The Game Changers in the Accounting Industry

Welcome to the Accounting for Innovation podcast, where we explore cutting edge strategies and insights into the world of accounting and finance. Presented by Decimal and the Radical cba, each episode dives deep into industry trends. Whether you're a seasoned professional or a budding entrepreneur, join us as we unpack key concepts and share practical tips to drive success. Welcome to the Accounting for Innovation podcast. Jodi. I'm Jody Padar, the radical cpa. I've been at the forefront of innovation in the accounting industry for over 15 years, and today I have with me my co host, Matt Tate, the CEO of Decimal, one of the fastest growing accounting companies in the country, and he's an accounting innovator.

Jody, I'm excited. I still remember where this podcast came about. I think I asked you a couple of months ago for 30 minutes of your time, and 75 minutes later, I totally forgot why I called you. We just couldn't stop talking about all of the cool changes we were seeing in the industry, all of the business model changes, all of the technology changes. Change was everywhere. And you and I just had a great conversation, and that ultimately led us to this podcast. And starting out in this first episode, you and I, I'm excited. Are going to discuss the landscape of the industry, contrasting traditional players with innovative disruptors who are shaping the accounting industry as we know it today, from established firms to emerging contenders. Lot to talk about. So, Jody, before we kick off, my first question to you is, when you think about the traditional players and who they are, who are they?

Well, Matt, we have a bunch of players in the industry. Some that I think people are very familiar with, and some that depending on the size of the firm you grew up in, you may not be so familiar with. So we have the big four. Everybody knows the big four. And we. We won't even talk about them today or pretty much ever because they're like in their own world, right? They live in a different environment. Then we have what they call kind of the top 100, which are the really big firms. They're national, they have millions and millions of dollars in revenue, and the firms have hundreds of employees, right? And that's its own group. Then we have what they call kind of the G400, which are basically the true partnership model. Many of them have multiple partners, and they've been growing, but they've been growing through mergers and acquisitions over many years. And these, this group of accounting firms pretty much all sell the same thing. They sell accounting and bookkeeping work, they sell tax, they sell audit, and they sell advisory. So they kind of make up the top half of the market. Right. And there are many people who just say, oh, D400. And that's kind of its own grouping. Then you have kind of the next level, which is. And when you first you think about that's only 400 firms. Right. But there's like almost 50,000 other firms who are actually like CPA firms. And then there's a whole nother group of. Of people who aren't even CPA firms. Like, they're tax practitioners. Maybe they're EAs, maybe they're bookkeepers. So, but after you get past that 400, you have basically most firms that are probably like 20 people or less. And they are the majority of what we call accounting firms today. They do the majority of the accounting work. Some of them do audits, but the majority of them don't. And then I think one layer, even below that, though it's not really below, it's just kind of adjacent, is what we call, like this retail tax and bookkeeping. Right. So I think there are firms that are like sole practitioners and they operate like a firm. And then there's what you would call retail tax or retail bookkeeping, where typically they would open up shop in a strip mall. That's how they got their name, retail. Right. Versus a firm which typically doesn't have, like, a storefront. Right. And. And so that's what makes up the greater accounting market traditionally. But that's all changing.

I think it's interesting that it's changing for all of these categories. As I think of the industry, I'm a. I run an accounting company, and I would tell you, I'm a recovering attorney and a technology entrepreneur. And as somebody that looks at this industry, I see change coming in a variety of areas. And number one, I think what everybody's talking about today is private equity. You have private purchasers, you have publicly traded companies that are coming top down, middle up, bottom up, all over the place to consolidate business models and change the industry through acquisition and consolidation. And in addition to that, the other kind of, I would say, sexy place that people are talking about are all these technology companies that are coming into the space you have. Pilot is the biggest one. Scale factor is the cautionary tale. Bench has been around for a long time. And then there are a couple of dozen others who are in this space doing work in a kind of, let's call it accounting services, client accounting services, bookkeeping functionality. And they're also taking tax, some R and D work, and a variety of other things.

And. And these firms that we're talking about. They aren't. Maybe they have CPAs as part of them, but they are not CPA firms, just like your firm is not a CPA firm. It is truly an accounting company which is very different. Before it was only the retail tax shops that were small or franchises, right. That had the opportunity to spread across the country. Because that was pre cloud, right? Think about it. It was brick and mortar. You had to have a, a storefront to do something like that. And now with the Internet, it. You don't need that. You don't need that to, to have the reach to sell accounting and tax services, you know, across the country.

Well, and I think one of the things that a company that those types of companies that you're talking about that are accounting companies can do is what they've done is they've broken the model apart. And they've done it in a couple of different ways. Number one, they break up the model in saying the people doing the work are not necessarily the people selling the work and managing the work. And what that allows you to do is whenever you are a. And you remember this, running your own firm, you're only going to sell as much as you can do, and then you hire and you're only going to sell as much as that person can do. If you create a model that allows you to sell at a different pace, staff at a different pace, and work at a different pace, all of a sudden you can grow astronomically faster than any of the other firms that are sitting in the space. The other way that you break apart the model is by saying, instead of doing all of it, let's exist doing a core competency, a core aspect of it. Maybe it's cast practice, maybe it's tax and just do that and then become a partner in the ecosystem of accounting and finance rather than a firm that does all of it.

Right. And, and I think the interesting thing about it too is the market has significantly changed since professional service firms came into existence. We have to talk about the market as well, not just the firm. And what I've come to realize is that CPAs, especially with it being tax season, they're complaining about like, the work, the workload, the shortage of employees, all of this stuff. But they forget to look at themselves and say, my product that I sell no longer fits the market that's out there and they blame the customer. Or they say, oh, there's no way to change. And instead of actually looking at what it is they sell and how to change it so that it actually fits the market today. Because the market today is very different in this cloud based, social, mobile world than it was 10 years ago, 15 years ago, even five years ago. But it's really hard for me to hear practitioners complain because I'm like, but you are not adapting to the market. You have to adapt to your customer. And I think that's where firms like yours has really kind of changed it up by looking at the customer experience standpoint.

Well, I think another thing, your story makes me laugh because I grew up in a family of entrepreneurs. My dad was a small business owner and every year he would take a shoebox of receipts. Every accountant that's been an accountant remembers those shoeboxes of receipts around tax season. And when we first started decimal, he said, hey, would you take on our work? I said, absolutely not. I'm not going to do that. And he's like, why not? I'm like, because there are other ways that make it easier for you and easier for me. But I think you've hit on a key piece that two things I think have really changed. And the pandemic accelerated this. It was already starting before the pandemic, but the pandemic left it forward a lot faster than it was going, which is number one, the way buyers are buying has changed. And it's changed in all aspects of our life. I go into my doctor and I tell him my knee hurts and my shoulder hurts and my head hurts. And he gives me three names to call. It's not a one stop shop any longer. And, and it's the same in accounting, it's the same in legal, and it's the same in professional services in general is people are more willing, because the access to information exists, to go out and seek out multiple things. And that's number one. Number two is, and you hit on it, customer experience. People expect to be treated well and they expect that they can find where to be treated well. And I think that's one of the things that there's a, there are older books out there about how to run professional services. And one of them, it has the premise of one of the failings of professional services is that they value the output, whereas the client values the experience. And you're seeing that change.

And I think the big thing now is customers have alternatives. So before you only had the CPA in your town or the CPA in the next town over, and then, okay, well, you only had a CPA who moved to Florida or something. Right. But now if I go online to look for accounting and tax services. Chances are a CPA firm is not the first thing that's going to pop up, right? And you have all these other players entering the market. And it's not just the accounting companies such as yours, there's technology players coming into the market and kind of changing up the space, right? When you think about Intuit and now how they're going to market and they're buying CPA firms so that they can service customers through their TurboTax Live offering or their QuickBooks online account offering, right? They're coming in. And so the client, a customer is in that program and oh, I need help. A technology company is right in there to offer help, right? Whereas a CPA firm before you would have to pick up the phone, you'd have to call the cpa. You might have to wait a day or two, whatever, right? That instant access is changing. You also have fintech coming into the tax world because they're selling other services, right? There's, they're selling credit cards. So, and then those credit cards, you get your 2% exchange fee or whatever it is. But those fintechs are taking that 2% earned on every purchase and they're reinvesting in the technology stack and in the customer experience. That's what the kind of the SaaS technology has really developed is that online customer experience. And we have, I should say we, meaning us as consumers, want that same sort of experience. We don't want to wait for that old school, oh, upload something and wait for three days for someone to get back. Like we have just this new, the buyer has a new expectation around what should be happening.

Well, and I think there's another expectation too, which is clarity. And it's one of the things that I think as professional services firms, as accounting firms and accounting practitioners look at the industry, one of the easiest changes that you can make is providing continuous clarity of expectation. I spent a lot of time at a, with a very large top 100 accounting firm and I was shocked to find that less than 20% of their clients had an engagement letter.

Wow.

And, and that was an abnormal. I talked to another one. There's the same thing. And I'm thinking to myself, how do you know what you're doing and what's built into that billable hour and the write offs and all of the stuff that just kind of comes with pricing. And I know you've been talking a lot about pricing and value and to me it's, it's also a clarity of expectation that people feel like, and they do deserve in this space and quite frankly, everywhere. And accountants in general, I don't think do as well at this. And it's an easy win to just say, here's what I'm going to do. Here's what it costs. If I do more, here's what it costs. Like, that's super easy.

Well, and that's kind of where it comes to the whole business model, where if you haven't standardized your services, it's very hard to create a standard, standard operating procedure because, like, nothing standard in CPA firms. And, and unfortunately, many of these larger firms or even some of the smaller firms, they're just. You put three partners together and each partner has their own idea of how something should be done and then know the customer even. And even at one firm, one customer could have three different experiences based on the partner and how the partner likes to do something. And that doesn't scale. All those snowflakes. Like, you can't scale that. You can't price it. And when you look at technologies, companies coming into the space, that's what they do. Well, that's kind of what they figured out on the scale piece. And right now, what's happening, and I think if there's no other reason, I always think about helping the accountant change. But what about the consumer? Like, how sad is it for the consumer who's consuming these accounting and tax services that they don't understand what it is they're buying, they don't know if it's right or wrong, and they haven't even felt like it's been explained to them correctly. And what does that say about the accounting profession as a whole? And I. I think it's. It's hard to look at yourself that way, But I think CPAs should be looking at themselves and being kind of disappointed in themselves and how they haven't really been there for the majority of their clients. Some of their clients I believe they are there for, but I would say a large portion of them, they're not.

You know, we hire professionals to translate the complex that we don't want to or can't. Doctors, lawyers, accountants. And I think you're right. When we started decimal, one of the things I always used to joke was one of the biggest problems in the industry is bookkeeping means different things to different people. As a accountant, bookkeeping means what I'm going to do in your ledger to make your reporting and your numbers look good.

Right.

As a business owner, when I've bought bookkeeping, I expected them to pay my bills. I expect them to do My payroll. I expected them, if I needed a report, to have it for me. But the alignment of expectations was very off on a very key term in the accounting profession. And that exists throughout a lot of different things. And I think you're right that the accounting industry, I've even seen multiple posts from accounting influencers that are like, what should be the next cats? What should be the next client accounting services? What should be the next cloud accounting? Like, it's been called a million different things that are absolutely meaningless to a business. And it's a problem, and it's a problem for the industry. And you know, one of the things that you and I talked about is how do you, how do these traditional accounting firms, how do these traditional accountants, these traditional bookkeepers, like, what are some of the approaches they can take to be more disruptive or to catch up to the industry or keep up with the industry? And I think, quite frankly, I'm a, I'm a technology person. I love the use of technology in the right places. But I do think that there are super easy ways that these accountants and accounting firms can make very effective changes simply by creating clarity of terminology, clarity of definitions, and clarity of expectations.

And that goes for the customer, but it also helps your team. You can't find accounting professionals to work. Why don't accountants like to. Because they want most people, when they do their job, they want to understand what it is they have to do and to do it correctly and to be successful at it. And if you have all this mishmash of stuff happening behind the scenes in your firm, your employees never know what the correct expectations are to hit it out of the park. And that's what firms need. They, they complain they don't have people to do the work right. Again, how does a firm change their business model to help for this talent shortage? Because if you can't find people, something has to change. And I think that's that, that's the hardest part. And, and what's happening as a whole is there's so much money coming into the space that other people are able to innovate faster and to change up what's, what's working or not working as they distribute their services across the country and they can iterate on it and they can evolve it. And unfortunately, most firms are buried in the busy and aren't really changing all that much.

Well, and I think you also hit on a key thing just a minute ago too, which is partnerships in general are a business model, which is, it's like a confederation of states Whereas when you deal with these accounting companies, we have one way of doing things, period. So if I want to change and innovate, I can do that. And it filters through. If you're selling innovation to a firm, a traditional partnership, you have to sell it to the firm and to each individual partner in person and hope that they all buy. And that's a very inefficient, ineffective model when it comes to change.

So what's the response? How do accounting firms keep up? How do they stay relevant? I think that's the big question for accounting firms. And I think it's on some of their minds, right? Like, how do accounting firms not become the way of Blockbuster?

No, I think for me, this is going to be a radical opinion from somebody like me. There will always be a need for accounting firms and accountants. I don't think that they need to necessarily always be called accounting firms. I talk to a lot of accountants about running their firm like a business, not a firm. And I think there's a lot of nuance packed into that. But I think one of the key things for accounting firms and accountants is pick the things that are the highest value and figure out how to outsource the rest to technology, to other people, or just to not do them. Understand what is good revenue and what is bad revenue and do the things that are good revenue and give them joy and advancement and cut the rest. And that's a really hard, I found that's a really hard thing for professional services and accounting firms is to understand the difference between good revenue and bad revenue and being willing to part ways with the bad.

So I think that's really important because as I, you know, mentioned before, you hear a lot of scuttle of accountants complaining about kind of where their businesses are during tax season or they don't have team yet. They don't make time for the things that are most important. So when we talk about having those clarity around conversations, right, the only way you can have time to have great conversations with your clients is if you schedule them and you make sure that you leave space for them, right? And if you are not doing that because everything else is taking over, you're not going to have the clarity there. You're not going to be able to deliver the same way something else has been structured. And I think that's really important because I think there are lots of small changes firms can make that they could do every day that can get them a little bit closer. And the other thing is when we talk about the future of where accountants are going to be, or I believe that there will always be accountants. What I don't think is the CPA firm as we know it will be still around. And I ran a poll on LinkedIn. We had almost 400 responses, 25% of people who responded and they're all CPA CFPs, they're all accounting professionals. 25% of the people who responded to the poll said that they do not believe firms will exist in the year 2030. That's only six years away. And when I say firms, firms as we know it, right. So I think there will be a lot more accounting companies. And I know we're going to dive deeper into it in more of our episodes around mergers and acquisitions and private equity and stuff. But I, I think that's a reality that people have to start wrapping their brains around is that accountants will always be around. It's just what entity will they be working for? What type of business will they be working for?

At some point, the industry itself is going to have to make the decision on who's driving. Is it the generation that did the accounting firm, or is it the generations that are going to be driving in the future? So with that, thank you for tuning in to the Accounting for Innovation podcast, brought to you by Decimal and the Radical cpa. You can find more insightful episodes of Accounting for Innovation wherever you listen to podcasts. And don't forget, pick up Jody's new book, Radical Pricing how to Optimize Profits, Delight Clients and Build a Top Value Firm. Interested in joining the conversation? Jody and I would love to connect with you on LinkedIn. Thanks.