Adopt a Winning Firm Strategy. Adjust to the New Business Reality & Watch Your Profits Soar

by: Steve Erickson.

There has never been a more important time for CPA firms to adopt, support and implement a strategy that will navigate them through these times of unprecedented change by remaining relevant to their clients while continuing to be economically viable as businesses.  We are dealing with the “Perfect Storm”; the aging demographics of our society and the profession, a “great recession” that will have a lasting impact on consumer spending habits for the foreseeable future and a flood of new technologies that are drastically changing the way that CPA’s will perform their work in the years to come.  Let’s take a look at each of these dynamics and how they will impact strategy in CPA firms.

AGING DEMOGRAPHICS

The Current Reality

According to the census bureau there are approximately 77 million baby boomers (those born between 1946 and 1964) which represent almost 25% of the total population in the United States.  The AICPA membership consists of a significantly higher percentage of baby boomers, 50%+, as shown by the following graph of the 2008 membership provided by the AICPA.

SteveGraph

Implications for the Accounting Profession

Over the next 10 to 15 years a significant number of accountants will be retiring and there will be fewer experienced CPAs practicing. This will bring about tremendous opportunities for those individuals and firms that adjust to this new reality.  Simply stated, clients will be served differently and accounting firms will be structured differently in the future.  To see some examples of how professions have adjusted you only have to look at how medicine and pharmacies have changed their service delivery models by increasing leverage and pushing many tasks down to less experienced technicians.

Strategy

The changes in CPA firm structure and service models will be gradual over the next 10 years.  Don’t fight it.  Look for ways to triage your work and develop your processes and procedures to enable you to use less experienced and less costly personnel wherever possible.  Technology is getting better every year and will be at the very core of these changes.  A good place to start is to ask your personnel “How much of your work could be done by someone with less experience”.  I have been asking that question for 15 years and I consistently get back that 50% of their work could be done by someone with less experience!  We have a tremendous amount of inefficiency in our firms and a significant element of your strategy must be focused on developing processes and procedures using less costly personnel while maintaining quality and client service.

THE “GREAT RECESSION”

Current Reality

The current recession is now being referred to as the “Great Recession” according to articles in the Wall Street Journal and Newsweek, as it is the most significant recession since the great depression and is predicted to permanently change the consumer spending habits of a large percentage of the population, especially the baby boomers.  Most people are now giving much more thought before committing to large expenditures such as housing, automobiles and leisure. This spending behavior is having a negative impact on our economy.  Prior to the recession housing alone accounted for approximately 33% of consumer spending according to the Hoover Institution at Stanford University.  The economy will eventually come back but it will be a very long time, if ever, that the baby boomers again spend as they did before the recession.  Businesses that have relied heavily on consumer spending will be somewhat flat as the baby boomer generation focuses on retirement and making up for past losses.

Implications for the Accounting Profession

Many client businesses will be growing more slowly and as a result, the growth of CPA firms will be limited unless there is a renewed emphasis on both internal and external growth.  In addition, clients will demand service offerings focused on planning for retirement, transition, succession and value extraction as well as financial security while mitigating the ever increasing risks of doing business in these times.  It will not be business as usual.

Strategy

Any firm that wants to remain independent must continue to provide opportunities for their personnel regardless of the economy or the changing spending habits of their clients.  At this time I recommend that firms focus on gaining market share by actively marketing their services while at the same time seeking out acquisition or merger candidates. It is a good time to make consolidation deals as the income of many accountants is down and as a result the value of their practices is lower than it has been for many years.  With the impending flood of retirements we should see a buyer’s market for smaller CPA firms for the next 5-15 years.

Firms must also make sure they have the people with the expertise and ability to handle the flood of retirements, business succession planning and transitions that will occur during the next decade.  There will be fewer experienced accountants so firms must make sure that their professionals are performing services commensurate with their level of experience and expertise.  There has never been a more important time to push work down and provide administrative support to your skilled professionals.  In order to thrive in the future firms must address their “brain drain” issues early and often as many of their professional start to retire.

TECHNOLOGY

The Current Reality

We only have to look at the changes in technology during the past five years to get a feel of what will happen in the next 5 to 10 years.  Scanning is getting better, voice recognition is getting better and the equipment is getting ever more powerful and sophisticated.  Remote access is now most common and many accountants have taken advantage of their ability to work just about anywhere.

Implications for the Accounting Industry

The technology revolution will continue to have a significant impact on how accounting is practiced for the foreseeable future.  The old accounting firm model, a large bricks and mortar office facility, could become less viable economically as much of the work is performed in a virtual environment.   The cost of technology will increase as a percentage of net fees as the companies who own the technology will continue to incrementally increase the licensing fees for their software.  This trend will accelerate as the accounting industry does not own its software, and the continued consolidation of the software vendors will limit price competition.

Strategy

Everyone in your firm must become more proficient in the application and use of technology.  Do not mistake this with using technology yourself, as we can no longer have experienced accountants performing data input.  Accountants must know the capabilities of the software and its practical applications so that staff with less experience can enter the data and generate products. This must be done to control costs and increase profit margins.

Firms must also invest the time to properly implement technology if they want to reap the benefits of efficiency and productivity in the future. Those firms that shortcut the processes while implementing technology (proper linking, etc.) will be at risk as their firm will be less efficient and competitive in subsequent years.  A primary goal of using technology is to limit labor costs. 

Change is difficult and expensive so it must be implemented incrementally.  I do not suggest that you tear up the house to implement change but you do need to set a strategic direction and then move incrementally and persistently to achieve your goals.  Now is the time to look forward to make sure your firm is well positioned for a very different future.  The journey starts now.