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Why Aren’t More Firms Jumping into Advisory Services?

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.  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 on the visit just from observing something that could 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 14 firms in that study which are sending their partners home with a net profit of more than $770,000 (and up to $1.248 million) and the median percentage of revenue from advisory even for these firms was only 15%. 

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 three of the main ones.

First, at least half of their business clients, and for some firms a good deal more, don’t want business advice and will not pay for it. This has been my own experience and is also the conclusion reached in a 2021 report conducted by PracticeWeb in the UK which found only 60% of business owners sought advice from their accountant with the reasons cited being: cost (i.e. they do not see the value), accountants don’t know their business, accountants don’t have business experience, and they have personality or manner issues.

Most of a firm’s business clients are owned and run by people who just want compliance services done efficiently and as cheaply as possible. They’re happy to make a living from their business and to take rank with their peers in their industry; their life interests lie outside their business which they simply consider to be a means to an end. These people own and run a business but for all intents and purposes they just have a job, the profit is their wage at best. This is probably the reason the PracticeWeb study found that 72% of the respondents who indicated they would be willing to pay up to £3,000 (AUD$5,400) for business advice. You can’t do much advising for a fee of that magnitude.

A few of clients are serious about growing a profitable business and may want help to go to the next level. They’re your target market for advisory but they are few and at a given point in time, probably only 10% of the total in this segment. If you get the value proposition right, you will find some great opportunities in this group. But your value proposition will need to go deeper than “we’ll prepare a cash flow and profit plan and meet with you every quarter to review the results with a dashboard” because they can already do that with the assistance of a competent bookkeeper.

Your value proposition will need to add, “and we will draw on our expertise and experience to proactively help you drive growth and improve the profitability and value of your business by improving your gross and net margins and financial structure.” To deliver on that value proposition requires a whole new range of skills that most accountants would need to acquire.

Then you have the high profit contributor clients. For the most part these clients are larger and more sophisticated and do value your advisory input. From what I’ve personally experienced and observed from my research, they account for most of the advisory revenue you now generate. Some of them may be interested in more advisory support but because they’re already happy with the current relationship it’s not likely they’ll move the advisory needle far. The point I’m making here is that if during a normal quarterly meeting with these clients you added a digital dashboard and some “what-if” analysis they would be impressed but it would be simply replacing what you previously did with a piece of paper or a spreadsheet. They will not suddenly jump out of their chair and ask for more advisory service.     

Most of these clients deal with senior people in the firm and typically, business advice is offered while discussing financial results and related compliance (including tax planning for example) issues and is likely to be incorporated in the fees labelled as compliance.

Secondly, accounting and compliance services require specialist skills that a 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 firm will buy these services because they must have them not because they want or value them. This suits most accountants because they don’t particularly like selling.

In contrast, advisory services need to be marketed and sold on a ROI basis. This is not a walk in the park. A business can survive without drawing on the expertise of an adviser, but it can’t survive without filing a tax return and financial statements. 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.

Thirdly, as indicated in the GBU report the median NPPP for all the firms in the study is in the order of $400,000. 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?

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 adding the words “And Business Advisers” to their business name. It will require a fundamental change to their business model, their choice of customers, their marketing strategy, their team selection and development, and their organisation structure.  I will talk about these issues in another blog post.

  1. September 6th, 2021 at 14:55 | #1

    You are one of the people who “get it” Craig. I totally agree with your additional comments. Thanks for taking the time to think about these things and to actively engage in doing what accountants could and should be doing a lot more of.

  2. Craig Badcock
    September 6th, 2021 at 14:24 | #2

    Hello Rick,

    This is spot on.

    A couple of additional points from my personal experience and from helping other firms enter this space:

    Firstly; I believe that we have an ethical obligation to offer any services within our skill set that will be beneficial to our clients.

    Secondly; it is important to free up capacity before attempting to introduce new services. Failure to do so always seems to result in priority for compliance deadlines and the new offering fades away.

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