and partner support.
- What challenges exist today?
- What is good about the firm’s Advisory practice today?
- Where can the firm Advisory practice improve?
- How do the firm’s leaders see the Advisory practice growing over the next five years?
What Does a Successful Advisory Practice Look Like?
Typical characteristics of a successful Advisory practice include:
- It is not ad hoc – it has a well rafted architecture.
- It is not opportunistic – it is grounded in a thoughtful strategy.
- Advisory is not a bolt-on – it is a well-integrated practice within the firm.
- It is market driven.
- It is talent driven.
- It is technology driven,
- It is future driven.
- It is FIRM driven.
Where does a Firm Start?
Presented below are our thoughts on how a mid-sized CPA firm builds the necessary foundation for a successful Advisory practice:
- Comprehensive analysis of the “as is”:
- Client base.
- Services provided today and by whom.
- Market dynamics.
- Create the initial footprint – integrate.
- Brainstorm “What Could Be”:
- Service architecture.
- Talent architecture.
- Technology architecture.
- Marketing/client acquisition architecture.
- Financial architecture.
- Develop the Strategic Plan:
- Year One, Year Two, Year Three.
- Need the Leader.
- Partner from within the firm?
- Recruit from the outside?
- Acquire the right firm?
- Services timeline.
- Talent timeline.
- Target client demographics.
- Go-To-Market Strategy:
- By service.
- By industry.
- Financial Plan, Investments and ROI.
- Sell the Strategic Plan Internally and then Execute.
- Monitor, Adjust, Monitor.
IN CONCLUSION
In Our Opinion, Advisory services are the North Star that most mid-sized CPA firms are seeking but building a successful Advisory practice requires patience, talent, leadership and investment. It also requires a very well thought out strategic plan much like any other business venture to overcome the primary cause of failure experienced at most firms. If a mid-sized CPA firm is not building-out an Advisory practice, it is missing out on the opportunity from transforming itself from an accounting firm to a professional services firm – the greatest revenue and margin growth vehicle moving forward.
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Dom Esposito, CPA, is the CEO of ESPOSITO CEO2CEO, LLC — a boutique advisory firm consulting to leading CPA and other professional services firms on strategy, succession planning and mergers, acquisitions and integration. Dom, voted as one of the most influential people in the profession for two consecutive years by Accounting Today, authored a book, published by www.CPATrendlines.com., entitled “8 Steps to Great” which is a primer for CEOs, managing partners and other senior partners. In Our Opinion, is a continuing series of perspectives for leading CPA firms where Dom and his colleagues share insights, experiences and wisdom with firm leaders who want to “run with the big dogs” and develop their firms into sustainable brands. Dom welcomes questions and can be contacted at either desposito@espositoceo2ceo.comor 203.292.3277.
