What Smaller Firms Need to Do to Become Firms of the Future – Part 1 of 2

Marc Rosenberg, CPA / Jul 13, 2020

It used to be common for practice management conference agendas to include a panel of luminaries – prominent consultants and rock star managing partners – to make predictions for the CPA industry.  As an up-and-coming consultant (who was too new to be invited as a panelist), I saved several years of these predictions to see if, years later, the predictions came true.  I was not surprised to find that only 10% of these predictions came true.  (Examples: the demise of small and mid-sized firms; outsourcing to become mainstream, tax law simplification.)  I vowed then, as I continue to do today, to refuse invitations to make predictions.

But modeling the future based on trend analysis is quite different than predicting the future.  And that’s what this article is all about.  Since the dawn of mankind, we have lived in a changing world.  We know that changes will occur, but few know exactly what the changes will be and when they will happen.

90% of all CPA firms can be considered “small.”  For purposes of this blog, let’s consider “small” as firms under $10M of annual revenue.  These firms may wonder:  What do we have to do to viable in the future?

The following are not predictions.  They are trends that, to varying degrees, have already begun, mainly at Top 10 firms.  Many are moving at a snail’s pace for smaller firms.  Whether or not these trends will have a major impact on small firms and when they will occur is anyone’s guess.  But make no mistake about it: If you want your firm to be a firm of the future, these are the things that your firm should be brainstorming at your upcoming partner retreats.

Advanced technologies such as data analytics and artificial intelligence.  Most experts in these technologies see their full impact at small firms in 5-10 years, a relatively short time horizon as sea changes go.  One of the main impacts of these technologies will be to significantly decrease revenue from traditional compliance services such as audits and income tax returns, perhaps as much as one-third of what they are today.  Put that in your pipe and smoke it!

More consulting to replace the lost compliance revenue. The CPA profession has already seen this impact in the form of assisting clients in getting PPP loans and getting the loans forgiven. There are many others.

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Clients’ needs will continue to get more diverse and CPA firms will need to satisfy these needs with a larger array of service offerings.  Firms that limit their service portfolios to tax returns and write-up work may be left out in the cold.  The more enlightened firms will continue their decades-long quest to retain their “most trusted advisor” status.

Mergers of non-CPA firms.  It’s really weird.  In practically every other business, revenue growth is revenue growth, whether it be organic or via mergers or acquisitions.  But the CPA industry always goes to great pains to cite their revenue growth excluding mergers.  It’s almost like growth via mergers somehow doesn’t count.  It’s only natural that CPA firms will be doing more and more mergers with non-CPA firms as they seek revenue sources beyond accounting compliance to satisfy their clients’ needs. It’s been happening with regularity at the Top 100 firms for several years now.  Many large firms are now doing more mergers of non-CPA firms than accounting firms. It’s only a matter of time until smaller firms start acquiring non-CPA firms as a strategy for providing consulting work to replace lost compliance revenue.

Wealth management.  From the mid-1990s through the early 2000s, this was the hot new service.  The large firms today are super-active in this area.  Some small firms got into it, but it has leveled off the past 15 years or so.  Today, only one-third of all firms under $20M provide wealth management services.  Yet, these providers will tell you they make more money on wealth management than CPA work.  As firms continue to hunt for ways to provide consulting services to clients, wealth management will become a “usual suspect” for change.

Watch for the second blog post in this series on more practices necessary for small firms to become firms of the future.

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