iShade brings this informative and insightful piece to you, authored by accounting profession thought leader Craig Baldwin.
I have the unique perspective of working and talking with owners of 1-2 person CPA shops to partners at big four firms on a daily basis. In a short amount of time I’ve met the laggards, the braggarts, and the leaders of the industry. One thing they all feel is the changing tide of the accounting industry. Yet the real question every individual asks is, “How will it affect my firm?” The question I pose is a better one, “What are you going to do about it?”
Lots of things are changing or finally taking hold in the industry. The cloud, value pricing, succession planning galore, a renewed entrepreneurial spirit in the industry. Oh and wait for it… millennials. The same song and dance you’ve heard before, but let’s try and really break it down.
As Larry Ellison, founder and CEO of Oracle has ranted in the past, the cloud is merely an evolution of the Internet packaged in a much prettier box. We’ve been experiencing “the cloud” for the last 10+ years. But somehow the tagline of cloud computing has sent people in our industry into a frenzy akin to city dwellers of a Godzilla movie.
In reality the cloud is just more present in our day-to-day lives than it ever was before. Technology spawned from the cloud gives CPAs the power do to things better and faster than they ever have. The interesting thing about the cloud is never has our industry straddled “old” and “new” technology like we do now. Technology in the SMB accounting world is hitting on all cylinders and giving us efficiency we’ve never had. It’s only a matter of time until efficiencies of the same scope hit the attest services scene. I know, because I’m currently working on one of those solutions.
Value pricing is another idea that seems new but really isn’t. Although it really can lead to more money in our pockets, yet not until recently have we seen it take hold in the industry. Why? My take is just like the Apple Newton, it was before its time.
Our day-to-day functioning wasn’t ready for a Newton in 1994, but now take away my iPhone for 45 minutes, and someone is getting it! It took us a while, but we’re okay with the idea of our lives being housed on a computer.
The day-to-day of accounting firms hasn’t changed that much in the last 15-20 years. QuickBooks is (still) king, Excel is the godfather of data, and there are always e-mails out the wazoo. We hid behind the hourly bill for 100 years, and I’d argue mainly due to insecurity about our inefficiencies.
The beautiful thing about hourly billing is it’s a constant barometer. It can be our friend when we go over budget (although a possible strain on client relationships) and a sign to slow down when we’re flying through work.
You’ll notice that firms embracing value pricing are tech adopters. The word “inefficiency” isn’t in their vocabulary. Their full suite of cloud technologies allows them to come from behind the inefficiency curtain and deliver on realizable value. If my time were really worth $200/hour, I’d collect money from my friends on NFL Sundays and my girlfriend on date nights. Your time isn’t worth anything, but your work is worth everything.
I’ll admit, as former big four auditor and newcomer to small business accounting, I can’t give much advice on succession planning. But I can talk about success planning.
Last week I sat down and set some goals for our firm. We are 3 guys who offer bookkeeping and outsourced CFO services. Given our performance in the last year, I projected a goal of $1 million in revenue for our firm. The kicker? It would require a total of 5 professionals (bookkeepers, CPAs) and 1 additional employee. Quick math gives us an efficiency of $166,667 in revenue/employee.
That number felt staggering, so I decided to do some quick research into what the big boys do. So I pulled up the top 100 accounting firms as listed by Accounting Today. Here’s revenue per employee for each of the top 100 firms:
While the numbers don’t change a ton across the board, you can tell efficiency does drop a bit going down the top 100, presumably due to billing. What’s interesting is that if I stuck our current firm into this data set, we’d be number 65 for revenue per employee… and we do not provide a single attest service.
So the question becomes, why would we? The real point at hand is that our embrace of the newest technology available, value pricing, and a fresh perspective on what an accountant actually does has allowed our business to hum. So what we you could apply those same methodologies and mindsets to attest services? I imagine we’d be a lot higher than 65th.
Another interesting thing I found was that for the 97 firms that had complete sets of data, 54 of them had a higher % increase in hiring than they did in revenue, year-over-year. Which tells me that a lot of these firms are hitting the proverbial ceiling of their respective models. Commoditization has been chasing the top firms down for years and each year that seems to become more and more evident.
As Gary Boomer stated so clearly a couple of weeks ago, getting into the value chain and moving upwards could be the smartest thing you and your firm do. The real question is – how many of these top firms swallow their pride and jump in? If you decide to keep fighting for audits, don’t say I didn’t warn you!
More than just inward facing operations is the drastic change taking place in the market itself. We now have a huge chunk of millennial entrepreneurs and business owners coming into the market for accounting services. A recent study of 1000 SMEs (small to medium-sized enterprises) by CCH discovered that more than half of the respondents would replace their accountant if they didn’t move to a cloud-based system. And in owners aged 18-34 (ahem, millennials), that percentage was 72%.
What many firms do not realize, nor do they want to, is we are currently in one of those every 30-40 year periods where the habits and expectations of our population are drastically changing. To put this in context for some of you, I think the last time this could be said is when some guy named Bob told us, The Times They Are A-Changin‘.
The individuals who’ve hardly ever known a world without the Internet are now business owners (soon to be needing tax, audit, and consulting services you top 100) and they have very different expectations than their parents. Millennials want online, on-demand, and transparency. While this is worrisome for firms still operating like it’s 1990, it’s a huge boon of success for firms that easily fit that demand. Just ask Michael Hsu of DeepSky, as found in his recent interview with Aspire Magazine.
Hopefully by now you realize the picture I’m trying to paint. The disruptors and idea curators are coming into the accounting space, in fact they’re already among us. Our industry is facing a perfect storm of altering conditions all at once: game-changing technology, deviations from century-old business models, and a fresh new marketplace. Such conditions will leave behind huge losers and even bigger winners. Which begs the question – which one will you be?
Craig Baldwin is former big four auditor, partner at Upsourced Accounting, and Co-Founder of GetSqrl. He spends his days in spreadsheets and his nights writing about running a modern accounting practice.
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