By Ric Payne, Chairman and CEO at Principa
Like any industry, the structure of the accounting industry will be largely shaped by outside forces that are beyond the immediate control of the firms in the industry today; those forces will create opportunities and challenges depending on the way firm leaders respond to them.
This article is about several of the key environmental shifts that are taking place and the opportunities and challenges they are likely to present.
It’s happened before
1. The GST
Most firms in any industry 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.
2. The GFC
The catastrophic global financial crisis 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.
In the 80’s, PCs complimented 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.
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 economically feasible. These firms helped their clients build better businesses and consequently built a strong brand around that service positioning.
And it’s happening again.
The trend towards globalisation 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. 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 whitepaper 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, giving their clients access to a client portal as a means of exchanging information and providing other valuable content, and helping them outsource the bookkeeping function and then providing 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 telecommuting. 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. Telecommuting can save commute costs for the employee, reduce office overhead as a result of lower infrastructure costs, and reduce oil consumption and greenhouse gas emissions.
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. They will leap ahead of the rest of the pack and see an improvement in the quality of client service and an increase in productivity. They’ll also be able to scale their organisation much more effectively than their real-estate-bound colleagues. The big consulting firms have been doing this for years.
Firms that feel telecommuting will result in a loss of control over their team members will find it very hard to attract and retain talent.
4. Social Media
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 website, they don’t give prospective clients or team members 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 the workplace in the same way that it did during their school and university days.
But how quickly is it happening?
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.
1. At the time of its introduction, a new technology is never completely functional so it’s easy to dismiss it as an inferior solution that will not replace existing technology.
2. 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.
3. Existing firms are so heavily invested in their current business model and its associated legacy systems that they are reluctant to introduce an unproven alternative technology for fear that their existing successful business model will be disturbed.
In the fullness of time, firms that fail to embrace new technologies that turn out to be superior will disappear. They simply can’t 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 organisation 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 may 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 always been the case, will 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 their competitors’ reluctance to change.
Principa is a global leader in helping small and medium sized accounting practices achieve their full potential by designing and implementing a business model that accommodates the immediate and emerging needs of their clients, their team members and their owners.
If the ideas expressed in this short article make sense and you would like to have a private conversation with Ric Payne, you can email him at firstname.lastname@example.org. Find out more about Principa at www.principa-u.com or www.principa.net.
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