54121b - payroll and bookkeeping services naics 2012 54121...

IBISWorld Executive Summary Industry Report September 04 2013

54121b - Payroll and Bookkeeping Services: NAICS 2012

54121 - Accounting, Tax Preparation, Bookkeeping, and Payroll Services: NAICS

2002

54121 - Accounting, Tax Preparation, Bookkeeping, and Payroll Services: NAICS

1997

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data or information contained herein. Copyright in this publication is owned by IBISWorld Inc. The publication is sold on the basis that the purchaser agrees not to copy the material

INDUSTRY RISK 54121 - Accounting, Tax Preparation, Bookkeeping, and Payroll Services

September 04 2013

© Copyright 2013, IBISWorld Inc. 2

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INDUSTRY RISK 54121 - Accounting, Tax Preparation, Bookkeeping, and Payroll Services

September 04 2013


Industry Risk

INDUSTRY RISK SCORE

Three types of risk are recognized in our analysis. These are: risk arising from within the industry itself (structural risk), risks arising from the expected future performance of the industry (growth risk) and risk arising from forces external to the industry (external sensitivity risk). These three types of risk are evaluated and each scored separately. These scores are then amalgamated to form a composite score which represents the overall risk affecting the industry.

Structual Risk Growth Risk Sensitivity Risk Overall Risk

Payroll & Bookkeeping Services 6.09 4.01 4.67 4.86

Professional, Scientific and Technical Services Sector 5.28 4.65 4.55 4.75

US Economy 5.21 4.59 4.35 4.62

Forecast Period: December 31, 2014

Composite scores range between 1 - 9, the higher the score the higher the risk.

Sector: Professional, Scientific and Technical Services Industry: Payroll & Bookkeeping Services

THREATS AND OPPORTUNITIES

THREATS - Potential clients sometimes opt for industries that offer a wider variety of services, such as the Human Resources and Benefits Administration industry (IBISWorld report 56111). An increase in external competition typically has an adverse effect on the industry. External competition is expected to increase during 2013, reflecting a potential threat to the industry.

tential clients sometimes opt for industries that offer a wider variety of services, such as the Human Resources and Benefits Administration industry (IBISWorld report 56111). An increase in external competition typically has an adverse effect on the industry. External competition is expected to increase during 2013, reflecting a potential threat to the industry.

OPPORTUNITIES - Operators often provide payroll services on a per-employee-processed basis; therefore, the national unemployment rate has a direct effect on the industry. Rising unemployment hurts industry demand because it reduces revenue for the number of employees that are processed. The national unemployment rate is expected to decrease during 2013, representing an opportunity for the industry.

erators often provide payroll services on a per-employee-processed basis; therefore, the national unemployment rate has a direct effect on the industry. Rising unemployment hurts industry demand because it reduces revenue for the number of employees that are processed. The national unemployment rate is expected to decrease during 2013, representing an opportunity for the industry.

Current Performance

The Payroll and Bookkeeping Services industry relies on outsourcing by time-poor managers and small operators that want to spend their time growing their businesses rather than completing administrative tasks. The trend of small businesses outsourcing noncore tasks fueled industry growth leading up to the recession. However, this growth was largely offset by revenue declines during 2009 and 2010. The recession caused unemployment to rise, reducing client payrolls and causing more businesses to go bankrupt. In turn, this trend reduced the pool of clients that ultimately needed payroll and bookkeeping services. Consequently, IBISWorld estimates that revenue increased only slightly at an annualized rate of 0.9% to $38.7 billion in the five years to 2013. Growth is expected to accelerate to 5.2% in 2013, as rising business confidence and corporate profit creates demand for more employees and, therefore, payroll and bookkeeping services.

CURRENT PERFORMANCE 54121 - Accounting, Tax Preparation, Bookkeeping, and Payroll Services

September 04 2013


Profit slumps with pricing competition The recession led to a temporary reversal of outsourcing among some businesses, causing industry profit margins to decline. As businesses downsized, some shrunk to a size that allowed them to perform payroll in-house. Furthermore, the number of clients looking for payroll and bookkeeping services declined as more businesses declared bankruptcy. Reduced business activity and delayed expansion plans gave managers more time to spend on administrative tasks that would have been outsourced to industry operators. The recent decline in demand reduced many operators' profit margins as firms struggled to retain clients. Furthermore, pricing competition caused profitability to dwindle as operators competed for fewer clients with reduced need for payroll and bookkeeping services. However, in 2012, industry profit margins began improving and are expected to rise to 8.6% of revenue in 2013. While a slow recovery in the labor market will hamper industry growth, incremental improvements in the unemployment rate will ultimately boost revenue. Furthermore, corporate profit is expected to rise by an average annual rate of 9.9% over the five years through 2013. This is expected to allow businesses to expand and outsource human resource services, such as payroll and bookkeeping. As a result, industry revenue is expected to expand 5.2% in 2013. Contraction in a fragmented industry This industry is composed primarily of small players and is highly fragmented. The predominance of small operators is mainly due to a large proportion of small business clients. Many of these small business clients prefer to deal with small, local service providers that provide personalized service and have knowledge of their business and operating environment. The majority of firms in the industry are sole proprietors or partners in a nonemployer firm. These firms, which generate about one-tenth of revenue, largely serve the small business community. This has made them particularly susceptible to the effects of the economic decline because small businesses were among the hardest hit. Larger players have a more diversified client base, which includes small and global clients. This factor has mitigated declines for some major players, including Automatic Data Processing (ADP), which has a greater capacity to serve large corporations. In the five years to 2013, IBISWorld estimates that the number of players has increased slowly at an annualized rate of 0.4% to 237,171. Many firms that have left the industry are nonemployer firms. These firms often work on a part-time basis and have far fewer costs to cut; therefore, it is easier for them to leave the industry when profit falls. The same factor is expected to contribute to growth in 2013, with small operators easily entering the industry as demand increases. Small firms were not the only ones affected by the recession. Many of the industry's large firms service small business clients and, therefore, experienced similar declines. To maintain profit margins, large players have been forced to cut costs where possible, including reducing staff numbers. In the five years to 2013, IBISWorld estimates that industry employment has increased at an annualized rate of 1.0% to 522,329. While the exodus of nonemployers is responsible for slow employment growth, many firms have been forced to reduce employee head count, given the decline in demand. Operators have also taken other cost-cutting measures like freezing salaries and closing unprofitable branch offices. Although there has been a number of new small businesses entering the industry, the largest players have continued to consolidate their position. Major players such as ADP and Ceridian have continued to acquire smaller companies in an effort to increase their market share. Over the past five years, acquisitions have focused on technologically savvy businesses, particularly those that are able to improve client platforms. For example, in 2012, Ceridian acquired cloud software and human capital management services company, Dayforce. The acquisition allowed the company to improve its InView platform, which is used to help businesses manage human resources and payroll. The case for outsourcing

CURRENT PERFORMANCE 54121 - Accounting, Tax Preparation, Bookkeeping, and Payroll Services

September 04 2013


Many industry players focus on servicing small businesses that are owner-operated or have just a few employees. Small business operators are specialists in their particular field, but they are not necessarily experts in business administrative tasks, such as bookkeeping and payroll. Many of these small business managers consider their time better spent performing core business functions and growing their businesses, rather than handling administrative tasks. This factor is the primary motivation for small businesses outsourcing payroll and bookkeeping. The outsourcing of payroll and bookkeeping also ensures businesses that they will not face action from the Internal Revenue Service or other regulatory bodies for incorrect payments and withholdings. In the past decade, medium- and large-sized businesses have trended toward streamlining to focus on core business activities and have outsourced noncore functions, including payroll and bookkeeping. This practice reduces overhead and increases flexibility. When the need for a service increases or decreases, it is relatively easy for a business to alter its use of outsourced services. By contrast, performing these tasks in-house often requires additional staff and resources.

Revenue

Revenue Growth Rate

KEY FACTORS 54121 - Accounting, Tax Preparation, Bookkeeping, and Payroll Services

September 04 2013


Gross Product

Gross Product Growth Rate

Key Factors

KEY SENSITIVITIES

The key sensitivities affecting the performance of the Payroll & Bookkeeping Services industry include: Corporate profit Description: A measure of the level and growth of corporate profits. Corporate profit refers to the level of profit received across all industries. As businesses become increasingly profitable, they are able to hire businesses to handle their payroll and bookkeeping services, which increases industry revenue. Corporate profit is expected to increase in 2013. External competition for the Payroll & Bookkeeping Services industry Potential clients sometimes opt for industries that offer a wider variety of services, such as the Human Resources and Benefits Administration industry (IBISWorld report 56111). An increase in external competition typically has an adverse effect on the industry. External competition is expected to increase during 2013, reflecting a potential threat to the industry. National unemployment rate Description: Labor market conditions such as the unemployment rate. Operators often provide payroll services on a per-employee-processed basis; therefore, the national unemployment rate has a direct effect on the industry. Rising unemployment hurts industry demand because it reduces revenue for the number of employees that are processed. The national unemployment rate is expected to decrease during 2013, representing an opportunity for the industry. Number of businesses Description: The number of businesses as measured by the number of establishments with employees and payroll - historical and forecast data and analysis.

OUTLOOK 54121 - Accounting, Tax Preparation, Bookkeeping, and Payroll Services

September 04 2013


The number of businesses operating in the United States has a direct influence on the demand for payroll and bookkeeping services. Growth in this driver will increase industry demand. The number of businesses is expected to increase during 2013. Outsourcing to the Business Services sector Industry activity is most affected by the level of outsourcing of noncore activities. Businesses are increasingly outsourcing administrative functions, resulting in strong growth in revenue and industry gross product. Outsourcing to the Business Services sector is expected to increase during 2013.

KEY SUCCESS FACTORS

The key success factors in the Payroll & Bookkeeping Services industry are:

Access to quality personnel management In order to stay competitive, service providers need to have access to high-quality personnel management.

Ability to quickly adopt new technology Service providers need to constantly find new and better ways to apply the increased functionality and flexibility of technology to improve services. Then, this technology needs to be made available to clients.

Accessibility to consumers/users Successful service providers offer products with an accessible client user interface, mostly provided through the use of web-based technology.

Economies of scale The high degree of assimilation in services implies that service providers should be able to achieve significant economies of scale. These can be transformed into improved earnings and used for competitive pricing when the industry matures.

Ability to manage external (outsourcing) contracts Third-party providers need solid contract management skills to secure professional, ongoing relationships with clients.

Outlook

Revenue

Revenue $ million Growth %

2014 40,331.4 4.2

2015 42,590.0 5.6

2016 44,208.4 3.8

2017 45,357.8 2.6

2018 46,809.2 3.2

2019 48,166.7 2.9


September 04 2013


Revenue

Revenue Growth Rate

Gross Product Growth

Gross Product $ million Growth %

2014 28,941.1 3.9

2015 30,795.8 6.4

2016 31,823.9 3.3

2017 33,070.9 3.9

2018 34,231.1 3.5

2019 34,817.7 1.7

Gross Product



September 04 2013


As the economy recovers in the five years to 2018, business activity and renewed expansion plans will take up more time from managers and small business operators, leaving less time for administrative tasks like payroll and bookkeeping. Many businesses that brought these functions in-house to cut costs during the recession, will begin to outsource once again to focus on their core competencies. Furthermore, an improving labor market will provide the Payroll and Bookkeeping Services industry with a platform for growth because of a rising number of businesses and employees. Over the five years through 2018, the number of businesses in the United States is expected to grow by an average annual rate of 1.6%, which will drive down the national unemployment rate. Consequently, in the five years to 2018, IBISWorld projects that revenue will increase at an annualized rate of 3.9% to $46.8 billion. Economic recovery and technological growth The national unemployment rate is expected to continue to fall over the next five years, which will create new demand for industry services. IBISWorld expects the national unemployment rate to fall to 5.6% in 2018, precipitating a number of new businesses that will require payroll and bookkeeping services. Furthermore, firms are expected to focus on their core most profitable operations following the recession. These firms are expected to outsource payroll and bookkeeping services to specialized firms. As a result, the industry is expected to grow by 4.2% in 2014 to $40.3 billion. In addition, firms are expected to implement greater analytics over the next five years to maintain greater profitability following the recession. This will include greater emphasis on reporting and transparency, which will create demand for bookkeeping services. Firms are also expected to increase their investment in technology to reduce cost per employee paid. The largest players in the industry have aggressively pursued new platforms and interfaces to reduce labor costs in an industry that is currently highly labor intensive. Over the next five years through 2018, industry operators are expected to leverage more technology such as employee self-service technology, which allows employees to enter their personal details without assistance. Profit to increase marginally Over the next five years, industry operators will continue to offer services at low rates. Competition is expected to rise during the period, particularly for smaller players due to enterprise growth. Over the five years through 2018, the number of firms in the industry is projected to rise by an average annual rate of 1.7% to 257,776. A number of firms that exited the industry during the recession are expected to return as demand increases and captures rising profit margins. This is expected to increase industry employment by an average annual rate of 2.7% to 597,213 over the five years through 2018. However, larger companies in the industry such as Automatic Data Processing (ADP), Paychex and Ceridian are expected to sustain higher than average profit margins as they offer integrated services such as tax preparation and human capital management. Larger firms are also expected to differentiate themselves by providing more self-service processes and new technologies to attract new business. Competition from other HR service providers Small industry operators that focus on payroll or bookkeeping will increasingly face competition from larger firms that offer a full suite of human resource and business administration outsourcing services. Large recruiting agencies, temp agencies and professional employer organizations are expanding into this industry by acquiring businesses in fields that complement their services. These businesses aim to create one-stop shops for the outsourcing of human resources and business administration tasks. Competition from firms in the Human Resources and Benefits Administration industry (IBISWorld report 56111) is expected to increase in the five years to 2018, potentially hurting the Payroll and Bookkeeping Services industry.

IBISWorld Executive Summary Industry Report July 02 2013

54121c - Accounting Services: NAICS 2012



DISCLAIMER







INDUSTRY RISK 54121c - Accounting Services

July 02 2013


Industry Risk

INDUSTRY RISK SCORE



Accounting Services 5.16 4.08 3.49 4.05


US Economy 5.21 4.59 4.35 4.62



Sector: Professional, Scientific and Technical Services Industry: Accounting Services


THREATS - An increase in the number of businesses promotes further demand for industry services. During a recession, the number of employing businesses typically decreases, causing many accounting firms to experience a decline in demand. The number of businesses is expected to increase slowly over 2013. A dip in business creation could pose a potential threat for the industry.

increase in the number of businesses promotes further demand for industry services. During a recession, the number of employing businesses typically decreases, causing many accounting firms to experience a decline in demand. The number of businesses is expected to increase slowly over 2013. A dip in business creation could pose a potential threat for the industry.

OPPORTUNITIES - Finance and insurance companies are some of this industry's largest clients. As such, increases in demand from these downstream markets will boost industry revenue. Demand from finance and insurance is expected to increase over 2013, representing a potential opportunity for the industry.

nance and insurance companies are some of this industry's largest clients. As such, increases in demand from these downstream markets will boost industry revenue. Demand from finance and insurance is expected to increase over 2013, representing a potential opportunity for the industry.

Current Performance

The Accounting Services industry weathered the early-stages of the recession by relying on the demand for its bankruptcy and restructuring services. In 2009 and 2010, when the fiscal crisis ebbed and countercyclical work related to insolvency and liquidation services slowed, industry revenue declined by 0.8% and 3.8% respectively. Starting in 2011, industry revenue rebounded. Buoyed by economic growth, rising equity markets and a growing number of new businesses, the industry experienced an increase in demand for its traditional services, which include auditing, advisory and accounting related services. In the five years to 2013, industry revenue is expected to increase at an annualized rate of 2.0% to $99.1 billion. In 2013, industry revenue is expected to increase by 5.3%. Impact of the recession

CURRENT PERFORMANCE 54121c - Accounting Services

July 02 2013


Apart from insolvency services, the accounting industry's traditional lines of business are sensitive to changes in economic growth. Growth in the number of US businesses drives industry performance, particularly for the small- and medium- sized firms, because it increases the number of companies that require accounting services. The industry also generates revenue from initial public offerings (IPO), merger and acquisition (M&A) activity, as well as business expansions. These sources of revenue for the Accounting Services industry were negatively impacted as a result of the recession. In 2009, the industry shrank as the number of businesses in the United States declined 2.2%, as a result of the worsening economy. In that same year, the S&P 500, a broad measure of equity performance, dropped by 22.0%, and, the number of IPOs declined 10.6%, after an abysmal drop of 50.0% in 2008. For the largest accounting firms, auditing revenue comprises a significant proportion of total company revenue. The severity and abruptness of the recession temporarily altered the stable relationship between accounting firms and their clients. Public companies often retain the same auditing firms for extended periods, guaranteeing a stable financial reporting structure for the publicly traded company and a dependable stream of revenue for the accounting firm. But with the onset of the recession, companies that were strapped-for-cash, chose auditors based on price as opposed to name or loyalty considerations. Accounting firms responded by engaging in competitive price-cutting practices, pressuring fees and pulling audit revenue downward. Demand for tax and other strategic advisory services, provided by accounting firms also declined as a result of the recession and the Accounting Services industry experienced two consecutive years of revenue decline. Growth after the recession Industry revenue increased from 2011 onward. The number of businesses in the United States has increased offering an expanding pool of new clientele for accounting services. M&A and IPO activity improved as the credit markets stabilized and the equity markets increased. Even revenue from the auditing and assurance lines of business improved. In the five years to 2013, the auditing segment's share of total industry revenue has been slightly decreasing, attributed not to a drop in audit revenue, but rather to strong growth from other accounting advisory services such as consulting. Audit revenue for the Big Four accounting firm has actually increased since 2011. Market saturation and competitive pricing on auditing fees may dampen growth from this key segment, but some evidence supports that auditing fees, as of late, have been rising. A survey from Financial Executives International, released in 2012, reported that public companies saw a 5.0% increase in external auditing fees in 2011. New sources of income One factor that has driven long-term revenue growth for the largest firms has been the increasing number of services they offer. Many of these services are not directly related to traditional accounting services. An increasing proportion of Accounting Service firm revenue is generated from activities like business, risk and IT consulting. Other service areas that have grown include property services, back-office business services, management consulting and legal advice. Under the Sarbanes-Oxley Act, auditing companies are not allowed to provide consulting services for the same clients that they audit. This law, however, has failed to stifle growth of the consultancy service segment of the large accounting companies. Consulting operations offer significant revenue generation potential, particularly in periods of economic growth. The management, operational and tax complications that accompany business growth often leads to increased demand for consulting services. Profit expansion and an increase in industry businesses During the recession, the number of industry firms contracted and many struggling firms reduced employees and cut salaries. Employment declined 1.0% and 2.1% in 2009 and 2010, respectively. Profit margins started increasing slightly in 2010, largely as a result of these cuts. Revenue expansion, starting in 2011, pushed industry profit even higher. In 2013, industry profit is expected to reach 13.9%. In the five years to 2013, the Accounting Services increased employment in

KEY FACTORS 54121c - Accounting Services

July 02 2013


response to increase revenue and demand for accounting services. Labor is not the only industry indicator that improved. Additionally in the five years to 2013, the total number of companies in the industry and the number of industry establishments increased at an estimated annualized rate of 1.5% and 2.1%, respectively.

Revenue

Revenue Growth Rate

Gross Product


Key Factors

KEY SENSITIVITIES

The key sensitivities affecting the performance of the Accounting Services industry include: Demand from finance and insurance Description: Downstream demand for the industry's products.

KEY FACTORS 54121c - Accounting Services

July 02 2013


Finance and insurance companies are some of this industry's largest clients. As such, increases in demand from these downstream markets will boost industry revenue. Demand from finance and insurance is expected to increase over 2013, representing a potential opportunity for the industry. Demand from professional, scientific and technical services Description: Downstream demand for the industry's products. Professional services firms of all types rely on certified public accountants. So rises in demand from these downstream industries will increase industry revenue. Demand from professional, scientific and technical services is expected to increase over 2013. Demand from retail trade Description: Downstream demand for the industry's products. Like other businesses, retail companies rely on the services of accounting firms. Therefore, an increase in demand from these downstream markets will boost revenue for industry operators. Demand from retail trade is expected to increase over 2013. Initial public offerings Description: The number of first sales of stock by companies to the public. Accounting firms are used extensively for initial public offerings (IPOs), which fell significantly as a result of the recession. Growth in the number of IPOs will cause demand for the industry's services to rise. Initial public offerings are expected to increase over 2013. Number of businesses Description: The number of businesses as measured by the number of establishments with employees and payroll - historical and forecast data and analysis. An increase in the number of businesses promotes further demand for industry services. During a recession, the number of employing businesses typically decreases, causing many accounting firms to experience a decline in demand. The number of businesses is expected to increase slowly over 2013. A dip in business creation could pose a potential threat for the industry.

KEY SUCCESS FACTORS

The key success factors in the Accounting Services industry are:

Access to highly skilled workforce An appropriately qualified and trained staff is essential to carrying out the complicated services provided by accounting firms.

Having a good reputation Developing and maintaining a good reputation is vital for attracting clients.

Effective quality control Effective quality control procedures in place are essential to meet the highest level of regulation and scrutiny.

Maintenance of excellent client relations Maintaining a loyal, satisfied client base ensures repeat business.

OUTLOOK 54121c - Accounting Services

July 02 2013


Having a clear market position Specialization or catering to a niche market focuses a firm's resources and is a successful strategy for small to mid-size operators that are unable to compete on scale with major players.

Ability to compete on tender The ability to tender competitively for contracts, and complete the job within budget, is a characteristic of successful firms.

Outlook

Revenue


2014 102,983.1 3.9

2015 102,562.2 -0.4

2016 106,209.0 3.6

2017 113,638.8 7.0

2018 117,362.4 3.3

2019 119,942.0 2.2

Revenue

Revenue Growth Rate



2014 62,555.5 3.8

2015 61,746.3 -1.3

2016 63,880.7 3.5

2017 67,147.6 5.1

2018 68,710.5 2.3


July 02 2013


2019 70,510.3 2.6

Gross Product


Revenue in the Accounting Services industry is expected to increase in 2014, driven by strong sales growth from the major industry players. In addition to their core auditing and corporate tax work, industry firms derive a significant proportion of revenue from advisory work on major corporate deals, such as M&As and capital market activities. These activities are expected to increase during the next five years, driving demand for major firms' cyclical services. Smaller firms will also experience growth as the business market improves. In 2014, IBISWorld projects that industry revenue will increase 3.9% to $103.0 billion. In the five years to 2018, revenue in the industry is expected to increase at an average annual rate of 3.4% to $117.4 billion Growth prospects The Accounting Services industry traditionally offers services such as audit, advisory, and other tax and accounting related services. During the next five years to 2018, revenue in all these business segments is expected increase. The industry's largest accounting firms will likely be the beneficiaries of an expected increase in corporate deal-making and initial public offerings. M&As are expected to increase in the five years to 2018. Additionally, IBISWorld estimates that the number of initial public offerings is expected to increase at an average annual rate of 4.8% during the same period, as a healthy stock market and increased business optimism will lead to a greater number of companies choosing to go public. The total number of US business is also expected to increase during the next five years, increasing the revenue outlook for accounting firms of all sizes, by expanding the pool of potential clientele. Both large and small accounting companies will likely pursue opportunities in new, niche fields. Future revenue growth will be dependent on firms offering add-on services to existing clients. Forensic accounting is anticipated to be an area of future growth, given the increasingly regulated nature of public accounting and the financial reforms that occurred as a result of the recession. The largest accounting companies will continue to sell themselves as experts in wide array of business consulting practices. Accounting service firms now offer services like business, risk, management, legal and IT consulting. Entering new fields of business or establishing a company as a specialist in a niche field, often increases branding or marketing costs. Any increase in marketing costs will be dwarfed by wage and employment related expenses, which will continue to comprise the industry's largest cost burden. Employment, wages and profit


July 02 2013


In the five years to 2018, employment in the Accounting Services industry is expected to increase at an average annual rate of 1.9%. Wages are the accounting industry's largest cost. Employees in the industry are highly educated, with an understanding of tax laws and accounting practices. Revenue growth is expected to outpace wage growth in the five years to 2018, but wages are also expected to rise at an average of 2.3% annually during that period. During the lean years of the recession, Accounting Service firms learned how to do more with less, adopting outsourcing and better management practices and utilizing labor-saving technologies. Whether these cost cutting policies will be remembered during the expected years of future growth remains to be seen. While profit margins are expected to rise as the economy continues to recover, industry profit growth will be limited by escalating wage costs.

IBISWorld Executive Summary Industry Report September 20 2013

54121d - Tax Preparation Services: NAICS 2012



DISCLAIMER







INDUSTRY RISK 54121d - Tax Preparation Services

September 20 2013


Industry Risk

INDUSTRY RISK SCORE



Tax Preparation Services 5.96 5.36 5.07 5.36


US Economy 5.21 4.59 4.35 4.62



Sector: Professional, Scientific and Technical Services Industry: Tax Preparation Services


THREATS - The industry faces external competition from other methods of tax preparation. In particular, an increase in competition from tax preparation software will hurt industry demand because more consumers will attempt to prepare their own taxes. External competition is expected to increase during 2013, posing a threat to the industry.

e industry faces external competition from other methods of tax preparation. In particular, an increase in competition from tax preparation software will hurt industry demand because more consumers will attempt to prepare their own taxes. External competition is expected to increase during 2013, posing a threat to the industry.

OPPORTUNITIES - Changes in per capita disposable income influence demand for tax preparation services. An increase in disposable income will cause consumers to increase their use of professional service firms, including tax preparers. Per capita disposable income is expected to increase slowly during 2013, indicating a potential opportunity for the industry.

anges in per capita disposable income influence demand for tax preparation services. An increase in disposable income will cause consumers to increase their use of professional service firms, including tax preparers. Per capita disposable income is expected to increase slowly during 2013, indicating a potential opportunity for the industry.

Current Performance

Individuals must file a tax return if their income is above a certain level; this level changes based on filing status, age and the type of income that an individual receives. Due to reduced incomes and employment caused by the economy's slowdown, demand for the Tax Preparation Services industry declined in 2009 and 2010. Low employment and income levels meant that fewer individuals reached the income threshold that requires tax filing, slowing industry growth over the five years to 2013. IBISWorld estimates revenue declined at a 0.2% average annual rate, including an estimated 1.4% increase in 2013 to bring revenue to $9.4 billion. According to H&R Block, the industry's largest firm, the number of tax returns filed with the Internal Revenue Service (IRS) declined 1.7% in 2010. As a result, revenue and profit margins have recently taken some hits due to the fall in chargeable hours and pressures on billing rates. In 2010, industry revenue declined an estimated 3.0% due to a reduction

CURRENT PERFORMANCE 54121d - Tax Preparation Services

September 20 2013


in the number of individuals filing taxes and an increase in consumers preparing their own taxes. Fortunately, industry operators are expected to get a boost in demand in 2013 as the economy returns to recovery and the unemployment rate begins to decline, driving up revenue an estimated 1.4%. Nevertheless, the industry's growth has been hampered by the inability of some operators to provide refund anticipation loans (RALs), which are short-term consumer loans secured by a taxpayer's expected tax refund. As a result, IBISWorld estimates industry revenue increased just 0.7% from 2010 to 2011. Industry player Jackson Hewitt's inability to offer RALs contributed to poor performance in 2010 and 2011. This factor caused the company, which is the second largest tax preparation firm in the United States, to file for bankruptcy and have its stock delisted in May 2011. During periods of high unemployment, more consumers forego or are not required to file tax returns. Consequently, a portion of the recent decline has likely been caused by more individuals electing not to file tax returns. However, the federal government and some states have continued to make tax preparation easier by offering electronic filing options. According to Jackson Hewitt, about 72.0% of individual tax returns were filed electronically in 2010 (latest available data). The ease of filing online has increased the number of consumers who attempt to prepare their own taxes, further hampering industry performance. Profit down, competition up Tax preparers rely on high volume and quick turnaround work to increase revenue. This factor has caused fee-based competition within the industry because firms with lower prices can increase the number of clients served. Over the past five years, tax preparers have also been forced to deal with rising competition from operators in the Software Publishing industry (IBISWorld report 51121) that provide at-home tax-filing computer programs, such as Intuit's TurboTax. This trend has increased price competition and driven down profit in an industry that already experiences high competition among players. In 2013, IBISWorld estimates that profit margins represent 17.8% of industry revenue, down from 21.0% in 2008. Tax preparation is very seasonal; though filing for an extension is possible, the deadline for most individuals to file for taxes is April 15. While some firms operate only on a seasonal basis, large players typically operate at a loss between May and December. The seasonal nature of the Tax Preparation Services industry, coupled with its low barriers to entry, makes it ideal for individual nonemployers working on a part-time basis; about 85.1% of industry firms do not have a payroll. The industry's intermittent work schedule also results in relatively low average wages for operators. Because most firms are active for only a few months each year, the average industry wage is estimated to be just about $12,660 in 2013. Since the recession, individual operators have entered the industry to supplement their income, even if only by a small amount. In the five years to 2013, IBISWorld estimates that the number of firms operating in this industry has increased an average of 1.0% annually to 109,758. However, industry employment fell at an annualized 0.5% to about 302,931 due to increasing consumer use of industry operators' online services and self-service kiosks at retail locations, both of which require less labor. This increase in the number of players has put downward pressure on profit. In September 2010, the IRS announced new regulations for the 2011 tax year that require all paid tax preparers to file for a preparer tax identification number. This new regulation is expected to discourage small firms from entering the industry in 2011 and cause a small number to leave the industry. The "freemium" effect While a decline in demand has recently caused pricing competition, tax preparers have historically increased the price of services each year. This factor, which contributed to strong revenue growth until 2008, mitigated declines following the recession. However, the industry has experienced some threats during the past decade. In response to consumers increasingly using computer software to file their own taxes, industry operators have started to provide basic electronic tax

CURRENT PERFORMANCE 54121d - Tax Preparation Services

September 20 2013


filing for free. In 2003, the IRS and 19 tax preparation providers teamed up to create the Free File Alliance. This alliance allows taxpayers with an annual income of $57,000 or less to file online for free. Despite the access to free filing, about 60.0% of US tax returns are prepared by a paid tax return preparer, according to the IRS. Consumers continue to use tax preparers because they derive comfort from hiring a professional to avoid mistakes. The provision of free tax preparation services reduces profit margins, but industry operators have been forced to offer similar services because too many other free services exist. Operators also sell additional premium services to make money. In general, only the most basic tax filing is available for free, and there is an additional charge for more complicated taxes, such as those filed by homeowners or the self-employed. Many large firms offer tax-related financial products, such as RALs, which are made by a partner lender based on an anticipated federal income tax refund. In general, revenue from these activities is generated through fees paid by the borrower, a portion of which the bank and tax preparation firm both receive. Unfortunately for some operators, a number of loan providers could not give these loans out following the recession due to lack of resources or regulatory restrictions. Many consumers opt for tax preparation firms that can provide RALs, so the availability of RALs can directly affect an operator's performance; the inability to offer RALs has hurt the performance of some industry operators. For example, Jackson Hewitt's revenue declined by 3.9% in 2010 after the lender that it uses to process RALs announced that it would be unable to do so during the year.

Revenue

Revenue Growth Rate

KEY FACTORS 54121d - Tax Preparation Services

September 20 2013


Gross Product


Key Factors

KEY SENSITIVITIES

The key sensitivities affecting the performance of the Tax Preparation Services industry include: External competition for the Tax Preparation Services industry The industry faces external competition from other methods of tax preparation. In particular, an increase in competition from tax preparation software will hurt industry demand because more consumers will attempt to prepare their own taxes. External competition is expected to increase during 2013, posing a threat to the industry. Number of employees Description: People engaged in all employment categories; thousands; historical and forecast data. Changes in the total number of employees affect demand for tax preparation services. A decline in the number of employees will reduce the number of people that are required to file for tax returns. The number of employees is expected to increase slowly during 2013. Per capita disposable income Description: The level of and/or movements in real per capita disposable income. Changes in per capita disposable income influence demand for tax preparation services. An increase in disposable income will cause consumers to increase their use of professional service firms, including tax preparers. Per capita disposable income is expected to increase slowly during 2013, indicating a potential opportunity for the industry. Regulation for the Tax Preparation Services sector Over time, the federal government has taken steps to make it easier for individuals to file their own taxes. This legislation reduces demand because it increases the likelihood of consumers preparing their own taxes. Industry regulation is expected to remain flat in 2013.

OUTLOOK 54121d - Tax Preparation Services

September 20 2013


KEY SUCCESS FACTORS

The key success factors in the Tax Preparation Services industry are:

Experienced work force Experienced tax preparers can perform a larger volume of work, generating higher revenue through speed and efficiency.

Being part of a franchising chain Operators that are part of a franchising chain can gain credibility among consumers through brand recognition.

Provision of personalized services Small players can gain a competitive advantage by developing a relationship with clients.

Must comply with government regulations Tax preparers must comply with government regulations, including those related to client confidentiality and accuracy.

Having a loyal customer base Having a loyal customer base is extremely important for operators because taxing agencies increasingly attempt to make tax preparation easier.

Level of security provided for client data Industry operators deal with a large amount of sensitive information. Operators need to ensure that the information is secure, especially when providing electronic filing services.

Outlook

Revenue


2014 9,487.2 1.1

2015 9,583.3 1.0

2016 9,698.3 1.2

2017 9,872.9 1.8

2018 9,991.4 1.2

2019 10,131.3 1.4


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Revenue

Revenue Growth Rate



2014 5,788.8 1.2

2015 5,675.9 -2.0

2016 5,730.5 1.0

2017 5,806.1 1.3

2018 5,886.7 1.4

2019 5,977.8 1.5

Gross Product



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In the five years to 2018, the Tax Preparation Services industry's revenue is projected to grow at an average annual rate of 1.3% to $10.0 billion. As the economy recovers, improvements in the labor market will increase the number of Americans who need to file taxes. Furthermore, rising disposable income will enable more consumers to hire a professional tax preparer. After growth of 1.4% in 2013, IBISWorld expects industry revenue to grow a further 1.1% in 2014. Despite this growth, industry operators will continue to face challenges associated with competition. While disposable income growth in the United States will enable many Americans to afford professional services once again, consumers will continue to seek tools to help them prepare their own taxes. Consequently, increasing competition from computer software companies will stifle demand for tax preparers earning below $50,000 in gross annual income and cause industry revenue to increase at a slower rate in the five years to 2018 than it has historically accomplished. As the Software Publishing industry (IBISWorld report 51121) increases its share of the tax preparation market, the Tax Preparation Services industry will focus on cutting costs and increasing competitive strengths, including service-orientation and tax-related financial products. Many operators will cut costs to improve profit, particularly as they provide more services for free. Despite cost-cutting efforts, profit margins are expected to decline over the next five years to 16.2% of revenue in 2018. Refund anticipation change RACs are expected to replace refund anticipation loans (RALs) over the next five years. RALs were used as a short-term loan backed by a consumer's tax return, however, they have received a large amount of criticism because of their reputation as a high-profit, low-risk loan targeted toward a poorer demographic. Many firms such as H&R Block are now offering RACs in place of RALs. RACs work by having a consumer's tax return placed in a bank account linked with a prepaid credit card minus company fees. Although RACs allow users to pay no upfront fees, the development of free online tax preparation services such as IRS Free File and other programs are expected to lower demand for financial products. New products sustain free services Industry operators will likely begin marketing their personalized services to improve perceived value, which software publishers cannot compete with. Additionally, tax preparation firms are expected to increase the number of services that they provide for free, such as electronic state income tax filing to get more clients in the door. Firms can do this because they know that many consumers who use tax preparers will upgrade to fee-based services after being lured in by free offers. Industry operators are anticipated to change their financial service products on offer, pursuing growth by expanding marketing efforts to include different demographics and offering other incentives, such as reduced service fees. The development of new products will be especially important because financial reform laws are expected to inhibit growth over the next five years. Following the credit crisis, an increasing number of limits were placed on companies offering financial products, including the RALs that some tax preparation firms offer. These products have become an increasingly important source of revenue for tax preparation companies. Consequently, further sales growth of financial products is expected over the next five years. IRS regulation and changes The industry has the potential to benefit from at least one form of government action. A new IRS regulation requiring paid tax preparers to have a preparer tax identification number (PTIN) may also contribute to revenue growth. The PTIN requirement, which went into effect during the 2011 tax season, is limiting the number of firms operating in this industry, easing pricing pressures. In the next five years, all tax preparers will likely need to pass a competency test in order to


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register for a PTIN. These factors will further limit the number of companies entering the industry, with an estimated growth of just 0.9% per year in the five years to 2018 to 114,900. However, firms are expected to continue hiring, with industry employment forecast to rise by an average annual rate of 1.5% to 326,215 workers over the same five-year period.

54121b - payroll and bookkeeping services naics 2012 54121...

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