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The Nature of the Digital Practice Model and the Benefits to You and Your Firm
The objective of this chapter is to provide you with a foundation for understanding the overall nature of the digital practice model and how it is integral to increasing the value, quality, and profitability of your client services in the 21st century.
The Digital Practice Value Proposition
Let’s start with a bird’s eye view of the traditional CPA practice model pyramid in figure 1-1. The bulk of time and energy spent in your firm is most likely focused on gathering data and transforming it into meaningful information that typically results in a report of one form or another.
Some examples of these activities are as follows:
Compiling transaction data into journal entries to generate financial statements that report on the financial status and performance of an organization
Gathering individual tax data in the form of W-2s, 1099s, brokerage statements, K-1s, and so forth to prepare a 1040 tax return to measure the amount of taxes due and comply with federal and state income tax regulations
Figure 1-1: The Traditional CPA Firm Practice Model
Accumulating income and expense projection data to develop a cash flow budget to determine anticipated financing requirements
Gathering industry information to develop a business valuation report
When you think about these individual examples, focus on where all the time is spent and where the real value is. Frankly, your clients could not care less about how much time and effort you spend in generating any of these reports other than to the extent that it affects their bill if you are still using a traditional “hours x rate fee” model. We will talk more about this in chapter 12, “Security and Disaster Recovery.” The only thing your clients are really concerned with is what information the final report will provide them. In many cases, they do not know how to properly interpret the final report without your analysis and explanation. This is where the real value in your services lies because your knowledge and experience are critical to the quality and value of the services.
The key is to leverage technology as effectively as possible to automate the data processing activities that occur in the red zone, which will enable you to get that work done as efficiently and profitably as possible. Then, you can focus more of your efforts on analysis and planning services to optimize the value of your services.
We recommend that you keep the concept of this pyramid in the back of your mind every time you consider an IT initiative. Ask yourself a basic question:Will investing in this initiative result, directly or indirectly, in automating the red zone activities or increase your ability to enhance and expand your professional advisory services, or both? If you cannot answer this question in the affirmative, then you probably have an initiative that should fall toward the bottom of the list of priorities (unless it is required for regulatory purposes, privacy regulations compliance, or to mitigate risk, for example, disaster recovery planning).
One last point to mention on the pyramid is that what is happening in the accounting and tax industry is that the red zone is rapidly becoming increasingly automated at the macro market level. The challenge is to achieve this transformation at a micro level within your firm in order to remain competitive.
Key Challenges for Today’s CPA Firm and Technology’s Role
On any given day it may seem like your firm has an endless array of challenges to meet. We think it will help to focus here on four key challenge areas and talk about how a digital practice can help you deal with them more effectively.
Staffing
Whether the economy is up or down, the most important priority regarding your staff should be to maximize their productivity via automation. A multitude of benefits accompany this focus: greater return on investment on your personnel costs and improved employee satisfaction by continually moving them to more meaningful duties that truly leverage their professional expertise. With the proper technology solutions, a higher quality work product will result, from which everyone benefits. This is also essential from a recruitment and retention perspective. The new generation of professionals expect nothing less than a completely digital practice model and the benefits that come with it in terms of supporting a nontraditional work environment, whereby they can work when and where they want. It is not about work/life balance so much as it is about work/life integration. These, perhaps, are two sides to the same coin. But if you can foster this culture in your practice, you will move into the top percentile of “best places to work.” One additional point is that the new generation is not the only one that wants the benefits of a digital practice; CPAs at all stages of their career have come to realize the benefits to them as well.
Regulation
Source: Architect of the Capitol.
We believe any objective assessment of our regulatory system would conclude that we have complicated things so much that we are putting our country and our profession at a significant competitive disadvantage in the global economy. The main point we want to make here is that technology has allowed us to automate the compliance of many regulations. Once we get the information into digital format, we have access to an abundance of software tools to process the information in a manner that is compliant with all the various regulations and standards. If you are not buying this point, download a copy of the Form 1040 and fill it out manually and keep track of all of the routine decisions you have to make that your tax preparation software currently makes for you. We believe the only way we can keep pace with the expansion of regulation is to automate the compliance with it as much as possible through technology.
Firm Succession
We suspect that many of you who choose to read this book are thinking maybe you can just ride out the technology storm for a few more years and retire to the golf course. The point we want to make here is that you have an unprecedented opportunity to systemize your business processes and client services through a digital practice model. What this means is that your client services become based more in structured and automated information delivery and less on the client knowledge that is stored inside your head. We know we are taking a risk in making this point, but if you buy into it, you will come to realize that your practice will have more value when you transition ownership. By then, you will have a well-oiled machine that is delivering your clients their financial information and services where and when they want it. Take a few minutes to ponder this objectively. Some of the most challenging transitions in firm ownership occur when the primary value is based on the partner’s personal knowledge. This is because you have a natural conflict between maximizing your payout and moving toward retirement versus the value that is based on your continued involvement in the firm.
Technology
Obviously, this entire book is focused on technology, but this portion discusses the challenge of technology. It is evident that technology is changing the landscape of the accounting profession in ways that we did not even imagine just 15 or 20 years ago. Technology is going to have an even more significant impact over the next decade. Overall, the impact will be positive, but CPAs who do not take the time to develop an understanding of the direction of market forces and figure out ways to embrace the technology do so at their own peril.
Google, smartphones, iPads, cloud computing—just think about the impact that each of these recent innovations has had on the delivery of accounting and tax services. One of the difficulties of being in such a rapidly developing technological landscape is determining when a technology is ready to be embraced or if it is still too “radioactive” to risk your investment of time and money. But the greatest challenge with technology today is the abundance of choices from which you can select. It is way too easy in the current environment to make bad decisions, which is why using this book to develop a plan is so valuable. By taking the time to become informed, you can assess both the readiness and appropriateness of key technologies for your firm.
Hopefully, this review of the key challenges you face and the role that technology can play in helping you deal with them will provide further motivation to continue reading. Before you do, take a few minutes to think about this chapter and decide how valid you think these points are.
Key Trends in CPA Technology
Let’s get started with a review of the four key trends in accounting and tax technology that provide the foundation for everything else that we will be discussing in this book. These trends are illustrated in figure 1-2.
On the next page we introduce and explain these four key trends. In the 30 years we have been working as CPA technology advisors, we find the environment we are currently working in to be exciting and full of opportunity. As objective CPAs, we hope that you will see how these trends affect your day-to-day practice. We also want to point out that these four trends are so interrelated that if you believe in them and fundamentally understand them, it will become relatively easy to establish the direction of your IT strategy for the coming years.
Figure 1-2: Key Trends in Accounting That Affect the Digital Practice Model
Cloud Computing (aka SaaS)
There is little question that cloud computing (also known as SaaS, or software as a service) is the most significant trend in IT today. It is a paradigm shift of unprecedented magnitude. The value proposition is undeniable. We will dive into the concept of cloud computing in chapter 3, “Infrastructure;” for now, we’ll attempt a simple definition. Cloud computing is a model whereby we outsource the procurement, configuration, deployment, and management of our IT infrastructure and software applications to the specialists, which allows us to focus on the core services that we provide to our clients. It can accurately be described as IT outsourcing, but it is really so much more. Some folks do not like the concept of outsourcing. However, if you evaluate it objectively, it is a model that benefits your clients as well as your practice.
As mentioned previously, the acronym SaaS stands for software as a service, which means you are not only outsourcing your IT infrastructure, you are also transferring 100 percent of the responsibility for the performance and reliability of your software applications to the developers and vendors. The value proposition of the SaaS model is substantial. One way to consider this trend is by analogy. The evolution of the SaaS model of IT is like the arrival of the quick oil change market for automobiles. There was a time when the majority of people took responsibility for performing their own oil changes. When the oil change shops started to appear, many consumers made the shift to outsourcing this task because they could get the job done more efficiently and more effectively for a price that was easy to justify on the basis of saving your personal time for pursuit of more worthwhile activities.
Mobile Computing
For a number of years, the hype over mobile computing was questionable. The whole idea of substituting our dual monitors for a puny screen to do computer work just never seemed very appealing or practical, even though it was the “cool” thing to do. Then, along came the Apple iPad. All of a sudden, mobile computing as a paradigm shift became crystal clear to us. We could devote an entire book to this topic alone. For now, let us say that it goes hand in hand with cloud computing. The cloud takes care of our infrastructure responsibilities, and mobile computing gives us true anytime, anywhere computing. Both are key drivers of the current IT paradigm shift. The sooner you are positioned to embrace these two trends, the faster your firm’s value will rise.
Client Portals
We will delve into the concept of client portals in chapter 9, “Client Portals—Gateway to the Future.” Let’s start by saying that we truly believe the concept of a client portal has the potential to change the CPA/client relationship for the better more than anything else in the history of the CPA profession. The client portal is the path to leveraging the value proposition of both cloud computing and mobile computing. If we were leaders of a CPA firm, one of our key strategic objectives would be to exchange the network administrator role with a portal administrator by leveraging cloud computing to eliminate the network administration responsibilities. The potential of the portal to improve the quality of your client services and the profitability of your firm is substantial. Think of it in these terms. You probably empowered your firm administrator to spearhead your selection, design, and transition to your newest office. Your client portal is more important and valuable to your clients than your office, so it deserves the allocation of the necessary resources.
Extended Workflows
With the evolution of all of these new technologies (cloud computing, mobile computing, and client portals), you have an unprecedented opportunity to redesign your business processes in order to provide your clients with better and timelier information. This can be accomplished by leveraging these various technologies to extend your workflows to include the client at strategic points along the way. It might be as simple as sending e-mail or text alerts as his or her engagement status changes or sending reminders of impending deadlines for tax filings, tax estimate payments, and other regulatory compliance. Also, the workflow extension may evolve in more substantial ways, such as facilitating a process for the client to enter his or her tax organizer data directly online through your portal. Perhaps you can automatically send a draft of the tax return or financial statement for a review by the client prior to finalizing it or possibly implementing a shared cloud-based accounting system whereby you and the client are both entering data into the same accounting database. You and the client will always be working with the same current set of data and eliminating the continuous transfer of accounting data files back and forth. This is a true shared workflow model.
As time moves forward over the next few years, we believe this will be an area in which we will experience numerous changes in the client accounting business processes. Reflect back to how your relationship with airlines has changed over the past 15 years. You can now get a continuous stream of information electronically sent to your phone, which reminds you it is time to check-in and also updates gate changes and flight status alerts. These are all automatic and very useful pieces of information created to minimize some of the frustrations associated with air travel. You always have the option to stop receiving this information if you find it becomes more of a nuisance than a benefit. We think similar workflow integrations between CPAs and their clients will have a positive impact on improving the quality of the relationship and the loyalty of the client.
As we progress through this book and take a deeper look at the specific initiatives needed to transform to a digital practice model, we will identify how these trends will affect your business process design.
Benefits of the Digital Practice Model
We already discussed how the digital practice model will help you address the key challenges that were identified at the beginning of this chapter. Let’s use this opportunity to outline the benefits of transforming to a digital practice model from a more holistic perspective. The objective here is to make every effort to help you understand the value of automating your workflows.
Quality of Client Service
We cannot imagine there is a CPA who does not want to provide his or her clients with a higher quality of service. It is a fundamental success factor. Moving your practice to a digital model will improve the quality of your client services by facilitating more efficient processes. The accuracy of the information will improve because there will be fewer steps involving the manual transfer of data from point A to point B. Even the most cautious practitioners can make mistakes. In the overall picture, you will simply be spending more time analyzing and reviewing information and less time actually recording the information. Thus, your skills will be naturally applied at a higher level.
Stronger Client Relationships
The way in which humans interact with one another on an interpersonal level has changed significantly in the past few years as a result of technologies like texting, instant messaging, and e-mail. Everywhere we go, we see people with their heads down, looking at a screen of some sort. Instead of communicating with the people directly around them, they are choosing to communicate with people elsewhere via the various virtual technologies. For better or worse, that is where the world has evolved to today. So what does this have to do with a digital practice model? Once you achieve a state where you can deliver and exchange information with your clients electronically, you can work toward making your firm the place they visit online on a regular basis to access their business and personal financial center. You want to keep pushing the envelope with innovative ways to reach out to your clients in a virtual world. It may be through a web conferencing session to walk them through the process of filling out the tax organizer or providing them access to their entire collection of online financial information in a single place (your portal). Perhaps it is sending them important alerts via e-mail or text to expand the level of communication you have with them. The more you leverage the digital practice model to develop these communication links to your clients, the stronger your relationships will be because you will be in their virtual space much more than you were ever in their personal space.
Do More With Less Effort
Refer back to the practice paradigm pyramid and contemplate the red zone. Every time you are successful in implementing a technology initiative that automates a piece of your business processes, you are making a deposit in the time savings account. If technology exists that can automate a task, then that is one more task you probably should not be doing manually. The time you save through automation can be reallocated to increase the volume of your services without increasing personnel resources. Or you can refocus more of your efforts on the higher value analysis and advisory services, or you can simply take more time back for your personal life. The bottom line is that if technology can do it for you cost effectively, why not make that choice?
Enhance the Overall Value of Your Firm
The accumulation of all the benefits described in this chapter will result in three very strategic benefits to your firm: increased profitability, increased value, and stronger client relationships. This will provide you with greater resources to invest back into your staff, your office, your technology, your service offerings, and yourself. This will also result in pushing up the valuation of your practice when it comes time to transition the ownership.