This post is an updated version of an article I wrote for the 2014 Good, Bad and Ugly inter-firm comparison study done by the Australian firm, Business Fitness.
The accounting services industry has been around for long time and is likely to be around for a long time to come because people and organizations need their services. But as is the case with every industry, its structure will be largely shaped by outside forces that are beyond the immediate control of the firms in the industry today and those forces will create opportunities and challenges. The way in which firm leaders respond to those forces will determine the destiny of their firm.
This article is about several of the key environmental shifts that are taking place and the opportunities and challenges they are likely to present.
Most firms in any industry you care to choose fail to see the opportunity that change brings. For example, the introduction of the GST mandated more regular financial statement preparation. Some firms saw this as an opportunity to build a closer advisory relationship with their business clients. The majority of firms simply saw it as an opportunity to do a bit more compliance work and missed the opportunity to add a value adding dimension to their business model. Needless to say, their clients struggled to see what value these firms bring to the table when all they are doing is accommodating a necessary evil.
Another example of this was the global financial crisis. This catastrophic event reminded business managers of the need to run a tighter ship and give more attention to profit management and working capital control. It also served to rid the market of marginal performers.
Some accounting firms saw this as an opportunity to step into the breach and help their clients not only weather the storm but take advantage of the soft economy to build their competitive position through acquisition, aggressive marketing, and the implementation of more robust and disciplined financial management control processes. These firms won the respect and loyalty of their clients and have experienced significant profitable growth. The majority of firms missed this opportunity and simply viewed the GFC as the reason for their lack of growth, shrinking margin, and the need to work harder to maintain profitability.
The trend towards globalization has created amazing opportunities for firms to participate in market growth and to take advantage of the law of comparative advantage by outsourcing certain elements of their value chain. Firms that have mastered this are well positioned to take their place in the global economy and utilize their resources much more effectively than those who have not. The latter group will quickly find themselves in a competitive disadvantage.
Technology has always been a game changer and the inexorable movement to the cloud is the next big thing that’s already here but nowhere near having run its course. Rapid change creates big opportunities and big challenges and the cloud’s potential for driving innovation in the profession is a case in point.
In a recent IBM white paper on the opportunities presented by the cloud the authors open with the following comment:
Although the cloud is widely recognized as a technology game changer, its potential for driving business innovation remains virtually untapped. Indeed, the cloud has the power to fundamentally shift competitive landscapes by providing a new platform for creating and delivering business value. To take advantage of cloud’s potential to transform internal operations, customer relationships and industry value chains, organizations need to determine how best to employ cloud-enabled business models that promote sustainable competitive advantage.
Internet access has become ubiquitous and inexpensive. This, coupled with massive leaps in rich multi-media communication technologies, together with accounting systems resident in the cloud and the virtually costless access to the world’s knowledge base has leveled the competitive playing field and we’re going to see this flattened even more.
Some firms have embraced this trend and use video conferencing as a client communication tool, give their clients access to a client portal as a means of exchanging information and providing other valuable content, and help them outsource the bookkeeping function and then provide their clients with dashboards that monitor the status of their business in virtually real time together with online consultations as part of a tailored management control plan. But all of this is just the start of the value that the cloud will enable smart firms to deliver.
Many firms still see the cloud as a risky environment that adds an unnecessary cost their clients are not willing to pay for. Sadly they’re right, THEIR clients would not pay for it and therein lies the fundamental problem with their business—they are working with the wrong clients who are dictating their business model.
Another significant technology-driven trend is the growth of tele-commuting. According to a recent Forbes article, in the US (and I suspect it’s the same in Australia) 30 million people now work from home at least once a week and that’s expected to rise by 63% in the next five years. Approximately 50% of all jobs (which is expected to increase in developed countries) are compatible with telecommuting and 79% of US workers say they would like to work from home at least part of their work week.
This has been possible for many years through VPN connections but the cloud takes it to another level of simplicity and cost advantage. There are significant external economies associated with telecommuting including a commute cost saving for the employee, a reduction in office overhead as a result of lower infrastructure costs, a significant reduction in oil consumption and a reduction in greenhouse gas emissions. I make this point because this is a trend that’s not going to go away because it has significant employee, employer and social implications.
Some firms see this as an opportunity to attract and retain high-quality team members by introducing management innovation such as a results only work environment known as a ROWE – see Why Work Sucks and How To Fix It by Cali Ressler and Jody Thompson – I interviewed Jody for a podcast episode on www.mpmpod.com My sense is that in the fullness of time these firms will leap ahead of the rest of the pack. They will experience an improvement in the quality of client service, an increase in productivity and will have the ability to scale their organization much more effectively than their real estate-bound colleagues. Take note that the big consulting firms have been doing this for years!
While on this point a TED talk by Ricardo Semler, the celebrated author of Maverick: The Success Story Behind the World’s Most Unusual Workplace, is well worth taking a look at. The talk is called Radical wisdom for a company, a school, a life.
Firms that feel telecommuting will result in a loss of control over their team members (I guess I should refer to them as staff or hired help) will find it very hard to attract and retain talent. This is likely to be a hugely important element of a team member value proposition going forward.
Social media has taken the world by storm but most firms are still trying to come to terms with how to most effectively use it as a marketing and client service tool. Most firms seem to have placed this in the “too hard” basket and when coupled with their very ordinary static web site they don’t give prospective clients or team member much reason to want to deal with them.
A firm’s social media strategy is a very important element of its positioning and branding but there’s more. In my view we will see greater cross-firm collaboration in the future as social-media-savvy employees assume management roles and understand the value this can bring to workplace in the same way that it did during their school and university days.
Humans are hard wired not to embrace change too quickly. That is literally part of our DNA and ironically it’s one of the main reasons we have become the dominant species. When change is relatively slow this human characteristic is not problematic. But when change is rapid a failure to respond results in falling behind very quickly.
Social psychologists have discovered that most people have a greater aversion to risk than they have to embracing an opportunity for gain. The way we deal with that is to rationalize a no-change or a wait-and-see strategy.
I have been around the accounting profession long enough to have witnessed the impact personal computers have had on business information processing. In the 80’s, PCs complemented by “so-called” user friendly accounting systems, were rapidly taking over the role of manual bookkeeping and there were many people who recited every reason you could imagine as to why computers would never be smart enough, or secure enough, to replace people.
Nothing changes. I’m hearing the exact same comments in relation to the cloud. As is the case with the introduction of all disruptive technologies the majority of firms in the industry rarely see, or accept, the full consequences of it playing out. There are three reasons for this.
First, at the time of its introduction a new technology is functionally never really good so it’s easy to dismiss it as an inferior solution that will not replace existing technology.
Second, the new technology is typically intended to perform the essential function of the existing solution with a “promise” of doing it better (e.g. faster, cheaper) but little thought is given to how it could lead to a totally new customer value proposition or create a new customer segment. Even the technology innovators usually do not see the full potential of what they have built and therefore do not position that as a selling point.
Third, existing firms are so heavily invested in their current business model, and its associated legacy systems, they are reluctant to introduce an unproven alternative technology for fear that their existing successful business model will be disturbed. This is a rational economic decision, at least for the short term, because typically these firms are performing well and see no urgency for change.
And yet there were other firms (typically relatively young ones) that could see the opportunity to harness the power of computers equipped with spreadsheets, database applications, CRM tools and word processors in addition to robust accounting solutions that made budgeting and therefore management accounts incorporating variance analysis, cash flow and profit projections, and what-if analysis to assist decision-making. These firms helped their clients build better businesses and consequently built a strong brand around that service positioning.
It’s also worthy of note that the firms that did really well by embracing this technology were the ones who actually got in front of clients rather than just appending fancy reports to financial statements they had traditionally prepared. In other words they complemented the technology with a face-to-face connection with their clients that served to not only build rapport but also build their credibility as true business advisers who “understood” their clients’ businesses.
In the fullness of time, firms that fail to embrace new technologies that turn out to be superior will disappear. They simply can’t (or don’t want to) compete with those that do. And the firms that do embrace it with varying degrees of haste usually do so in order to incrementally improve operational efficiency. This shows up in the form of a flatter organization structure and higher revenue per person but because of competitive price pressure and a higher cost structure the average net profit margin does not rise and my even fall.
The beneficiaries of this have been customers who experience lower real prices and vendors who have been able to extract more from the industry value chain. The consequence of this for most accounting firms is a reduction in the real income of the owners.
However, a small number of firms will see technology and social change as an opportunity to re-design their business model. They will be the leaders of tomorrow. I have no idea what the “firm of the future” is going to look like but I do know that the leading firms of the future, as has been the case in the past, will be the ones who see change as a huge evolutionary opportunity to design a new business model in the knowledge that it will be the source of their competitive advantage. The other source of their competitive advantage will be the fact, as has been the case in the past, that their competitors will be reluctant or slow to do anything different.