May 28th 2012
So, the evolution has arrived, and more and more accountants are moving to the cloud. It is the topic of discussion at conferences, blogs, periodicals, and amongst your peers. But, how would you price a cloud engagement with your accounting services clients? This among other IT issues is a puzzle to many accounting firm owners to figure out. So, in this article, I am going to attempt to give you some insight to help you with applying this to your own firm and provide a better understanding of the pricing model to employ in this new frontier of cloud accounting.
The AICPA just issued their 2012 Top Technology Initiatives survey. The survey found that the top technology priorities for firms are: securing the IT environment, managing and retaining data, managing risk and compliance, ensuring privacy and leveraging emerging technologies. It also found that the technology initiatives considered having the most impact are information security, remote access, control and use of mobile devices, business process improvement with technology, and data retention policies and structure.
The cost of monitoring all of the regulation, security within your firm, privacy issues, and what is accessible on a mobile device, just to name a few, is a large overhead cost that firms are having to bare. Most likely, paying outside experts to help them make sure they are in compliance due to the large amount of regulation in this area. It is much too complex to figure out on your own, unless you already have an IT background and stay up to date on the ever-changing and increasing regulation and opportunities to be compromised. The efficiency of being in the cloud helps to spread a small portion of the costs you would incur if you did it yourself to manageable costs over all of your client engagements. You pay for what you use instead of having the upfront overhead cost that needs to be covered by your engagements before you even start becoming profitable. Your cloud providers incur the cost of maintaining all the security and privacy regulations and auditing the system. So when pricing your services in a cloud environment, you have a real opportunity to incorporate your cloud costs into a value-billing system with your clients to gain profitability as you become more efficient with each engagement.
Value billing or fixed-fee billing was something I used to stay away from before the cloud. Reason being, in an on-premise environment where I did not control the accounting or the software selection of the client, I could not be sure of the work I was going to be doing each month. The client led the engagement instead of me being able to control the quality of the accounting system and the deliverables it could create. Additionally, the collaboration issue was an expense I could not predict either. Each client had their own setup – different remote access solutions and back-up procedures that made it hard to predict how much non-billable time I was going to incur just to be able to do the work or return it to the client. All of these non-value tasks add up and create those hidden costs that draw down profitability.
In a cloud environment, the costs are face value. The software and hardware expenses, IT security and privacy audits, real-time client collaboration, financial and operational reporting, customer support, and all other accountant program benefits is all inclusive in the price you pay. Therefore, value billing is possible and not a science anymore. So for example, if you have 20 clients you bill monthly accounting services, and the invoice is always variable each month with hourly rates offering little opportunity to become more profitable as you become more efficient, this cloud environment will allow you to value bill. When moving to this model, you can take advantage of the efficiencies you create to drive your realization higher and make the bill more predictable for your client, which makes it a win-win for both parties!
Going back to this example, you may have the following scenario with 20 clients on your chosen cloud platforms.
Let's estimate the annual program fees for your firm from all of your cloud vendors is $2,500. The overhead cost per month for these program fees would be approximately $208/month spread across your 20 outsourced accounting clients.
The monthly per-client fee to utilize the system, including all of your cloud vendors, may be approximately $100/mo/client.
If you have 20 clients on the cloud platforms of your choice, the monthly cost for you to pass through to your client would be (20 x $100/mo) $2,000 + the monthly total of the program fees of ($2,500/12) $208 = $2,208.
In this example, the client services you provide for your 20 clients are bookkeeping (i.e., entering and paying bills, creating customer invoices, bank reconciliations, etc.) and/or controllership (i.e., monthly financial statement preparation and analysis, cash flow forecasting, business planning and budgeting, etc.) for an average of $1,500/mo/client. The total revenue for the accounting services you would bring in each month would be approximately $30,000.
Assuming that you spend approximately $60,000/yr on staff to perform the work for these 20 clients, the monthly labor cost would be $2,500.
Your profit before any other firm overhead costs for 20 clients on a cloud platform would be:
- Client Revenue @20 clients/mo (avg $1,500/client): $30,000
- Cloud Platform all inclusive costs/mo ($2,208 + $2,500): $ 4,708
- Monthly Profit Margin on 20 clients/mo: $23,292
- Profit Margin Percentage: 84%
Taking this same example and spreading it over your real client base, you can see the opportunity to change the way you work with your clients and become more profitable at the same time. It is also a large request that I am sure you hear from your clients that they appreciate more predictable billing. Additionally, when moving your practice to the cloud, you can have peace of mind that your cloud vendors are doing the necessary IT security processes and procedures that you would not be able to keep up with on your own. Get involved in the discussion on the social media sites and take the time to learn more this upcoming conference season to assess whether you can incorporate some of these changes into your practice this coming year!