Counting on Change in the Accounting Industry

Warren Buffett once said that accounting is the language of business, but today a more accurate observation might be that digital disruption—the ongoing changes driven by digital technology—is the language of business.

All segments of the professional services industry are experiencing digital disruption, and accounting firms haven’t been spared. While the industry has seen robust growth over the last seven years, the landscape is changing quickly. Firms face dramatic shifts as a result of changing customer behavior, the emerging impact of technology such as machine learning and automation, and the need for transformational services and delivery models. In addition to those challenges, traditional accounting firms have expanded their offerings to include more consultative and advisory services, which require a different skill set and often the upskilling of staff.

Statistics show that the industry is struggling to keep up with this rapid change. Service Performance Insight (SPI), a global research and consulting organization, compiled some troubling data in a recent report: Most of the key performance indicators (KPIs) for the accounting industry lag behind those of the general professional services industry. For example:

• Operational efficiency challenges: Projects are delivered on time at a rate of 70 percent, compared to a cross-industry average of 77 percent. Project overruns are 25 percent more than the cross-industry average.
• Revenue: Revenue leakage, such as error-prone invoices or a delay in recording time, is 18 percent higher than the cross-industry average. The percent of revenue targets achieved is also below the industry average, where revenue per employee is 10 percent lower than the cross-industry average.
• Retention: This industry is typically plagued with high attrition, where 20 percent annual attrition can be normal. The industry five-year average for accounting hovers above 17 percent.

And, although accounting firms typically offer five to 10 guaranteed annual training days—a range that’s close to the industry average—statistics show that increasing this to 10 to 15 days per year improves both retention and earnings.

For the accounting industry’s long-term health, these KPIs need to change. Here are a few ways to get these numbers moving in the right direction.

Today customers are in the driver’s seat, with easier and automated technology options as alternatives. Firms, in turn, must remain focused on profitability, but they also need insights into their own business practices, such as efficiency and billing.

This industry has a rich history of over-managing detailed transactions (such as work-in-progress and revenue) with aggressive write-downs and charge adjustments in its billing practices. On the one hand, accountants are driven hard to bill, but on the other hand, partners and leaders make many manual adjustments to keep their firms in line with customer expectations. Many firms still bill based on a rack rate or gross rate, but then rely on these back-end adjustments to get them to an invoice a customer will accept.

Do these billing practices create a foundation that allows your firm to understand the real business opportunities with customers? Does this provide you with the data you need to effectively plan and gain insight into the effectiveness of operations? I think most would agree the answer to these questions would be a sheepish, dispirited “no.”

Some firms have recently taken steps to get a more accurate look at their business, including:

• Scoping project work based on detailed effort, leveraging realistic rates, and planning a more accurate revenue and margin picture.
• Weaning the business off of gross rates and micro-managed adjustments. 
• Encouraging people to forecast their work.
• Looking at utilization, but also examining KPIs that measure effectiveness, such as project overruns, realized hours, and on-time/on-budget project completion rates.
• Starting to measure the true margin of customer engagements. For example, capturing all hours, understanding what is being written off and why, and incentivize proper estimation and management.  

As automation and other technologies eliminate certain tasks, the work that remains demands deep advisory expertise, which also creates lasting customer relationships. Your team is what will differentiate your firm in this landscape, so the burn and churn mentality is a detriment—and costly. According to a recent Accenture report on the employee experience, companies with highly engaged workforces are 21 percent more profitable than those with poor engagement. In other words, it pays to engage, develop, and empower people (and customers will notice). The firms that don’t will cede ground to competitors—or automation.

In addition, create a culture that provides continuous and positive feedback. Be on the side of your people first, and they will keep your firm’s best interest at heart and create better customer connections. As Michael C. Bush, CEO of Great Place to Work, told us recently, a great culture leads to greater business success.

A focus on learning and access to learning opportunities at any virtual touchpoint is also critical. (We did a deep dive in a previous post to explain why this is so important for professional services firms, and the variety of learning approaches available today). A Deloitte survey of more than 10,000 Millennials found that 73 percent of those who plan to stay with their employers for more than five years say their organizations are strong providers of education and training.

Retain top talent by incentivizing managers and partners to lower attrition rates, and consistently check the pulse of your employee base. At Workday, for example, we survey our employees every Friday with two quick questions relating to their work, their managers, or their overall employee experience.

Technology, even new technology, does not guarantee change. In this industry, technology can be seen either as a competitive advantage or as competition. Before looking at a technology solution to run your own business, consider these questions:

• What are the pressures of your business, and what needs to change? Having an end-point strategy is wise, but what needs to happen now? Don't get stuck in only today's feature functionality viewpoint, try to look out three to five years. 
• Are there emerging technologies that can help transform your entire business? Is there a chance to leverage training and development technology for not only employee improvement initiatives but also operational performance improvement?
• Does your organization have the knowledge and skills, but also the culture, to embrace change? New technology leads to new benefits, but change takes time. Have a continuous innovation plan to move your firm forward continuously, not just at a milestone go-live point.
• Do you have a strategy that looks at the highest-impact technologies? For example:
  • Cloud: This has immense opportunity to set your firm on a path of continuous innovation. Identify which internal processes are locked down today and difficult to change. Are these processes that require change for the future? What are the cloud options to support these business processes?
  • Machine learning (ML): Machine learning is the next-step change that will fundamentally shift the accounting industry. Identify quicker wins for business impact, such as expense automation, anomaly detection analysis, and business process framework automation. In addition, have a plan for more transformational use cases that leverage ML and artificial intelligence, such as augmented analysis, virtual assistants, and natural language processing. Embrace platforms that allow you to create an innovation roadmap. 

Bottom line: There’s a lot of uncertainty in today’s landscape, but change is a sure thing. Is your firm prepared for it?