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Consolidation will transform the mid-market within the next five years

BDO International global head of network development Anders Heede speaks about accounting market consolidation and explains why he believes that in five years only two of the three truly global mid-tier networks will remain

As my firm, BDO, marks its 50th year, I believe the accountancy profession is on the brink of a true global transformation. The transformation I'm talking about is the consolidation of mid-tier accountancy firms. It's a trend we've already witnessed for some years among the very largest networks and it is now repeating itself for the mid-tier.

Let me illustrate the scale of transformation I believe is coming. I predict by 2018, only two or three truly global mid-tier networks will remain. The impact of this will be far-reaching, not just for our profession, but for those we serve too.

The core client base for mid-tier firms, small and medium-sized companies, are increasingly seizing opportunities for international expansion. In fact, according to Eurostat figures, 44% of all EU SMEs already have international activity, and this is only likely to continue as they purse global growth markets.

Much like for larger corporates, this internationalisation will not only bring them opportunity - it will also carry risk. In order to navigate the challenges of expansion, and realise the potential across global markets, ambitious SMEs will increasingly need professional services firms to help them.

But these mid-sized companies have different needs and service expectations to their larger counterparts. They aren't always best served by the largest firms, who have traditionally catered for the demands of large corporates. In fact, our own research in 2011 showed 40% of UK SMEs are unhappy with the service they receive from their current advisors.

What's clear is they expect exceptional and consistent service, regardless of
geography. They need professional services firms with the depth of skills and sector expertise and local knowledge to help them navigate risks associated with expansion. At the same time they need advisors with the global infrastructure and centralised processes to deliver high-quality work and tailored market-by-market service as their organisational structure and activities become more complex. This applies to all forms of advisory - in particular auditing, where scrutiny has never been greater.

To be able to deliver all of this requires investment - investment that many mid-tier firms simply cannot make or sustain. This is clearly evidenced by the number of firms we've seen leave the market in recent times because they have struggled to compete in a fiercely competitive market - a market where surplus capacity has pushed prices down by some 15 to 20% over the past four years, according to our own analysis of larger European markets. This pricing pressure, combined with ongoing economic uncertainty, means weaker firms won't have the resource to invest in key developments (infrastructure, tools and people) and ultimately their cohesiveness will be challenged.

For many, the pressure looks set to continue. Stressed margins will undoubtedly impact lower earning firms, forcing them to seek scale benefits and synergies. Only the strongest and most capable networks, those able to meet the increasingly sophisticated needs of mid-market businesses, will be left standing.

At BDO, we have actively pursued a strategy that will drive further mid-market consolidation. We are continuing to grow our network both organically and by merging with strong firms that share our values and add to our strengths. For example, our biggest, most recent merger with PKF in the UK has resulted in a firm of 3,500 people with revenues approaching £400m.

As we grow, we are continuing to invest in markets and areas that set us apart and, importantly, matter to our clients. As such, last year BDO Li Xin merged with a significant part of PKF China, strengthening BDO Li Xin's position as the largest Chinese owner-managed audit CPA firm and the market leader in serving state-owned enterprises in China.

Consolidation is inevitable and necessary and denial is not an option. We have recognised this and, as such, have founded our long-term strategy in there being a transformed mid-market. I believe it is now time for the rest of the mid-tier to recognise the change that's coming, take control and plan for it.

Our profession and the clients we serve are counting on it.


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