For years, the profession has talked about the need for investments in new technologies, processes and business models to transition to a new and innovative way of doing business. The Big 4 are investing billions of dollars in this arena, but what about the other 96 firms that make up the IPA 100? What does that rate of investment look like in 2020?
Over the past five years, IPA has asked some of the brightest minds in the profession to help define what makes up “transformative investments” and to offer ideas on ways to quantify the dollars spent on those investments. After all, there is no line on the income statement or balance sheet, yet, that is coded as “transformative investments.” Research and development costs are itemized in sectors like manufacturing, technology, transportation and health care, but not nearly as often in professional services firms.
Let’s start by defining “transformative investments.” They are NOT: Replacing computers every three years; sending people to technical CPE in their given discipline; upgrading furniture and fixtures for a better office environment; or anything else that is an incremental change or the usual cost of doing business, such as maintenance.
A few examples of what transformative investments DO include are: Building prototypes using artificial intelligence; hiring new C-suite executives focused on innovation and/or transformative strategy; building out services using blockchain technology; or incorporating data analytics into regular compliance processes.
Although there is not a comprehensive list of transformative investments within the profession, to paraphrase Supreme Court Justice Potter Stewart in 1964, “We know it when we see it.”
Seventy-seven firms that collectively represent $11 billion in revenue provided an answer to “What percentage of revenues are being spent on transformative investments?” Only one-third of that group indicated a number other than 0%; as a group, those firms average 2.0% of net revenues being spent on transformative investments, or roughly $80 million.
So how much is enough? The amounts being invested by the Big 4 on these transformative activities exceeds the total combined capital accounts of all the other 96 firms that make up the IPA 100, so trying to compete at that level is a fool’s errand. But targeting a specific percentage of your firm’s revenue each year will assure a focused and dedicated effort that will inevitably pay dividends in navigating an ocean of change.
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