The consulting practices of U.S.-based accounting firms—especially the Big Four—saw strong growth in revenue last year, in part due to last December's tax reform overhaul, according to a new report.
The report, released Wednesday by Source Global Research, found the Tax Cuts and Jobs Act, and preparations ahead of its passage, freed up cash that businesses clients were eager to divert to other priorities, creating work for consultants. That helped the consulting arms of accounting firms increase revenues by 9.4 percent last year to $23.6 billion to grow faster than the wider U.S. consulting market, which grew 8.1 percent to $63.2 billion in 2017.
The report found business clients were looking for help from accounting and consulting firms to restructure their tax strategy to take advantage of the new rules. Many of them found the Big Four to be a good fit, because they could leverage their tax strategy know-how to help companies benefit from the new tax law.
Other factors were also at play besides tax reform, according to Fiona Czerniawska, director of Source Global Research. “Digital transformation is also one of the big drivers of growth across the market as a whole, and the Big Four are benefiting from a strong client interest in cybersecurity and risk more generally,” she told Accounting Today.
The tax law is prompting questions from clients asking about what tax planning is appropriate, and that should have even more of an impact on accounting firm revenues this year. “It was one of the key drivers in 2017, but given that some of the tax changes were only announced late in the year, the actual impact in numbers was relatively small, but it has potential to grow much more in the future,” said Czerniawska.
Tom Puthiyamadam, U.S. consulting competencies leader and digital services leader at PwC, was one of the consultants interviewed for the Source report. “We’ve been talking about tax and consulting working together for 10 years, and now it’s really happening," he said. "In the last three months of 2017 and at the start of 2018, there hasn’t been a supply chain transformation discussion or a growth discussion that doesn’t involve tax reform. It’s transformational lighter fluid.”
While regulation still significantly drives demand for consultants in the U.S. financial services sector, the peak level of regulatory activity has passed, according to the report, pointing to the wave of financial deregulation in Washington. Along with changes to corporate tax rates, that's likely to boost net income of banks by an estimated $26 billion in 2018. Banks and other financial services companies will have more funds to invest in further growth, driving more demand for consulting help on wide-ranging transformation initiatives.
Carl Carande, vice chair of advisory at KPMG, said in the report, “While client priorities are many and varied, we heard a lot about clients funneling their newfound gains into transformation projects, helping to further fuel the rapid growth of digitization within the U.S. market. Clients’ propensity to spend is up in 2018. Part of it is as a result of tax changes—for some it’s been a windfall, which means they have the ability to spend on transformational programs.”
However, the Source report also noted that a convergence in the consulting market is forcing the consulting arms of U.S. accounting firms to make large investments to fend off competition and position themselves as a one-stop shops for end-to-end digital transformation.
“We’re competing against some strategy boutiques—they’re trying to move into our space,” said Geoff Vickrey, America advisory performance improvement leader at Ernst & Young. “It’s a very competitive and dynamic market.”
Accounting firms still face stiff competition from technology consulting firms such as Accenture. In a further sign of greater competition, U.S. technology consulting firms knocked the accounting firms off the top spot in terms of growth in 2017, becoming the fastest-growing type of firm in the U.S. consulting market. Technology firms grew by 10.8 percent to $14.2 billion in 2017. Tech consulting firms are expected to lead the market again this year, growing an estimated 11 percent.
Still, the new tax law is expected to fuel growth in consulting and that should help boost revenues at accounting firms.
“The tax overhaul was good news for all consultants in 2017, but that doesn’t mean that this was a market without challenges,” Czerniawska stated. “With consulting firms of all types and sizes competing for the same projects, the consulting arms of accounting firms are having to work harder than ever to differentiate themselves. That work is evident in their investments in end-to-end transformation capabilities, which are intended to entrench their position in the digital space and to offer a broad spectrum of services.”
Uncertainty about trade policy and tariffs could also boost consulting revenues this year. “We've got the divergent tax regimes going on, but clearly there's more than that,” said Czerniawska. “Strategically where do you place your operations and what kind of market can you expect to deal with in the future? Even the last few days have demonstrated the uncertainty around trade at the moment.”
She noted that the U.S. accounts for just under half the total global consulting market. “It's going to have a huge impact, almost whatever it does,” said Czerniawska. “It's hard to think of an industry which is so skewed toward one single country as the consulting market is.”
Smaller firms beyond the Big Four can also play a role in helping clients deal with tax reform and other consulting issues, but they do face stiff competition from the giant firms. “Smaller firms are working with smaller businesses, but a lot of the projects that the Big Four accounting firms are winning are large projects, which a smaller firm wouldn't have a chance of winning,” said Czerniawska. “I don't think it changes the rules of engagement very much. If anything, I think more work is being generated by the bigger companies, and the small firms don't seem to get much access to that. It seems to be quite tough for smaller firms.”
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