Can Smaller Firms Compete With The Big 4?

A few weeks ago, Tracy Coenen of Sequence Inc and the The Fraud Files Blog interviewed me in preparation for an article for the Journal of Accountancy on establishing a small forensic accounting practice.  She is regular girl but obviously has big ambitions.  The Journal of Accountancy?  I don’t swing in those crowds anymore.  Fortunately, as Vice President of our ISACA Chapter here in Chicago, I can get an article in our newsletter once a year if I twist a few arms.  

Tracy’s article is still pending, but I thought you might like my answers to her questions.  
What are some of the key strengths very large firms (with large forensic accounting practices) have when it comes to competing with small firms? What are some of the weaknesses of the large firms?

Large firms have all of the infrastructure in place and already paid for to support a large proposal effort and a large, long engagement. Forensic engagements tend to be intense and may involve extensive travel, sometimes international. That means professionals are not in the office to develop proposals for the next engagement. It helps to have a team back home that can tie all the information together in a professional way, with prior project qualifications, team bios, latest though leadership, etc, while the professional are on site with other clients. 

The disadvantage of that approach is that partners and specialists often follow the business development formula and do not spend as much time on business development and client development after the engagement starts as they should. It’s the old “smaller firm, more hands-on, personal involvement” advantage for smaller firms. During an engagement, the administrative effort of managing a far flung team, one that’s traveling a lot and spending a lot of money up front,  is easier for a large firm than a smaller one.

What can small firms/practices do to differentiate themselves from the large firms?

Highlight your expertise, industry or technical. Don’t try to be everything to everyone. Exploit that focus into a competitive advantage. Make yourself the “go-to” firm, first-choice, for specific types of engagements. Have senior members of the firms spend more hands-on time with clients. This is going by the wayside fast in large firms. Make quality #1. The large firms take it for granted, since they hire “best and brightest” and spend a lot of time and money on training. But do they know for sure this mantra sticks in the hearts and minds of their professionals when they’re out alone at a client with no one checking in on them often enough?

Do smaller practices have any opportunities to partner with larger firms or make strategic alliances that could be mutually beneficial?

I think this is always possible but should be considered with care. If a firm is starting out and wants to gain credentials, experience, connections, then partnering with a Big 4 or next tier firm is fine. But you run the risk of not establishing your own identity, brand and always being considered only a supplement, sub firm, and not a prime. Strategic alliances with the law firms or perhaps the independent firms like Huron or FTI are are the most promising. Stake out your firms and your target client type and stick to the opportunities you’re going to be very good at delivering. 

Where is the future of the huge accounting firm going? And how can a small forensic accounting practice best develop its business and customer base in light of this?
The best way to exploit the challenges the Big 4 firms are having is to be aware of the independence conflicts and to highlight your firm’s lack of conflicts. For all firms, hands-on, specialized expertise of senior staff will be hard for the large firms to beat. Although they have prominent, heavy experience partners, that is not who is on the ground doing the work. Too much is left to much younger, much less experienced staff and this is the trend as the firms continue to focus on profitability in these more difficult times. Layoffs and higher attrition mean even they have less staff for all the work that is available to them.

Can you speak to the true depth and breadth of experience in the large firms? Smaller practices sometimes get eliminated from consideration for a project because it is assumed that the larger firm brings more experience, expertise, and resources to the table. Is this really true? If so, how can small practices deal with this from a competitive viewpoint? If it’s not true, how can small practices make this more well-known without looking like they’re bashing the big firms

The firms do have, in many cases, hundreds if not thousands of staff to bring to the table in a particular engagement. The fact is they are unlikely to do so, except in the most unusual circumstances. Practices are run locally and partners who win work tend to use their own local team, regardless of fit. Pulling folks in from other cities and even using local office staff in international locations takes away from the lead partners profitability and threatens his control of the client and engagement, since these are more like consulting engagements than annuity audit engagements. The relationship is sometimes second degree via the law firm, and the partner is new to the client. 
Smaller firms can exploit the illusion of the thousands behind the Big 4 name by committing that the people in the proposal and at the presentation are the ones who will work with the client. They can make this happen by not spreading themselves too thin and focusing on their strongest areas of experience and expertise rather than any thing that moves. (Notice I didn’t say compete on cost? Forensic engagements are mission critical, usually. Not the time to bargain shop. A client who does is to be suspected.)

Where do you see the future of forensic accounting going, especially in light of increased scrutiny on corporate governance?
More investigations, more investigations, more investigations. It was backdating last year, it will continue to be FCPA and now it’s subprime and insider trading related to these big earnings/loss announcements and the acquisitions like the JPM/Bear bailout. It’s going to be something every year for a while…

If you had to be part of a very large firm or a much smaller practice, which would you choose, and why? (smirk) Oh, I’m a small firms girl now, very small, me and only who I choose to work with. What did Groucho Marx say, “I wouldn’t want to be a part of any [firm] that would have me?”

2 replies
  1. Oversight for the Better
    Oversight for the Better says:

    I look forward to reading your interview in the JOA. I still read it – cover to cover. That’s one way you can tell if you’re an accountant in spirit, not just fact. Another sign is when you won’t leave a movie until the credits have scrolled to production accountants. Speaking of which, how do you get to be an accountant for a movie?

  2. Krupo
    Krupo says:

    Great interview, worth sharing.

    LOL, funny thing is I always notice the “Production Accountants” credits in movies too. 🙂

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