Part II – Accounting as a Service – The new business model.
Jason‘s Note – following on from our last post on Metrics for the Modern Accounting Practice we received a bunch of feedback from accountants, interested in the “Accounting 2.0” business model. Questions like, why has the game changed? How do you move from time-based billing and what tools are available to do this? In this post, Guy Pearson takes us through why the Accounting game has changed and provides practical tips on how existing practices can fundamentally evolve their firm to the Accounting 2.0 business model. Warning – this post is epic.
“Software is eating the world.”
Human processes are dead, long live human advice and interaction.
With the move away from taxation and compliance for accounting practice’s bread and butter caused by the introduction of technology now and in the future, we will see a replacement of any repetitive manual data entry and processes with software.
What’s caused all of this?
Cloud software is built on APIs (Application Programming Interface) which controls the flow of data between software code and what you see on the screen. It can also be used to communicate with 3rd party applications.
What this means is that data can be converted and then pushed from system to system.
A great example is how bills/invoices from suppliers or receipts can be scanned in on your phone and the data accurately converted into software code with great accuracy. (Greater accuracy where the source of the original data is sourced from a computer – e.g. PDFs) Once a PDF or a format is known, templates are collectively built which ensures great accuracy.
This data can then be pushed into an accounting ledger with a copy of the digital image and all fields filled in. (Note: digital images don’t fade.) From here it’s not too much of a stretch to see the data ,correctly coded, making it’s way through into correct codes and automatically being pushed to a tax return.
Now, let’s add in the fact that software can have rules and workflows (if this condition is met, please, do that action), it means that the human element is removed from this whole process and we move from a data entry to simply a reviewer.
The time billing model and data processing, tax filing are all going to become a race to the bottom in regards to price. So, we need to change our focus as an industry.
Advisory is the way forward
What this means is that we must focus on a few things to remain relevant in the future:
- Assisting companies in establishing these data flows;
- Learn how they work and audit these systems;
- Provide advisory in tax and compliance, but, not simply data entry;
- Deal in the now and help businesses build forecasts, develop KPIs and OKRs which can be seamlessly and easily measured;
- Add in speciality industries where you can benchmark and have authority about best practice;
As an industry we need to move away from being a jack of all trades that simply charges for everything (including finding answers to problems we should have spent time on R+D making a standard).
Time still has a place to measure efficiency, and, on long engagements (such as a business sale, capital raising, mergers and acquisitions) however % fixed fees on size of deal can also be used if there’s an undefined scope, with a minimum monthly retainer.
So, if time entry is gone (for the majority of billing), how does the business model work?
Monthly billing enables cloud accounting
As you move to the cloud, your software you wrap around your service offerings to your clients will be billed (9/10) on a monthly basis. This means that you need to generate revenue in the same timeframe as your expenses are being paid, otherwise you’ll carry your costs of software, estimated ~$50 per month for 12 months. Obviously this is not a lot of money per client, but, it adds up quickly as you move to the model.
Factoring in that the majority of your expenses/overheads are charged monthly as well, it only makes sense that you need to move to monthly billing to match expenses and overheads.
Delivering value in line with charging your client
So, you need to bill monthly and add value monthly and not just with compliance. It only makes sense that this is where advisory needs to be wrapped into your regular offerings and where accounting (advisory) as a service comes into play.
Regular touch points, real time data, difference making advice to any company and helping them become a more profitable and robust company… tax is merely an outcome, a by product, unless it’s a niche (e.g. transfer pricing).
Metrics for the cloud accounting practice
With time no longer a measure of billing and revenue, we must change the numbers we need to focus on. You now run more like a software company then you think.
The key metrics that we are seeing come to prominence amongst the firms that are excelling in the cloud accounting practice model are the following:
- COA: Cost of Acquisition
- LTV: Life Time Value
- MRR: Monthly Recurring Revenue
- ARR: Annual Recurring Revenue
- Non-recurring revenue: one-off fees, project work
- Churn: loss of customers
- CMR: Contribution margin ($ each client adds to your total revenue)
- ARPC: Average Revenue Per Client
- ARPH: Average Revenue Per Head (Split between average, recurring, non-recurring)
- Services: Adoption and contribution rate for each particular service
- Conversion: Conversion from quote to converted client
- Retention: Retention rate of clients
- NPS Net Promoter Score
See a whole presentation on Metrics for the Cloud Accounting Practice here
These metrics are all common in high growth software startups that bill monthly for software as their primary source of revenue. As accountants move to monthly billing with monthly value delivery, it makes logical sense that we need to follow the companies that do it best in the world.
Practice Ignition’s new dashboard is bringing all of these to your fingertips that will be built automatically measured and tracked just by using our engagement engine.
So how do existing practices practically evolve their business model?
As it’s too hard to turn a large sea going vessel, it’s hard to implement drastic change across a pre-existing business even despite the best intentions. We’ve seen it time and time again at Practice Ignition.
Setting up a new cloud division
There’s really only one scenario that allows a practice to change directions over time. That is to setup an entirely new division in your firm that only offers cloud services with separate branding, separate client base and monthly billing.
The key to the new division is to make sure that the adequate authority and responsibility is given to an individual to build this new model without the associated cost base of the existing practice.
From here the model can grow and be developed and over time the existing model can be rolled into the new successfully.
Big changes that need to be made
- Appoint a director of this new entity that’s only required to run this new entity;
- Enable your tech savvy accounting team flexibility to go through trial and error;
- As a practice you’ll need to make sure no “dead weight” is assigned to this new model – only the best and the brightest;
- Treat it as a startup. Assign capital (in the form of wages and a marketing budget) to the new model with a decent timeframe to get to breakeven – e.g. 3 years.
This may sound like a lot, but, it takes a startup practice with the owner/entrepreneur about 5 years (based on my experience) with no momentum to build anything sizeable and scalable practice from the ground up, so it’s necessary to give an existing business a decent period to come up with the transition period to the new business model.
So in summary, what is the new model?
1. Fixed fees
The new model is to productise the baseline service offerings allowing you to systemise and streamline workflow and build something scalable as compliance services become more and more automated.
The model for fixed fee pricing, business modelling with capacity planning are both things we built into Practice Ignition to help firms achieve this.
Advisory as stated above, will be fixed fee, estimates or percentage amount based on the success of the advisory engagement. It’s unlikely in today’s economy you’ll get straight time based fees (except for extreme niche requirements), so you need to provide an estimate, whether a baseline fee, a ceiling or, a range.
The key, no matter what the model is to make sure that the signing of the contract is not a hard thing to understand.
3. Who are the winners?
The winners will be the practices that can achieve low cost of acquisition of clients whilst increase their lifetime value (LTV) by executing an efficient marketing, sales and retention strategy in the same that software companies strive for this.