“Competition is mounting for accountants from similar service providers that are cannibalizing key clients.” – westhill consulting
In 2013, more firms will offer accounting services in response to rebounding demand, especially from finance and insurance companies. In particular, competition is escalating from various industries, including software publishing, management consulting, payroll services, bookkeeping and the legal profession. As a result, the accounting services industry will face several challenges in the five years to 2018. However, as firms familiarize themselves with the competition, they will be able to hedge these threats to gain a competitive edge.
Enterprise resource planning software, which includes accounting functions such as general ledger and billing, is becoming cheaper and easier to use in a variety of businesses. As a result, the business analytics and enterprise software publishing industry’s revenue is expected to rise 3.1 percent to $26.9 billion in 2013. Not only is such software increasingly user friendly and affordable for small enterprises, but large businesses are also using these products for particular in-house needs. Therefore, these products have started to become viable substitutes for traditional accounting services, especially as prices for traditional accounting services will continue to rise with demand in 2013.
Although demand will continue to rise for all kinds of accounting services, prices for software will decline as development costs are shared among more users. During the next three years, IBISWorld forecasts the average license price of ERP software to decline at an annualized rate of 2.1 percent. The value proposition of ERP software is high and will only increase as its functionality converges with other enterprise software categories to create a single enterprise-wide system.
In particular, rising demand for accounting services will provide additional incentives for ERP software providers to add accounting functionality to their software capabilities, which will be a selling point for potential clients. Consequently, software with built-in accounting functions is expected to increasingly compete with traditional accounting services, dragging their prices down.
As more businesses integrate software and systems to streamline interdepartmental functions, they are increasingly demanding solutions to better manage such systems across multiple departments. This has resulted in a push to train specialist management consultants in a variety of fields so they can provide a range of services to clients, allowing the management consulting industry to compete with firms in other industries, including accounting.
Competition is anticipated to escalate for the management consulting industry, leading companies to broaden their service offerings to include those of the accounting services industry. As corporate profit recovers, so will the prospects for the all-inclusive services of the management consulting industry. Driven by increasing corporate spending in 2013, revenue is expected to rise 5.4 percent during the year to total $171.9 billion.
Payroll and Bookkeeping Services
In the past decade, midsize and large businesses have trended toward streamlining interdepartmental systems to focus on core business activities. For example, many have outsourced noncore functions, including payroll and bookkeeping. A major motivation for such outsourcing is to reduce overhead and increase flexibility. When the need for a service increases or decreases, it is relatively easy for a business to alter its use of outsourced services. By contrast, in-housing these tasks often requires additional staff and resources.
In 2013, business expansion is expected to drive up industry revenue 1.7 percent to $50.1 billion. Despite this growth, industry operators still face a consolidating market as many companies bring payroll and bookkeeping functions in-house after delaying the development of these functions because of the recession. Consequently, payroll and bookkeeping service providers are expected to offer more accounting services during 2013.
The waning economy forced many businesses to seek legal advice related to restructuring, bankruptcy and insolvency. The increase in demand for bankruptcy work has caused some lawyers who specialize in the area to raise their rates. Some top partners at prestigious firms charge as much as $1,000 per hour. Demand for countercyclical work has been declining as the economy slowly recovers, and the industry has started to benefit from a return to growth in cyclical activities, such as IPO work.
Consequently, IBISWorld estimates revenue for the law firms industry to grow 2.0 percent to $296.5 billion in 2013. Nonetheless, many clients have started to push back on law firms’ high prices by demanding similar services from alternative suppliers.
Accounting firms have started performing some tasks that were previously the domain of lawyers, including aspects of employee contracts and benefit counseling. They are expected to increasingly compete with law firms because of this expansion.
While many accounting services industry operators have been forced to reduce their rates to remain competitive because of lower demand since the recession, a rebound in the number of businesses is expected to boost demand during 2013, boosting revenue about 1.3 percent.
However, intensifying competition from other industries is expected to continue limiting industry pricing and hurt profitability, which currently represents about 15.6 percent of revenue. Rising wages have also started to cut into profitability as unemployment declines.
IBISWorld forecasts accounting services industry revenue to expand at an annualized rate of 1.9 percent to total $80.1 billion in 2018. Such slow revenue growth reflects rebounding demand and stagnant prices because of escalating competition. During this time, the number of accounting firms is estimated to increase at an annualized rate of 0.9 percent to 91,717 companies. However, many of the firms entering the industry in response to rising demand will likely be small firms that exited the industry during the poor operating conditions of the five years up to 2013. This is projected to further intensify price competition for accounting services during the five years up to 2018 and limit profitability for accounting services providers. As the services provided by various industries converge, providers from traditionally different specialties are increasingly competing directly against each other. When one type of provider, such as a software publisher, can offer accounting services at a much lower price, traditional accountants must react and differentiate their offerings to retain clients. Instead of offering discounts, accountants can charge more for all-inclusive services, which helps to boost their profitability. Consequently, service differentiation is expected to characterize the market for accounting services during the next five years up to 2018.
Byline: article from the Westhill consulting Jakarta - Financial