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Published 26 October 2012 06:42, Updated 26 October 2012 12:33
Big 4 accounting firms are benefiting from adaptability and diversification.
Big accounting firms have a lot to teach big law firms. There was a time when the lessons to be learned by comparing one profession with another seemed few, and in any event no one was interested. Things have changed, as is evident when the pattern of growth of the accounting Big 4 is compared with that of the law Big 6 over the past 10 years.
Using publicly available figures for their Australian practices, chart one compares the aggregate annual revenue of the law Big 6 – Allens, Ashurst, Clayton Utz, Freehills, King & Wood Mallesons, Minter Ellison – and the accounting Big 4. From 2004 to 2008, the Big 6 grew 22 per cent; the Big 4 grew 59 per cent. Whereas from 2008 to 2012, the Big 6 shrank by 2 per cent while the Big 4 continued to grow, albeit more slowly at 16 per cent.
A component of the big four’s growth is inorganic, especially for PwC and Deloitte. This undoubtedly explains some of their powering on after the GFC, but it’s noteworthy that revenues were stagnant over 2009 to 2010. Other than lateral hires, none of the Big 6 engaged in M&A in Australia during the decade. How much of the big six’s flatline over 2008-2012 is explained by deliberate downsizing, the success of clients’ price-down tactics, reduced demand and the loss of most of one firm’s Perth office is not known. No doubt all these factors contributed in some way.
Using the same source data, chart two compares the year-on-year growth of the Big 4 with the Big 6. The accountants – a misnomer being used as shorthand for what are effectively diversified professional services firms – are more volatile, especially in their faster and higher rebounds. They have a spread of 24 percentage points in their growth rate (+20 to -4), compared with 15 per cent (+10 to -5) for the lawyers over the 10 years.
For the Big 4 the portfolio effect of a diversified range of services – hence calling them professional services firms – and corporate activity probably explains most of the difference between the two groups. But I think there is another less tangible and in the long-run more important factor. It’s adaptability. For decades the “accounting” firms have been diversifying (that is, in the early days Price Waterhouse bought Urwick Orr and Coopers & Lybrand bought W D Scott, both large management consultancies) and they have been globalising. The Big 6 haven’t diversified (not yet, anyway) and only very recently have four started to globalise. Hybrid vigour and worldliness are integral to learning to adapt. Add to this the inherent conservatism and the higher profitability, on average, of law firms and the reasons for their slower growth are explained.
But growth and volatility are not everything. For the past 10 years the Beaton Benchmarks studies have consistently shown that law firms, including the Big 6, outperform accounting firms, including the Big 4. Clients of law firms rate the performance they experience and the value they receive substantially higher than do the clients of accounting firms. This fact says it’s time for best of class benchmarking, not just best of breed benchmarking, because there are more insights to be garnered by comparing one profession with another in these ways, rather than by simple financial metrics. And when benchmarking performance adds value, it’s clients who will benefit.
George Beaton is executive chairman of Beaton Research & Consulting and a partner in Beaton Capital, firms dedicated to professional services.