Rick Telberg's Insider: CPA Firms as Business Incubators

July 12, 2000 (SmartPros) — Business incubators, those hothouses of entrepreneurial fervor and investment, have been springing up across the nation. But they're nothing new to many accountants.

In fact, accountants have long been pioneers in making their own firms into test labs for ingenuity.

In Nashville, Tenn., for example, Kraft CPAs says only half of the firm's clients are actually clients of the core CPA firm. The rest buy from the Kraft Technology Group (a computer consultancy), or Second Generation Capital (merchant bankers), or Centennial Valuation Group (for asset and business appraisals), or the Kraft CPAs Employee Benefits Team (for qualified benefit plans). When the units get healthy enough, they get spun off, like the HR Group did last year.

You'd hardly think that the firm is 42 years old. "Everything we do within the firm is to meet the needs of our clients," Kraft chief Vic Alexander says. "If our clients have these needs and we don't meet them, the competition will."

What's next? Maybe a division to handle eldercare services.

Here's another example: BDO Seidman is spinning-off its e-business consulting practice as WaveBend Solutions LLC. The unit, which was launched in 1995, saw its revenues grow 51 percent last year. WaveBend's clients include Barnes & Noble, DaimlerChrysler, and Northrup Grumman. Although a separate entity, WaveBend will continue to deliver e-business services to BDO Seidman clients and will continue to have access to the BDO International consulting practices.

"We believe that by spinning-off the Business and Technology Solutions consulting practice into a separate entity, we can unleash this practice from the constraints that are often associated with traditional accounting firm partnerships,'' said Denis Field, chairman and chief executive officer of BDO Seidman.

The entrepreneurial bent at BDO must be working. Field yesterday announced revenue for the fiscal year ended June 30, 2000, of $408 million, a 37 percent increase over last year’s level. The revenue jump was led by growth in the firm’s taxation, technology and specialized services business lines.

Or take Deloitte & Touche: The London branch of the firm has confirmed that it would float its CSL outsourcing subsidiary early next year in an initial public offering worth up to $500 million. A wholly owned subsidiary of Deloitte's British partnership, CSL had profits last year of about $15 million on revenues of about $250 million, mostly from streamlining government agencies. But it has work in the pipeline of over $1 billion and must go public to make the acquisitions it needs to scale up. Deloitte acquired the unit in 1993 when it was spun off by the government.

Big Five firms are complaining that independence-minded regulators are forcing them to break up their practices. And maybe that's part of the story. But CPA firms seem today to be merging and de-merging, acquiring and divesting, dissolving and re-forming at a pace unheard-of in the past.