In this episode of William Blair Thinking Presents, global services analyst Andrew Nicholas, CPA, discusses findings from his team’s extensive inaugural survey of accounting services executives, covering industry dynamics such as organic revenue growth, technology use, and M&A trends.
Podcast Transcript
00:20
Chris T
Hey everybody. Today is February 12th, 2025. And this is William Blair Thinking Presents.
We are welcoming back Andrew Nicholas. He's a global services analysts covering consulting, HR, technology and information services companies. Andrew and his team, in partnership with Winding River Consulting, just published results from extensive inaugural survey of accounting services executives on a variety of industry dynamics that include everything from organic revenue growth, parts of the town, environment, technology, the use of non U.S. labor, M&A with insights on both backward and forward looking basis where appropriate.
So Andrew welcome. Let's kick things off. Can you provide a little more context around the survey. Maybe like what inspired you to conduct in the first place was the methodology behind it and what faction of accounting service executives up went after, all that, you know, all that good stuff?
01:12
Andrew N
Yeah absolutely, and thanks, Chris, for having me on. I would say that what inspired me to conduct this survey and just to take a step back, this kind of services survey, really covers firms that are doing tax, audit, consulting and advisory work for companies across the United States of varying sizes. But what really led me to conduct this survey is the fact that with the exception of maybe a couple companies, the vast majority of the accounting services industry is privately held.
And so there aren't a whole lot of industry wide data points on growth, on pricing, technology use that investors and us as outside analysts can look at to help understand the leading and most important dynamics within this industry. And so that's what we really set out to do and what we're kind of most excited about in terms of the survey that we publish, is just how many executives across the entire industry that we got to fill it out, and the level and sophistication of those survey respondents.
So, to put some numbers around it, 77% of the respondents to this survey are either president, CEO or managing partner at their firm. All but 6% are on the executive team of these firms. So, these respondents are in a really good position to speak to what's going on within the profession, what's going on, with respect to their individual firms.
And then also, once you kind of acknowledge that there is, you know, high level sophisticated respondents, we also got a very good mix of respondents by firm type, by firm size, and in terms of the different services they offered. So, we're really excited about what this represents for the industry. We think it could be a benchmark industry report that will continue to get more and more interesting as we do it annually going forward.
03:18
Chris T
Yeah, absolutely. It sounds like it. And one of the first takeaways from the survey in the report is that respondents experienced strong organic growth in 2024, with over 73% seeing at least 6% organic growth at their firm and another 23% experiencing low to mid-single digit growth. And then the outlook for 2025 seem to be even higher.
Can you unpack those a bit? What's the core takeaway in that regard?
03:43
Andrew N
Yeah, I think organic revenue growth, which is, you know, essentially revenue growth excluding acquisitions. And that's an important distinction in an industry with a ton of M&A and consolidation going on right now. I think the organic revenue growth component of the survey is maybe the most important and most instructive for the health of the industry as a whole.
And I would break it down into two pieces. We asked people what organic revenue growth looked like in 2024, and what organic revenue growth is expected to look like in 2025. So maybe that's how I'll, I'll split up my answer.
04:19
Chris T
Yeah, that sounds good.
04:20
Andrew N
If I look back to 2024, in total organic revenue growth was pretty good. Across the industry. We estimate close to 9% organic growth, 8.8% in 2024 to be more specific. If we adjust for firm size, which is essentially to give more weight to larger firms, that estimate goes down a bit to 6.7%, but still a healthy mid-single digit plus type growth rate for the industry.
That was driven by really strong growth across a bunch of different practices. So, client accounting services grew 9% based on our survey. Tax, audit, consulting and advisory, all in the six seven 8% range. So widespread and broad-based growth. The only other thing that I'd say before moving on to 2025 is on 2024 we were impressed by the growth rates at every firm size.
The largest firms, think about firms that have $500 million in revenue or more, grew 5.5% in 2024. So not as strong as maybe the smaller firms, which maybe is, is somewhat predictable, but still a very healthy growth rate. I think the punch line, though, and yes, for the core takeaway, is that 2025 is expected to be even better.
So, respondents, in general, we estimate the weighted average growth for 2025 is 9.2%. And if you adjust again for firm size, that estimated organic revenue growth rate is 8.4%. What's driving that? Well, it's consulting, advisory and client accounting services, which are expected to accelerate versus the growth that they experienced last year. But overall, I think there's a lot of optimism across all the different service lines within this industry.
That growth will be quite, quite good in 2025.
06:16
Chris T
Pricing made a strong contribution to organic growth in 2024, which you say, based on industry conversations, continues a strong pricing trend from the preceding 2 to 3 year period, which is aided by inflationary pressures. What were some of the key findings in that regard?
06:32
Andrew N
Yeah, happy to answer that. And you made part of the point which is this has been an ongoing trend within the industry. Wage inflation has been elevated across the professional services space ever since Covid. That is exacerbated in the accounting services market by the fact that there is a shortage of CPA talent in the industry.
And so it was not surprising to us that our survey showed weighted average price increases of 5.4% in 2024, and 80% of all the respondents to our survey indicated price increases of 4% or higher. So that's a continuation of a trend. Although likely a bit lighter than 2022 and 2023. Still very strong price realization across the industry that is concentrated in smaller firms.
Larger firms had a little bit lower price realization in 2024 than their smaller peers, but in the aggregate, very strong price realization. If we look to next year, that's largely expected to continue. I said 5.4% in 2024. The expectation for 2025 is that that is closer to 4%. And over the next 3 to 5 years, 4.4% price realization is expected across the industry.
07:55
Chris T
Got it. In another key takeaway, talent attraction and retention pressures for the accounting industry ease in 2024 compared to the past 2 or 3 years. And not only that, but executives also expect compensation increases to remain at a pretty strong levels over the next few years. Can you dig into that one for us?
08:14
Andrew N
Yeah, it's an interesting one because we have the price realization dynamic that I just described, wage inflation, CPA shortage, all driving a really tight labor market in many respects. And that was something that that we've seen over the past several years. I think the survey results did indicate, though, that it's become a little bit easier to attract talent, a little bit easier to retain employees in 2024 versus what the case was in 2023.
65% of the respondents in our survey indicated it was easier to attract talent versus last year, and nearly every one of them indicated it was easier to retain talent versus 12 months ago. So, the talent environment is certainly a little bit looser, today than it was, 12, 24 months ago.
On the compensation front, that is something that I think was maybe most surprising to us in the survey results. We understand that price realization is strong. But the survey respondents, executives that responded to our survey, I should say, expect compensation growth to remain really strong as well. It was 5.3% on average in our in our survey for 2025, and in that mid 5 to 6% range over the next 3 to 5 years. I think the majority of respondents expect compensation to grow in the mid-single digit range.
And that's something that that will keep an eye on going forward.
09:53
Chris T
Got it. So as far as, anticipated technology investment, the survey found that 65% of respondents indicated that there will be a significant increase in investment within, that area, that area being technology. Over the next 3 to 5 years. So what's driving that one? Exactly? And what was the most cited use of technology by respondents?
10:13
Andrew N
Yeah. So, technology is a huge driver within every industry. And professional services and accounting services is no different. I think a lot of the respondents or I should say, responses to our survey, were predictable on this front and that people expect to increase their investment in technology, artificial intelligence, automation, things of that sort. In the next 3 to 5 years. We had 25% of respondents that cited plans to increase technology investments modestly over the next 3 to 5 years, 65% of respondents described their technology investment plans as being significant increases.
So this is an opportunity for firms and the accounting services market to improve margins, to add to the amount of time that professionals have for higher value projects. Those were the two main reasons, or two main benefits that respondents cited in our survey. And so we expect that to be a huge theme over the next 3 to 5 years.
Taking it back to the question and the compensation comment that I made earlier, I think technology is a is a huge opportunity and also a way for firms to potentially offset those compensation pressures and still protect their profitability in an environment where CPAs, accountants, people in this industry are demanding more, in terms of compensation from their employers.
The only other thing that I'd say here, and I haven't really mentioned to this point, but we did in our survey, separate or ask respondents to flag when they were leading firms with private equity investments or external capital. And so there's some interesting takeaways on the technology front, specific to firms that are private equity. Back, for example, 82% of firms that have external capital have cited a significant increase in tech investment over the next 3 to 5 years.
If you look at, non-sponsored firms, that's closer to 60%. So that's certainly one way the private equity firms are looking to create value in these organizations.
12:25
Chris T
So, let's talk about reliance on non U.S. labor within the industry as well. What were some of the findings there.
12:31
Andrew N
So maybe I'll continue with the same theme. Automation and non-US labor both ways for these accounting services firms to offset compensation pressure to perhaps drive margin improvement. Perhaps add more opportunities for value-add project work in their U.S labor force. And so what we asked of our respondents is, is first, you know how much of your labor force is non US based today and what are your ambitions on that front going forward in terms of what the status quo is today?
23% of the respondents in our survey still do not use any non-US based labor. An additional 25% of respondents leverage it for less than 5% of their workforce. So what that means is there's a long runway for increased usage of non US labor going forward. In our view, roughly 80% of respondents expect to either modestly increase or significantly increase their use of non-US labor over the next 3 to 5 years.
I think it's a great way to, not only improve the cost structure, but also allow these firms to service clients on a 24/7 basis. And so those are some of the reasons why we would expect larger firms and private equity back firms in particular, to be ambitious on, on this front in the future.
13:58
Chris T
So finally, the, the last area of the industry surveyed was M&A, with results showing that it's a key growth strategy for the majority of accounting firms with multiples trending higher in the past few years. And some respondents citing evolution in deal structure over the same timeframe. Let's talk about that a little bit.
14:16
Andrew N
Yeah. Happy to and like I said earlier, this is a huge theme within the accounting services industry, private equity capital coming into the industry. And really the rationale for M&A and consolidation in the industry is very, very strong, as in a lot of cases that can improve or add to a firm's geographic footprint, their product depth, their capability breadth, all these things make it a really good area to execute M&A. So perhaps unsurprisingly, 90% of the people that we surveyed indicated that they are involved with M&A decision making, at their respective firm. It's a key part of this ecosystem at this point and the multiple front and as one might expect with private equity coming into the industry and consolidation accelerating we have seen multiples increase, 43% of respondents describe the increase as slight. Another 34% of respondents said that multiples have increased meaningfully over the last 12 months. That's consistent with the conversations we've had in the industry and I think reflective of, you know, what some might refer to as a gold rush on the accounting side. In terms of targets, the respondents chose consulting advisory as the most interesting areas for acquisitions, closely followed by tax and client accounting services.
On the deal structure front, there seems to be an evolution to have more cash upfront in these deals, or at least that's some of the anecdotal responses we got when we conducted this survey.
16:00
Chris T
Andrew, thank you. That's actually all the time we have for today. For those interested in reading the report, you can request a copy by reaching out to us at WilliamBlair.com/Contact-Us. Thank you for taking the time to be with us today.
16:14
Andrew N
My pleasure. Thanks, Chris.