In today’s times,
when the market is seeking lower cost alternatives in every spend and the
otherwise not-to-be touched area of audit fees or tax fees of a CA firm is
increasingly being questioned by CFOs and business owners, with ever-increasing
need for specialist advice, the refrain is to come together with like-minded
professionals.
Consolidation of
professional services firms is a prerequisite for professions to grow. It is a
huge challenge and an uphill task for a lot of firms to grow as disaggregated
practices. Covid-19 has actually altered the course and changed the rules of
the game and advanced the time for these discussions. If you are not growing
consistently, there is a case for a relook. If you haven’t thought through
succession planning for your firm, now is the time to do so.
This article is an
attempt to provide some ideas and suggest a framework to proprietorship firms
and partnership firms providing professional services such as chartered
accountancy firms, law firms and other professional services firms to come
together, collaborate and work together for their common growth.
Consolidation of
accounting firms requires a fair bit of thought, analysis and a sustained
positive outlook. The mindset of growth has to be foremost for any
consolidation to be productive and value accretive. And to start this process,
collaborating with like-minded firms may be a good way to proceed.
(I) PREREQUISITES OF CONSOLIDATION
(i) Mindset
It is of paramount
importance that the mindset to collaborate, consolidate and grow is clear and
positive. Having a positive, open mindset means that one is willing to work
together under a conducive framework;
(ii) What can one consolidate?
Consolidation
doesn’t only have to be by merger. One can consolidate mindsets, expertise,
people, teams, functions, technology, markets, HR, brand building, finance and
accounts, administration and various other aspects which can make the
professional services firms nimble-footed and adaptable to change and growth.
(II) GETTING STARTED
It is also not lost
on any of us that coming together for a common client or referred client may be
a good way to get started.
For example:
When there is a
referred client, where a professional refers some matter to another
professional, although the other professional will be the primary service
provider, the referring professional should contribute actively by providing
the background knowledge on the basis of his / her experience and the
relationship aspects of dealing with the client, so that the other professional
can benefit from the referring partner’s experience and expertise.
If this is
addressed in a manner which is sufficiently engaging, powerful, organised and
delivered in a properly thought through manner, then you have the right
prerequisites for a successful consolidation.
The thesis is that
enthusiastic collaboration is a vital ingredient and a prerequisite for
sustained, organised growth. I have no doubt that professional services firms
will pursue the above with a lot of enthusiasm and momentum once a road-map is
given and a framework is created.
(III) MODELS OF CONSOLIDATION
(A) Referral
model
This is a simple,
‘start with’ model. ABC & Co has a client to whom it is providing audit and
tax services. The client needs MIS services. Given that ABC & Co is an
auditor, it may not be able to provide MIS services as then the firm may no
longer be independent. So, ABC contacts XYZ & Co and refers the client’s
MIS work. XYZ delivers and invoices fees.
XYZ will in turn
ensure that it will not pitch for any other services to the client. If the
client comes for any other work, it will get referred back to ABC. This is an
unwritten code that is based on trust.
If this is done
well, trust develops and this lays the ground for both firms to collaborate. If
XYZ ever crosses the line, ABC will not work with XYZ in the future. That
itself is a good deterrent in this model.
The code of conduct
and rules of professional engagement may prohibit payment of referral fees and
this needs to be respected.
(B) Preferred
partner model
This is an
extension of the referral model, where ABC and XYZ consider each other as
preferred firms to collaborate with. If ever there is work coming to ABC which
it cannot deliver, ABC will refer it to XYZ as the firm of first choice.
Conversely, XYZ
will refer work to ABC for any engagement where it needs help / support. In
this model again, it is a very clear way of supporting each other in such a way
that the sanctity of the preferred firm model is maintained.
There could be
exceptions where XYZ is not able to service a client of ABC, in which case ABC
is obviously free to choose any other firm.
(C) Associate
firm model
An associate firm by definition is a form of membership where
like-minded firms agree to come together under a common association and agree
to abide by the principles and rules of working under a larger umbrella. The
associate firm continues to work under its own brand and will not need to
change its constitution nor its key areas of work.
The associate firm
agrees to collaborate with other member firms in a manner that encompasses the
referral model and the preferred partner model with more formalised meetings,
exchange of knowledge, use of resources, common marketing collaterals and a
greater speed of response and alignment.
The associate firm
model has been in existence for many years and has proved to be a very credible
alternative to the member firm model and the network model. The biggest
difference is that members are free to continue their own brands and they have
far more independence in what they choose to do or not to do, including the
choice of work, business areas, office locations, client servicing and choice
of sharing of information.
Effectively, there
are no compulsions and there are no territorial restrictions. Each firm is free
to expand into any territory and is free to conduct or practice any service
area without any pre-approval or without worrying about a centrally
administered bureaucratic process.
The main
disadvantage of an associate model is that it may not always be tightly
integrated and associate firms can choose not to fall in line citing whatever
compulsions they face and there is very little that other firms can do.
(D) Network
model
A network model is
one of the best ways to grow professional practices. Each firm is a member of a
global network or a national or regional network, using a common brand, using
common tools and having signed a member firm agreement which binds them with
the central leadership, a common partner pool and, most importantly, a common
identity.
Indeed, over a
century it has been proven that the network model has the ability to grow the
fastest and to become the largest amongst all prevalent models of
collaborations amongst professional services firms.
In a network, the
biggest consideration is giving up one’s brand where the professional services
firm agrees to use the international brand or the national or regional brand
and accepts that its own brand will play second fiddle. All marketing
collaterals and service delivery are under the common brand; except where
regulations may not permit a foreign brand. In such cases, the network pushes
for alternate options and finds a way to co-exist within the rules.
In a network model,
member firms are often guided by common rules of engagement. Conduct of shared
work, sharing of knowledge, territorial restrictions, respect for an office,
its location and its territorial boundaries, firm-wide dissemination of
developments and a governance structure where partners align with the central
leadership form the daily core of network firms’ activities.
Whilst there are
several perceived disadvantages such as loss of one’s own brand, the associated
loss of identity and integration into common practices which one may take some
time to evolve, understand and add up to, the network model has stood the test
of time. It has proven and validated the concept of ‘collaborate to grow
manifold’ and critics have accepted the formal network models.
(E) Merger model
In a merger model,
the referral firms, the associate firms, the preferred partner firms and the
network firms effectively amalgamate into a single firm with a single bank
account. Effectively, one is ‘all in’. That means it is truly a ‘one firm,
firm’ and partners can grow or not grow driven by the collective performance of
the larger firm. There are no real silos, there are no individual mindsets, nor
any individual practices.
Each partner works
for the larger collective firm under the belief that as long as one is
contributing to his or her best abilities, the larger collective will grow. As a
partner, I am benefiting from the expertise and the common delivery processes
of the firm.
In a merger
situation, the rules of the game are very different and may appear overwhelming
to start with. One should get into a merger only after detailed due diligence
and after a few years of working together with one of the above models. It is
like a marriage; there are sacrifices to be made, there are positions to be
gone away from and yet there’s the harmony and beauty of the collective.
A partner may not
need to be spending time on areas outside of his or her core focus. What it
does is provide partners with adequate time to build, consolidate and grow.
Focus on service areas, with administrative or functional work percolating down
to the teams, is a positive outcome.
(IV) Road-map for consolidation
Having looked at
the various models of consolidation, it is now time to look at the execution
road-map for consolidation:
(i) Each firm
should identify its own skill sets, expertise, specialisation and the firm’s
USP. Clarity of expertise and USP is critical.
(ii) The objective of the collaboration should be
very well defined. What are we trying to achieve? Is it growth of revenue,
growth of profitability, growth of skill sets, working with the best minds,
professional growth, sharing of knowledge, newer geographies, recognition of
the changing market place and demands of the client? Clarity on the objective
is very critical. Often, in the haste of coming together, the main objective is
forgotten. That’s to be avoided at all costs.
(iii) Once the firm
is clear on who is best at practising a particular area, the automatic next
step will be to have one or two partners from each of the firms to collaborate
intensely and with the purpose of achieving a target of identifying a few
like-minded yet unique firms to integrate with. These one or two partners have
the responsibility of ensuring that the objectives of the collaboration are
fulfilled.
(iv) One of the
better ways to start is by working together on actual projects. That normally
provides a good way to get an insight into the other firms. It also provides an
easy and operational way to get to know the practices and processes of other
firms. Taking the first baby steps is important.
(v) Once some early success is seen, the
foremost assumption that all partners are aligned for collective growth will be
tested. It will be hard for partners to sit on the fence. Thus the acceptance
of a preferred firm model or even an associate firm model will not be too
challenging. Keep moving forward to a point where trust is created and
enhanced. Each model should be given adequate chance to work and succeed. At
some point, an associate firm model can give way to a network firm model.
(vi) The partners
leading this initiative for their firms have to be at it. It’s a constant
effort. Take small steps but keep moving forward. It won’t get done overnight.
But achieving small successes will pave the way for larger integration. If all
cylinders are aligned, the practices will see merit in a merger and move
towards a one firm, firm model.
CONCLUSION
It is no longer
okay to continue the status quo. During Covid-19, survival itself is
akin to growth. But, what next? Perhaps, it is time to understand and
introspect. It is time to move forward from working as disaggregated practices.
It is time to work together. It is time to consolidate.
