These challenges — post-pandemic economic instability; a dismal business environment; increased competition for such essentials as talent, clients, and technological prowess; complex and all-encompassing global regulatory changes; new types of cybersecurity threats, and more — have greatly increased the level of concern that today’s tax & accounting firm leaders are enduring.

To delve deeper into this situation, the Thomson Reuters Institute asked top executives from several of the nation’s largest accounting firms to share their thoughts, via separate conversations over videoconference, on many of the tax & accounting industry’s most critical and challenging issues. In a new white paper based on these conversations, From automation and M&A to relationships and talent: Top tax & accounting executives discuss today’s leadership challenges and opportunities, we see that although these challenges are widespread and diverse, the central themes underpinning them all actually center around four key areas of concern — growth, efficiency, talent, and client service.

A balancing act

The new white paper shows that, despite all of the turbulence in the larger economy and in the tax & accounting industry in general, accounting firm leaders also are having to address common challenges around their day-to-day operations, which can often have powerful ripple effects. For example, many accounting firm leaders noted that their decision on whether and how to deploy advanced technologies, particularly automation of certain work practices, is a weighty one, implicating areas of talent, outsourcing, and client service in its wake.

Indeed, many leaders said that even once that basic accounting processes are automated, questions immediately arise on how to develop and nurture the next generation of firm managers and leaders, as well as advisors and consultants in order to best meet changing client needs and a myriad of advances in the accounting profession itself.

Overall, it’s the type of balancing act among several key directives that have many leaders reassessing how they do business and working to come up with more innovative practices to address these challenges head-on. “The two central tenets of our strategy were to serve our clients better and create better career opportunities for our people,” said Tom Watson, CEO of FORVIS, an accounting giant created earlier this year by the merger of two Top 20 firms, BKD CPAs & Advisors and Dixon Hughes, during the interviews.

Fundamental concerns at the core

Still, the conversations highlighted in the paper clearly show that fundamentals remain top of mind for many large tax & accounting firm leaders. Throughout the paper, these leaders stated strongly that their firms must grow, cash must be conserved, clients need to be satisfied, and employees still need to be hired, trained, and retained.

As we engaged in these separate conversations around how top accounting leaders are addressing the challenges they face, we saw that many of their responses fell naturally into the four basic categories we’ve mentioned: growth, efficiency, client services, and talent. And while many issues were discussed, time and again, many of the leaders we spoke with kept coming back to the central issues of these primary and overlapping challenges.

In fact, leaders elaborated on what specifically they saw as challenging around these themes, with remarkable congruence. Around growth, for example, leaders said they were being compelled to find the most strategic, effective way to grow the business; and with efficiency, it was how best to adapt to workflows, processes, and job requirements to accommodate new technologies. Clearly, these two key areas are intertwined, with decisions and actions taken in one area greatly impacting the other, often with mutually beneficial results… if handled correctly.

Interestingly, none of the executives we spoke with appeared to be pursuing growth for growth’s sake; rather they explained that their growth goals were inextricably tied to their desire to improve client services and create a more dynamic culture for their top talent. And in the critical area of client services, again the overlapping aspects of how best to prepare the firm and its professionals to adapt quickly enough to meet evolving client need while (of course) outpacing the competition were seen as vital to any future growth.

That leaves talent — the all-consuming recruiting, hiring, developing, and retaining of top employees in an increasingly competitive environment in which both technical and business acumen are sorely needed and much in demand. The concern around this area undergirds all others as rising talent costs are eating up resources that could be used for investment in technology-enable efficiency improvement among other initiatives. Yet, even as technology was cited by many leaders as a means toward greater efficiency, the understanding followed that any resulting changes in workflows, processes, and job responsibilities would have a direct impact on employees, and that impact must be factored into any technological value equation.

Overall, leaders were clear that even though hybrid working schedules and improving technology are current challenges, they cannot be seen as existing in a vacuum. Many leaders were clear that none of the solutions they’re currently envisioning are going to change the fact that, at its core, tax & accounting service is still a people business — run by professional people for the benefit of their clients, who also happen to be people. And as the white paper clearly maps out, the conversations with these tax & accounting firm executives suggest that no matter how technologically sophisticated a firm might become, the factors of client relationships, communication, leadership, and a strong foundation of trust are still as crucial as ever.

You can download the full white paper, “From automation and M&A to relationships and talent: Top tax & accounting executives discuss today’s leadership challenges and opportunities”, by filling out the form below:

Further, unemployment in the UK remains historically low, sitting at under 4% for all of 2022; however, economic uncertainty has increased in recent months and future prognostications seem a bit grim.

This combination of robust demand and low unemployment puts pressure on UK law firms to retain their lawyers, especially their associates, amid high competition for talent in the country and across Europe. Indeed, the flight risk of associates, the majority (60%) of whom classify themselves as senior associates, remains elevated at 37%, according to a recent pulse survey conducted by the Thomson Reuters Institute in July 2022. This measure of how many associate lawyers are contemplating leaving their current firm compares to a flight risk of 25% for mostly partners, according our stand-out lawyer research.

The Top 5 factors that are forcing these associates to consider moving on from their employers include:

1. 1. 1. 1. feeling under-appreciated (identified by 48% of associates as a key factor);
         2. the firm’s compensation system (45%);
         3. lack of career progression (38%);
         4. their current compensation (35%); and
         5. a lack of genuine regard for their well-being (25%).

What is interesting about the feedback from UK associates is that a higher concentration of lawyers indicated dissatisfaction on factors having to do with the law firm’s culture and career progression when compared to their peers in the United States and Canada. (See table below)

Flexibility cited as a major driver of satisfaction

The strong desire for flexibility — in terms of when, where, and how work gets done — dominated the feedback from associates as a top driver of satisfaction:

For example, when asked about what they like best about their current employer, 45% of associates who are consider flight risks cited “flexible work practices” as the top factor. Other often-cited factors include people/colleagues (25%); culture/environment (22%); and quality of work (21%).

Out of those associates who are most likely to stay at their firms, 65% cited flexible working as a main driver of their decision. Additionally, 62% of associates ranked “I am treated fairly” as a second most popular driver; and 57% indicated “I can be myself at work” as the third most popular one.

Conversely, the biggest gaps in drivers of satisfaction between associates who are likely to stay or leave their current firms revealed that law firm management, leaders, and fee-earning colleagues have some work to do. (See chart below)

Further, women associates have a greater flight risk than that of men, but only by four percentage points (36% to 32%). For the most part, the Top 3 drivers of satisfaction were consistent between the two, although those in the second and third spots for women were reversed for men.

Recommendations for action

Taking in all of this data, UK law firms should see the opportunity they have to double-down on what associates appreciate most about the firm, such as:

• • • Flexibility— Firms should continue to emphasize flexible working as part of their commitment to employee well-being. Associates, whether they indicated a likelihood to leave or stay, indicated that flexibility was a top driver of satisfaction.
    • Fair treatment — Continuing to provide a sense of fair treatment is a strength for firms according to associates feedback. Indeed, this is an area for law firms to tout in their efforts to retain associates.
    • ‘Being myself at work’ — Law firms are doing a decent job at providing an environment where associates feel they can “be myself at work.” Indeed, it was identified as Top 3 factor for men and women and a Top 2 driver among those who were likely to leave.

At the same time, law firms need to address the gaps in those areas that associates identified as ones of less-than-ideal satisfaction, especially when it comes to feelings of under-appreciation and a lack of career progression. Focusing on these areas will also help law firms to shrink the satisfaction gaps associates feel for law firm management, leaders, and fee-earning colleagues.

Indeed, showing appreciations or simply saying “Thank you” is one of the easiest ways to demonstrate to employees that they are valued. Even better, showing gratitude for associates’ contributions by local management, fee-earning colleagues, and leadership — areas which had the biggest gaps between in satisfaction among associates — would have a multiplier effect on retention by improving lawyers’ feelings of appreciation and their positive views on management, leadership, and partners.

Also, firms should work on expanding options for career advancement beyond the simple path to partnership by explaining and emphasizing the path to Of Counsel or other legal professional roles, or the possibility of reduced hours or part-time work. In addition, consistently asking questions like, “How can I support you in your career development?” or “What can I do to ensure you have a rewarding career here?” are easy ways for firm leaders to show they care about associates’ career progression.

These investments of time and energy will help UK-based law firms boost their retention of associates and contribute to lower attrition rates overall. At the current salary rate of six figures per associate, multiplied by the current rates of attrition experienced by many law firms, offering a simple “Thank you”�����Ի���“Well done” are a pretty small outlay relative to the cost of losing key talent.

The — released in September by consulting firm  — aggregates and analyzes the financial performance of 315 accounting firms. For its analysis of year-over-year revenue, the report looks at firms with net fees exceeding $2 million annually, which represents about 90% of the firms that participated in the survey.

The last time the survey found revenue growth to be in the 5% range was 2012. From there, it climbed to 6.7% for two years, hovered between 7.0% and 8.1% between 2015 and 2018, then dipped to 6.4% in 2019 before falling to 5.7% last year.

The survey also showed that only three-fourths of accounting firms’ growth in 2020 was derived organically from operations. The rest was attributed to business acquisitions during a period of continued consolidation within the tax & accounting industry. “We are seeing M&A activity in small firms, medium-size firms, and large firms,” the report notes. “Firms, including Top 100 firms, are merging up to help with succession issues and lack of leadership, and/or to join forces with a larger firm who has the capital to help them make the transition from compliance to advisory” services.

Profitability

Average CPA firm profitability, measured by income per partner (IPP), was $521,000 in 2020, up 4.8% over 2019. (IPP grew about 6% the two previous years.) “We have been tracking a very interesting trend over the past 12 years,” the report states. “Prior to 2006, revenue growth rates fell short of IPP growth. But every year since 2007, the reverse has happened — revenue growth has exceeded IPP increases.”

The survey also offered several interesting takeaways, including:

The impact of firm size

The Rosenberg Survey has tracked the correlation between firm size and profit for more than two decades and found that “while being a larger firm does not guarantee larger profits, our data shows that the larger the firm, the more profitable it will be.” Here’s the average IPP by firm size in 2020:

• • • Firms with more than $20 million in revenue generated $688,000 in IPP;
    • $10 million to $20 million — $519,000;
    • $5 million to $10 million — $504,000;
    • $2 million to $5 million — $343,000; and
    • Less than $2 million — $258,000.

Based on The Growth Partnership’s consulting work with accounting firms, the report attributes larger firms’ profitability to their ability to:

• • • provide more advisory services;
    • attract larger clients;
    • engage in strategic planning, marketing, and practice development;
    • attract, retain, train, and develop staff and groom future leaders;
    • adhere to a strong set of core values and maintain partner accountability; and
    • establish a strong technology infrastructure.

“As more firms merge up, the small and mid-sized firms will have to compete against larger firms who are becoming stronger and stronger in these areas,” the report adds.

Aggressive billing rates

Another factor impacting profitability is the ability to collect higher billing rates. “When consulting with firms, we consistently see firms with aggressive billing rates outperform those with lower rates,” says Charles Hylan, a managing director at The Growth Partnership and lead author of the Rosenberg Survey.

The survey finds this is true regardless of the size of the market in which accounting firms operate. For example, in markets with populations greater than 2 million, firms with the highest partner billing rates generate $744,000 in IPP, while firms with the lowest rates generate $369,000 in IPP. The pattern holds in markets with a population of less than 250,000, where firms in the top-quartile for billing rates earn $516,000 in IPP, while those in the bottom quartile earn $280,000 in IPP.

The report suggests that the factors behind this trend are behavioral, attitudinal, and operational. Simply put, those firms with higher rates compete more aggressively, believe they are worth every penny they charge, and provide more advisory services and less compliance services.

Rate realization

The report notes that some CPAs believe firms with high billing rates discount their work more heavily than firms with lower rates, but the survey finds this to be untrue year after year.

In 2020, for example, firms with the highest partner billing rates and those in the middle of the pack discounted their rates about 14%. More importantly, those in the top quartile collected $384 for each partner hour (85.7% of their average billing rate of $448), compared with $289 for firms in the middle two quartiles (86.1% of their partner billing rate of $336.)

The impact of the firm’s audit practice

For the sixth straight year, the survey found that accounting firms which produce more revenue from audits and reviews are less profitable.

The survey examines profitability based on the percentage of firm fees generated by audits and reviews. The quartile of firms doing the least amount of this work — 8.6% of their total fees, on average — were 34% more profitable than the quartile of firms doing the most audits and reviews (50.7% of their total fees.)

Hylan says businesses have created downward pressure on rates for these services as they strive to contain the cost of audits and reviews, which they view as an operational requirement but not a strategic value. At the same time, increased regulatory requirements and staffing challenges make it harder for accounting firms to complete this work efficiently.

What makes an elite firm?

The Rosenberg Survey also explores what sets apart firms that generate more than $500,000 IPP — which it labels “elite” firms. The key factors, according to the survey, are higher rates and greater leverage, represented by the number of billable professionals divided by the number of equity partners.

The survey also found that:

• • • the average staff-to-partner ratio of elite firms is 8.4-to-1 compared with 6.4-to-1 among non-elite firms.
    • average net fees per equity partner are $2.4 million in elite firms compared with $1.7 million among non-elite firms.
    • fees per person are $220,000 in elite firms and $189,000 in non-elite firms.
    • elite firms’ average partner billing rate ($382) is 13% higher than non-elite firms’ average ($339).

Meanwhile, realization, utilization, and billable hours are similar between the elite firms and the non-elite firms, according to the survey.