ACCA - The global body for professional accountants

As Baker Tilly’s takeover of Tenon shows, it’s a tough world for accountancy firms and even a merger may not save them if partners keep the fiefdom mindset, says Peter Williams

This article was first published in the October UK edition of Accounting and Business magazine.

In early September Baker Tilly completed its acquisition of RSM Tenon and at that point the hard work really began – no doubt for both sides.

The collapse of the debt-laden firm into the arms of a rival marks the closure of a sorry chapter. It is hard to see many other professional firms now following the RSM Tenon route of stock market listing and aggressive acquisition, notably its merger with RSM Bentley Jennison in 2009. And just to finish off the tale of sorrow, RSM Tenon’s accounts had to be restated following the discovery of significant accounting errors. It is not the best advert for a professional outfit that earned its crust telling others how to manage their accounts and run their businesses. The National Firm of the Year Award in 2011, courtesy of the British Accounting Awards, must seem a long time ago.

Clearly, some firms fare better. Around the same time the Baker Tilly/Tenon deal closed, PwC’s annual results showed profits of £740m and distributable profits per partner topped £700,000. Figures only to be dreamed about by most in practice.

When training in the 1980s, I would hear the expression a third for costs, a third for staff and a third for partners trotted out with some regularity. It was a financial target probably few firms achieved (PwC didn’t quite make it in these results), but it implied both a certainty of strategy and clarity of expectation of a bygone era.

Accountancy professionals may not be the most dynamic of entrepreneurs but they remain well equipped to run their own ship. That competence has not deserted them, but what has hit with increasingly ferocity over the past years has been an oversupply, as recession-hit businesses dampened down demand for accountancy services as they sensibly tried to avoid taking on extra professional costs during the long recession. What they wanted was the minimum amount of help at the smallest cost.

So if you had to pick what was more representative of commercial reality for most accountancy firms – Tenon’s pre-pack or PwC’s millions – then, sadly, it is the struggle for survival. It has always been hard to run an accountancy firm successfully, especially in the middle tier. And those pressures are increasing. Not helped by the half-decade downturn, partners in the mid-sized firms have faced a damned if they do and damned if they don’t dilemma.

If they don’t merge with another firm, they will face cost pressures in terms of meeting the need to invest in technology, deal with regulation and pay the bills for expenditure such as marketing. Yet if they do merge, they have to deal with the equally difficult task of reaping the benefit from the increased scale, and that means ruthlessly taking out unsustainable costs by deduplicating physical locations and back-office functions, and getting rid of the most costly staff and partners who aren’t pulling their weight in terms of productivity.

And while the knives are being stuck in around the back, it is a top priority to keep smiling at the front of the shop so that clients don’t wander off because they can see the fall in service, or they’re hacked off their long-term contact partner has just been shown the door.

This makes it a challenge to do the crucial task that must be achieved for the merger to be a success: retain the revenue. It is not made easier by a partnership culture where partners see themselves running their own empires with their own clients, staff and ways of working, while in a form of loose and flexible legal and business collaboration with their fellow partners.

Such confederations just won’t work in today’s business climate. Partners may still co-own the business but if they want to be owners of anything with any value then they have to be prepared to cede control and take and follow orders. If not, their demise may not be as spectacular as RSM Tenon’s but it will be inevitable.

Peter Williams is an accountant and journalist

Last updated: 10 Oct 2013