The Great Spinoff

The Great Spin-off: How Firms Can Prepare for Advisory Spin-offs

With the news that both Ernst & Young and Deloitte are actively exploring spinning off their advisory businesses, the accounting industry stands on the edge of a seismic shake-up. In many ways, this marks a repeat of the past: from Arthur Andersen spinning off Accenture to Ernst & Young selling their consulting unit to Capgemini.

Advisory practices have developed into major growth levers for Big 4 firms in recent years. Since the passage of the Sarbanes-Oxley Act twenty years ago, Big 4 firms have evolved significantly and today, focus largely on serving public companies. They’re far from just accounting firms: they’re full-service financial services firms and CPA and Tax work is the minority of what they do. 

The advisory practices of the Big 4 hold significant enterprise value. They’re far more profitable than CPA work, and the playbook is already there. Since being spun off 20 years ago, Accenture has grown dramatically and today has a market cap of approximately $173 Billion. 

In this period of change in the accounting world, it’s natural for leaders at top firms to question what these pending spin-offs might mean for them. Right now, there’s little to be done but it’s worth monitoring the situation for new developments. 

What Do These Spin-offs Mean for Top 100 Firms?

The majority of work that the Big 4 do is focused on public companies, which has often meant that they’re not in direct competition with smaller firms focused on the midmarket. While many top 100 firms are certainly well-aware of the Big 4, they’re not usually in direct competition with them. 

That’s because working with public companies is simply a whole different ball game. At my CPA firm, we considered servicing public companies, but it wouldn’t have been worth it. Everything is different, from risk to compliance, and more. It’s why only a very small subset of accounting firms serve public companies: namely, the Big 4. 

If these spin-offs go through, the practice areas that remain at Big 4 firms will be largely focused on Tax and Audit. In order to drive growth, it’s possible we’ll see Big 4 firms refocus towards the upper tier of the midmarket. 

With the requirements of Sarbanes Oxley, the Big 4 had largely abandoned this segment in the past 20 years to focus on public companies. Other firms filled this void, and many of today’s top 100 accounting firms owe their success to the opportunity to build an established presence in the midmarket. 

But now, the Big 4 most likely has to refocus downmarket. They have to grow somewhere. Previously, that’s been advisory, but if that’s no longer possible, it’s a logical guess that they’ll turn their attention to the upper tier of the midmarket. That could spell new competitors for today’s top firms outside the Big 4.

What Can Managing Partners Do To Prepare?

Preparing for this shift is difficult: right now, it’s all just rumors. But if these spin-offs do go through, your firm stands to gain a formidable competitor in certain markets. Even after spinning off their advisory practices, all of the Big 4 would still be at least $10 Billion firms and they’d still have a huge presence in major cities. 

Some firms are more insulated from the effects of this than others. If you command a niche, you have a valuable, defensible position in the market. The same is true for firms located in smaller cities where Big 4 firms have a smaller presence with less capacity to serve local companies. 

Essentially, it’s a question of keeping your eye on the ball and tracking the latest developments. There’s no shortage of issues for managing partners to stay abreast of and ultimately, this is just one more thing to add to your plate. 

For managing partners with an eye to growth in any market, digital strategy is imperative. It’s one of the many things Winding River Consulting offers exclusively to accounting firms. Connect with us to learn more.