Adrian pearson is A VETERAN UK CHARTERED ACCOUNTANT AND the founder of ledgerscope - A SOFTWARE COMPANY MAking great tools for accountants in practice.

Cloudy thinking on accountancy firm profitability

Let me start with a quote from Colin Dunn of Nixon Advantage, made in a comment on one of my earlier posts:

Accountants have collectively invested billions on technology to drive efficiencies in the past 30 years. Unless you price every job upfront based on the value to the client you will not benefit from this investment.
In many firms profit margins are the same as they were in the days of manual trial balances which proves the point.

The rationale behind Colin's assertion is simple; for firms that bill based on timesheets, if new technology let's you get the job done in half the time, unless you double your charge-out rates, you will pass your productivity saving on to the client. However, firms that work to fixed prices can charge the same amount as before and pocket the value of the productivity saving, as a return on their investment.

So, for the rest of this article let's agree that we are talking only about firms using fixed prices.

Dennis Howlett recently posted on his blog insights gleaned during a round-table discussion where he met with the principals of several accountancy firms who were keen adopters of cloud bookkeeping software. I pushed-back a little bit on the general euphoria and commented that, although I know that working in this new way is more enjoyable for all concerned, I am not convinced that accountants are being careful enough to carve out some of the benefits for themselves, in the form of more profit.

In his post expanding on his original article, Dennis provides three specific examples of the benefits accruing to accountants and then says:

In other words it cannot all be about a past definition of revenue attainment but an adjustment to the business model that protects revenue while improving service.

Improving customer service is fantastic but if the new business model only "protects revenue" then it follows that no extra profit is generated for the accounting firm. Yes, there are lots of spin-off benefits arising from having a happy client but that is not what we are looking for here. Maximising client satisfaction is not the primary goal of an accounting firm. Maximising profits is, making clients happy is just a means to this end.

Only one of the examples suggested by Dennis alludes to improved firm profitability - when one contributor says that he can do more work with the same staff. The other two examples illustrate "quality of life" benefits which, as I have said before, I totally accept.

So, here I think we get to the oak tree in the middle of this forest; accountancy firms must see productivity gains against fixed prices to clients. Otherwise all of the benefits of cloud collaboration on bookkeeping flow through to the client.

Dennis puts it this way:

All agree that clients continue to need training in using the newer systems. BUT – they also believe that better client education means reduced error handling and better service.
Over time that has to translate into less time needed handling routine work. By definition that means increased profit.

There are two profitability scenarios for us to consider:

  • Firstly the accountancy firm doing an annual accounts and tax compliance exercise from the data in a client's cloud-based bookkeeping software and
  • Secondly the accountancy firm providing a monthly supervision service, which includes the year-end work as part of the bundled price.

In the first scenario, there is a real likelihood of a productivity gain from having client information in the firm's preferred format - assuming that the client has not needed much "hand-holding" during the year. There is the possibility that the client may feel that they are entitled to a reduction to their fee, because they have "played ball" with the accountant, but this should be relatively easily rebutted and the amount of potential discount involved would be small. This scenario is therefore a win for the accountant.

Let's be clear for a moment here though. There is no reason why this scenario cant work just as well with on-premise software. The key issue is the client being able to understand and use the software recommended by their accountant, so that they can produce a relatively error-free file. It just so happens at the moment that the newer, cloud-based products deliver sufficiently on ease of use compared with the likes of Sage and QuickBooks, which do not.

The second scenario is one that I see increasingly offered by accountancy firms and promoted as a new business model by the software vendors. Typically, it is positioned as a monthly "virtual financial director" service with year-end compliance bundled into the fixed monthly price and can only be sensibly delivered using cloud software.

Here, as I have suggested before, I think there are real dangers for the accountant. Even if the client is well enough trained to ensure that their online data is in good shape, the time involved in "picking up and putting down" the job twelve times a year versus once means that there are unlikely to be any productivity gains. As I said in my posting referred to above, I believe that 12 x 1 should equal 15. Pricing the service at 12 (or 9 as Dennis seems to suggest) is a loss for the accountant.

The response I often get is that monthly collaboration with clients, facilitated by cloud software, is the way forward for progressive accountancy firms and that it's what clients want. I totally agree with idea, and have been a strong advocate of it for some years now. What I don't want to happen though is for lots of my accountancy colleagues to sleep-walk into a situation where their clients are taking all of the benefits for themselves.

Finally, a word about using the time saved by using the new cloud products to provide additional, value-added services to clients. Of course that's a great idea - a long as the client is charged for it.

I have had many conversations with clients over the years when they say something along the lines of "so, if I use this software you recommend, and you have much less work to do at the year end, will you be reducing my bill?" My answer was typically either: no but it will mean that I am not forced to put your fee up as I would have done otherwise, or I will use the time saved on the grunt work to do more valuable work for you. Knowing the nature of accountants in practice, I think there is the real danger that if they get into the position where they can produce year end accounts in half the time, they will simply provide twice as much time to the client on other services, and bill the same amount as last year.

As I have said before, this is a commercial matter for accountants not a technology issue. As the quote from Colin Dunn suggests, as a profession we don't have a good track record on this.

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