Recently, a friend of WRC and former client - Brandon Hall - put together his perspective on Gary Shamis's latest article around The Trusted Advisor. Brandon's analysis was quite intriguing, and we are excited to share it with you here. Brandon currently has a weekly newsletter for firm owners that you can subscribe to here.
Today, I’m going to break down a recent article my friend, Gary Shamis, wrote about how the industry is evolving to a more transactional approach.
Gary grew SS&G to the 37th largest firm in the U.S. before selling to BDO. He is a practice management savant and has coached me for the past few years. He runs an annual conference, Winning Ways, in Chicago - if you ever get a chance to go, you should.
Gary has noticed something interesting in the accounting industry - large firms are optimizing for transactional/project work rather than strong client relationships:
"All my roles and stops were great, but ultimately, being the "Trusted Advisor" did it for me. Many CPAs fill this role for their clients. When Sarbanes-Oxley came along, there was a concern that the legislation was designed to make the CPA independent, but the need to continue the "Trusted Advisor" role was so great that it continued, perhaps a bit under the radar. That is how most CPA firms grew and positioned themselves over the years.
Today, the industry is evolving, at a fast pace, from a relationship ("Trusted Advisor") to a transactional relationship (get the work done).
Why is this happening? There are not enough CPAs to fill the need, and many millennials prefer a traditional 9-5 job and relationships with their clients and firms. The amount of work continues to grow — regulations drive the need, and the amount of CPA talent to serve the need is diminishing in front of our eyes."
If you are running, or part of, a sub $20M firm, you’ve probably seen the result of this first-hand when onboarding new clients.
We’ve won hundreds of thousands of dollars of tax work in the past year from clients coming from larger firms. These clients are GPs of syndicates and funds and complain about “just paying for a tax return,” getting no proactive advice, experiencing delays and missed expectations… all complaints about the relationship with their old firm.
I have a habit of looking up the names of the service partners these clients are leaving to come to us. And these service partners are smart, highly competent people.
But they simply can’t staff teams to keep up with all the work.
Traditional firms make their money on project work and have historically struggled to price in the relationship.
In effect, they create a death-loop of sorts where the only way, in their mind, to make more money is to do more tax returns… relationships/reputation be damned.
"Sarbanes-Oxley certainly influenced that as related to public work, and the quantity of work was staggering. The outcome is more of a transactional relationship with clients. There is so much work to be done and not enough homegrown CPAs, and over 50% of the firms in the industry rely on international outsourcing to get the work done."
This transactional approach results from regulations increasing the demand for CPAs but not enough supply of CPAs to do the work.
This huge pile of work naturally leads people to optimize for task completion rather than holistic relationship management.
It's easy to see, too, how the continued consolidation of the industry is growing billion-dollar firms that are more transactional in nature. In many ways, I view the large, consolidated firms as banks, with partners functioning as vice presidents, not as I did when I was a partner and a "Trusted Advisor."
There's no going back to the olden days. Large transactional CPA firms are imperative for getting the work done.
Optimizing for transactional work and deprioritizing the actual relationship is not a bad business model in the sense that it will make money…
at least for as long as a talent supply gap exists.
Gary has some thoughts:
"Is there still a place for the "Trusted Advisor?" I say yes, but providing that type of relationship to clients is very difficult due to the diminishing numbers of CPAs. and the diminishing desire on the part of those who are CPAs to maintain it.
Down the road, the availability of the "Trusted Advisor" relationship will wain as the numbers and desire of CPAs to provide these services continue to shrink.
Where do we go from here? The "Transactional CPA" firms will continue to thrive, consolidate, and grow — the country needs this to happen. The "Relationship CPA" firm will become a boutique and a luxury. Like all luxury items, these services will be in high demand and should charge a commensurate premium for these valuable services. This somewhat mirrors what is transpiring in the medical profession with the uprising of "concierge medicine" — where doctors limit their practice to provide high-end services to those willing to pay a premium."
I think there will always be a need for a strictly transactional approach to tax/accounting.
Some clients just want it cheap and fast.
But I also think a subset of clients will place more value on the relationship over the coming years. This is especially true with AI advances - clients will want an expert guide (human) even if AI does all the work.
Think about how you can prioritize the relationship component of client service. Maybe clients have to pay you an annual fee to access your services… the benefit they receive is your firm has a lower client-to-staff ratio and can spend more time guiding clients.
The TAM may be smaller, potentially limiting growth, but you’ll be more profitable.
Imagine each client you prepare returns for has 1.5 returns on average and your average return price is $2500. To bill $700k in revenue, you need 280 returns and 186 clients.
This book likely runs @ 20-25% net margin (factoring in the replacement cost of partner time).
Now imagine you require a minimum annual advisory/relationship/concierge fee of $3,000. With that, clients can access you via email and phone as well as attend private events and webinars.
To make the same $700k, you only need 103 clients.
Those 103 clients have 154 tax returns meaning you’ve axed 126 returns from your workflow.
The 154 returns bring $385k revenue @ 20% net margin = $77,000. But the $309,000 of advisory runs closer to a 60% net margin, or $185k. On this ~$700k book of business, your blended margin is 37%.
A ~17 point increase in net margin by adopting a more relationship-based model.
Your clients are happier. Employees are happier. And you are happier.
That's all for this Sunday. See you next week.
Cheers,
Brandon