ed kless: liz, it is my honor and pleasure. thank you so much for having me.
liz: well, it was the least i could do since i was on your podcast some time ago, so i’m just returning the favor. that was a while ago.
ed: get to turn the tables on me. [chuckles]
liz: that’s right. that’s right, but i have a few more questions than you did.
ed: that’s fine.
liz: well, we have a lot to cover, so let’s dive in. now, as you know ed, accounting talent has been really hard to find in the world for years. covid and the great resignation made it worse. what are your ideas on how to make things better? what have you seen firms do successfully?
ed: this is a great question. it’s the constant struggle. the latest numbers are that accounting graduates are up, which is good, but people who are going into public accounting is still down. people are getting their degrees in accounting then going right into to private, whereas in the past, you used to have to do some time in public first, and then you would gradually move into the private sphere but no longer. it seems that people are jumping right in and people are more than happy to accommodate that as well. it’s no longer a requirement that people have cpas at their corporate jobs. i think this is not going to be surprising coming for me, those who have heard me and my co-host ron baker talk.
i think that one of the biggest problems still remains the timesheet as a problem. if you really think about this from a college graduate point of view, they just undergone a four, sometimes five-year degree where they had autonomy as to when they did what they did. they really could set their schedule, and somehow they figured out a way to get through all of the classwork and probably maintain a social life as well.
now the first thing they do on day one sitting in the public accounting firm is they’re handed this timesheet or probably it’s not a sheet anymore, it’s probably on an app somewhere, and said, “now we want you to account for every six minutes of your day because we’re not sure that you can work unless you tell us what you’re doing every six minutes.” i think that this sets an immediate bar as well, “what are you doing to me? i just want to get the work done. you don’t need to babysit me here. i’ve just went through this degree program and got through it somehow.” i still think that’s a big problem.
we are in a way, the timesheet is the cancer, as ron baker calls it, of the profession because it’s eating the profession from within. i still think it’s a huge problem. that the number one thing i think that firms can do is look at eliminating their timesheets. i think you will begin to attract more talent because you say, “hey, listen, you come to our firm. we’re a timeless firm. we’re not going to make you track every six minutes of your day. we just want you to get the work done.”
liz: that’s an interesting perspective. what do you say about the people who say, “well, i need to track the time so that i know how long a job takes to get done so that i know how to bill it in the future?”
ed: there are four defenses of timesheets. the first one is i need it for pricing. i think that one is completely destroyed by the work that ron baker has done going back to the late 1980s, really. the other defenses are, i need it for project profit or project management, i need it for job profitability, and i need it to understand the efficiency of my people. i need to know if they’re working and that kind of stuff. well, i can very easily falsify all three of those in one fell swoop. i called this the nuclear option because; i’ve done this in front of huge crowds of accountants where the first question i’ll ask is, “how many of you have ever filled out a timesheet?” of course, every hand mostly goes up.
there are some people who gladly never filled out a timesheet but some have, most have. the hands go up. then i say, “okay, now keep your hands up. how many of you have ever not exactly put down what really happened on the timesheet, either too many hours or too few hours?” in other words, you were eating time, which is a fireable offense, by the way, at most accounting firms. eating time is a fireable offense if you don’t put down what you actually, really did. liz, do you know anyone who’s ever been fired for eating time?
liz: nope. nope.
ed: [chuckles] nope. do anyone who’s not eaten time?
liz: nope.
ed: nope. [chuckles] here’s my point, people don’t put on the timesheet what actually happened; people put on the timesheet what they think should have happened, or more accurately, in most cases, they put on the timesheet what they think their boss thinks should have happened. that’s what they put down on the timesheet. if that’s true, which i think it is? well, haven’t i just blown those three reasons out of the water because it’s not actual time? it’s not actual anything. it’s optimal time. it’s what i think should have happened. you’re using this to make decisions. you’re using this to measure profitability of an engagement. you’re nuts. [chuckles]
liz: it’s crazy. i agree with you. at the last firm i worked with the, for some time, we got this report, which showed the dollars that i brought to the bottom line for my work. that was a much more useful report for me than those spreadsheets that had percentage of budget and realization and utilization and all of that nonsense that i thought was just hokum.
ed: nonsense. [laughs]
liz: it’s nonsense, but the one report that showed how much my efforts brought to the firm, that was actually useful.
ed: i would even go so far as to say it probably wasn’t your efforts, but it was your effectiveness that brought that to the bottom to the firm. really revenue is more of a function of how effective one is, not how efficient one is. that’s a big difference between effectiveness and efficiency. the little shorthand i usually use for that is if you have a brain tumor, god forbid, do you want an efficient surgeon or an effective one? well, you want an effective one. you want effective.
the same thing is true of an accountant, do you efficient accountant or an effective one? well, you want an effective one. when you bill by the hour, when you have to measure your time, and when you tell the customer, “pay attention to my efficiency because that’s what i’m going to charge you,” then they start looking at your efficiency instead of your effectiveness, which is the wrong thing to be looking at.
liz: what really matters is how much money did my efforts bring into the firm and how well was i utilized? how much did the firm leverage off of my efforts?
ed: i would even go so far, don’t say efforts, but your knowledge. how well did the firm leverage your knowledge in positioning it to its customers?
liz: that’s a good way to look at it. that’s a good segue into my next question, which is about the business model for accounting firms. for a long time, it really hadn’t changed much firm billing by the hour, the same parameter org charts, but now we are finally just beginning to see a few different models emerging. what are some of the changes that you’re most excited about in the firms that you work with?
ed: the biggest one is, we’ve gone beyond what ron and i call value pricing 1.0, which is the stuff that he was talking about for the longest time to something that he and i have really embraced in the last, i guess, three or four years, and that is the subscription model, a full-on subscription model. let me describe what a subscription model is not, first of all. a subscription model is not taking your annual price and dividing it by 12 and charging it monthly.
that is not a subscription model at all. a subscription model is really looking completely differently at the business, and what it is that you charge for. i said earlier about your efficiency, effectiveness. i would almost say in the subscription model, what you’re charging for is your efficaciousness, which is the maximum possible benefit that you can provide. let me give an example that’s not accounting. i, in the last two months, has subscribed to two things. one, i’ve subscribed to a vacuum cleaner.
liz: vacuum cleaner?
ed: a vacuum cleaner. i have subscribed to a vacuum cleaner. i’ve also subscribed to a salami place that sells this most delicious salami that has truffles in it, which is absolutely outstanding. not truffle oil, real actual truffles. [laughs]
liz: wow.
ed: really, really good. anyway, that’s best salami i’ve had in my entire life. i’ve subscribed to both of those and beyond that– let’s talk about the vacuum cleaner, first. i didn’t even realize it until after i started using this vacuum cleaner. it’s one of those eye robots that goes around your house and cleans, sweeps the floor, and puts the dust in the dustpan, and then it goes back to a base station. the base station sucks all of the stuff out of the unit itself and into a little vacuum cleaner bag. therefore, you don’t have to even do anything to change. it just goes into this bag. you change the bag once a month or whatever. here’s the thing, i pay a subscription for this, and i think it’s $30 a month. i got the unit.
there was no price for the unit. they just sent it to me. they monitor the parts on the vacuum cleaner, including the air filters as well as anything that can be changed on it. there’s this rotary fan that spins around that they monitor how much is in the bag. then they just automatically send me those things when i need them when my vacuum cleaner needs them because they know. my vacuum cleaner is connected to the internet and it knows that it needs this part changed, et cetera. i didn’t ultimately subscribe to a vacuum cleaner, i subscribed to clean floors.
liz: i could subscribe to that.
ed: i subscribe to, it wasn’t a vacuum cleaner. the vacuum cleaner is the thing that does. it’s the mechanism. the question is what is it that current customers or accounting firms are really subscribing to? if they were to subscribe, what are they subscribing to it? i would submit, just like me, it’s not a vacuum cleaner. it’s not an accountant. it’s not even tax returns. it’s peace of mind.
liz: exactly.
ed: to me that’s going to be the biggest shift from a business model perspective is accountants who understand that they’re not charging for inputs anymore, which is the hourly stuff. we blew that up two decades ago, and it’s unfortunately still diffusing for some people. you’re not even charging for outputs anymore, which is a tax return or a financial statement. you’re charging for an outcome which in most often is things like peace of mind and that’s what people want.
liz: i think you’re right. even in early days working at h&r block, many people came in not because their tax returns were that complicated, but because they wanted to be sure that they didn’t make a mistake filling out the forms. these were not very hard tax returns to do. i could crank one out in about 20 minutes. these people were coming in because they didn’t know how to do it correctly. they wanted to be sure that it was done right.
ed: if you think about it this way and it ultimately what you were with h&r block, it wasn’t your time that mattered. the 20 minutes that it took you to fill out the form, what ultimately was important was how much time would it have taken them to do it and feel comfortable with it. the answer is never
liz: never.
ed: [chuckles] the answer to that question is never because even if they went through and spent probably 10, 15, 20 hours on it themselves, they still would not have felt comfortable with what the outcome was. they still would’ve felt, “oh, there might be something wrong here. i don’t want to go to jail, whatever it is. i don’t want to get audited.” that’s not what they wanted. they wanted that piece of mind. we need to shift everybody to that thinking.
the providers are their own worst enemies in this because the providers think that what they’re selling is the 20 minutes or the tax return. that’s what they get in their head, and it’s not that at all. we really got to begin thinking about this outcome stuff. what’s the outcome come?
liz: i’ve heard other people talk about the deliverables
ed: that’s the outputs.
liz: that is the important thing, the deliverables. it’s not always necessarily the deliverables, but the peace of mind and the relationships and just knowing that there is somebody in your corner. well, what about growths? how do firms grow? are there different strategies for growing under this subscription model?
ed: there absolutely are. one of the mantras in studying pricing theory as, by the way, i distinguish pricing theory from price theory. price theory is supply-demand curves intersecting and charts and graphs. pricing theory is the art and practice around the setting and creating of prices. one of the mantras in pricing is innovate for growth, price for profit. when an organization wants to grow, the focus has to be on innovating, creating new things to offer, not necessarily what we used to be called rainmaking, which is getting more customers. i don’t think that there’s a problem per se in getting more customers in and of themselves. i don’t think that that’s a problem.
i think that when accountants especially think growth, that’s what they’re thinking. they’re thinking we need more customers. we need to bring more people into the firm. i think what has to start, we have to start thinking about now is what can we innovate. what are the things that we could begin to provide customers that were ancillary to what they’re already getting from us that are over and above that? for example, take something like a subscription. if you wanted to create a subscription service around tax, it would be more than just the tax return. it would be things full-on tax planning.
it would be staggered conversations throughout the year on what are we doing to minimize your tax exposure. what’s happening inside your family to make sure that we can set this up, set you up for the right things, and even long-term planning? accountants know when the kids are going to go to college. it’s on the form. they have to mine this information. they should be 12 steps ahead of the people that they’ve been serving.
why aren’t accounting firms offering services like, “we know you’ve got college-age kids now, we will handle the financial aid stuff for you.” i don’t know about you. i have a 16-year-old son, and we’re starting to hear about all of this disaster that is the filling out of the financial aid forms for college. it sounds like to me the ultimate value pricing strategy, which basically i, “we need to do a complete financial audit of you, and then we’ll tell you how much college is” [laughs]
liz: exactly.
ed: we’ll figure out your price after we know every cent you have ever earned in your life, then we’ll tell you what the price is going to be. sounds a little sketchy to me. be that as it may, why aren’t accounting firms doing that? they know when the kids are going to college, right?
liz: yes. there are so many other things that accountants could be doing, but so many of them complain about capacity. i think what were going to get to is if you fix the pricing, then the capacity problem is solved.
ed: that’s right. one of my favorite things to do, and remember when we used to go to conferences, liz. remember that?
liz: yes.
ed: that was great.
liz: oh, yes.
ed: hopefully, we were going back soon. i’m sure we will be, but inevitably i would be at the sage booth or at some after-hours event with a glass of chardonnay and i would ask people, “how are you?” for many people, the only acceptable answer to the question, how are you, is busy. that’s the only answer. when they say, “busy,” i have a tourette’s syndrome reaction because i immediately say, “oh, i’m so busy. raise your prices. [chuckles] raise your prices. in fact, double your prices.” “well, but if i double my prices, a half–”
if you doubled your prices, ask yourself this, if you doubled your prices, would half your customers leave? the answer to what i get to most people is like, “no.” “okay, but some people who leave, right? “yes.” “okay, what i’m telling you is if you double your prices, you’ll make twice as much money. in those who leave, what? 25% of them leave, you’re still going to make more money, but you’re going to work less and be less busy.”
liz: yes and you’ll be able to give better service to those who are left.
ed: exactly. exactly.
liz: well, we’ve solved the problems of accounting firms, but they’re not ever going to listen to us.
[laughter]
liz: you and ron have been saying this for years, but for some reason, they’re just not changing.
ed: there are some that are and that’s a good thing, but there’s a great quote from daniel susskind, who has a book called the future of the professions. i think it came out seven or eight years ago. he spoken at a sage summit conference. we had him in to talk to our partners. his saying, one of the sayings in the book is, “that which kills you does not look like you.” what’s going to kill most accounting firms and tax practices doesn’t look like them.
we know one of them already, it’s online tax preparation that many of us including me, have switched to mostly because liz, what made me insane was when my accountant which i did have for a while, would send me the 70-page tax planning guide, and tell me to fill out all of these forms. if i could fill these forms out, i could do the tax return. [chuckles]
liz: yes. that’s right. that is very true.
ed: [chuckles] it was just insane to me to get this tax planner. anyway, so that which kills us does not look like this. i’m sure you and some of your listeners are aware of a company called pivotal, which is a bookkeeping company that’s come in. there’s a guy who’s backed this, i don’t know if you’ve heard of him. his name is jeff bezos.
liz: yes, or you mean pilot?
ed: pilot, pilot, pilot, pilot, pilot. pivotal is an old crm company that i have on my brain. i’m getting too old. pilot. yes. pilot. bezos is getting involved with this. that company has, the last i checked a market cap of higher than all but the big four.
liz: really?
[chuckling]
liz: wow. it’ll be the pilots and the benches and botkeeper and all the other tech firms that are trying to become accounting firms.
ed: yes.
liz: our world will be changing, and that sounds like accountants are going to need to change and adapt. what skills will accountants need to be successful in the future?
ed: ironically, the same skills that they’ve needed when the accounting profession was born. this is a way back, long time ago. think about the words that we use, liz. i know you’re a word person, too, so you’ll appreciate this, that the words we use in english to talk about accounting. first of all, it’s accounting, past participle, it’s what went on in the past. if i give an account of something, it’s oral. someone is giving an account. i’m giving an account with a verb account. it has its origin in a verbal skill. it’s called an audit, which has the same route as auditory nerve. the auditors were the listeners, the hearers of the account, which was the story of what was going on from a financial perspective.
in english, the origins of the whole profession were around people who were giving an oral account to auditors. that’s what accountants have to get back to. it’s going to be much more– it already is a relationship-based business, but it’s going to be much more about the stories that we can tell about the numbers than it is just about the numbers themselves. the skills that people need are the soft skills, which are very hard. [chuckles] the soft skills are hard. [chuckles]
liz: the soft skills are not what drew people into accounting in my generation.
ed: correct.
liz: it’s changing now. it is beginning to change. i saw on twitter, a professor at a university polled the students in his intro to accounting course, and 75% of them said that they were taking accounting because they wanted to start their own business.
ed: wow.
liz: the other 25% were doing it because they wanted to go into accounting as a major. that’s a huge change by itself.
ed: i’m also seeing, and i don’t know if you’re seeing this list too, but more and more companies are just outsourcing the accounting. large, even midsize companies, they don’t want to do it anymore. they just want to outsource it.
liz: it can be done more efficiently, more cheaply by people in india or in the philippines, or romania, or who knows where somewhere else.
ed: or bots. [laughs]
liz: that’s true, by bots. now, we’ve talked about the things that accountants do. what should accountants stop doing immediately?
ed: [chuckles] other than timesheets? [laughs]
liz: yes.
ed: i think accountants need to– this is a really hard question because they have to stop thinking that it’s about them and that it’s about the customer. i’m sure that there are people who’ve picked up on the fact that i don’t use that other c word, client, i don’t use it. i say, customer. i’m sure that there are people who have listening to this podcast are saying, “yes, no. we have clients. we don’t have customers.” no, you got to have customers.
you got to stop calling them clients. you got to start thinking of it more from a customer perspective or better yet if you pick up on the whole subscription thing, i like this idea, call them members. call them members. your firm should have members, and those are the people that you serve, your members. think of it as an accounting club.
liz: that’s a good way to look at it. now, how can we help them to succeed more? how can we help these people run their businesses more effectively? how can we help these individuals reach their financial goals?
ed: the american express had a great campaign, was it, 20 years ago? membership has its privileges. i’m sure you and i, we have enough gray hair to remember that. even on every american express card to this day, it still says member since, member since member since. membership has its privileges. i encourage people to embrace that idea, and that’s where we create a membership system around your firm.
what are the membership benefits that people get from being a part of your firm? what is the social capital that you can offer? we’ve got another colleague at the verasage institute, name is dan morris. i’m sure you’ve met dan.
liz: yes.
ed: dan has a firm out. it’s in portland and san jose. they’ve got dual offices. he has really embraced this concept of having people who he says, “i’m not necessarily going to be able to handle all of their needs, but for a certain select group of customers, i want to be their first call, regardless of what the request is. i want to be their first call if they want super bowl tickets.” now, that’s not everybody; that’s a certain group that wants that. he wants these 10 people, he wants them, dan morris to be their first call regardless. he’s tells a couple of great stories about this including one where it was the person they called him right after they called an ambulance because somebody was having a stroke. [chuckles].
liz: wow.
ed: he was the second call because, “dan, you know people, do you know somebody who can help my father or whatever.”
liz: wow.
ed: that’s the level of intimacy that i think people should be really striving for amongst the select group of members, not everyone but against the select group.
liz: well, you bring up an interesting point, the intimacy factor. that is something that i think is very challenging for many in public accounting. now, one of my favorite books and one of your favorite books is peter block’s the answer to how is yes.
ed: oh, yes.
liz: he has a whole section on intimacy. i think that that is something that is very challenging for accountants to do to try and think about what additional services they could provide or how they can deepen the relationship. i think that can be very challenging.
ed: i think it’s also because of something that you brought up earlier in your line of questioning, i think is right on, is this the whole capacity issue. there far too over capacity on all of this other stuff to be able to get to those things, to be able to innovate, to be able to think about new and better offerings for their customers. one of the other great things about the subscription business model is that you have to be constantly innovating and adding new things to your funnel. think netflix. netflix always has to be releasing new content and better content. now they have three levels, one which has the 4k, the high definition stuff that is now, i think $20 a month.
i guarantee you that what’s going to happen over time with netflix offering is that 4k is going to move from the top level to the mid-level, and then it’s going to move from the mid-level to the base level at some point in the future because everything’s going to be broadcast in 4k at some point and it’s not going to have a differentiating effect. that’s really the way that i think accountants need to begin to think about it.
they need to start putting stuff that they only offer to their top level customers. then over time, those things then trickle down throughout their offering. it might be 10 years, but over time, those things will flow through. that’s the innovation stuff that i’m really asking them to challenge themselves with. what are those things, whether it’s business process reviews or financial aid forms for students? all of these different things.
liz: i’m brought to mind some services that i used to perform for one of our clients when i was in public accounting and was a widow whose husband had been with the firm since sometime in the ’70s. this was a long-term client. i noticed that she was having some health problems. i decided that anything i needed from her, i would go to her house and pick it up in person. that made such a huge difference for her. i even sat next to her and helped her sign up for her, my social security account so that she could do that. these were things that i did because this was a special person to the firm and to myself.
ed: sure.
liz: when i was departing, i told the young man who was taking over, “this person gets white glove treatment.” he looked at me blankly and said, ”what’s white glove treatment? i don’t know.” i just said, “okay, anything she wants, i have been doing for her.” he’s like, “oh.” that’s something that you can’t scale easily. you can only do that for a select few. i think that if you’re going to have that select model of being the first one to call, then you automatically cannot have the same capacity. if you are not, you just cannot. it doesn’t work.
ed: that’s a great point. the fact that there are such things as certified financial planners is an indictment of the accounting profession. there should be no such thing as certified financial planners that are separate and apart from accounts. accounts should have been that.
liz: one of my other colleagues, somebody else i worked with a lot, l. anderson, said pretty much exactly that, that accountants missed the boat. they had the data. they had the information. they had the insight and they just missed the boat. that and stock analysts, they could have done that too. they could have taken over that field too but they didn’t. we’ve talked about the things that accountants should do, the things that they shouldn’t do. we alluded a little bit to some of the problems keeping them from changing. let’s go into that a little deeper. what are the things that keep accountants from changing?
ed: fear. [chuckles] “we’ve always done it this way. there’s a lot of people too who are just like, ‘hey, i’ve only got three or four years left. i’m just going to run the table on this.’ ” i can’t say that i’m going to change any of those minds, certainly, and they’re probably right. one of the things i think they should consider is that their practice is not going to be worth very much if they don’t bring in more recurring re revenue that’s not based on just them.
liz: that is very true.
ed: it’s fear. to a certain extent, this affects all of us. we don’t like change. block says in the answer to how is yes, that ultimately, those how-based questions are about fear of death because we don’t want change.
liz: no. no. no, we don’t want to change, not one bit. right now, client accounting services, client advisory services, whatever you want to call it, reachable cfo, that’s the new big thing that everybody seems to be jumping on board on. what do you think will be the next big thing?
ed: after client advisory stuff?
liz: yes.
ed: [sighs] you know what? i have no idea. i have no idea. i don’t know that we even can know that. the reason for that is that innovation of that magnitude is always comes as a surprise to us. it’s always a surprise. if we could plan it, if we could plan innovation, well, first of all, socialism would work because it could be planned from the top down [chuckles] but it can’t be. i don’t know if we could– the great thing about innovation is that it’s disparate ideas coming together and being tested and finding a result, does it work, or does it not work? i do a presentation on innovation and one of the things i have, it’s a picture of this stroller that a toddler stands on a platform as the stroller is being pushed.
it’s like a combination stroller and skateboard. i just think it’s such a great example of innovation because it’s two disparate ideas that have come together to form this new thing. that’s this stroller-skateboard thing. there’s no other way to describe it. i think that’s what we’re going to see. i don’t know what it is, but i know how it’s going to happen. it’s going to be from people who are taking what seems to be a disparate idea and marrying it to something that we already do. i think we talked about one earlier. it certainly could be financial planning for college, filling out the financial forms for college. that could be it. that’s an innovation.
i don’t think we can know it. i think that if this is helpful, i guess to answer the question a little bit more fully, i do think that client advisory services is just going to continue to explode because as we talked about earlier, more and more people just don’t want to do their own accounting. they want to outsource it. there’s not going to be accounting departments anymore.
liz: i think that we’ve really only touched on the potential value that we can bring to clients and customers with additional advisory services. i think everybody in accounting could do so much more for their clients. even the auditors who really want to stay neutral and impartial, they could certainly tell their clients know, “look, i see that your cost of goods sold is way out of line with the other people in this industry that we work with. what’s going on? they could do something simple like that. that’s not that hard. that’s not hurting independence.
ed: no. not at all. that’s a whole another issue. that’s a can of worms, the whole independence issue. let’s not go down that. we [chuckles] wouldn’t have time to do that one. [laughs]
liz: no, no. i would agree with you on a lot of that, what you’ve said. i’ve written about some of that myself, so i would agree with you there. well, i want to thank you, ed, for taking the time to share your intellectual capital with me.
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