This week the Accountants industry report from Business Fitness New Zealand – The Good, the Bad and the Ugly – was released. It is not good nor bad but it sure is UGLY what is happening to the NZ Accounting profession. You can buy your copy here. I was asked to write the opening remarks for this years report. My summary says it all.
In 2001 I wrote the very first edition of the Good, the Bad and the Ugly of the Accounting profession. Back then 105 (Australian and New Zealand) firms submitted their numbers and the average profit per partner was around $160,000. Since then businessfitness was formed and my original work has been carried on in New Zealand for 11 consecutive years.
I am thrilled that I have been asked to write the opening remarks this year. It makes me proud that the commentary and analysis has continued. However, it does not make me proud what is going on in the New Zealand Accounting profession. In short, it’s 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 $176,163. In 2014 the actual median profit per partner is $190,409. Not only has the actual profit per partner declined in the past 8 years (from a high of $229,646 in 2007) but when you apply ‘CPI plus a bit’ of just 5% to each year since 2004 the then the 2014 comparison results are staggering.
The other numbers of WIP, Receivables, Write offs, Average Hourly Rate and Productivity have gone up, down and sideways. At the end of the day it’s the profit per partner that matters.
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 $286,951. Alas, this year it’s only $190,409. That’s almost a $100,000 difference per partner!
On $190k how can partners 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 adviser? Most partners are making less than their clients yet they are advising them of business success! Hmmm.
So why is this happening? I think there are 3 primary reasons:
- Cloud accounting technology is driving efficiencies in the firm and the profession has been forced to reduce prices.
- Savvy clients have more information than ever before and they are asking more ‘price’ and ‘value’ related questions
- Nimble Accounting firms are promoting bundled and cheaper prices than ever before and thus ‘commoditising’ compliance.
There is more of this to come as well. To counteract these market forces the profession has not acted fast enough in marketing, value pricing and delivering business advisory services.
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.
I think there are 7 key things the profession needs to do to remain relevant and stop the leakage.
- Improve client service. One of the key reasons clients leave because of poor ‘service’. Adding value to what you are currently doing is critical.
- Train your team. Gone are the days when an Accountant who ‘processes’ compliance work can command the salaries they do. They must get new skills and add value to what work they are doing – otherwise the technology and off shore labour will replace them.
- Marketing every day. The profession has a lot to offer yet no one knows about the cool work you can do. Marketing is a must.
- Service offerings need to be increased. Just offering compliance or ad-hoc advisory is not enough. The profession needs to get involved in ‘financial coaching’ a structured way whilst staying close to the numbers.
- Pricing differently. Charging by the hour (especially in arrears) is so last century. You need to price in advance and preferably based on the value you create for the client.
- Sales skills. With increased competition and new services to sell the profession needs to learn how to sell.
- Cloud promotion. Due to social behaviour and technology companies driving change you cannot stop it. So join it. Promote cloud accounting & use modern tools to capitalise on it.
It’s not all doom and gloom. However if the profession does not do something different then who knows what the next 10 years will look like.
The graph below tells the story. I urge you to pass this onto every Accountant you know and let’s stop the decline. On January 20 2015 I will be doing a webinar in NZ to help stop the rot.
Most Accounting firms are on a quest for efficiency. They are focused on systems, process, people and equipment to get more efficient.How can we do the job more efficiently is the management mantra.
Accountants have been pretty good at getting efficient over the years. But at what cost?
If an Accountant ‘prices in arrears’ where the price is determined after the work is done (based on the time taken and a charge rate) then if the Accountant is more efficient then the time goes down and so does the price. Or worse you end up doing more work for the same amount of money. Some Accountants attempt to ‘write up’ the job to a more acceptable price. This is unethical as the business model said ‘time taken X charge rate = price’.
Unless you want to be penalized by being efficient the only right way is to scope the job out in advance. Then price the job, communicate in writing the price and scope of the job to the client and then be as efficient as you possibly can. Don’t go outside of the scope and if you see another project within the same job then communicate that to the client with a new project scope and price.
Pricing in arrears has got issues written all over it. And don’t get me started on driving utilization, productive time or billable hours – that’s the worst of them all. In another blog post perhaps!
It’s November and I have already ‘scheduled out’ 2015. I have added to my calendar all regular events:
- Date nights
- Bike riding
- Blog writing
- Kids drop off
- School holidays
- Rob & Nat Holidays
- Unavailable time
- Golf – practice & play
- Meetings – team, board, forum
- Conferences to attend
Anything that is known or regular is in the diary. So far 12 International trips for 2015. I then do any business around what it left. In my experience, if it’s not in the diary it won’t get done.
We released our annual benchmark report last week. Hundreds of firms sent in their financial data, we analysed it and then produced a 23 page report on our findings.
Already thousands have downloaded it (if you haven’t got it yet the entire report is available here for free) and no doubt it will be the topic of conversation at many partners meetings coming up.
I noticed this year that profit per partner was about the same as last year (A$344k in Australia and A$259K in New Zealand) and many of the other metrics are very similar.
Does that mean that there has been limited improvement? Probably. I often wonder why that is. I think it comes down to being comfortable.
Think about it. The Accounting profession is a pretty solid business with the majority (in the small to medium sector of firms) of work in annual compliance. Every year you have to ‘do the books’ of your clients (whether they like it or not) and every year there is some form of legislative change that you need to implement. You have the status of ‘trusted advisor’ so when other business opportunities occur you’re often the first to be called upon. Put into the mix that you have ‘financial intimacy’ with your clients (you know things that no one else does – or you’re the first to find out) which means they stick with you for a long time as well.
In my view all this ‘comfort’ breeds apathy and lack of innovation.
There are many changes afoot and massive disruption on the way (make sure you read my dossier and open letter to the profession in the first few pages of the report) which will hopefully (as they happen) break the cycle of apathy, reactiveness and limited innovation.
My company offers performance coaching & training for Accounting firms. We build really cool software solutions to help accounting firms succeed. My biggest competitor is apathy. There needs to be a healthy discontent for the present to break a cycle.
If the profession was more ambitious and was REALLY interested in the success of their clients then it wouldn’t be so apathetic.
That’s my rant for the day!
The tables below are a summary of the Australian and New Zealand samples. Full report available here.
There are many forces outside of your control that are affecting the profession. You can’t stop them so you might as well embrace them. There is no time stamp (like Y2K all those years ago) when you need to be ready for the changes. They’re just happening around you.
You are only going to change if you’re motivated to change. If you break the word ‘motivation’ down and modify it slightly you get ‘motive-action’. What is your motive for action?
I believe in 5 things with the Accounting profession:
- I believe that Accountants are the natural and trusted financial advisers.
- I believe that Accountants that add value do not earn enough for how smart they are.
- I believe that Accountants can make a massive difference to their clients’ financial condition.
- I believe that ‘cloud’ technology is not a fad and it will fundamentally change the way you operate.
- I believe that clients want a Real Time Accountant not a Redundant Data Accountant.
Maybe there is something in my 5 beliefs that inspires you to make some changes. Maybe in my 5 you can find your motive for action.