Accounting Office Management & Administration Report

What specialties are hot and which are not? Despite the ongoing popularity of particular specialties and niches, and the difficulty of making others succeed, a CPA firm that is worrying too much about what’s "hot" can downplay the very criteria needed for successful specialization today. This was the consensus of a panel of three leading consultants to the CPA profession at the AICPA Practitioners Symposium in Las Vegas.

In a session entitled "Building a Specialty Practice," panel members shared suggestions and insights on how specialization is evolving at CPA firms. With the shift back to audit, accounting, and tax work, firms are finding that a niche that works for the firm down the street may not be right for them—and that there’s more work in making a specialty succeed than they may have anticipated.

How today’s niches are different. Specialties have been around forever, but began to draw tremendous interest about a decade ago. "The dynamic has changed in 10 years," noted Jeffrey Pawlow of The Growth Partnership (TGP; St. Louis). Where there once was a higher concentration of people focusing in the same area, such as manufacturing, "firms are now trying to carve out opportunities with less competition, and they are getting smarter," he observed.

However, one thing about successful niches hasn’t changed since the 1990s, said Pawlow. "The niches that succeed all have a passionate leader devoted to growing the area. Without core passion, the commitment won’t be what’s needed to move forward."

This dedication is being applied in specializations made for today’s marketplace. Pawlow explained, "For firms serving privately held organizations, the clients look for you to cover their backs financially. They’re good at their kind of business, but not necessarily at financial things." The emphasis then is on what Pawlow referred to as "applied accounting," which is the advice the CPA gives the client about buying or selling its company, its strategy, and its finances.

Another way that CPA firms are building specializations today is though partnering in strategic alliances. These allow firms to capitalize on broader opportunities with clients, Pawlow said, essentially building expertise by "renting" it.

Passion is great, but it has to go beyond a single partner’s devotion, commented Jennifer Wilson of ConvergenceCoaching (Bellevue, NE). "Partnerships must be unified and you need top support of the niche as a core service."

Choosing your niche. Avoiding the "popular" niches and going with a specialty that is right for the firm is critical now, the panelists agreed.

Knowing your market is a good place to begin. Wilson advised firms to "get educated about what your competitors are doing. Make a competitive analysis. Use a grid [like the one offered on the ConvergenceCoaching Web site at www.convergencecoaching.com] of competitors and attributes; include your mission, vision, value statement, number of available staff, and any other key factors." Once you know what’s out there and are satisfied that the proposed niche will meet your firm’s goals, you need to find a way to differentiate your firm.

At the same time, don’t try to reinvent the wheel yourself in taking on a new specialty, Wilson cautioned. "Take advantage of specialty groups in your niche—learn from those who have gone before."

Make sure that the new niche will be desirable to your client base, Wilson urged, adding that the best way to find out is to ask your clients. Wilson suggests asking clients annually what they need and want for their businesses.

Carving out too many niches is also a bad idea, as many firms learned in the late 1990s. You need to "beware of ‘being a mile wide and an inch deep,’" Wilson warned. It can result in insufficient expertise, especially with staff resources at a premium. "You can’t do it all and do it well," she stressed. "Don’t just think about how cool the bullet will be on the Web site, or that it would be fun to start," she said. "Commit to strategic plans: Marketing and sales; an HR plan; a staff plan; service delivery; risk management methodology; and identify the ideal client. In 12 months, you can do some of this. In two years: Profit. In three years: Momentum and critical mass."

Pawlow expressed agreement with the need for a strategic plan and, in general, with Wilson’s timetable for success. "In a year, you’ll understand if the niche will work. In two years, it should be profitable. Figure out what your value proposition is and if there is enough market, and then exploit it to the hilt."

Success factors. How do you know when a niche is succeeding? While making money at it seems to be the obvious answer, there’s more to it than that, the panelists noted.

"Market share is what indicates success to me," Pawlow affirmed.

According to Wilson, "Very successful niches build critical mass in knowledge and subject-matter expertise, the number of clients serviced, and prospective clients, a leading indicator of market share."

Owners at firms who are looking toward a future merger are concerned to know whether a particular niche will add value to the business. Joel Sinkin of Accounting Transition Advisors (New York City) advises CPA firms on mergers and acquisitions, and he urges firms to focus on what is best for the firm, rather than worrying about what will sell in the marketplace.

"Start with what your audience wants to buy," said Sinkin, who agreed with Pawlow and Wilson that starting with a plan and identifying what clients will find interesting is essential. He also concurs with Wilson’s view that what will bring success in the niche is commitment on the part of the entire firm, not the fact that many other firms are choosing that arena.

When it comes to considering the acquisition of a niche, or expanding one by an acquisition, Sinkin said that a compensation arrangement must be reached to make everyone happy. A sign of a valuable niche leader whom you may want to acquire is someone who says, "All I need is access to your clients to sell."

If you’re looking for a set multiple of fees to guide your niche development, forget it, Sinkin recommended. "I can’t give a cookie cutter multiple. Supply, demand, market value—all will have an effect," he stated. "In general, if there’s enough competition in your area of the country, a niche will add value to the firm."

What’s hot; what’s not. Those who would like to know which niches are popular at the moment—despite the panel’s warning not to choose those to jump into without good cause—may want to consider these observations by the panelists.

What’s hot will vary by your clients, regulators, the economy, competitors, and client demands, said Wilson, adding, "What your core services are will probably affect what your clients need." Tax-heavy practices, for instance, are seeing more work in specialties such as business processes, performance measures, outsourced CFO services, and write-up/small business services. On the audit side, regulation is driving services. An increased focus on CPE and quality standards "can drive firms out of an area in which they may have been dabbling," she pointed out.

Wilson’s picks for least successful niches now are personal financial planning and information technology. "IT as a niche frequently dies off because the top-down commitment lags," she commented.

Pawlow noted that hot areas include manufacturing tax, cost segregation, outsourced CFO services, and nonattest services for small public companies related to Sarbanes-Oxley. The least hot niches now, in his view, are financial services and technology.

Both Wilson and Pawlow observed a rise in alliances for niche services, either firm-to-firm or with other professional providers such as insurers. Staff shortages, expensive CPE, and the growth in firm associations are some key reasons for joint alliances, which often lead to referrals.

If you are forming an alliance, it is important to have a contract just as you would in any other business transaction, whether you choose to make it a written one or an informal one. If you are afraid that an alliance partner-firm might steal your clients or staff, or have access to too much sensitive information, you can use a contract and noncompete agreements to address those issues, Sinkin said.

Cross-selling your specialties. Successful cross-selling has been a challenge for CPA firms ever since niches became a powerful market force a decade ago. The panel participants concluded that you can make it work, but it requires planning, just like any marketing initiative.

Setting up an analysis of the current marketplace can help to zero in on the best cross-selling possibilities. Pawlow recommended Zapdata.com as a useful tool to create such an analysis and help you identify competitors as well as prospects.

He adheres to the old saying that 20% of your clients are 80% of your revenues—and that cross- selling should be focused on that important 20%.

"Firms are growing partner income, but the top line is flat or dropping," Pawlow said, suggesting that what is needed is "more focus on key client relationships—they are not too fee sensitive as a result."

Wilson argued that "lack of understanding or education is why many are reluctant to cross sell." She said the starting place for cross-selling is the same top-down commitment required for the success of the niche itself; moreover, she emphasized, you need to be clear about what is special about your firm and what difference you are bringing to niche clients. "You must answer this to succeed—and you have to document it," she remarked.

Next, Wilson continued, identify the "ideal target client." Then develop documentation so partners and staff are educated. She likes firms to employ qualification sheets on which referrals are asked to provide basic information. Tracking referrals is crucial to making sure you understand how cross-selling is working (or not).

A cross-selling matrix for clients in Excel can help you to cross-reference clients with service lines, Wilson suggested. "Every client is a row; every service line is a column. Put partners into it and figure out who is a prospect for other services."

None of this will really work unless the firm’s strategy is focused upon either an entrepreneurial approach or a firm approach, advised Pawlow, summing up. "You need to consider if partners are really solos sharing overhead, or really a firm," he said. "You must see clients as the firm’s clients, not ‘mine.’ This is where the value to the firm comes in. Decide what you want to be."