20 Jul Farm-Aid for Accountants?
John Mellencamp’s hit song, “Rain on the Scarecrow” chronicle the decline of the small American farmer in the 1980s. Farmers faced economic devastation caused by new technology and emerging international competitors.
Expensive new machinery and international competition transformed farming from a sleepy vocation handed down between generations to international global commerce driven by technology and sophisticated business metrics. Farming became a real business.
Small farms disappeared as expensive machinery demanded economies of scale that could create a sufficient return on capital investment. International competition lowered prices to where new technology was required to compete with lower-cost international labor.
Farmers needed to raise the level of planning beyond pushing seeds into the ground and waiting for favorable weather. They began to pay attention to detailed yield metrics and weather patterns, planning irrigation to effectively use natural rain patterns. They used Monte Carlo simulations to plan which crops to plant and sell.
The ones who didn’t change went bankrupt or sold and retired. Musicians held a concert, Farm AID, to call attention to the farmer’s plight.
Driving to work this morning, I realized that changes in the CPA industry parallel the plight of the small farmer in the 1980s.
Solo and small firms face fundamentally the same challenges small farmers faced in the 1980s. Competition disrupts pricing and profitability in traditional service areas. Foreign competition from outsourcing demands lower labor costs at the same time domestic employees are increasingly expensive and in short supply.
Expensive new technology demands sufficient scale to create a sufficient return on investment. The best tax and accounting technology is too expensive for small firms. Yet small firms need efficiency boosts most.
The hot-off-the-internet presses “Accounting Firm Operations and Technology Survey” from industry tech gurus Randy Johnston and Brian Tankersley rips the band-aid off the coming pain and disruption solo and small firms will suffer over the next decade.
Who makes the technology acquisition decisions for solo and small firms? The survey suggests partners and maybe firm administrators make these decisions. Of course, the decisions are limited by their tech knowledge, which is likely to be lacking compared to IT professionals and even tech partners in larger firms.
The survey shows that solo and small firms don’t even use IT consultants extensively. How informed can these decisions be? We can logically conclude solo and small firms will fall even further behind in technology, which impacts their ability to compete in commoditizing traditional markets.
From the survey, solo practitioners rate understanding new technology as a bigger challenge than attracting new clients. Small firms rank practice improvement as their number two challenge. That’s really just a proxy for identifying the right tech solutions.
In the survey, solo and small firms rate examining technology to solve workflow inefficiencies as their second most effective way to control costs. Yet, how can they do that with limited knowledge?
Avoiding the issue by selling at retirement won’t work. The survey also shows that the likely suitors for small firms, medium-sized firms, aren’t that interested. Less than 20% of medium firms believe firm acquisitions are an effective way to generate revenue.
Show that to the broker, who tells you that you’ll get a 1.2 collections multiple on your sole proprietorship. I had lunch recently with a CPA firm owner, who had made four recent acquisitions. He told me that the maximum multiple he paid was 0.8 times. He avoids any firm that has “brokered up.” They don’t know the reality of the declining value of 1040 practices.
If selling and retiring isn’t a solution, what is?
Rather than listening to vendors and consultants, who have never worked five minutes in a CPA firm, maybe we can generate the solutions ourselves. We need a new type of vendor/consultant, who brings solutions from experienced CPA’s to other CPA’s.
Effective practice management arises from interdependent components:
- Workflow
- Software
- Human resource management
We need a new type of vendor/consultant, who can marshal resources to solve challenges with all three components. Good workflow means nothing without good software. Good software means nothing without a good workflow. Both workflow and software fail in the face of poor staff management.
Our current vendors know little about the day-to-day grind of solo and small firms. At best, they are great software developers. At worst, they are international conglomerates, who had the misfortune of acquiring companies serving CPA firms.
They have no emotional investment in our success or our clients. They haven’t known the joy and challenge of preparing thousands of tax returns in a small firm. They couldn’t care less about the small businesses, who depend on small CPA firms for advice that literally keeps small businesses open.
These vendors provide training led by product specialists, who know every little bit of product functionality but have zero knowledge leveraging the features for small firm success. They know the software, but not workflow or people management. They address an isolated piece of the practice improvement equation.
Our version of Farm AID won’t be led by musicians. Our plight just isn’t as tears-worthy as farmers. Our version of CPA AID won’t be a concert. It will be support for CPA’s by other CPA’s.
Start by following the advice from our industry visionaries like Randy Johnston, Brian Tankersley, Donny Shimamoto, and Ed Mendlowitz. Then demand solutions from vendors with real-world experience running CPA firms.
John Mellencamp won’t be writing a song that will solve our problems. We’ll write that song ourselves.
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