Cloud accounting software provider Xero just released their 2020 Xero Canada Accounting & Bookkeeping Industry Report which surveyed over 250 accounting and bookkeeping firms of all shapes and sizes from across the country. In it, we see some interesting benchmarking stats, trends and variances (yup, everything a real accountant loves to see!) which I wanted to summarize into 10 must know insights for firms.
While this was a Xero Canada report, I believe these insights are applicable to firms not only in Canada, but also in the US (and likely other parts of the world as well).
Without further ado, let’s take a look at some of the goodies I was able to pluck out of this extensive Xero Canada report.
About the Survey Respondents
What’s interesting about this Xero Canada report is that it looks at a few different kinds of firms which can help us in drawing some conclusions in some of the insights that follow:
- Compliance firms = Firms that focus their efforts on compliance-based services (ie. tax returns, bookkeeping, etc.)
- Repeatable advisory firms = Firms that offer services that look forward which can be offered regularly (ie. budgets, cash flow projections, etc.)
- Complex advisory firms = Firms that offer services when complex challenges arise which are typically not recurring mandates (ie. succession planning, capital raising, etc.)
Also, the report gives stats on the top 10% high growth firms from the survey, called pacesetting firms. As these firms grew at a clip of 31.3% per year compared to the average at 9.4% and, on average, earned $2.3M in revenue compared to the $1.3M earned by all respondents, we’ll certainly want to dig in a little here as these are significant differences.
Insight #1 – Welcome to the Repeatable Advisory Practice
The problem with offering advisory services is that it generally takes a lot of your capacity as each project is custom to the specific business in question. So if a client needs succession planning assistance, for instance, this could be a big, complex project over and above your already heavy workload. Most firms therefore give preference to things that just “flow” (ie. tax returns, financial statements, etc) instead of advisory work.
In their Xero Canada report, Xero introduces a term that I haven’t really heard much of, if at all, before: the repeatable advisory practice (in their previous report they called it a “simple advisory practice”).
I’m a fan of the “repeatable advisory” term.
Because it better represents the kinds of advisory services that I would typically recommend implementing in a firm that has to deal with capacity issues and where they’re not able to always accommodate large, complex projects without disrupting the firm.
If you offer compliance services, you can easily build these kinds of solutions into a subscription model and create a repetitive, recurring workflow around it. From there, you can level up what solutions your firm has available and start offering advisory services that recur over and above your compliance services.
This might be quarterly management reports, monthly budget meetings, semi-annual KPI analysis, etc. Essentially, you are taking services that look into the future and repeat them over an agreed upon frequency. Your client is happy because they’re getting more value and you’re happy because you increase your revenues with little disruption to your firm.
What’s interesting is that firms that had a repeatable advisory offering generated close to 15% more revenue than compliance focused firms, so this is an interesting way to bump up your revenues without implementing a radically different or disruptive approach.
Insight #2 – Bookkeeping In-House is a Precondition for Advisory Services
Let me say this loud and clear. You can’t offer advisory services if you don’t control the timeliness and accuracy of the books. Full stop.
Within the “Accounting-Bookkeeping Practice Types” section, it’s even stated quite clearly under “the repeatable advisory practice”:
“An important precondition is that clients have their core accounting information well organized and available online. As a result, these types of practices often require their clients to use their bookkeeping services or to have another very capable person maintain their accounts.”
This is why many firms that do offer advisory services, also handle the bookkeeping for those clients as well.
Want more proof?
Acuity based out of Atlanta is an 80 person cloud accounting firm with a heavy focus on tax and CFO advisory service lines. In a recent podcast with them, partners Matthew May & Kenji Kuramoto discuss how they mandate bookkeeping services to ensure accurate, timely data in order to offer their advisory services (check minute 35 of the podcast here).
The easiest way to get the books done, of course, is to implement cloud-based tools that can help automate the process.
Insight #3 – Compliance Firms are Still Growing the Fastest
Surprisingly (or not), in the last 12 months, firms focusing on compliance services are growing faster (15%) than repeatable advisory (12.6%) and complex advisory (7.9%) firms. While firms have been told that compliance services are dying and that they should focus on advisory services instead, the data seems to suggest otherwise.
Well, perhaps one theory is that technology is allowing for further automation so that firms can add more capacity and do more with less resources.
Keep in mind that this data is backwards looking and does not take into account the increased competitiveness hitting the space, primarily in compliance oriented services. New accounting tech startups are raising a lot of money to attack compliance services with increased automation and at lower prices. See here for my take on the matter.
Lastly, keep in mind that while the top line is growing, we actually don’t know anything about the bottom line, where typically, compliance-oriented services are lower margin.
Insight #4 – Repeatable Advisory Firms Earn 65% More Per Client & 14% More Per Employee
This is interesting. Repeatable advisory firms charge an average of $7,100 per client compared to compliance-focused firms at $4,300 per client.
Either these firms are much better at sales pitches or their clients simply see far more value in what they are offering. I’d wager on the latter 🙂
By the same token, these firms, on average, generate $131,000 per employee compared to compliance firms at $115,000 per employee. Not surprisingly, complex advisory firms generate the most on a per employee basis at $150,000.
The other interesting thing?
Repeatable advisory services are not nearly as disruptive to your firm as with complex advisory services. On average, compliance focused firms spent 170 hours servicing a client compared to repeatable advisory firms at 210 hours followed by complex advisory firms at 390. While there is a jump up from 170 to 210, that’s only about 3 hours more per month of time that you would spend on a client compared to the additional 18 hours that you would need for complex advisory.
Insight #5 – Advisory Services Increases Employee Retention
Here’s another interesting stat.
We all know how hard retention of your high value employees can be. Want to boost your chances? It seems that having your team work on advisory services is of greater interest to them as repeatable advisory & complex advisory focused firms each reported lower percentages of high value employee departures over the past 12 months.
Insight #6 – Pacesetting Firms are Using More Technology
Want a good hint at what is making these firms grow faster than the rest? Look no further than their use of technology compared to all other respondents.
When it comes to data automation apps like Receipt Bank & Hubdoc, 87.5% of pacesetters are using these compared to 76.9% for all other practices. And the difference was more pronounced in their use of advisory apps like Float, Fathom & Spotlight Reporting, where their usage was anywhere from double to quadruple to their counterparts.
The majority of pacesetters also use online accounting to a greater degree across all practice types and in all firms categories (compliance, repeatable advisory and complex advisory), pacesetting firms using Xero outstripped the rest who were not. Most notable were in compliance practices, where 38% of pacesetters were using Xero compared to 23% not using Xero.
The use of cloud accounting, data automation and advisory automation technology is clearly one thing that is helping pacesetting firms grow at a much faster clip than other firms.
Insight #7 – Pacesetting Firms Actively Recommend Ways to Improve Processes
Pacesetting firms appear to be much more proactive in making recommendations to help streamline and automate workflows. One particular survey question highlighted this when it asked respondents whether they actively make banking recommendations to their clients.
Why is this important?
Because some banks work better than others when it comes to the way they connect to your cloud accounting system. So if you want an automated feed of bank transactions downloading into your accounting system, you’re more likely to recommend banks that work more reliably than the others in order to automate your work.
30% of pacesetters will actively recommend their preferred bank to their clients (compared to 12% for the other firms) whereas 57% of non-pacesetter firms happily accept whatever bank the client works with (compared to almost half of that for the pacesetters).
While this is just one example of how pacesetters recommend systems and technology to help streamline processes, I would wager that these same stats would carry forward in a number of other areas beyond banking.
Insight #8 – Pacesetting Firms Spend 175% More on Marketing
Compared to the average practice in the Xero Canada report, pacesetters are spending an average of $11,800 per year on marketing activities, such as content marketing, podcasting, etc, compared to $4,300 per year for all other respondents.
What’s more is that pacesetting repeatable advisory firms are spending way more than the pack (almost 1000% more!), spending an average of $23,700 compared to $2,200. Yikes!
Is this one of the reasons why they are growing much faster than the rest? It’s very likely.
Insight #9 – Pacesetters Engage in More Real-Time Communication
I liked this one in the Xero Canada report as it appears that pacesetters understand what clients are looking for in a relationship with their professional firm in the modern era, demonstrating that customer experience matters.
Pacesetters seems to interact more frequently with their clients during the day compared to their counterparts. For example, almost 20% of staff at all levels at pacesetting firms interact with their clients 5-8 times per day (ie. about once an hour), compared to 8% for non-pacesetters. And 8% of pacesetters interact with their clients more than 17 times per day compared to 0% for the non-pacesetter firms.
Compare that with 55% of the other practices only interacting with clients 1-2 times per day with pacesetters sitting at 37%. A big difference…
This demonstrates a closer, more real-time connection that pacesetters have with their clients. This is no doubt greatly facilitated by the use of the proper communication technology (see my list of the 4 best communication apps for firms here) and getting all levels of staff involved in working directly with clients (therefore staff with customer service soft skills becomes imperative).
Insight #10 – Firms that Describe Themselves as “Tech-Loving Accountants” Lead in 2 Areas
In the Xero Canada report, respondents were also asked how they would best describe themselves. Interestingly, those that described themselves as “tech-loving accountants” had the highest revenue growth in the last 12 months (17%) compared to the others.
They also enjoyed the 2nd lowest percentage of staff departures at 8.9%. As millennials and Gen Z make up more and more of the workforce, I feel this number would decrease even further down the road (or increase more among the other respondents) as these generations want to use tools that help them be more efficient. They are used to the iPhone generation where technology is smooth and seamless.
The use of technology can do more than just make you efficient. It can help boost revenues and also retain staff.
My 1 Big Takeaway – Moving to Repeatable Advisory Can Give You a Lot for a Little
In insight #4 above, I noted that firms that have a repeatable advisory offering can charge 65% more per client than a firm that focuses solely on compliance services. On top of that, you can see a greater ROI on a per employee basis and also improve the retention of your team (again in insight #4). This can all be achieved with a relatively low amount of disruption to your model as I noted in that same insight since on average, repeatable advisory firms spend 17.5 hours per month on a client (ie. 210 hours per year) compared to compliance firms that spend 14 hours per month on a client.
So for a mere 3.5 hours more per month, you can reap quite a few rewards.
Moving to a repeatable advisory model is not that difficult, though it does require a bit of planning. For one, the report notes (which I agree with), that timely, accurate books are a prerequisite. Therefore taking the bookkeeping in-house becomes important, for which you’ll need a bookkeeping service line that works well and is efficient (and likely fuelled by technology). Next, you’ll want to identify different kinds of repeatable forward-looking service offerings that you can incorporate into your plans (hopefully via a subscription model).
By applying some of the things important towards moving to a repeatable advisory practice, you’ll be on your way to becoming a pacesetting firm in time for next year’s report 🙂
To read the full Xero Canada firm benchmark report, click here.