Existential angst: Accountants have nothing to fear but… everything?
In this column, David Bailey, consultant to Accounting and Financial industries at AJ Chambers, sets out the existential challenge and quite how small to mid-size accountancy firms can meet the urgent need for digital transformation.
High ethical standards, technical ability, rapid analysis of financial data, and the delivery of error free reports are the current perceived accounting traits that partners must maintain to clients. And it is based on the perception that accountants possess special training and ‘secret knowledge’.
Yet, the profession worldwide statistically fails to deliver on customer expectations even at the most basic level, and that perception is getting worse, not better, as traditional clients are replaced by tech and media savvy younger clients.
The truth is most clients can look up online, in seconds, answers to almost any simple accounting or taxation query that they previously needed to ask an accountant for.
Partly as a result of these factors, client retention is falling across the small to medium accountancy practice sector, and they’re moving to online services, cloud providers, automated taxation platforms, online payroll and simple google searches. Many of the previous ‘purposes’ of accountants have fallen away.
None of that is an accident. Government, lobbied both by business and large accountancy firms, has raised the audit threshold (releasing a lock on clients for small firms), while simultaneously enabling a digital shift via Making Tax Digital and online submission of XML tagged filings at Companies House. It is part of a consistent strategy to reduce the cost burden on small to medium companies and to improve the quality of data held by the state for the purposes of recovering taxation.
None of those is likely to be news to anyone running a mid-sized accountancy practice.
And the results of industry surveys show that accountants have heard parts of the message but have not understood the totality or the speed of the transformation that is required. Firms face an existential threat which they are ill-equipped to respond to.
The financial objective of most accountancy firm partners is to build up a large recurring fee-based structure which can be sold on a multiple of fees to a larger company.
Traditional metrics for sale value have steadily fallen from 1.5 X to 0.9 X fees at sale as retention periods have shortened, margins have been squeezed, and costs of retaining staff have risen. The traditional target of building up a sale value of £3m to £5m per partner at the age of 55 to 60 is just not likely to be achieved by the vast majority of small to medium accountancy practices. That pension pot is evaporating faster than firms can pour hours into it. Whether the exit was from sales to a larger practice or by convincing younger managers to take out bank debt to buy out the senior partners, it is becoming less and less likely.
Investing in technology platforms, especially cloud accounting services, has not yet led to the expected growth in value for firms that have implemented them. Firms have seen a loss of cash, increased borrowings, and falling profits.
This is apparently only a surprise to accountancy partners. Everyone who has ever been involved in the software transformation of any industrial sector has seen that introducing software rapidly displaces labour and almost always increases capital requirements and crushes profits in the sector dramatically – sometimes by around 90%.
Summary: Partners need financial resilience and sustainability at the core of their objectives, instead of rushing for an exit and an early pension.
Most firms build their financial and management models based on ‘last year plus X percent’. This simply does not work in the modern world. Products are adopted more rapidly, technologies develop more rapidly, changes happen more rapidly, and they do not last any longer.
That is the key point: the period of optimal exploitation of new things has halved repeatedly, from 60 years, to 30 years, to 15 years, to 7 ½ years, to 3 ¼ years, … you can see where this is going.
How can small to mid-size accountancy firms survive, let alone thrive, if they must constantly double their speed of change, yet only have half of the available time to exploit their investments?
Over the last 10 years firms have been increasingly structured to service bulk commodity work such as monthly accounts, monthly management accounts, annual filings, tax returns, credit control, and payroll. Firms have been ‘hollowed out’ – they have many more lower-level administrative and technical accounting staff, fewer managers, and a relatively large number of partners.
This is precisely the wrong solution for the future. Online packages – Iris, Sage, Xero, Free Agent – have rapidly de-skilled lower-level jobs and made managerial roles in accountancy firms deeply unattractive to ambitious millennial graduates. Yes, this has boosted profit per partner, but it isn’t sustainable, or provide the agility, flexibility and resilience the firm needs to cope with exponential change.
Small to mid-size accountancy firms have also been structured to service a traditional model of a simple, stable, trading business that requires payroll, taxation, accountancy, and accounts filing. Those firms are rapidly ceasing to exist.
Is it even possible to predict the optimum structure of a firm to fit an unknowable future?
Summary: Accountants need to look at their decision-making speed.
Decision-making in accountancy firms is notoriously slow. Big consultants have studied it for years, but the facts have not changed. The average “change cycle” in any small to medium size accountancy firm I have come across in the last decade is close to 3 years.
Sometime very soon, the decision-making period and change cycle of accountancy firms will fall below the technology and social change rate. At which point, simple Darwinian evolution will kill off slower firms with increasing rapidity.
The psychology of the majority of partners remains, overall, risk averse consensus seekers with a focus on detail. They tend to score (according to DISC) highly on introversion, agreeableness, and conscientiousness while scoring lower on emotional well-being and openness to new experiences.
They score low on dominance, moderate on influence, and very high on compliance and steadiness.
This is excellent for repeated intellectual work designed to produce accurate outputs for clients from a group of people who must share financial and reputational risk in a traditional environment. It is also just about the worst combination for dealing with constant rapid change, new technology, and uncertainty.
What sort of person would make a great partner in the onrushing world of artificial intelligence, robotics, cloud solutions, entrepreneurs, and exponential change?
Some think they can decide on these issues later. When things are clearer. When they have more facts. After deeper analysis.
This is a major strategic error. Unless firms can rapidly shorten their decision-making loops, they are going to fall outside the pace of change.
Summary: Accountants need to have a strategy in place to decide how they will survive, let alone grow or extract capital.
Financial strategies that focus on resilience, sustainability, and constant investment to sustain change are those most likely to succeed. Perhaps partners need to give up the idea of a wealthy retirement at 55. Rather, they could focus on working longer where they can add real human experience and value to founders and investors for decades.
Becoming agile is a major issue as it requires psychological as well as structural change. It means understanding the social, environmental, technological and process issues in an agile business. Not just for today, but for a future of permanent change.
Embracing change is no longer optional. How we do that is a direct threat to the traditional model of accounting firms. The ethos of ‘hypothesis – build small – fail fast – fail right – measure – react – repeat quickly’ needs a lot of care being introduced to a business with an output of accurate timely regulated information. It can be done. It is just a bit more difficult than it appears.
Where the skills and experience to deliver on this transformation do not currently exist in a firm, those skills can be bought in. There are many consultancy firms, recruitment companies, and freelance talents who would love to help.
Models of charging for hours are rapidly falling out of favour, and for good reason. They encumber the firm with substantial administration, create demoralised staff, lead to inappropriate goal seeking, and are a source of constant anxiety for partners who are measured by them.
New billing models are much more efficient. Shifting to a model of fixed fees while attempting to improve efficiency (time under budget) and value added can totally transform a firm. In some cases, selling based on the value delivered to a client, by way of a fixed fee plus a proportion of the game drives real alliance between client and firm without creating unmanageable conflicts of interest.
Adopting new technologies needs to be done in a different way. Smaller, reversible, cheaper changes are the way to be more agile and appropriate to your clients. The big challenges of collecting financial information, vouchers, invoices, receipts, and so on have pretty much been solved by the large online platform providers.
The new challenges are in the forms of providing appropriate information to clients about the wider business environment, providing forecasts and intelligence, analysing processes, assessing the quality of staff and executive talent, finding new customers, regulatory and legal change, and a hundred other areas all of which impact upon the financial results. Who will need to consult a valuation partner when an online artificial intelligence with 99.9% accuracy is available at the click of a button?
Given that taxes are entirely codified, how long do we think it will take before one can speak to an online artificial expert about 99% of all complex personal and corporate tax problems? Why does your management account pack not automatically contain trend analysis, competitor analysis, economic and legal factors, and a fully flexed cash flow forecast taking all the above into account against over two million successful businesses? Are job adverts for predicted vacancies in all departments not automatically created against forecast and trend sales? Why is there ever a question as to where an item in WIP is against a customer order or stocking requirement?
Adding value is the big one. There is, I strongly believe, a future role for experienced partners in small to medium sized accountancy firms. At least the ones that manage the transformation described above. The key is adding value provided it is matched by effective management of rapid change.
Partners who can successfully add value in rapidly changing times:
I hope this article has sparked some thinking and a sense of urgency among partners and directors in small to medium sized accountancy practices serving the SME sector. The future is there to be grasped, provided you started yesterday or are prepared to run and catch up.
This article was written by David Bailey, consultant to Accounting and Financial industries at AJ Chambers.