It’s very possible that there’s never been a more difficult time than now to run a modern accounting firm. A confluence of factors is coming together to make running a firm more challenging and complex than it has ever been in the past.
Young college graduates don’t want to work in accounting. Veterans are leaving firms. Polarized politics have led to frequent and consequential tax and monetary policy changes. Artificial intelligence (AI) is here, and nobody knows what kind of long-term impact it will have on the profession.
Huge opportunities exist for the modern accounting firm
Culture, technology and security matter in a way they didn’t 20 years ago. Firms must adapt if they want to survive. And for those who can adapt, there is a massive opportunity. Running an accounting firm well, especially in an era of high demand for services and shrinking supply, is one of the best investments of time and money anyone can make.
The key is to know how to build a modern accounting firm. To get some perspective on why that’s so difficult and so important to do right now—as well as how to do it—I sat down with Darren Root, Chief Strategist at Rootworks and Right Networks.
Lee Pender: Why is it harder to run an accounting firm today than it was in years past?
Darren Root: There are a lot of factors that have come together in the last few years. I think you can’t get away from hiring as a challenge. We live in a combative political environment where it feels like policies are changing every 15 minutes. That’s creating difficulty for accountants to keep up with tax and fiscal policies. There are ongoing compliance issues as well, especially as firms cross state lines to serve clients. There was a time when I didn’t have a client outside of Bloomington. Now, clients are everywhere.
Technology is changing, too. Not that long ago, most firms ran on a core set of solutions. Today, a lot of firms are turning to microsolutions. The quantity of applications has increased, and the expectations among clients and employees for what those applications can do have also increased. Firm leaders have to spend a lot of time figuring out things that aren’t necessarily their skill set. It’s overwhelming.
Lee Pender: Let’s delve into hiring. There’s a lot of evidence to suggest that firms continue to struggle to recruit and retain employees. Perhaps most critically, at a time when a lot of veteran accountants are retiring or looking to leave the profession, there aren’t enough young accountants taking their place. How do you see that situation playing out?
Darren Root: The demand for services is growing, and the supply of talent is dwindling. The younger generations—recent college graduates—don’t have the same attitude as a lot of members of the older generations. When I was younger, we did things because older people told us that’s what we were going to do. We did what institutions told us to do. Generation Z, people in their 20s, don’t buy into that. They don’t subscribe to the old paradigm or dogmas of the past.
Working weekends, working nights and working 80 hours a week during tax season are not things recent college graduates are willing to do. Running a traditional accounting firm with the demands and pressures we used to consider normal is no longer acceptable for a generation that has information at its fingertips and is used to working from anywhere. I think that’s a good thing. Firm leaders just have to adapt.
Lee Pender: One of the factors you talked about is a new national—sometimes even global—reach for firms that used to focus almost exclusively on local clients. One way to facilitate a broader reach is by adopting the right technology. But that’s easier said than done. What are the challenges there?
Darren Root: Building the right technology stack is critical, but it’s not something most firm leaders should try to do on their own. The stakes are too high, and technology is changing too rapidly for non-experts to be able to make smart decisions about how to invest. If the rate of change in the last 15 or 20 years felt like a lot, it’s only going to intensify with the advent of AI. There’s enormous potential for disruption and change.
I think there will be winners and losers among new technologies and new technology vendors, so picking the right one is important. No longer can you go this alone. What’s clear is that we have to figure out how to make running a modern accounting firm less complicated, because what we’re doing now isn’t sustainable for most people.
Lee Pender: There’s a lot of talk about AI right now. What do you think the short- and long-term impact of AI will be on the accounting profession?
Darren Root: Anybody who’s speculating about the impact of AI beyond 12 months is pulling things out of thin air. Not long ago, the blockchain was going to revolutionize everything. It hasn’t yet, and the hype around it has largely died down. But blockchain was more behind-the-scenes infrastructure. ChatGPT is right in your face right now. Everybody’s talking about it, and it’s evolving rapidly.
Over the next 12 months, it feels like AI in general and ChatGPT in particular will provide assistance on administrative duties. Say I get a request for information from the IRS. How can I craft a better response? With ChatGPT giving me a starting point, I might spend 20 minutes doing it, instead of an hour. As accountants, we already have more work than we can handle. There are fewer people who want to embark on handling that work. If AI helps us become 20% more efficient, it’s helping us level set a little bit. I look at it as a positive. It’s going to move us closer to reaching our potential as advisors. The only thing clients really care about is their lives being better for having interacted with your firm.
Lee Pender: So, with all this complexity and all these challenges, how can firm leaders adapt?
Darren Root: Firms need to be intentional. They need to make decisions instead of just letting things happen to them. Beyond that, they need to be smart—to make good decisions based on expertise that will produce long-term benefits.
There are four pillars to building what we call a smart firm. The Smart Firm Management pillar has to do with the nuts-and-bolts operation of the firm. It’s about selecting the right tech stack, building the right business model and selling the right products. A big part of the technology component is having the right practice management and client communications solutions in place.
The Smart Client Management pillar is about understanding who your ideal clients are and holistically serving them. This means developing the right services for serving existing clients, as well as for bringing in new clients. In some cases, it also means culling clients who aren’t worth your time and resources to serve. The idea here is to find and retain clients that are right for your firm and build strong relationships with them. You want to be a trusted advisor, not just a firm that does their taxes.
Smart Security Management, another pillar, is really about finding the right partner and moving all your technology into one place. That place is the cloud, where experts can handle security for you, and you can get on with running your firm. Security is just too complex and important for firm leaders to try to manage on their own. You need a partner that can take care of your network and the devices you and your employees use. Another important facet of security is training employees to avoid cyberattacks. Employees are the last line of defense for a firm’s cybersecurity operation.
Then there’s the pillar that might be most difficult for accounting firms to address: Smart Team Management. This pillar is about paying attention to and adapting your culture. As we discussed earlier, younger generations just won’t sacrifice their lives for your firm. They demand balance, and your firm has to learn to provide it.
Lee Pender: To be clear, firms need help constructing all of these pillars. But why is the Smart Team Management pillar so challenging?
Darren Root: Firm leaders absolutely need help building all four pillars. They’re already overwhelmed with their day-to-day responsibilities and simply don’t have the luxury of time to mull over big-picture issues. In terms of technology, most probably don’t have the expertise, either. So, nobody should try to tackle building any of the four pillars alone.
But the smart team pillar is probably the one that’s farthest away from most accountants’ expertise. It’s not in their comfort zone at all. When he ran his firm, my dad would go shut his door and just expect everybody else to get their stuff done. It doesn’t work that way anymore. The world is changing. What we learn by talking to firms is that the biggest problem in the culture is the person who gets up and looks at themselves in the mirror that morning. It’s hard to fix. If the owner is a jerk, the culture is going to be tough. Firm owners need to address culture in a positive way. They definitely can’t ignore it.
Lee Pender: Rootworks has been providing expertise to firms for years. Can you think of an example of a firm that leveraged one of the ideas from a Rootworks coach?
Darren Root: One firm I can think of, a $7 million firm, had implemented one of our product packaging concepts. It created three tiers for 1040 clients; think of it like a tiered support model. If a client wanted to be in Tier 1, the simplest and cheapest tier, everything would be 100% digital. No personal consultations, just simple transactions. If clients wanted to get up to Tier 3, the firm would provide the highest level of service, with virtual meetings, extremely rapid response to queries and other premium benefits.
All the firm did was sell its tiers to the existing client base. Clients opted to pay more money for the higher tiers on their own. So, firm employees did the same amount of work they were doing before, and the firm increased revenue by over 10%. It’s a fantastic example of implementing an idea from our smart firm pillar. The leaders of the firm presented this at one of our conferences, and I thought it was incredible.
Lee Pender: Rootworks is really a community of firms. How much do firms need each other in order to meet the challenges of today’s accounting profession?
Darren Root: I think your previous question is a great example of an idea generated by our team, implemented by a firm and then shared to hundreds of other firms. This is the community in action. Leaders of a modern accounting firm are able to follow a model inside a community that’s built to support the kind of life that would be engaging for themselves and their team. The community really centers around the sharing of ideas and best practices. Firms are collegial when they don’t perceive other firms as competitors. Historically, accounting firms trust other firms more than they trust anybody else. Peer recommendations are really high on their list of credible sources. That’s why community is so important. Firms need all the help they can get, both from experts and each other.
Lee Pender: For those firms that do move to being modern accounting firms, the opportunities must be enormous since there is already increasing demand for accounting services and a shrinking number of accountants. What’s your view of the opportunities for smart firms?
Darren Root: It’s pretty simple. Running a modern accounting firm, if done with intention, is one of the best lifestyle business choices one can make. For instance, you can make $350,000 a year on a firm that generates a million dollars in revenue. Essentially finding the right 50 clients, and holistically serving them with solutions that your team is gifted at delivering gets you there. You’re no longer limited by geography, whether that’s client geography or where you and your team want to live and work. Where else can you consistently generate $1 million and get a 35% return? Why would you not want to do that?
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