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How Firms Can Justify the Cost of New Technology

Apr 4th 2017
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Outsourced accounting firms are the back-office heroes of small business – champions that can banish nearly any tedious and time-consuming administrative headache for their clients, from 11th-hour payroll processing and account reconciliation to managing the monstrous month-end close.

But there is one nagging issue, one recurring challenge, these outsourced accounting firms face within their own offices that isn’t so easy to dispatch, said Nicholas Fedele, CPA, president of Lumiola Consulting, a New Jersey-based consulting firm that helps small businesses improve their accounting processes through the use of technology.

They know they need to upgrade their technology to grow their business and better serve their clients, but they still struggle to justify the cost.

“Accountants fundamentally understand that growth warrants changes in the technology they use,” Fedele said. “They recognize that a new software platform that integrates all the varied applications their clients are using will improve their firm.”

But they still initially hesitate to commit to the cost of purchasing a larger software platform – a Workato or a FloQast, for example – because the return on investment isn’t immediately evident.

It’s understandable, Fedele concurs, that the first question accountants ask themselves when they begin to think about buying new software is: “How am I going to absorb this cost?” But it also misses the mark.

Instead, the first question accountants should ask themselves when purchasing new software should be: “How can I justify this cost? What are we, my firm, and my clients going to get from this?”

And that is a relatively simple proposition.

“The way I see it, there are two main ways you can justify the cost of purchasing new technology,” Fedele said. “First, ask yourself if you can justify the purchase based on improved firm efficiency. Will this software reduce your labor costs, streamline daily operations, or replace outdated tools?

“Second, ask yourself if it will allow you to provide your clients with more valuable service through better data,” he continued. “Will this software help me deliver data that is more insightful and deliver it in an actionable way, in real time, to my clients?”

Efficiency and Better Data
To determine if your firm will gain efficiency with new software, your first metric should be labor cost, according to Fedele. Will the software reduce the number of hours you and your staff spend on outmoded, or redundant, back-office tasks, such as hand-keying or manually importing data into multiple systems?

“The benefit of most applications today is integration and automation,” he said. “They replace manual processes where someone is required to run a report in one system and either hand-key it or manipulate data in Excel to import it into another system. By replacing that process with software, efficiencies are gained.”

If the new software does increase your firm’s efficiency, you are also likely well on your way to justifying the other main reason you would invest in new software – it will help your clients make better business decisions through better data.

“Efficiency and improved data go hand in hand,” Fedele said.

Because the old processes linked to old software are so labor heavy, the accountants who use them likely only generate reports on a weekly or monthly basis – an eon in the app economy. Most of today’s cloud-based tools, however, allow for real-time transfer of data. That means accountants and their clients can see up-to-date information within minutes of it happening.

Today’s cloud-based tools also improve the quality of the data accountants can provide because “integrating these applications typically is much more conducive to getting more granular data than a manual process would allow,” Fedele said.

That doesn’t happen through a specific piece of software, per se; rather, the better insights come from having systems that are connected.

“Integration allows a greater level of detail when information is moved back and forth between systems. It allows you to report in more detail, or slice and dice data in different ways than you could before,” Fedele said.

Take the example of an outsourced accounting firm that has an e-commerce client selling goods on Shopify. If Shopify isn’t integrated with the general ledger, employees would have to manually run reports, then hand-key or import/export the sales data into the general ledger. The process is so labor intensive, the firm would likely only make a journal entry at the end of every month to book revenue by category (i.e., shirts, pants, jackets, or accessories). 

The problem here, Fedele said, is it’s very difficult to provide any in-depth analysis with only data that broad found in the general ledger. But by integrating Shopify with the general ledger, every order and all of its details will appear in real time. Then everyone can see exactly what SKU was sold, for how much, to whom, what items were added to the order, and so on.

“Now you can provide your client more value through better analysis because the new software allows you to measure margins by item or product line, identify which products are best performing, and which are costing the company more money to sell,” Fedele said.

There are many applications that help automate traditional processes, Fedele said. Products like Bill.com or MineralTree help with automating accounts payable, while Expensify or Nexonia helps with time and expense management. Workato, he said, is a platform designed to help with the integration of other applications like Intacct and Shopify, while tools like FloQast and BlackLine help firms manage and streamline the monthly close process, saving multiple hours on each client.

Determining How to Cover the Cost
Once you determine if and how any of these applications might help your firm, Fedele said, then you can move onto the next step: determining how to cover the cost.

If the firm itself expects to see increased efficiency (through streamlined processes and reduced labor costs), it should absorb the cost of the new technology. The clients you serve may or may not ever know about the change.

“Firms should never charge their clients for applications that only increase firm efficiency,” Fedele said.

Instead, the cost of the software will be offset by reduced labor costs themselves. 

If, on the other hand, your new software provides the client additional value-added services through better data (better data in the general ledger and extra metrics every month), you will likely want to discuss an increase in fees with your client.

In most of these cases, the firm will take on the direct cost of the software, but it will increase the client’s monthly fees justified by the increased level of service, Fedele said. A firm that purchases Workato to assist with the integration of its e-commerce client’s general ledger and shopping cart apps is one that would fit this bill, as would integrating Nexonia with the general ledger for a professional services firm so they can see timesheets and expense reports with the rest of their financial data.

That last example underscores an important point, Fedele said: Keeping pace with new technology is much more than “just an e-commerce issue.” 

Eventually, all outsourced accounting firms, regardless of the clients they serve – restaurant owners, brick-and-mortar retailers, not-for-profits, financial services providers, doctors, lawyers, or dog groomers – will have to justify the cost of new technology if they want to keep pace with their clients’ businesses. Clients in all industries are seeing increased efficiency in many other areas of their business through technology, and accounting should be no different, Fedele said.

“I think most outsourced accounting firms understand that they need better technology if they hope to thrive going forward,” Fedele said. “In your client’s mind, your ability to provide better insight is what sets you apart from the traditional CPA down the street who only makes monthly journal entries in their old legacy system. New technology will put you out there as a cutting-edge, proactive firm that provides valuable services to your clients.”

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