Strategic Growth Through Consolidation: Analyzing Fragmentation and Opportunities in the U.S. Public Accountancy Industry
Analyzing the U.S. Public Accountancy Industry: Consolidation, Fragmentation, and Growth Opportunities from the 2017 SUSB Data
Every five years, the U.S. Census Bureau releases the Statistics of U.S. Businesses (SUSB) analysis, which provides critical insights into the economic landscape of U.S. businesses. This comprehensive dataset includes information on the number of firms, establishments, employment figures, and annual payrolls, segmented by industry and business size. The most recent data from 2017 offers valuable insights into the competitive structure of the U.S. public accountancy industry, particularly under the North American Industry Classification System (NAICS) code for Offices of Certified Public Accountants.
This essay aims to analyze the structure of the public accountancy industry using the 2017 SUSB data, focusing on key elements such as establishment size, employment, payroll, and revenues. Furthermore, this essay will explore the implications of industry fragmentation, corporate consolidation opportunities, and strategic growth for public accountancy practices, particularly in relation to scope economies, stakeholder value, and economic profit.
Overview of the U.S. Public Accountancy Industry Based on 2017 Data
According to the 2017 SUSB data, the U.S. public accountancy industry comprises approximately 53,167 practices operating across 56,705 locations, collectively generating $102.7 billion in annual revenues. These figures give a macro-level view of the industry's size and economic impact.
Key metrics extracted from the SUSB data reveal important characteristics of the industry's structure:
68.7% of public accountancy practices employ fewer than five employees, generating an average of $247,011 in gross revenues, with payroll expenditures of $83,864 and profits around $98,805.
95.6% of practices have fewer than 20 employees, averaging $471,714 in gross revenues, with payroll expenditures of $190,694, and profits of $188,686.
99.9% of public accountancy practices operate within the smaller revenue and employment brackets, capturing approximately 41.7% of total market value, while the remaining 0.1% of the industry accounts for the remaining 58.3% of market value.
Fragmentation and Market Dynamics
The SUSB data underscores that the public accountancy industry is highly fragmented. 95.6% of firms consist of small practices, many of which are micro-enterprises employing fewer than five people. This suggests that the industry operates in a near-perfectly competitive market, where firms struggle to differentiate themselves and face intense competition. This fragmentation can be attributed to several factors:
Low Entry Barriers: The public accountancy industry, particularly at the smaller scale, has low entry barriers. It is relatively easy for experienced accountants to set up their own firms, which increases the number of small players in the market.
Homogeneous Services: Most smaller public accountancy firms offer similar services, such as tax preparation, auditing, and bookkeeping. The commoditization of these services means that many firms compete primarily on price rather than unique value propositions.
Mature Market: The public accountancy industry is considered mature, with slow growth and limited opportunities for innovation. In mature markets, it becomes increasingly difficult for firms to grow organically.
Interestingly, the data suggests that 4.4% of the industry—larger firms with more employees and greater revenues—have managed to establish some degree of monopolistic competition. These firms have likely differentiated themselves through specialization, brand strength, or offering a wider array of value-added services. However, the overwhelming majority of firms remain highly fragmented, facing intense competition and operating within a narrow profit margin.
Implications of Fragmentation on Growth
Given this high level of fragmentation, many smaller public accountancy practices face significant challenges in achieving sustainable growth. Traditional growth models in the industry, such as expanding through client referrals or hiring experienced practitioners with an existing book of business, may not be sufficient to maintain competitive positioning in a rapidly evolving market.
The competitive pressures in the public accountancy industry are not limited to price. As more firms offer similar services, it becomes harder for smaller practices to differentiate themselves, leading to eroding market share and collapsing entry barriers. Many practices fail to recognize this shift and often attribute declining profits and client losses to seasonality or economic downturns rather than addressing the root causes of competition.
Corporate Consolidation: A Strategic Path to Growth
Strategic theory suggests that, in fragmented and mature markets, corporate consolidation can provide a more effective growth strategy. According to Barney (1997) and Porter (2008), consolidation enables firms to achieve economies of scale, improving cost efficiencies while also increasing their market power.
Consolidation in the public accountancy industry typically takes the form of mergers and acquisitions (M&A), where smaller practices combine to form larger entities. The potential benefits of consolidation include:
Economies of Scale: Larger firms benefit from reduced per-unit costs, allowing them to offer more competitive pricing while maintaining profitability.
Increased Market Share: Merging with or acquiring other practices enables firms to expand their client base, geographic reach, and service offerings, increasing their market share.
Enhanced Differentiation: By pooling resources, consolidated firms can invest in new technologies, training, and marketing initiatives that help differentiate them from smaller competitors.
Improved Profit Margins: Consolidation allows firms to streamline operations, reduce redundancies, and improve overall efficiency, leading to higher profit margins.
The Role of Economies of Scale, Stakeholder Value, and Economic Profit in M&A
The success of mergers and acquisitions in the public accountancy industry largely depends on the ability of the combined entity to realize synergies that lead to enhanced economies of scale, increased stakeholder value, and improved economic profit.
Economies of Scale: Achieving economies of scale is one of the primary drivers of consolidation. Larger firms can negotiate better rates on software, office space, and other operational costs. Additionally, they can distribute administrative tasks more efficiently, freeing up resources to focus on high-value client work.
Stakeholder Value Added: M&A activity also has the potential to increase stakeholder value. Clients benefit from a broader range of services, better expertise, and access to specialized knowledge. Employees may enjoy greater job security, better career development opportunities, and access to more advanced tools and training. Shareholders or partners in the firm can expect increased returns as the firm grows more profitable and resilient to market fluctuations.
Economic Profit: The ultimate goal of consolidation is to improve economic profit. By reducing operational costs, expanding the client base, and enhancing service offerings, firms can increase their revenues while maintaining or reducing expenses. This leads to improved profit margins and a higher overall economic profit.
Challenges in Consolidation
Despite the potential benefits, consolidation is not without its challenges. For example, merging two practices with different cultures, systems, and client bases can lead to integration issues that negatively impact performance. Additionally, there is a risk of value destruction if the anticipated synergies do not materialize or if the costs of integration exceed the benefits.
Furthermore, smaller firms may resist consolidation due to concerns about losing autonomy, changing work cultures, or sharing profits with a larger entity. As a result, consolidation efforts must be carefully planned and executed to ensure that the benefits outweigh the costs.
Conclusion: Embracing Strategic Growth through Consolidation
The 2017 SUSB data highlights the fragmented nature of the U.S. public accountancy industry, where the majority of firms are small practices competing in a highly competitive market. In such an environment, traditional growth models may no longer be sufficient for long-term success.
Corporate consolidation through mergers and acquisitions offers a viable path for public accountancy practices to achieve growth and remain competitive. By pooling resources, achieving economies of scale, and increasing stakeholder value, consolidated firms can improve their market positioning and enhance economic profit. However, firms must approach consolidation strategically, recognizing both the potential benefits and the challenges involved in integrating disparate practices.
In conclusion, as the public accountancy industry continues to evolve, firms that embrace consolidation and adapt to the changing competitive landscape are more likely to thrive in the long run. Those that fail to address the realities of the market may find themselves struggling to remain relevant in an increasingly competitive environment.
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