Remaining Relevant: The Future of the Accounting Profession

By Rob Nixon

‘Remaining Relevant’ is practical and practiced advice for accountants to remain relevant in a ‘disrupted’ industry and has been described as “the most important business book that you will read this year.”
Anthony S Bongiorno, The Bongiorno Group.

The explosion of cloud computing and its impact on the accounting industry is the impetus for ‘Remaining Relevant’, which is all about the future of the accounting profession - essential reading in this manual for an accountant’s success.

“Technology is enabling and will demand the accounting profession to transform. From the changing the engagement and service mix within a firm, to fixed fee billing and off shoring ... everything is up for review. As long-term industry insider and visionary, Rob has the unique capability to help accountants focus on what is important through his direct, and at times confronting, analysis of the profession. A must read.”
Tim Reed, MYOB CEO

“Rob Nixon is to accounting what Peter Drucker was to strategy: He creates new paradigms and fresh approaches to a discipline that would be headed for the doldrums without him.”
Alan Weiss, PhD, Author, Million Dollar Consulting
Rhode Island, USA

“The accounting game is changing forever. Any partner who doesn’t acknowledge this is kidding themselves. The age of the dinosaur firm is coming to an end, and this book is a must for any accountant who wants to remain relevant in the 21st Century.”
Chris Hooper, CEO, Accodex
Adelaide, Australia

• Language: English
• Publisher: Vivid Publishing
• Release date: Mar 27, 2015
• ISBN: 9781925209662

Book preview

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Dear Accountant

Dear Accountant,

I have been privileged to be working with and advising the Accounting profession since May 1994. I was 25 when I started working with you. I am not an Accountant (I left school when I was 16) yet I have gravitated toward your profession. Over the years I have delivered seminars, coaching programs, created DVD training programs, created software, online content, trained thousands and visited hundreds and hundreds of Accountants offices. I have dedicated 20+ years and counting to your profession.

Anyone would think I liked Accountants! I do.

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Industries all over the world are being disrupted by technological advancements, social change and innovative thinking.

It’s a wonderful profession to be working with, yet I see some massive changes happening around the world.

It’s all about your industry being ‘disrupted.’ It’s a word (disruption) we hear a lot about these days. We live in a world of disruption. Industries all over the world are being disrupted by technological advancements, social change and innovative thinking.

Entrepreneurial thinking is being applied to these industries that have been in existence for many decades. A new nimble player will enter the market and challenge the status quo. Typically they will use internet-based technology to ‘cut out’ parts of the supply chain and give a better experience to the consumer. They will invent better ways of doing something and find cheaper labor to deliver the service or product.

All over the world the industry types that are getting disrupted in a major way are:

1.   Intermediaries & supply chain

2.   Information providers

3.   Processing companies

4.   ‘Behind a computer’ companies

Sound like anyone we know? Hmmm.

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The Accounting profession globally is being disrupted right now and most Accountants don’t even know it is happening.

Yes – it’s you! The Accounting profession globally is being disrupted right now and most Accountants don’t even know it is happening.

There are 3 main areas that are being disrupted in the Accounting profession:

1.   Compliance is being commoditized by technology

2.   Labor is being sourced from less expensive countries

3.   Clients are using the internet for your advice

These 3 market forces will only escalate, and if you do nothing about it revenue, profit and business value will erode.

Let’s look at each one and work out what you can do to capitalize on each one.

Disruptive area #1 – Compliance is being commoditized by technology

The adoption of Internet (commonly called cloud) based technology is growing at a rapid rate of knots. You can’t stop this happening. There is social behavior/change in action (people want to access their information on their handheld device) and there are massive technology companies investing huge sums of money to drive the change – if they don’t they won’t be in business.

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The adoption of Internet (commonly called cloud) based technology is growing at a rapid rate of knots.

The applications that are used over the Internet are very sophisticated, very accurate and can connect to other Internet systems. For example the Accounting system can connect to the client management system, which can connect to the stock control system and the distribution system. At the client end, inexpensive applications can ‘talk to each other’ and give real time information to the business leader.

Here’s an example in action:

A customer buys a product / service by whatever means. It is scanned using the bar code and automatically registers the sale into the online accounting system. Bank accounts, income statements and balance sheet data are automatically updated. The action also updates the inventory management system that there is one less product. The client management system (assuming the customer used a login/user name/loyalty card to identify the customer) and the buying habits of that customer are updated and now can be tracked. A real time report / dashboard is automatically updated/sent and the leadership of the business can see the trends or reports immediately on their smartphone or tablet. They might be on a private island at the time sunning themselves and the report comes through or they can check when they choose.

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"No waiting.

No people.

All real time.

All automated."

This level of automation (all driven through the Internet) enables the business leader to make instant management decisions and run a better business. It’s happening right now. No spreadsheets manually updated. No paper filing and updating. No need for a meeting to tell me the numbers. No waiting. No people. All real time. All automated.

It’s exciting and it is happening right now. In my business I have had this level of automation for 2 years.

Let’s look at the accounting process.

Previously it used to be on a spreadsheet, server or hard drive and kept at the client’s premises. A bookkeeper (or spouse of the owner) did the data entry using manual key strokes. At the end of the year a file was saved and sent to the Accountant with supporting information. There would be questions and queries back and forth and the Accountant would then prepare a ‘set of accounts’ and present back to the client some 2-9 months after the initial data was received. The preparation of the historical data was a necessary evil as it had to be done to comply with the government authorities.

However, the data was old data. It was redundant. What help is it when you tell me ‘I should have done this and that’ 9 months after the fact? No help whatsoever!

Enter Internet-based accounting systems. The products available offer real time information that do not need people to do the data entry. With these systems the data is more accurate (super computers are doing the processing, not people) and there are less mistakes. As well as that, the accounting systems are offering excellent reporting and data analytics which were only previously offered by Accountants as a management accounting package. The revenue I used to spend with the Accountant, is now delivered by technology.

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The revenue I used to spend with the Accountant, is now delivered by technology.

Also because the information is more accurate and the systems only have one version, the time spent at your end to prepare annual accounts is far less. In fact we are seeing anything from 30% to a 60% time reduction at the Accountants’ end (in year 2 onwards) for accounts preparation work. What do you do with that time saving? Do you reduce your price? Unfortunately for you, the technology companies are directly promoting that ‘You will be more efficient working with your Accountant when you buy our product.’ You have been selling ‘hours’ for all these years and more efficiency means fewer hours and fewer hours should mean a cheaper price. That’s what the business community is thinking.

We are seeing more price pressure on compliance than ever before and it will only escalate.

As an example, the New Zealand accounting profession is one of the world leaders in the adoption of cloud accounting technology. They have been active in the space since 2010 and approximately (at the time of writing) 25% of New Zealand small businesses use a cloud accounting product.

As a result of technology and market forces, the New Zealand Accounting profession has been negatively affected. In short, it’s going backwards.

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As a result of technology and market forces, the New Zealand profession has been effected. In short, its going backwards.

All you have to do is take a look at my profit per partner analysis below of the last 11 years. In 2004 the actual median profit per partner was NZ$176,163. In 2014 the actual median profit per partner is NZ$190,409. Not only has the actual profit per partner declined in the past 8 years (from a high of NZ$229,646 in 2007) but when you apply ‘CPI plus a bit’ of just 5% to each year since 2004 then the 2014 comparison results are staggering.

The other numbers of Work in Progress, Receivables, Write offs / Realization, Average Hourly Rate and Productivity / Utilization have gone up, down and sideways. At the end of the day it’s the profit per partner that matters.

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Most partners are making less than their clients yet they are advising them about business success!

Every expense in a firm is increasing. Salaries and overheads are increasing and you should be running a better firm each year so applying 5% per year profit growth is a very conservative growth target. Based on 5%, the median profit per partner in 2014 should be NZ$286,951. Alas, this year it’s only NZ$190,409. That’s almost a NZ$100,000 difference per partner!

How can the average partner in New Zealand afford private school education, decent cars, reasonable holidays and still give back to the community? Most can’t.

And to make matters worse, isn’t the Accounting profession supposed to be The Trusted Advisor – the Primary Business Advisor? Most partners are making less than their clients yet they are advising them about business success! Hmmm.

So why is this happening? I think there are 3 primary reasons:

1.   Cloud accounting technology is driving efficiencies in the firm and the profession has been forced to reduce prices.

2.   Savvy clients have more information than ever before and they are asking more ‘price’ and ‘value’ related questions.

3.   Nimble Accounting firms are promoting bundled and cheaper prices than ever before and thus ‘commoditizing’ compliance.

There is more of this to come. To counteract these market forces the profession has not acted fast enough in marketing, value pricing and delivering business advisory services.

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The reason the majority of the Accounting profession exists is to make sure that the government gets the correct amount of tax money that it is owed.

As the old saying goes if nothing changes, nothing changes. What that means is if you do nothing (strategy, process, tools, etc.) then nothing changes. In this case doing nothing means everything changes. And a sharp decline in profit should be enough to motivate the industry to change. Let me add one more to the mix before we get onto solutions. One click lodgment. With all the Internet data (which is much more accurate) already in the Internet accounting system, how long will it be before the government authorities get their systems ready and allow direct lodgment? The government authorities do not care about the intermediary called an Accountant. All they want is their tax money! The reason the majority of the Accounting profession exists is to make sure that the government gets the correct amount of tax money that it is owed.

One click lodgment is not far away and it will bypass Accountants and eliminate a big chunk of their revenue.

Technology is disrupting the industry and there is more to come. Is your firm ready?

Disruptive area #2 – Labor is being sourced from less expensive countries

Manufacturing companies have been using low cost labor in developing countries for decades to produce their products. Just look at the clothes on your back. I bet very few of them are made in your current country!

The reality is that (because of escalating labor costs) most western countries have priced themselves out of markets by attempting to produce the product locally.

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Now we are seeing ‘services’ companies embrace the outsourcing trend with fully resourced teams.

Up until a few years ago it was primarily ‘hardware’ based manufacturing companies using this resource. Now we are seeing ‘services’ companies embrace the outsourcing trend with fully resourced teams.

Most people think of this as outsourcing where in actual fact the correct term is offshoring.

Outsourcing is where you get someone else to do the task who does not exclusively work for you. Accountants are a classic outsourced service. You work for many clients and they send their work to you because you are better at it than them.

Offshoring is where you set up a team (maybe starting with one person) offshore and they exclusively work for you. The banks and airlines have been doing this for years. They get themselves an office in a developing country, fill it with desks/chairs/computers/phones and hire and train some people, and voila, they have an office that can support their customers.

For one off projects, outsourcing is the way to go, however for larger ongoing tasks offshoring is the way to go.

Accountants have recently embraced the idea very quickly and are hiring people in developing countries with some degree of vigor right now.

I went on an offshoring study tour (in the Philippines) and the opening speaker said 2 things to me that got me excited:

1.   Any job that can be done over the phone or behind a computer we can do for 50% – 90% cheaper, faster and often better

2.   "I have been a virtual assistant for 5 years for a university professor in New York. I have gotten to know her job so well that I now mark her students’ papers for her"

I thought WOW. There are smart, hard workers, there is an abundance of them and they are relatively inexpensive.

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Any job that can be done over phone or behind a computer we can do for 50% – 90% cheaper, faster and often better.

If you think about an Accountant’s day. Most of it is spent on the phone or behind a computer. Most of the day is spent dealing with client queries and processing Accounting work. The technology products will take a lot of the processing work away and the balance can be done by cheaper labor offshore.

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The Accounting firm of the future has a local team who are customer facing (nurturing, sales and advice) and everything else (back office and processing) is done offshore.

What is left are team members who are customer facing and adding value. The Accounting firm of the future has a local team who are customer facing (nurturing, sales and advice) and everything else (back office and processing) is done offshore.

There are 3 compelling reasons why this makes sense:

1.   An abundance of labor

2.   A labor force who are supremely qualified

3.   A lower cost structure

Let’s take the Philippines as a case in point. It is estimated that circa 1.3M work in this space. It is growing every day. Their English is fantastic, the schooling system is very good, they are very family orientated, the time zones are reasonable and the government is right behind the initiative with infrastructure. They cannot build the office towers fast enough.

The table below highlights the salaries (March 2014) that Accountants in the Philippines are being paid. These are considered ‘middle class’ salary levels as the cost of living is so inexpensive.

You can set this model up one of 3 ways:

1.   Hire people directly who work from home.

2.   Go through a serviced office business (called a BPO) and hire the people through them.

3.   Incorporate a company and set up your own office – viable if you need 20+ people.

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Place an ad, go through a recruiter, receive resumes, cull them out and hire the best person for the job.

When hiring someone you do it via video conference (Skype®, Google® hangout, GoToMeeting® etc.) and you do it the same way you already do. Place an ad, go through a recruiter, receive resumes, cull them out and hire the best person for the job.

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They are your employees and they need to be trained in your systems and your way of doing things

If you go through option 2 then the Business Process Outsourcing (BPO) will help you hire the people. The training is up to you – again via video conferencing or personally. They are your employees and they need to be trained in your systems and your way of doing things. They become part of your team so they need to be treated as such.

As an example my Australian team had a cooking class the other night. My team in the office in Manila did one on the same night in their city. My Australian team does daily huddles and they Skype in our team every day in the Manila office. What we do in one office we do in another.

Some people have a problem with this idea. We must keep the jobs in our country I hear. What will our Accountants do if we send the work to a team elsewhere is also another one. What would my clients think is a common one. Well, most Accounting firms will have different nationalities employed already in their local offices. What’s the difference? You just have a team working for you in a different country in your ‘offshore’ office.

If you pare the comments often they are either racist or the person saying them has inadequacies and hang-ups that their job can be done by someone else for a 10th of their salary.

All of this is globalization and a change in social behavior. I think the concept got off to a bad start with telemarketing companies calling you at home and you could not understand what they were saying. It also got off to a bad start because the term ‘outsourcing’ was created and many Accounting firms sent jobs offshore and because the person worked on the job was not working 100% for that firm there was a lot of re-work needed.

As a disruptive trend we are seeing Accountants use the available resource in the following way:

•    Hiring marketing people to do the marketing work for the firm. I know of an Australian $4M firm who has 8 marketing team members offshore.

•    Hiring client service coordinators to handle data collection and job set up from clients.

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"Hiring bookkeepers to do bookkeeping work for clients – and charging clients @ $20 per