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According to the Rosenberg Survey, revenue growth, at 7.7%, is up from last years 7.0%. Larger firms lead this trend, with higher growth rates than the smaller firms. What do you make of this?

Its encouraging to see this year-over-year lift in accounting firm revenues. Hinges own study of over 240 CPA firms, conducted in late 2018 and early 2019, agreed with the Rosenberg Survey, finding the profession took a similar rebound after hitting a four-year low the previous year (http://bit.ly/2OdhXKI). Will this upward trend continue? That may depend on whether the United States can extend this streak of economic growth.

While a growth rate of nearly 8% is great news for the profession, its important to put it into perspective. Historically, accounting and finance has underperformed all other professional services sectors, and last year was no exception. TheExhibitshows the median growth rates for four key professional services sectors over the past four years.

Median Growth by Professional Services Sector

Every year, the accounting sector consistently lags other industriesa trait we have noted for at least the past decade. We see three important factors behind this phenomenon. First, the accounting profession spends less on marketing than other professional services. Accounting median marketing budgets are tied for last with law firms in the professional services sector. Second, accounting firms have traditionally focused on compliance-oriented services. These are services clients undervalue and strive to minimize. Third, and more speculative, is accountants supposed aversion to risk. Whereas tech firms have to make risky bets to remain relevant in a fast-changing industry, accountants are often seen as more conservative. As any investor knows, riskier investments have higher potential upsides. Most CPAs seem comfortable with lower risk and lower returns.

Organic growth grew from 4.3% to 5.9%. Does this prove that the accounting profession is really cultivating a focus on business development?

Mergers and acquisitions have high failure ratesbetween 70% and 90%, according to Clayton M. Christensen, Richard Alton, Curtis Rising, and Andrew Waldeck (The Big Idea: The New M&A Playbook,Harvard Business Review, March 2011,http://bit.ly/34XzPQg)so organic growth can be a safer way to build an accounting practice over time. If CPA firms are indeed focusing on business development fundamentals, it will only make their organizations more resilient in an economic downturn.

Hinges ongoing research into high-growth firms provides some insight into how accounting firms are starting to approach new business development. High-growth firms do more content marketing, invest more in training their experts in business development skills, and leverage powerful digital techniques like SEO and social media more than low-growth firms. In short, they are making their expertise more visible in the marketplace.

Income per partner was $470,000, 6.6% higher than the prior year. Growth in profitability (6.6%) caught up to top line growth (7.7%). What does this trend mean?

Over the past few years, weve witnessed more and more accounting and bookkeeping functions become automated and commoditized. This trend can only dampen profitability, so it is encouraging to see profitability rising again.

That 6.6% number, however, only tells the story of the average firm. The high-growth segment was on another level altogether. According to Hinges Marketing Budget Benchmark Study (conducted with the Association for Accounting Marketing), high-growth CPA firms generated nearly $1 million more revenue per equity partner than their low-growth peers (http://bit.ly/2CFC8eZ). These firms must be doing something different from everyone else.

There was a noticeable increase in the percentage of partners over age 50 in the smaller firm category (less than $2 million in net fees). Do you think partners at smaller firms are not retiring because their firm doesnt have a partner to replace them, because they dont want to retire, or because the firm simply cant afford to pay for their retirement?

Lacking a clear succession path, many owners find they have little choice but to work well past retirement age. Many of these firms ultimately sell to local or regional rivals, fueling the recent spate of acquisitions. In fact, M&A activity is playing an important role in the evolution of the profession.

If you look at high-growth firms, however, most (approximately 80%) of their revenue growth happens organically. High-performing firms have many advantages, of course. They are able to attract top young talent more easily, and their higher profits and ability to generate strong revenues on a consistent basis make it easier to plan for and fund equity buyouts.

There was an increase in the percentage of firms that have mandatory retirement provisions. Do you think this is a result of firms trying to make room for new partners and allowing retiring partners to exit while still at the top?

In our experience, these provisions are often driven by a desire to keep the firm young, vital, and more likely to change with the times. In a marketplace that is rapidly being transformed by automation and artificial intelligence, this adaptability is going to become a competitive edge.

Do this years results once again prove that leverage and rates drive profitability?

Historically, weve seen a strong correlation between high growth and profitability. For example, weve seen this connection in high-growth accounting firms ability to generate greater revenue per partner (see above). But what drives this growth? According to Hinges data, high performers approach marketing differently. They tend to invest more than other firms in digital marketing techniques and in the business development skills of their experts. They also allocate 40% more of their marketing budgets to creating content and 600% more to educational events than low-growth firms. While these areas of emphasis may not fully explain these firms success, they almost certainly play an important role.

Why do the firms in the lowest quartile of performing audit work (as a percentage of fees) actually outperform (in terms of income per partner) those firms in the other three quartiles?

This comes as no surprise as the profession moves from compliance to advisory services. When Hinge looks at the high-growth segment of accounting firms, we also see this effect. High-growth firms are much more likely than low-growth firms to offer advisory and information security services. We expect this transition to continue in the upper tiers of the profession; thats where the value and profits will be. Furthermore, as automation takes over even more traditional accounting functions, expect the competition for clients at the lower end of the market to become more difficult and the margins thinner. The profession is in the throes of reinventing itself, a process that could take a decade or more.

The percentage of female partners continued to increase, moving from 21% to 23% for all multipartner firms. How do we get further along to gender parity?

While this increase is certainly good news, more than three-quarters of partners at CPA firms are still men. There is a long, long way to go if the profession wants to achieve anything close to gender parity. The cultural causes of this gap are dauntingly complex, but by acknowledging, monitoring, and discussing the problem, we are taking a positive first step. This is a statistic well be following over the coming years.

The Rosenberg Survey found an increase in the percentage of firms, across all firm sizes, offering investment advisory services. How do CPA firms perform and market such services successfully?

As firms grapple with the changing marketplace, they naturally look for new sources of revenue to replace or supplement services that have become less profitable. In this case, the new services replicate those offered by traditional investment and brokerage businesses, which could contribute to the professions challenges in differentiating its services. As firms offer more and more disparate services, they become more confusing to buyers. These jacks-of-all-trades could soon find themselves outmaneuvered by a new wave of specialists that deliver a narrow range of easy-to-understand services. High-growth firms arent necessarily following the same strategy, as Hinge has not found an association between offering investment services and high performance.

Those firms in the lowest quartile of the percentage of billable hours during busy season (meaning their work is spread more evenly throughout the year) outperform (in terms of income per partner) the other three quartiles. Why do you think this is?

While Hinge has no high-growth data on this specific phenomenon, it fits a pattern of the best-performing firms. First, high-growth firms monitor the evolving needs of their clients and build their businesses to address those needs. If their clients need accounting or advisory services outside of tax season (for example, business valuation services), high performers are equipped to recognize the need and provide the relevant services. Second, high-growth firms focus on educating their audience, so that they are visible to potential buyers year round. When a buyer has a need, he will think of the most visible firm first.

Read more:
Perspective on Revenue Growth and Profitability: Lee Frederiksen - The CPA Journal