What the Data Says About Automating Compliance
Now that we have set some important parameters for automating compliance work, let’s get down to business. What are the actual results of using technology in a compliance-based firm?
To quickly recap, Part 1 in this series identified the segmented tasks of a compliance job and outlined some of the key information we need to build a profitability model. Part 2 looked at the three real drivers that need to be examined in order to discuss the impact of technology on compliance.
Ok, now I need to explain the results using two scenarios:
Scenario 1: The traditional time billing method, where an hour saved is less fee charged. I don’t subscribe to this method in my firm (refer scenario 2), but I appreciate there are accountants in practice that are experiencing fee pressure out there.
So under this scenario we will take the automation (as it applies to the assigned client value) and allow a client discount. It hurts for me to write ‘client discount.’ I believe in over delivering rather than discounting. Scenario 1 also allows for a client discount 24 percent, being the reduction in the segment client value based on the segment automation percentage.
Scenario 2: The Ron Baker school of value pricing teaches the enhancement in the client experience through technology more than makes up for the time saved. Scenario 2 sees the client being charged the original $5,000 for the compliance job while being provided a greater experience through technology.
So what are the results?
Scenario 1: So, even if a firm were to allow the client to pocket the automation efficiency, or the client was to demand a discount (dreaded fee pressure), would the job become less profitable? Simply, no.
What would you say if the model showed that even after allowing a 24 percent fee deduction the compliance job was still 29 percent more profitable. With no automation, a firm will make an average of 32% profit per job, but with automation that profit can increase to 61 percent.
“Wait, What? You gave the client a discount and you still made nearly 30 percent more?” Correct! Plus, added to that increased profit margin, a technology-driven firm can have 64 percent additional staff capacity to re-deploy as it sees fit. The 64 percent will allow for another 1.8 compliance jobs to be completed using the same cost (staff and overhead). So, factoring in this additional revenue, a technology-driven firm can make 4.5 times the profit on those costs.
It’s worth discussing the 64 percent additional capacity created by automation. People will argue that this will cause issues with idle staff, etc. Having worked in small firms for over 20 years and having a large network of other small firms, I can safely say that between written off time, unpaid overtime, mad deadline scrambles and even missed lodgments, a firm has an awful lot of catch up before it will actually create real spare time.
Scenario 2: Here is where it gets really exciting. Technology provides a greater client experience (access to live data allows quicker turnaround times and greater decision making, etc.). I believe that experience has a value that equals or exceeds the reduction in time spent. So, no discount! Over my 9 years of being 100 percent cloud-based in my work, I haven’t discounted one job.
What are the results if we maintain the fee? Glad you asked.
The model shows that the compliance job is 38 percent more profitable. With no automation, a firm will make an average of 32 percent profit per job, but with automation (and value pricing) that profit increases to 70 percent.
In addition, when the firm using value pricing redeploys that 64 percent additional staff capacity, it can make 6.6 times the profit on those costs. Any way you dissect it, these are pretty impressive numbers and are far from ‘disruptive.’
From my perspective, the Australian accounting profession (and I suspect those in North America) has gone through a disappointing time over the last 10 years. Firms have delayed embracing technology and automation due to all of the scaremongering and misinformation. I often wonder what the profession would have looked like if we had seen headlines of “opportunity” rather than “disruption”?
Discussions around the opportunity for firms to offer advisory are extremely valid. Compliance and the tasks involved can be mundane for a lot of accountants and I appreciate the next generation may view this even less.
It’s true that many people leave a practice or stop doing compliance. This is mostly because it’s boring, but none I’ve heard of because the work is drying up.
What I can’t stand, is unfounded views around technology and automation having a negative effect on the role of the compliance-focused accountant. While fee pressure is often sighted, as this research concludes, fee pressure can still result in far more profit.
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Paul is an Australia-based practitioner, podcaster and pragmatist. Director - 5ways Group Chartered Accountants, Founder - Freedom Accounting System, Presenter - From the Trenches Podcast. To learn more about the practical ways Paul, through his Freedom Mentoring, assists accounting firms navigate technology, feel free to...