Future alliances.

The inevitable path to multiple specialty areas.

EXECUTIVE SUMMARY

* CPA FIRMS ARE CHANGING: They will become more dependent on each other--fueling growth and service opportunities in the coming decade.

* THE FIRMS WILL SHARE CLIENTS with other firms, creating informal cooperative networks. Further, industry CPAs will outsource more work to this network, which will adapt itself to the changing market.

* INDUSTRY PRACTITIONERS ARE TRANSITIONING from corporate purse-string controllers to top managers. In a few years, almost every business client of a CPA firm will likely have its own in-house accounting talent, and those in-house CPAs will probably be the project managers or corporate officers responsible for implementing nearly every service a CPA firm offers. Thus they will become the single biggest purchaser of services from public accounting firms.

* IN THE PAST FEW YEARS, CPA firms have successfully extended their services to clients in many other areas. These added services also have enhanced client loyalty because they've provided solutions their customers need.

* AS THESE SERVICE extensions mature, CPAs have to know more about more subjects. Over time, many specializations will segment further into subspecializations. This will create growth opportunities both horizontally (new service areas) and vertically (services requiring greater expertise).

* TO BE SUCCESSFUL in this changing market, CPA firms--from the largest to the smallest--need to create alliances with other CPA firms. Within the alliance, professionals will fill many different roles in the continuum--from generalist to specialists. And these alliances need to develop structures so that all CPA professionals work closely together in the best interest of both their clients and their firms.

CPA firms are changing--there is little doubt about that. The firms will become more dependent on each other--fueling growth and service opportunities in the coming decade. In my view, the changes will evoke a unique spirit of cooperation.

On a practical level, I can see CPA firms sharing clients with other firms, creating informal cooperative networks. Further, I can see industry CPAs outsourcing more to these networks, which will adapt themselves to changing market needs. Let me explain how I came to these conclusions and how the future can benefit the profession.

Consider the following statistics from AICPA annual reports:

The two growth segments are industry practitioners and retirees. At first glance, it appears there should be more opportunity for the public CPA because there are fewer of them. However, there were almost 50% (around 45,000) more public CPAs in 1995 than in 1980, and applying even the most conservative estimates would put demand for their services as only keeping pace with the growing supply. The most significant statistical group, though, is the approximately 150,000 CPAs working in industry who are performing most, if not all, of the work that was traditionally left to accounting firms.

As the table shows, more than half of the profession now works outside public accounting. And where you once found a CPA controller primarily in a $50-million-plus organization, today you are likely to find CPA controllers in most organizations worth $5 million. If the trend continues, in a few years any company with more than $500,000 in sales will probably be a candidate for an in-house CPA.

Growth Trend Within the Profession

            Total
Year     membership      Public      Industry

1980       161,319        54.1%        35.5%
1985       231,333        51.0         38.8
1990       295,633        44.5         40.4
1995       323,779        40.7         41.7

Year      Education    Government     Retired

1980         2.9%          3.3%         4.2%
1985         2.7           3.3          4.2
1990         2.7           3.7          8.7
1995         2.4           4.4         10.8

THE RISE OF THE CPA

In addition, industry practitioners are redefining their roles, shifting away from being corporate purse-string controllers and becoming top managers. It's common today to find CPAs in charge of a range of business functions well beyond traditional accounting--information technology, human resources, strategic planning and marketing.

Think of the consequences these changes trigger. In a few years, clients of CPA firms will likely have their own in-house accounting talent, and those in-house CPAs will probably be the project managers or corporate officers responsible for implementing nearly every service a CPA firm offers. That will make them the single biggest purchaser of services from public accountants, and public accountants need to rethink how they service this market.

To defend against the decline in market demands for tax, financial statement and audit engagements that has occurred over the past several years, public CPAs have successfully extended their services to clients in many other areas. These added services also have enhanced client loyalty because they've provided solutions customers need.

As these service extensions--or niche areas--mature, CPAs have to know more about more subjects. For example, consider technology consulting. Until about 15 years ago much of the technology consulting work CPAs performed involved requests for proposals (RFP), needs assessment and breakeven and cost analysis. Although CPAs still offer these services today, many now routinely install the systems for which the RFPs were written. In other words, as niche areas develop in complexity and diversity, they spawn new niche areas.

This leads public CPAs to ask themselves

* What is our firm's growth plan?

* What is my personal career path, given the specialties on the horizon?

* Given our resources, how are we going to continue delivering the ever-expanding services that our clients expect?

* Do I want to help strategize and manage the work as the business generalist or as the generalist in a specialty field, or do I want to develop the expertise to be a specialist?

* Am I willing to give up account control to someone filling a generalist role if I choose to focus on developing my specialty skills?

Public CPAs need to address these kinds of questions now, before the path they are on imposes the answers for them.

A PATTERN OF CHOICES

Over time, many specializations have segmented further into subspecializations. This has created growth opportunities both horizontally (new service areas) and vertically (services requiring greater expertise).

To be successful in this changing market, CPA firms--from the largest to the smallest--need to create alliances with other CPA firms. (See "Solo, But Not Alone," JofA, April99, page 35.) Within the alliance I envision, each professional could fill many different roles in the service continuum--from generalist to specialist and even subspecialist. This alliance would need to be structured so that generalists and specialists worked closely together in the best interest of both their clients and their firms. It should be noted that such alliances don't depend on the AICPA's creation of specialty designations. Our clients already demand specialty services; they seek strong business partners, not just service providers.

As specialties emerge, firms will have to choose the field they want to service. For example, I predict a number of broad specialties for most alliances: Accounting, planning, human resources, marketing, technology, and efficiency/profitability will be core areas.

To understand how segmentation grows out of those specialties, consider an example in the technology field. The technology generalist will be the person in the organization most likely to identify the technology strategy that benefits a client's business most. Given today's technology, the technology generalist would likely spawn two technology specialists: applications (software and databases) and platforms (computer operating environments). Out of the platforms specialty, two further subspecialties would likely be formed: wide area networks (WANs) and local area networks (LANs). And then, under the LANs subspecialty, four more subspecialties are probable: Windows NT, Novell, NetWare and Unix.

DEVELOPING A MODEL

As you consider your local business environment and develop a model for your firm and the alliances it would need to form, some specialties will not need subspecialties; others will not only divide into multiple layers but will segment into numerous other specialties.

The next step is to determine what part of this model your firm will fulfill. If you are one of the largest accounting firms, you have the financial and human resources to create a strategy to do everything. If you are small, then you will have to position your alliance wherever it can operate most effectively and profitably.

In the technology model cited above, the arbitrary divisions I described might represent the resources of either one firm or several closely affiliated small firms. So, as an example, one small firm might offer the specialties of strategic planning, operational efficiency and operational profitability; another might only offer human resources services; a third might deliver marketing and general technology assistance; and another might deliver the applications, platforms and all the associated specialties below that.

In a typical arrangement, an alliance's generalist would identify, manage and distribute the business opportunity to the specialists. For example, a Windows NT technology specialist would not be called in to discuss the business's overall technology strategy because that would assume that a solution--Windows NT--already had been chosen. Instead, a technology generalist with a knowledge of a wide range of technology alternatives would be a much better candidate. And there is a strong likelihood that before the technology generalist were to be called in, the business generalist would have provided advice on the broader issue: the client's need for an overall technology strategy.

WHO'S IN CHARGE?

Traditionally, the generalist has been the CPA partner who managed the account. This is the partner who brought in a specialist to implement various projects. But in today's world the generalist is likely to be the client's CFO. Consider how that changes the process. The CFO, in effect, will create the strategic alliances, partnering or closely affiliating with a number of specialty firms to satisfy the company's needs.

I foresee that within about seven years, stronger and more formal strategic alliances or client-sharing agreements will become commonplace. Small CPA firms will work closely with other small firms, establishing a network of complementary specialty services. I envision the alliance giving itself the option to financially punish a member of the network that delivers services outside its designated specialty areas. Such an arrangement would also create a defensive barrier against competition from unaffiliated CPA firms.

Change is inevitable--driven by market demand--and we are being called on to adjust our business to address it. If we don't respond to our clients' needs, they will go elsewhere. We hold our future in our hands. We have to decide how to position our firms for tomorrow's marketplace.

Author's Note: In this article, public accountants refers to those working in CPA firms; industry accountants refers to CPAs who work for a company, government or nonprofit organization.

WILLIAM L. REEB, CPA, is a shareholder in Winters, Winters and Reeb, Austin, Texas. He is the author of Start Consulting: How to Walk the Talk, which is available through the AICPA and the Chartered General Accountants in Canada. He is the chairman of the AICPA's consulting services team and is a member of the Texas Society of CPAs executive board.