This article was first published in April 2011 in Accountancy Futures.
IFAC past president Bob Bunting has highlighted the important changes in the role of small and medium-sized practices (SMPs) providing support to small and medium-sized enterprises (SMEs), citing evidence from a recent IFAC research paper.
The evidence from the paper, entitled The Role of Small and Medium Practices in Providing Business Support to Small and Medium-sized Enterprises, indicates that globally SMPs are the preferred provider of business support to SMEs, providing an array of services including advice on HR and employment law issues. Indeed, from a UK perspective, research has found that SMPs are the main providers of advice on HR and employment law to SMEs.
However, little is known about the nature of the involvement of SMPs in this relationship, and ACCA has commissioned research to find out. This article summarises the research and highlights some of the issues.
To obtain a meaningful insight into the relationship between accounting practices and SMEs, the study carried out 20 in-depth interviews with accounting practices. The practices were mainly chosen at random although the study took account of the varying sizes of practices.
The type of advice varied and was dependent to some extent on the size of the practice, reflecting its knowledge and experience of dealing with HR and employment law issues. Typically, the services provided by the practices in the study were employment-related. They included contracts, dismissals, redundancy, benefits and leave, resourcing (searching and interviewing), remuneration (setting up bonus schemes and grading structures) and succession planning.
There were several reasons why SMEs chose accountants to give this advice. Trust was a significant one and was derived from the close relationship SMEs developed with their accountants while receiving traditional accounting compliance services, such as tax returns and auditing financial reports.
Additionally, the trust relationship benefited from the institutionalised trust generated by the accountant being a member of a professional organisation underpinned by an ethical code.
Another reason given for the choice of an accountant for advice was that SMEs recognised that SMPs’ needs and experiences are similar to their own and that they talk the same language.
Practices fell into three categories in their approach to providing HR and employment law advice: the qualified HR model, the payroll model and the minimalist model.
QUALIFIED HR MODEL
In the case of the qualified HR model, qualified HR personnel were employed in the practice. These practices saw their involvement in HR and employment law more strategically than those in the other two categories and positioned themselves as part of a one-stop-shop approach to their clients’ needs.
The development of HR/employment law services was part of a decision to seek to provide a full range of support services to SMPs. As one of the respondents mentioned: ‘We want to become a broader-based advisory practice.’
These qualified HR practices initially moved in this direction because their clients were seeking HR/employment law support. The respondents pointed out that they were aware of their competitive advantage over HR consultancies that were not accounting practices: ‘Our clients can shop around for any HR package… but we are in a unique position. They are already in-house, they already like our service, we know their business.’
Respondents recognised that by expanding the services they were offering it was possible to attract new clients.
While these practices saw the development of HR/employment law support as strategically significant, their mode of entry into it was sometimes opportunistic.
For example, one practice had appointed an HR specialist to deal with the practice’s own HR and employment law issues and only subsequently realised it represented an opportunity to develop an HR service for clients. Another practice had a long-standing referral relationship with an HR consultant. Recognising the growing demand for this type of service, it established a joint venture with the HR consultant.
The level of business activity generated owed a great deal to a practice’s active promotion of HR/employment law services. Partners were encouraged to promote HR services during general contact with clients. Direct promotion of the services also took place through mailings and via vehicles such as employment law seminars to which potential clients were invited.
Not surprisingly, most qualified HR practices were the larger practices, and they generated a significant proportion of their total fee income via HR/employment law business.
THE PAYROLL MODEL
Some practices that provided HR/employment law support had developed these services alongside the provision of a payroll service to clients, albeit without the support of qualified HR staff. There seemed to be a consensus among these firms that if a practice offered a payroll service then the demand for HR advice would follow.
This is because payroll services involve practitioners in dealing with clients’ staff. Any questions in relation to staffing will inevitably be first raised by the SME with the practice in its ‘payroll guise’.
This point was cogently made by one of the interviewees: ‘It [HR advice] is a part of being an accountancy practice, especially if you are doing payroll. We have always done payroll and it’s bound to be an issue.’
Practices that provided payroll services, but had not yet decided to appoint a qualified HR specialist, seem to represent a halfway house between the qualified HR model and those practices least active in HR/employment law.
In the main, practices in this category were comfortable to be involved in HR/employment law. However, some practices recognised that they needed to upgrade their skills. A number of these practices were considering employing a qualified HR specialist, but were worried about the significant investment involved, particularly in insurance costs.
THE MINIMALIST MODEL
The smaller practices employed no staff who specialised in HR/employment law. The provision for support in HR/employment law was not actively promoted. It tended to be client-driven, demand-led and reactive. New clients were picked up because they wanted advice about tax and accountancy issues rather than HR. In general, these practices were very cautious about getting involved in this area of advice.
They recognised that they lacked skills and knowledge. This was a major constraint to offering HR support and was often a function of the size of the practice. Their nervousness is illustrated by the following comments from interviewees: ‘Not my field. Extremely nervous because we don’t have the expertise.’ ‘Threat of litigation is a constraint… a growing worry… insurance.’
Despite this caution, most partners felt obliged to provide some support. Given the competitive nature of the market, they felt unable to withstand client pressure and obliged to engage in some dialogue with clients. There was evidence of partners passing on the more complex problems to third parties that were more qualified to deal with the problem.
It seems clear that there exists the potential for the provision of HR/employment law support to SMEs by accountancy practices to add value to SMEs while enhancing the fee income of these practices.
There are, however, concerns in those practices offering the minimalist model and, to some extent, in those just offering a payroll service. These need to be addressed. The study points to a number of ways concerns could be addressed and the support role of these practices could be further developed:
- The development of a robust and tested model for the practices to engage in a brokerage role, enabling their small firm clients to access specialist HR knowledge.
- The encouragement of joint ventures between accounting firms and HR consultants.
- The merger of practices to enable the employment of specialist HR staff.
- The further development of the skills and knowledge of non-qualified staff dealing with HR issues.
- The enhancement of member support by professional accountancy bodies.
Professor Robin Jarvis is ACCA’s head of small business and professor of Accounting at Brunel University. He is a member of the European Commission’s Expert Group –Financial Services Users Group and is a member of the International Accounting Standards Board’s (IASB) SME Implementation Group.
Mike Rigby is director of the Centre for International Business at London South Bank University, and teaches on master’s programmes at Carlos III University of Madrid, and the Open University. His research interests include employment relations, SMEs, work-life balance, occupational health and safety, training and development.