Transitioning from complicated to complex is a challenge for accountants moving into advisory

One of the things that is interesting me at the moment and which I’m including in my book is reflected in a fabulous book by General Stanley McChrystal called Team of Teams: New Rules of Engagement For a Complex World which deals with organisational design and management in a complex (as opposed to complicated) world.

I believe this has important implications for the structure and management of accounting firms in the future as they move from product lines that are complicated i.e. an accounting system and related compliance requirements to product lines that are complex i.e. business development.

I had never really thought much about the difference between complicated and complex and nor have many other people it seems.  Even a standard dictionary search shows the two words to be synonyms. However, there is some sense in giving them each a specific meaning which first came to my attention when I read Nassim Taleb’s book The Black Swan – not the easiest book I’ve read that’s for sure.

The word complicated is best used to refer to a system that has many moving parts but each of them is specifically designed to perform a function needed for the whole system to work. A complicated system is therefore able to be broken down into it basic parts which interface and if the system fails to perform properly it’s just a matter (not necessarily easy) of finding the part that is failing and fixing it. Henry Ford’s production line is a great example of a complicated system as is each of the vehicles that came off the end of it.

The defining characteristic of a complicated system is that it may not be easy to understand how it all works but at its most basic level, when one part of an interface between to parts behaves in a certain way the part it interfaces with behaves in a totally predictable way. For example when you put your foot on an accelerator a specific amount of fuel enters the combustion chamber and a totally predictable result will be the speed of the vehicle will increase which will be associated with other predictable systemic changes e.g. in the gearbox. I’ve now reached the end of my knowledge of internal combustion engines.

And here’s the key.

Notwithstanding my mechanical ignorance I do know how to drive a car and because the parts of the vehicle system work in predictable ways I don’t need to worry about anything except what levers to pull, buttons to push, or wheels to turn for the system to do the job I ask of it. Furthermore, other people armed with an instruction manual, perhaps a checklist, and possibly some driver instruction can also learn to operate the system with predictable results despite it being a complicated. Complicated systems are relatively easily managed.

The word complex is different to this. It is best used to describe what happens when the interface between two or more parts of a system is not defined by a simple linear relationship but is reflected by an unpredictable relationship where one part may be benign and then suddenly behaves randomly. This is precisely what happens with a Black Swan event. For example, a stock market meltdown or a pandemic! These events are certain to occur but neither their timing nor the severity of their outcome is predictable.

Taleb describes many examples of Black Swan (i.e. complex) events but one of the more interesting that illustrates the virtual impossibility on managing in the face of them concerns the various risks faced by a casino.

And that brings me to the love of my life … accounting firms.

I would argue that auditing, accounting, and the provision of compliance services could be described as being complicated. Specific domain knowledge and skill is required to provide these services but with few exceptions, at the end of the day most of the work can be, and has been, broken down into interrelated elements which are complicated but not (generally) complex according to the definition of those concepts.

It’s a different matter with complex systems. Whereas the traditional work done by accounting firms in the compliance space is complicated, the firms themselves are complex systems.

Complicated systems, by their very nature, are quite easy to automate and, importantly, apply AI to as these technologies become commercially available. When this happens these services will commoditize, their prices will decline, and humans will be displaced.

This is certainly the view of Richard and Daniel Susskind in their book The Future of the Professions: How Technology will Transform the Work of Human Experts (see pp 84-94). The bottom line is that many routine services that once called for smart, well trained, knowledgeable people because they were complicated will be able to be delivered at much lower cost, much faster and, quite likely, more accurately than in the past.

And then we have complexity. I would argue that offering business advisory services is a classic example of working with a complex, as opposed to a complicated, system.

In recent years we have witnessed the explosion of cloud-based tools that have had a profound impact on the way accounting is done. Access to (close to real time) business data sets has encouraged tool makers to create sexy analytical tools that promise to free up time so accountants can engage in high value forward-looking “strategic conversations” with their clients.

The tool makers offer these products at very affordable prices using the Software as a Service (SaaS) subscription model so firms of virtually any size can use them with clients and there’s no doubt they look great. However, from what I have observed from their use in practice, SaaS is being viewed as Software as a Solution not as a Service.

The idea of engaging in strategic conversations with clients sounds great but the issues advisors face in the advisory space demands quite a different skill set to that needed for compliance work because of its complexity and ambiguity as opposed to its complicated nature. If you’re going to have a strategic conversation it’s a good idea for the business to actually have a strategy. Most businesses don’t, they just work a business model that’s similar to the one worked by their rivals. A strategic review is not simply a question of looking at a dashboard, observing that the needle is pointing in the wrong direction and then doing some what-if planning with a couple of mouse clicks.

Advisory demands a different type of relationship between client and service provider. With compliance, accountants are experts and are viewed as such. But expertise in advisory is not about knowing answers, it’s about knowing questions. It’s also about having a working knowledge of marketing, systems theory, business model design, competitive strategy, to mention a few disciplines. Add to that the need to be able to make the behavioral switch from confident expert to humble advisor and change facilitator and you have a quite a challenge.

Interestingly, this is also a challenge for clients who have become used to seeing their accountants as experts which is why I believe they have a bit of a credibility hurdle to get over. It’s very often much easier to “sell”advisory services to new clients than it is to existing ones.

After the mouse clicks, for the conversation to be valuable it must address the question “what are the action options for moving the needle in the desired direction, and what might the consequences be for each option.” There are no simple, or risk-free, answers to these questions which is how they differ from answers to most (I concede not all) compliance issues.

I believe this is one of the reasons why the majority of attempts by accounting firms to successfully create and grow a business advisory practice has been so difficult.

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