It would be an understatement to say there’s a lot of talk about the need for accountants to get into the advisory space. Like the folk tale of chicken little, the prophets of doom are screaming from the bell-tower that the end is neigh for the traditional firm and yet there does not seems to be much movement.
This is the cry from what I call the “advisory toolmakers”. These businesses have built software as a service applications (SaaS) that suck data out of cloud accounting systems in close to real time and present it in the form of cool dashboards that are positioned as “solutions” to enable accountants to deliver SME advisory services. One of the tool makers even describes its product as business advisory software.
That accounting firms could and should develop their business advisory capacity (meaning business performance enhancement not simply compliance advisory) is something I totally agree with and have been practicing and advocating for more than 40 years.
But in my, not so humble view, the belief that SaaS stands for software as a solution is seriously wrong and potentially dangerous. Software is not, and never has been a solution, it is a tool. People who believe that are in danger of being led down a garden path of frustration and costly failure. As a caveat to this comment, I accept that developments in AI and quantum computing may take us close to the software as a solution idea but we’re not there yet.
Basically, the idea currently being promoted by the toolmakers is that accountants will meet with their clients and look at past performance data on a monthly or quarterly basis and will be able to engage in “strategic conversations” with their clients who will be delighted and willing to pay well for the service. It seems that as soon as the word “strategic” is thrown into the mix everything becomes more valuable – it’s like pulling rabbits out of hats. If nothing else, this narrative indicates the toolmakers have absolutely no idea what strategy means nor do they have a clue about what business people are willing to pay for.
I’ve even heard some people suggesting the client meeting can be virtual, so you don’t need to leave your office! What an enormous lost opportunity to help a client that piece of bullshit advice is. I can’t recall a time when I visited a client that I did not come back with work that would benefit the client or was able to engage in an incredibly valuable conversation during the visit just from observing something that might be improved. It makes me wonder if the toolmakers have ever advised anyone in their life which is what happens when coders enter a foreign domain.
But with all that said it seems the profession has not yet been convinced by the toolmakers that their software is the solution. The 2020 Good, Bad and Ugly report prepared by Business Fitness on 169 firms in the Australian accounting profession indicates that just 10% of revenue comes from advisory services. Interestingly, there were 17 firms in that study which are sending their partners home with a net profit of more than $700,000 (and up to $1.248 million) and the median percentage of revenue from advisory even for these firms is only 15% although notably, one of them reported 40% from business advisory services.
Why a move into advisory is likely to be slow
There’s little doubt that accountants are in a strong position to offer business advisory services, but the vast majority don’t and there are several reasons for this. Here are 8 that immediately come to mind.
1. Accountants are considered to be trusted advisers to their clients but a 2021 report conducted by PracticeWeb in the UK it appears only 40% of business people get their advice elsewhere such as from online business forums, peers and financial advisers. So while accountants are generally trusted professionals it seems they may not be universally trusted as business advisers.
Of the 60% of business clients who do consider accountants to be their main source of advice the issues that they regarded as challenging and needed help with were predominantly compliance related. However, bearing in mind this survey was done in the middle of the Covid pandemic, business issues that were considered to be challenging by at least 30% of respondents included cashflow, in-sector competition, online competition, partner conflict, and financing. These are matters that a trusted advisor would be the logical person to turn to but interestingly the report noted “Despite such a big percentage of people saying they go to their accountant for advice, most of the people we spoke to in one-on-one interviews said they had not asked their accountant for advice on the challenges that were most pressing to them like managing uncertainty, accessing credit, and attracting new business.”
This highlights one of the problems of surveys of this nature in that interviewees say these are the challenges I have and this is often interpreted to mean the respondents are “screaming out for help with them” but the fact is they are literally not turning to their accountant for that help and the reasons given are: cost, their accountant does not know their industry, their accountant does not have enough experience in business, or their accountant has a “personality/manner” issue – the latter being cited by 25% of respondents! My point here is that if such a high percentage of clients are “screaming out for assistance” accountants would know and selling the service would not be an issue but that is not the case.
2. Accounting and compliance services require specialist skills that a small business would not want to perform internally and are therefore outsourced. It is difficult to differentiate technical skills which is why their services have the character of commodities. Clients are attracted to a firm from referrals or some form of marketing that essentially positions it in a favourable light viz-a-viz other firms in their community. Rarely do they win business based on a value proposition defined as a return on investment, so while they may need to market their services, they don’t need to sell them because a prospect who is happy with the relationship it has with the firm will buy these services because they are necessary not because they want or value them. This suits most accountants because they don’t particularly like selling.
In contrast, advisory services must be marketed and sold on a ROI basis. This is not a walk in the park and it calls for selling skills. A business may be able to survive without drawing on the expertise of an adviser, but it can’t survive without filing a tax return and to do that it must prepare financial reports. This is particularly relevant if they have been a client of a firm for many years and have never been introduced to the firm’s business advisory services because it begs the obvious question: “why are these guys now all of a sudden trying to sell me something I’ve lived comfortably without in the past?” There are marketing and sales protocols that deal with this situation, but it is a strong barrier to selling advisory services particularly for a person who has had limited experience as a business advisor and no demonstrable track record in that space.
On the surface, businesses that need advisory services are the ones that are underperforming for various reasons and yet while an attractive ROI may be able to be illustrated, their owners are the least likely to be willing to pay for business management advice for a variety of reasons including their ego, their lack of confidence in themselves or their accountant, their belief that the challenges they face are outside their control, and a lack the funds needed to pay. I think there may also be a behavioural thing in play namely, these people see their accountant is doing very much better than they are and there is a reluctance to further “feather their accountant’s nest” in psychology it’s called jealousy bias.
There is also an interesting paradox at play here.
The businesses I refer to above are precisely the ones (with exceptions of course) that would completely fail my client selection criteria for advisory work (see my blog post Jan 2016 – https://bit.ly/2ruH3JD). Not only do they have insufficient resources, but they are underperforming because of a history of poor management, they are probably operating in intensely competitive industries that are subject to all of the 5 forces of competition, and their owners consider their business to be a means to an end rather than an opportunity to add value to their clients and their community. It is highly unlikely that these clients would benefit from advisory services even if they could be “sold” on the idea.
On the other hand clients who meet the criteria I have described are typically doing very well and, again with some exceptions, have not felt the need for advisory services from their accountant. But what’s interesting and has been extensively documented by Marcus Buckingham and others, is the greatest opportunity comes from working on your strengths rather than trying to correct weaknesses – see his book Standout 2.0: Asses your strengths, Find you edge, Win at Work and several others he has written. I have found this applies to businesses as well because the weaknesses of a business can always be tracked back to leadership weakness. And often that weakness manifests because successful owners suffer from an illusion of competence meaning they believe that their ability was the reason the business is successful and so they must know all they need to know. The problem is they don’t know what they don’t know and it’s in there that their future challenges and opportunities reside.
In other words, the businesses that need it don’t believe they’ll benefit, and the businesses that would benefit don’t believe they need it.
3. As indicated in the 2020 Australian GBU report the median Net Profit per Partner for all the firms in the study is in the order of $400,000 (and it is the same in the US after adjusting for the exchange rate). That is scarcely a poverty-line income and even bottom quartile firms are sending their partners home with $250,000. Clearly, people who can earn this sort of money have valuable and marketable skills. If you’re busy making good money doing what you do in the belief that next year the opportunities will be much the same, why put yourself at risk of wasting time and money on developing competency in an area that your clients have not been vocally screaming out for and in any event only a few of them may want? (See point 6 below that reinforces this point.)
My view is that there is a wonderful opportunity for accounting firms to embrace advisory services as a legitimate and significant part of their revenue base but to make a success of the transition is going to take a lot more than simply adding the words “… and Business Advisers” to their business name. It will require a fundamental change to their business model, that is, their choice of customers, their marketing strategy, their team selection and development, their organisation structure, in addition to their tech stack. I will talk about these issues in another blog post.
4. The toolmakers promise that their so-called advisory software will open the opportunity for a “strategic conversation” to occur is, as I have mentioned above, absurd. The challenge with a monthly dashboard review is that unless the advisor really knows what s/he is talking about and has a thorough understanding of the client’s business strategy (assuming the client actually has a strategy), the conversation becomes a litany of platitudes which clients get tired of after a while and don’t see a return on their time and money. They usually enjoy the meeting and they probably do get some value from it but unless they do something about any insights they got, the time was wasted and the therefore they inevitably question the value of future meetings. If you’ve had clients cancel these meetings, they are signalling how important they consider them to be compared with the other things they’re dealing with.
Advisory services need to be marketed and sold on the basis of a return on investment. This is significantly more difficult than selling compliance services that are (a) required by law and (b) the accountant is accepted as being an expert and highly competent in that space. This comes back to points 2 and 3 above. Serious advisory services can’t be delivered for less than $30-50k per year. For that to be justified you will need to demonstrate at least $100-150K profit improvement potential and a consequential business value impact. It is very easy to run a What-if analysis to show how that is possible with relatively small changes in key profit drivers but the reality is quite different. Frankly, it’s a hard sell even for people who know how to sell, believe in their ability to deliver, have a demonstrable track record, and who have prospects who trust them enough to also believe they can deliver on their promise.
5. Advisory services call for specialist skills that most accountants do not have. They include the discipline of strategic thinking and strategic planning as well as change management, together with analysis and synthesis skills – these are quite complex disciplines. It is not simply a matter of looking at a dashboard and pointing to trends in financial outcomes. Anyone who believes that being an accountant for several years qualifies them as a business advisor outside of their specialist domain, is wrong. That experience qualifies you to understand financial reports which are lag indicators of performance (and at best symptomatic of underlying issues) and it qualifies you to create cash flow projections and profit plans based on assumptions provided by your clients but it does not qualify you to lead a strategic planning process which includes amongst other things business model and process design, marketing strategies, team member development plans and so on. I have in my toolbox over 30 analytical tools and protocols designed to identify and drive business performance enhancement some of which I have used for more than 40 years. It takes a considerable amount of time and effort to master these.
6. Related to point 5 above there is a strong cultural barrier that serves to stop or slow down a shift in focus from compliance to advisory. Ironically, this barrier is particularly prevalent in very successful firms. I use the word “culture” here to mean “the way we do things around here and in particular the way we set priorities, and make resource allocation decisions.” Over time a firm’s culture emerges intentionally or otherwise. A successful firm will reflect a sound culture … one that works! In other words, firms that do well are designed to do well. Their organization structure, leadership & management philosophy, complement of team members, choice of resources, decision rules & responsibilities, processes, marketing, and compensation system are a fundamental part of that design. These things determine the culture of the organization and to the extent it is profitable, they reflect good management. However, as Peter Drucker said “culture eats strategy for breakfast” meaning that if a strategy conflicts with a dominant internal culture, the culture will prevail and the strategy, however well intentioned, will not be implemented. This phenomenon is usually described as FTI – failure to implement. But it’s actually FTOTPOC – failure to overcome the power of culture.
In such a firm, if you decide to introduce a new service line such as small business advisory you will quickly discover there is tension between what your team know to be fruitful work in their familiar compliance space (and for which they are rewarded) and the possibility of value creation in the advisory space. Invariably you will find they put their time and energy in seeking more compliance work. Scott Anthony et al in Sleep, Eat, Innovate: How to Make Creativity an Everyday Habit Inside Your Organization refer to this observation as a shadow strategy which causes team members to respond to the “sucking sound of the core” and keep doing what they, and the firm, have always done. This explains why most accounting firms that attempted to get into the personal financial planning business using their compliance team as financial planners in the late 80’s were singularly unsuccessful.
It turns out, this is one of the main reasons why it is almost impossible for a business to disrupt itself and why I strongly recommend that if you plan to seriously implement an advisory strategy you will need to do it through a separate entity with a business model specifically designed to deliver advisory services.
7. Offering a client advice on ways to improve performance is largely a change management issue which carries a risk for both you and your client that the proposed changes will not work but at the end of the day your client will play the major role in executing the strategy which, in my view, tends to put a greater share of the risk on your shoulders. Furthermore, if a business is doing OK and providing its owner with an acceptable income why rock the boat. Even though there may be a compelling rational reason for implementing some change initiatives that have a high probability of success the natural human response is inertia. This is a well documented cognitive bias that favours the status quo. In my experience, most people see their business as a means to an end and are not driven to achieve greatness by taking what they consider to be an unnecessary risk – Daniel Kahneman won a Nobel Prize for his work on risk aversion being a normal human characteristic, that is, people are more concerned about avoiding losses than achieving gains. It is also worth noting that if a business is in deep trouble and obviously needs to change something, I can say without equivocation, it’s probably not a business you would want to get involved with as an advisor because its problems are likely due to poor management choices and that’s something you’ll be hard pressed to change.
8. Client Accounting Services, or CAS as it’s popularly called, is one of the fastest growing revenue segments in the profession at the moment. This is positioned as being the road to advisory. But it is essentially an outsourced bookkeeping service made affordable by cloud based accounting systems and related technologies. It is often complemented by payroll prep services and our friendly toolmakers position their SaaS tools as a logical part of a CAS firm’s Tech Stack. Now, based on what I’ve said so far you might be surprised that I think this is a service that has a lot of merit.
The reason I’m pleased to see CAS develop into a strong service line especially for small firms is they are potentially the most accessible advisors to small business and they already have a sound understanding of the financial performance of the business. This is a great opportunity to increase their revenue base while they strengthen the relationship they have with their business clients. However, the level of advisory that is offered at a periodic dashboard review meeting for say $300-$500 per month is arguably very basic and can be easily competed away because all firms have access to the same so-called advisory tools. The productivity gains and smarts made possible by cloud computing is migrating value creation from humans to software and there will come a time when business that have specific higher level advisory capability will be able themselves outsource the CAS piece and add the real strategic planning and execution value at the back end of that. This would leave accounting firms with CAS and tax preparation and they might not even get to keep CAS. This is already happening for example at OBK, a boutique advisory firm in the UK, which likes to start where other firms stop (see my blog post April 2017).
In my view, the most valuable service a firm could provide its CAS clients is a performance dashboard plus something very special. This is something I did using an Apple IIe running VisiCalc (a spreadsheet) 40 years ago. I gave my clients a Business Health Check which consisted of a detailed analysis of their drivers of profitability and business value. The computer enabled me to do a rapid What-if analysis and a crude 12 month profit plan and cash flow projection that I could rapidly tweak. But most importantly, it gave me the opportunity to illustrate the value of their accounting reports by explaining what everything meant. I leveraged that by inviting them to participate in a 1-day course called the Advanced Financial Management Program and by the end of that they understood what value an accountant can bring to the table by being able to understand what we talk about. We grew our advisory business on the back of that.
Post Script: If you want to read about my simple move into advisory go to my blog post Jan 2022