‘Big Eight’ Accounting Firms Do Battle for Suburban Market
When Nancy Ackley talks about the huge accounting firm of Arthur Young & Co. a note of sympathy creeps into her voice.
“I think they really lost money on us,” said Ackley, the comptroller for a Canoga Park software company called FutureNet Corp.
Arthur Young cut its fees the first year with FutureNet to get the accounting business of what it considered a promising company. In November FutureNet was sold, and the new owners replaced Arthur Young with another firm.
The people at Arthur Young say they broke even on the FutureNet account. They accept the episode as another illustration of how the San Fernando Valley is becoming one of the most competitive new markets for the “Big Eight.”
Increasingly interested in small- to medium-sized companies and lured by the many high-tech entrepreneurs, all of the national Big Eight accounting firms either have, are considering or are planning offices in the Valley within 12 months. The five that already have local offices are finding that their business is growing quickly.
Executives with those five say that their Valley offices are among the largest the Big Eight have opened recently in suburban areas coast to coast.
Arthur Anderson & Co., for example, has opened 10 suburban offices in the past three years. A year from now only the office in a western suburb of Chicago will have a staff larger than the 2-year-old branch in Woodland Hills, partner Tony Radaich said.
The Woodland Hills office has 34 accountants now, and a planned addition of about 60 more will give it the largest staff of any of the Big Eight firms in the Valley, Radaich said.
Missing Some Business
“Our sense is that there is a fair amount of business that we’re not getting a shot at because we’re not out there,” said Robert Dodson, the partner in charge of the Southern California offices of Touche Ross & Co. He said Touche Ross is taking “a pretty close look” at opening a branch in the Valley soon. Touche Ross ended up in charge of FutureNet’s books.
Ernst & Whinney is about to lease space in Warner Center. And the only question left for Coopers & Lybrand is whether to follow its competitors to Warner Center or go to Ventura County in anticipation of growth there.
The five Big Eight firms now operating in the Valley, all at the Warner Center office park in Woodland Hills, say they are planning expansions within the next 12 months. Besides Arthur Anderson, they are:
Peat, Marwick, Mitchell & Co., which opened a Valley office in 1980. It has a staff of 30 accountants and plans for 20 more.
Price Waterhouse & Co., which opened its office in January, 1983, and has 45 accountants. The firm has plans to add five to 10 more in the next year and eventually will have at least 100, its officials say.
Deloitte, Haskins & Sells, which came to the Valley in July, 1983. The branch has 10 accountants and is expected to have 35.
Arthur Young & Co., which opened its local office in February, 1984, and has 80 people. About 16 will be added.
The Big Eight accountants describe various strategies for the Valley, but one theme dominates. “We’re all like prospectors looking for diamonds in the rough,” said Larry Scherzer, managing partner of Arthur Young’s branch office.
Prospecting for Diamonds
The diamonds are companies like FutureNet. The company, which makes software that helps engineers plot graphic designs, was begun in 1979. It devoted three years to research and development. In 1983 it had $1.7 million in sales, Ackley said, and in 1984 sales stood at $10 million, with a pretax income of $3 million.
Then the company was bought by Data I/O Corp., a computer hardware and repair business based in Redmond, Wash., with annual sales of $36.26 million.
The Big Eight here are aggressive self-promoters. Most of them spread their names through newspaper and magazine ads, by sponsoring seminars for local businessmen and by mingling at gatherings of community groups, to which they often contribute.
But it’s pricing that shows the firms at their most competitive.
“They actually give away billing time to go after accounts,” said Ackley, who interviewed four of the Big Eight before choosing Arthur Young.
Big Eight executives say they will discount rates by as much as 30% in some cases to go after attractive accounts, ones where a merger or public offering might be down the road. Usually, the firms start a relationship by making package deals covering a year.
The deals are based on hourly fees ranging from $30 to $175, depending on the services included. Ackley said Arthur Young charged FutureNet $12,000 for doing the company’s quarterly reports, annual report, income taxes and various other work. She said Arthur Young also got a $40,000 fee for work related to FutureNet’s purchase, but she thought she got a good deal overall.
Some accountants for other firms are inclined to agree. “I can’t believe Arthur Young didn’t lose money,” said an executive with another Big Eight firm, who added that the account probably involved at least 300 hours of work. He speculated the work would probably have cost another $10,000 undiscounted.
Ackley says the other Big Eight firms she interviewed offered similar rate cuts. She said the main reason she went with Arthur Young was “personal chemistry.”
Discounting is not unique to the Valley, but several Big Eight executives said it is being done with an aggressiveness found only in the nation’s other leading suburban hubs for high technology, such as the Silicon Valley and the area around Massachusetts 128 outside of Boston.
Managers of Big Eight offices in the Valley do not seem concerned about the recent shakeout in the software industry, a market weakened largely due to crowding. They also do not seem troubled by a recent drying up of venture capital for high-tech companies. The Valley, they say, has a diversified economic base and will support them through slumps.
The Big Eight’s arrival in the Valley is not good news for local, medium-sized accounting firms whose bread and butter has been the small company with annual sales under $20 million. These firms, of which there are roughly a dozen in the Valley, can’t afford to discount work for a year or two, officers of several of them say.
“I know I lost a couple of important clients to the Big Eight,” said Michael Beck, a woman who is managing partner of Cleaver Beck & Co. The Cleaver Beck office in Warner Center is the company’s only one. It has 12 accountants and has been doing business for 12 years.
Beck believes the Big Eight firms sometimes discount by as much as 50%. She recalled three cases in which she bid on accounts, lost them to Big Eight firms, then called back to ask what kind of fee the winner was charging. She said the figure was always lower than what she could afford to charge.
Cleaver Beck, she said, is changing its strategy to deal with the Big Eight’s presence by emphasizing tax consulting for wealthy individuals and entertainment clients. She said that, 18 months ago, half the firm’s work involved corporate audits. Now it’s 20%.
“People think you need a Big Eight firm to go public, but that’s a myth,” said Jerry Cornwell, senior auditing partner with Singer Lewak Greenbaum & Goldstein, whose three offices include one at Warner Center and others in Westwood and Santa Ana. Cornwell said he could think of three clients that jumped to Big Eight firms in the past two years.
Cornwell said he also recalled three other recent occasions on which he was drastically undercut by a bid from a Big Eight firm.
Cornwell said about seven of his firm’s 60 accountants are in the Valley, doing about 25% of the firm’s business. He said about 80% of the firm’s 1,500 clients are companies, the rest individuals.
The Big Eight offices in the Valley all have 100 to 130 clients, according to executives with the firms. Reflecting the Valley’s commercial composition, the great majority of those clients are private companies with annual sales of $20 million and less.
The major urban offices of the Big Eight firms, by contrast, usually have hundreds of accountants and concentrate on large, public companies.
Although the Big Eight also go after the publicly held companies in the Valley, there are far fewer of those than private companies. Of the 85 largest companies based in the Valley, 65 are privately held and 20 are public, according to research by Peat, Marwick.
Of the 85 largest companies in the Valley, 45 are served by Big Eight firms. The largest of the businesses, according to sales figures obtained a year ago, is Tandon Corp. the Chatsworth-based, microcomputer disk-drive maker. The Peat Marwick research put Tandon’s annual sales at $303 million, but that was before IBM canceled a $14 million-a-month order.
The smallest of the 85 companies on Peat Marwick’s list was the Oh Boy! Corp., a frozen-food maker in San Fernando with about $23 million in annual sales.
Referring to the companies on the list whose accounting is not done by Big Eight firms, Kennan said, “I’d say those 40 firms are on the top of everybody’s watch list. But those firms switch auditors infrequently. You have a better hit ratio if you go after younger companies.”
Kennan said there are at least 1,000 such new targets in the Valley.
And the competition for FutureNet’s business isn’t over.
“Even though the company that bought us is with Touche Ross, I think we might consider going back to Arthur Young for just us,” said Ackley, the comptroller. “I’m not sure, but it’s something I’m definitely interested in exploring.”
