The accounting sector is poised to undergo its greatest reshuffling in generations. The combination of major talent shortages and rapid AI advancements is creating massive opportunity in an industry that has proven its willingness to adopt new technologies in the past.
The difficult strategic decisions facing accounting firm leaders today boil down to two options: pursuing the increasingly popular path of private equity or journeying down the less certain road of independent innovation and transformation.
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Private equity buyers are attracted to the industry's relative stability and cash generation through economic cycles. They also recognize a chance to consolidate smaller firms and increase economies of scale, expand into new offerings and markets, and invest in technology upgrades. Don't bet against the private equity firms and their ability to generate a return on investment.
At the same time, one must question whether private equity is the right tool for establishing the winners in an industry that is undergoing tremendous change. What is the right organizational structure and set of incentives that will enable new winners to emerge or incumbents to thrive?
Focus on the future
Private equity faces a timing problem. Timelines for returns are generally no more than 10 years, and that drives a focus on efficiency innovation — using organizational, process and technology changes to lower costs and generate more cash flow. In contrast, investment in growth takes longer to pay off and is far less certain.
A traditional accounting firm structure is a partnership, where the timelines for returns are relatively long. Employees spend their career at a firm working to become partners, and partners have tremendous skin in the game — even linking their retirement to the long-term success of the firm. At the same time, partnership structures are traditionally ill-suited for substantial pivots or investment in disruptive innovation that lowers annual distributions in the near term.
Despite what many energetic forecasters will say, it's impossible to know how this is all going to play out. There is no data about the future. The only way to obtain data about the future is to create it by taking action. Action creates data. In the face of an unknowable future, therefore, the best strategy is to run as many experiments as possible at the lowest possible cost per experiment. The firms that emerge (or remain) as leaders in the accounting industry are those running experiments to challenge status quo thinking about how the industry works. The future winners are focused on fundamentally reimagining the business, not just increasing efficiency.
Opt for optimism: Betting on growth through experimentation
Having a long-term mindset is a competitive advantage in any industry, but especially for those in turmoil. Most companies, including those operating under the incentive systems of private equity firms, don't operate with a long-term perspective. Rigorous and broad business model experimentation is not a capital-efficient process in the short run, but it is the path to long-term supremacy in any industry undergoing transformation.
Firms that are structurally capable of pursuing experimentation, and that can afford some capital inefficiency in this environment, will be more likely to endure and, ultimately, emerge as winners. Incumbent accounting firms can do this — they understand the problems and opportunities better than new entrants — but may not have the governance or incentive systems in place to allow adequate experimentation. Incumbents can win by unlocking and deploying cash for experimentation in the form of unexpected partnerships and acquisitions, and through building new products, services and ventures. At the same time, they should expect new entrants to emerge that have nothing to preserve and everything to win, who can enter the market in a disruptive way, grab a foothold, and move upmarket to displace incumbents that are mired in a focus on short-term efficiency bets.
Consider the potentially transformative impact of a creative merger between a major accounting firm and a technology company like Intuit: This partnership could unlock access to brand-new customer segments while injecting automation capabilities throughout the organization, likely offering substantially more "pros" than the standard private equity playbook of consolidation and cost-cutting.
The most profound opportunities for positive change often appear during periods of uncertainty, and the accounting industry's current landscape is rife with potential for genuine future-proofed transformation. When two roads diverge in a wood, taking the one less traveled can make all the difference. The firms that emerge as winners in the accounting industry are more likely to be the holdouts that remain focused on the long-term.
