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Why technology is not necessarily the answer

November 29th, 2014

I had a conversation with a leader in the media recently during which he mentioned that a software vendor had told him his company’s product could help accountants perform in 15 minutes a task that typically would take 3 hours when done in a traditional manner.

He then added: “the payoff is staggering when you think about it because they would be able to go out and get 3x more clients and consequently 3x their revenue.”

There are three flaws in this proposition. One is systemic, another is competitive reality and the final one concerns its profit impact.

First, the systemic problem. At the end of the day every business consists of a series of chained processes and when the productivity of one process is improved it will only lead to an improvement in productivity if that process is currently a constraint or bottleneck.

Furthermore, if it is a constraint its optimization needs to be looked at in the context of a potential subsequent bottleneck in which case a further investment will generally be required. At the end of the day the goal should always be to maximize throughput by eliminating all constraints – that’s easier said than done and is rarely achieved by knee-jerking into a single “solution du jour.”

Second, supposing the solution really does lead to a demonstrable improvement in productivity with the result that the firm does free up capacity and does race out and look for more clients, the competitive reality in this industry is that it will be a price-led marketing and sales strategy.

Of course you may (and quite rightly) say “but what if management does not look for more clients of the type it now has but instead uses the time freed up to add more value to its existing clients.”

That would be great for the firm and its clients and there’s no doubt some firms would do that BUT if competitive history is any guide that will not be the general result. History shows us clearly that whenever technology (that is accessible to all or most industry participants) is used to improve productivity, real prices fall and not only that, the technology providers take a larger share of the industry value chain which further erodes the net margin. There are always some industry participants willing to be the lowest bidder and as long as they exist prices will be pulled down.

The third issue is the fact that sales people (and too many firm managers) are preoccupied with revenue growth. It’s the bottom line that counts at the end of the day. My research shows conclusively that the vast majority of firms are lucky if they’re breaking even on at least 50% of their clients and typically between 15-20% are contributing a net loss.

One of the reasons for this is technology does free up capacity and this does lead firms to go after more business but ill-considered business at the margin is invariably second rate, price driven and represented by prospective clients with little or no potential for growth.

The best performing accounting firms are the ones that identify clients in respect of whom they can create value, clients who recognize the contribution their accountant makes to that value growth and who are willing to share a fair proportion with their accountant. These people are not won by price promises, they seek value promises.

And that leads me to the real payoff from implementing improved technology solutions. This comes when a firm looks at how it can harness the technology in a way that it really does create value for its clients and prospects. When it does that it’s able to go into the market with a value proposition that is unique (at least for the time-being before it’s copied as usually happens.)

Armed with a unique customer value proposition its possible to win the type of clients who will grow and therefore drive the growth of your firm. These clients value the contribution you make, they are therefore much more loyal and are more powerful and influential referral sources. They also offer your team more challenging work to do which promotes team loyalty and stretches their competency.

As a final caveat, I’m not suggesting that you should ignore technology solutions of the type referred to in my opening statements. On the contrary, all potential productivity enhancing technologies should be carefully evaluated and for the most part implemented. This is what you might call a table stake required for your survival. But the real gains are made when you adopt an evaluation mindset that starts with the following question: how can we use this technology to create, and deliver an enhanced value offering for the type of clients we want to grow with?

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