Much of professional services firms’ attention in the current crisis has been focused on what will happen to discretionary services—those that clients choose to buy. But what about the services they have no choice about?
Let’s take the financial audit as an example. This isn’t something most businesses have any choice about. While they may grumble about the work and cost involved, they recognise the importance of having reliable and consistent data available about their and others’ performance. Indeed, previous crises, because of the amount of restructuring work they drag along in their wake, have demonstrated the important role this sort of information plays in keeping the economic wheels turning.
But that doesn’t mean that audit firms can rely on this regular and predictable stream of income continuing as it has done in the past.
There are two distinct but intertwined reasons for this. First is the change that was already under way before the coronavirus hit, which was the increasing automation of the audit process.
Research we’ve carried out over the last couple of years has highlighted the extent to which clients expect automation to increase dramatically over the next 5-10 years, more the result of technology change than pressure from regulators. That will, we found, change buying behaviour: Clients will increasingly break the external audit process down into two phases—data gathering; and insights and the audit opinion. For a tiny minority of clients (we estimated 2%), this will have no impact.
But 53% will buy more services from their existing auditor (around automated data gathering and analytics), and 45% will use different (often technology) firms to gather the data before handing it off to the audit firm to analyse. While the overall audit market might grow as a result of this (more work for the current auditor or the inevitable inefficiencies of using two suppliers where clients chose to do so), some of that growth is likely to be offset by clients expecting savings where automation is involved. What’s more, the number of firms trying to claim a slice of the audit pie is likely to increase, perhaps substantially.
The second reason is about the extent to which the Covid-19 crisis is different from economic crises, and technology is a big factor here too. The collapse of Enron in 2001 may have brought down one audit firm (Arthur Andersen) but it reminded businesses of the value of an audit when done properly: audit fees rose as a result. But the issue today is how to carry out an audit when you can’t visit a client’s offices.
For all the automation that has happened to parts of the audit, much still depends on physical checks and face-to-face interaction over several weeks—which has obviously become very difficult to do in the current environment. So, a client that still needs to be audited is going to want to know where a firm’s audit process sits on a spectrum from still significantly reliant on physical interaction to being almost entirely delivered via technology. In the early days of this crisis, there were examples of consulting clients who, at the very late stage in the buying process, asked the shortlisted firms to explain how they planned to deliver the entire project remotely and factored the response into their decision.
The same seems likely to become common where the financial audit is concerned. Clients who might otherwise not want to switch auditor at the moment may find they have to if the latter can’t explain their new delivery model.
How audit firms’ share of the market changes during this crisis will therefore depend on how they reconfigure and position their audit process. Where consulting services are concerned, we’re currently predicting (see here for our latest update and an explanation of our methodology) a 29 percentage point difference between the type of work likely to perform best this year (we’re predicting an expansion of 8% in technology consulting) and the type that’s likely to perform the worst (HR & change, demand for which could drop by as much as 37%).
If your audit is closer to the HR & change end of the spectrum i.e. relies on a high level of physical interaction, then you’re going to lose market share to firms whose process sits far closer to the technology end of the market.