Beware the Progressive Promise

With more firms moving to the Verasage pricing model (good on them – great move), we occasionally come across examples where firms haven’t really arranged their systems and processes to support the delivery of services.

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We are fortunate enough to be picking up a new customer (via referral) from a competitor who has “productised” their offering and built their model around cloud accounting.  Terrific.

The customer in question has been working with their accountant for many years and supported them as they moved the model to an agreed pricing platform (I don’t believe based on our discussions with the customer that the firm is anywhere near value pricing their services).  They had been paying the monthly direct debit to cover all the services required.  They had been providing all the information required to enable the firm to do what was required.

Now, put yourself in this customer’s shoes.  They’ve been paying a monthly amount to the firm for the various compliance obligations for the past three years.  However, they have only just now received the financials and tax returns for 2013/14 and 2014/15.  Are they frustrated?  Bloody oath.

To be clear here, they are pretty happy with the quality of the work they were getting – when they got it.  They were driven up the wall by the constant chasing up to get information from the firm.  They like the accountant they have been working with.  But they feel like they have been “left for dead”.  The experience they have had has been very unsettling for them. As they said – “we’ve paid for the work, why hasn’t it been done?”

Many firms are making the move to productising their offerings and moving more to an agreed pricing model.

They fall down badly though when their focus is on marketing and “brand building” rather than service delivery.

Having your customers pay into your account regularly is great for your cashflow.  When you’re not delivering the services agreed to under that model, you have a problem.

The firm our new customer was going to is widely lauded as a “leader” in its field.  It is held up as a paragon of virtue and “a major disruptor”.  The problem is, the lived experience of their customers doesn’t support the hype.

We will be making sure we deliver our agreed services to them on time and support them up hill and down dale.  We will also regularly check in with them to ensure they are happy with our delivery and service.  The great thing is, once they get embedded into our firm, they are wanting to refer a whole heap of their mates to us who are also with this “progressive” firm as they are all having the same experience.

The other thing is, we are value pricing the engagement with the customer.  They are wanting a heap more real-value services and they are more than happy to pay for them.  This is money the “disruptive, progressive” firm was leaving on the table by productising their offering.  The firm’s focus wasn’t on the customer, and that has created a marvellous opportunity for us.

When you do go down the path of changing your model, please ensure that you deliver what you agree to and keep the customer in the loop.  It’s no use being a “leader” in the industry/profession if your walk doesn’t match your talk.

You also need to have the value conversation with the customer and listen to their needs and wants.

Ends up being a far better outcome for all concerned.

Regrets? They’ll have a few

OK, so we’ve all got them.  You know, those things that we look back on and think “what the hell – why did I do that?” or, (even worse) “why didn’t I do that?”

I’ve had plenty – more of the former type than latter, but it all forms part of the rich tapestry of life that we humans form part of.  And, much as we may regret things, it helps us develop into the people we are and forms the foundations of who we will be.  Great.

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BUT, what would happen if you knew that something was going to happen and, despite every nerve in your body screaming at you to do something, you didn’t “do it” (whatever “it” might be) – is that really a regret?  If you adopted a stance of denial, does that turn into a form of regret?

How is it that, even when confronted with massive amounts of evidence supporting a reality that is going to occur (and I’m not talking “consensus” here) – I am talking incontrovertible facts – you still don’t make the moves that are required?

I’m not going to launch into semantics here (I will leave that to my far more learned colleagues in Verasage), I am just trying to posit the argument that often times, people do not do what they should and don’t take action when they should or find a million reasons not to do something they know they need to because, well, they have lost something.

What is the loss they have made?

Consider if you will the current state of the accounting profession.  We are seeing massive changes set upon us – mainly from technology/cloud solutions, but also from offshoring operations.  Did you know, for example, that most of the Big Four have established offices throughout Asia to which they “in-source” their compliance work at (about) AUD10 per hour?  I know of an Australian example where a large corporate has moved a significant volume of their processing/admin work to a Pacific nation as the effective wage rate there is AUD1.20 per hour – a bit better than the award rate over here!

This is all happening now.  Today.  To our beloved accounting profession.  And what are the vast majority of our colleagues around the world doing about?  Nothing.

I posted some time ago about the changes that were occurring to our profession.  The changes that were coming then are rolling out even more quickly than I anticipated.

So, what is the profession doing to adapt to this change?  Not much.  Some of us a screaming to all who can be bothered to listen that there needs to be a change in business model.  Hardly anyone seems to be listening.  Or caring.  And we are not, by the way, being “chooky looky” – the sky is falling in!

What are most accounting firms doing to try and combat the inevitable?  They are trying to be more efficient.  Making better time recording platforms and putting greater emphasis on staff productivity.  Anyone recall Danny DeVito in “Other People’s Money”?  Buggy whips.

To make the process more precise isn’t what’s required in the accounting profession today (or tomorrow).  As Ron Baker is fond of saying – “I’d rather be approximately right than precisely wrong”.  Bravo Ron!  But tell that to the Luddites who persist with a 1950’s business model 65 years after it was made common place and 64 years after it became redundant.

The time-sheet is an anachronistic tool that does not fit with today’s requirements.  Staff hate them, admin hates them, managers hate them and Partners/Directors hate them.  The people who hate them most however, are the second most important people in your business – your customers.

In some respects, I am advocating a “back to the future” scenario – get rid of time-sheets – but with some important changes.  Changes like agreeing the scope of work and price up front with your customer.  The change which includes and involves your people in determining scope – and price!  The one where you truly empower your people to shine rather than record their misery in 6 minute increments.

Ed Chan of Chan & Naylor last week posted on Linked In.  Chan’s argument is that accountants sell time.  No.  We don’t.  We sell solutions to our customers’ problems.  His argument is that the “solutions” (I am expanding his argument a little here, but I believe it is in the same vein as what he has written) are all compliance-based whereby all we are doing is the “same thing” for each client.  As I have illustrated above, the basis of a lot of the compliance work is going to be automated or off-shored.  So scalability only applies if you’re doing basic, processing and bookkeeping work.  Not exactly what we’re trained for is it?

Similarly, setting an arbitrary hourly rate to charge them for your time isn’t reflective of their need or the value that they place on the work to be done.  Using the same rate for everything you do makes you pretty “average”.  And remember – average is where the best of the worst meets the worst of the best.

My belief is that every customer is unique and have their own set of fears, needs and the like.  To try and put them all in one basket is to demean both them and the people who work on their files.

Chan’s argument is also based on the premise that all you have to do is to hire more people and more customers will come to you.  Oh, to live in such a wonderful world!

From my experience (such as it is), the only way you can achieve this is to discount your offering to a level that drives people to you.  And then, what happens to “the margin” that Ed believes is the Holy Grail?  That and the fact that you’ll generally get the bottom-feeding clients who don’t value what you do anyway and will bring a whole heap of their “friends” along with them – High School Chemistry – like attracts like.  You will also not exactly engage your people as they merely become cogs in a never-ending grind out of tax returns.  Inspiring isn’t it!

So, in Ed’s world, where “you build a business to prepare a tax return”, I believe there will be regrets.  Lots of them.

Customers don’t want tax returns.  They want advice.  Support,  Counsel.  Encouragement.  SOLUTIONS.  The tax return work is only there because the government stipulates it.  Nobody really “values” it in the true sense of the word.  And the ultimate disruption?  I know of at least one of the Big Four that will be offering their clients compliance work for $0 in the coming years.  How’s “the margin” on that?

Getting the business model right for accounting firms is critical given the disruptive times we are in.  Making a bigger or cheaper version of what exists won’t answer the challenge – it merely cements in a race to the bottom for those firms that don’t adapt.

Regrets?  Yep, I have them.  A number of them.  One I do not have however is getting rid of time-sheets and moving to a business model that will sustain our business, our people and our customers for a long time.

Oh – the loss they have made that I referred to above?  It’s a loss of self esteem and belief in why they do what they do.  And that, my friends, can be scaled!

April 10, 2015 Show Notes – For Good and Evil: Taxes and Civilization

There have been great and powerful men who have moved civilization, but most of the time no heroes can be found, and the world is led by scoundrels, fools, and second-stringers. Taxes, however, are ever present, often making a strong impact upon our lives—for good and evil. The prosperity as well as the decline of nations has always had a tax factor, and this we will see time and again throughout history

–Charles Adams, For Good and Evil

For Good and Evil by Charles Adams is the most comprehensive book on the history of taxation throughout civilization that I have ever read. Adams is an international tax attorney who offers a refreshing perspective on taxation, one you will not find among most practicing tax professionals.

It is a lively book that takes you from Ancient Egypt, Greece, Rome and the Middle Ages, all the way up to present day. It offers a perspective on taxation that you will not find in the current debates surrounding tax reform, and offers some very compelling alternatives and improvements to our existing system.

In order to tempt you to buy a copy of this book and read it, we offer the following tidbits of knowledge you will learn from Adams:

  • Taxpayers from the beginning of time have reacted to oppressive taxation in three ways: 1) rampant tax evasion and flight to avoid tax; 2) riots; 3) violence;
  • The first casualty of “dumb taxation” has always been liberty; the second casualty has been the wealth and strength of a nation;
  • The origins of Hanukkah are rooted in the tax struggles of the ancient Hebrews;
  • The Ancient Greeks extracted large amounts of wealth from rich private citizens through the liturgy—the voluntary alternative to progressive taxation. Enforced by tradition and strong public sentiment, most gave three to four times more than what was expected from them;
  • Plane Geometry was not invented by Euclid, but rather by ancient tax collectors determining land size for harvest taxes;
  • One of the causes of the fall of the Roman Empire was tax evasion;
  • William Tell refused to acknowledge the Austrian Hapsburgs and their gang of tax collectors. For this defiance he was ordered to shoot an apple from the head of his son with a crossbow;
  • The American Revolution was probably more the consequence of the oppressive administration of taxes than the taxes themselves. Taxation with representation has proven more expensive than taxation without representation;
  • In 1787 no citizen of the United States could vote who was not a taxpayer;
  • Was the Civil War fought over slavery or Northern Tax policy?
  • In 1816 Britons put a tax on newspapers (the “knowledge tax”), designed to curb the opposition press. The tax was levied by the page. Papers today continue to print large pages, which were initiated for tax avoidance;
  • Tax laws have taken away liberty more often than foreign invaders;

And ultimately,

  • All good tax systems tend to go bad.

As Adams Points out: “Polybius, considered the greatest historian of the ancient world, said that the best preparation for politics was the study of history in order to avoid the disasters of others.”

With respect to taxation, there have been plenty of disasters. If enough of us educate ourselves, it may be possible to avoid those historical debacles. Adams reminds us of the wisdom from past thinkers that we have foolishly forgotten.

The Lost Legacy: The Enlightenment Thinkers on Taxation

It is vain to say that enlightened statesmen will be able to adjust these clashing [tax] interests, and render them all subservient to the public good. Enlightened statesmen will not always be at the helm

–James Madison, The Federalist, No. 10, 1787-1788

It has been noted that the principal trouble with the contemporary generation is that it hasn’t read the minutes of the last meeting. With respect to tax policy, this is an understatement. The Enlightenment period (1650 to 1700) was the high watermark for tax wisdom, ethics, jurisprudence and plain common sense, according to Charles Adams in For Good and Evil.

The Enlightenment thinkers knew their history; they searched the world’s governmental systems for what worked and what didn’t, and took the best of many. With regard to taxation, they frequently spoke of the relationship between taxation and despotism and prosperity. Their primary insight was that government exists to maintain our liberty—not our prosperity.

The legacy they left us has largely been forgotten. Listen to the present tax reform debates and you will not hear the ideas and ideals of the Enlightenment thinkers, especially amongst the media and the “tax experts.” Instead, they report on any changes as if it were a sporting event—who wins and who loses, rather than what is good for the whole country.

This is tragic. It is amazing that in a society such as ours—with instantaneous access and ability to transmit information far and wide—we have forgotten the wisdom of these thinkers. It proves that information does not equate to wisdom.

Charles Adams points out:

Perhaps this is an example of the simple truth about life—what comes easy is taken lightly. Our liberty and freedoms were handed down to us by generations past that had to fight for the liberty we now enjoy. Liberty to us is an inheritance, not something we earned or achieved on our own. We take liberty lightly, and we don’t seem to realize how hard it is to get it back once it is lost.

The following is the “priceless legacy” the men of the Enlightenment passed on to us, adapted from For Good and Evil (first edition), Chapter 26.

  1. Government is at best a necessary evil

Thomas Paine in Common Sense (1776): “Government, even in its best state is but a necessary evil, in its worst state an intolerable one.”

Paine said that taxation was tyranny, and a great destroyer of liberty as well as of property and industry, and it impoverishes the people more than foreign enemies do.

  1. The imaginary wants of the state

“Baron de Montesquieu in his The Spirit of Laws (1751), a book which greatly influenced the Framers of the U.S. Constitution, explained this problem:

                  The revenues of the state are a portion of that each subject gives of his property in order to secure or to have the agreeable enjoyment of the remainder.

To fix these revenues in a proper manner, regard should be had both to the necessities of the state and those of the subject. The real wants of the people ought never to give way to the imaginary wants of the state.

Imaginary wants are those which flow from the passions, and from the weakness of the governors, from the charms of an extraordinary project, from the distempered desire of vain glory and from a certain impotency of mind incapable of withstanding the attacks of    fancy. Often has it happened that ministers of a restless disposition, have imagined that the wants of the state were those of their own little and ignoble souls.”

  1. Government should stay out of business

Adam Smith in The Wealth of Nations:

Princes, however, have frequently engaged in many other mercantile projects, and have been willing, like private persons, to mend their fortunes by becoming adventurers in the common branches of trade. They have scarce ever succeeded. The profusion with which the affairs of princes are always managed, renders it almost impossible that they should. The agents of the prince regard the wealth of their master as inexhaustible; are careless in what price they buy, are careless in what price they sell; are careless at what expense.

Two words: Post Office.

  1. Liberty carries the seed of its own destruction

          Montesquieu noted that people living in a state of liberty tend to let their guard down and tolerate great taxes, but once granted they discover they cannot take a backward step: “Liberty produces excessive taxes; the effect of excessive taxes is slavery.”

  1. Direct taxes are the badge of slavery, and indirect taxes the badge of liberty

         Again Montesquieu: “Capitation [direct taxes on the individual] is more natural to slavery; a duty on merchandise is more natural to liberty, because it has not so direct a relation to the person.”

Recall that the Supreme Court ruled the 1894 income tax unconstitutional because it was a direct tax (thus had to be apportioned amongst the states).

  1. Tax evasion is not a criminal act

            Tax evasion is the consequence of excessive taxation, it’s a “positive offense” because it’s one manufactured by the state, not worthy of being called a true crime.

Taxation means forced exaction. Taxes aren’t debts, no principle of fair value received, which is basis for legally enforceable debt.

The US Treasury Department defines a tax as: “A compulsory payment for which no specific benefit is received in return.”

A tax is owed because the government says so, nothing else is required. You can’t be put in prison for not paying your VISA bill.

  1. Liberty’s most dangerous foe: arbitrary taxation

          David Hume:

“But the most pernicious of all taxes are the arbitrary. They are commonly converted, by their management, into punishments on industry…It is surprising, therefore, to see them have place among any civilized people.” If any of the following three principles are violated, the taxation was considered arbitrary:

  1. Taxation must be with consent.
  2. Have to be apportioned among the people by a definite standard or rule.
  3. Must be equal, counter to the inclination of everyone to push their taxes off onto someone else.
  1. Common sense economics: the supply-siders

            Not a new theory at all, goes back into antiquity.

  1. The marks of a bad tax system: Adam Smith’s four points:

1. A tax was bad that required a large bureaucracy for administration.

2. A tax was bad that “may obstruct the industry of the people, and discouraged them from applying to certain branches of business which might give maintenance and employment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds which might enable them more easily to do so.”

3. A tax was bad that encouraged evasion. “The law, contrary to all the ordinary principles of justice, first creates the temptation, and then punishes those who yield to it.”

4. A tax is bad that puts the people through “odious examinations of the tax-gatherers, and exposes them to much unnecessary trouble, vexation, and oppression…It is in some one or other of these four different ways that taxes are frequently so much more burdensome to the people than they are beneficial to the sovereign.”

  1. What a good tax system should be: Lord Kames’s six rules:

            Lord Henry Home Kames, a scholar of that era, published his Sketches on the History of Man (1769), which analyzed tax issues and greatly influenced Adam Smith. Here are Kames’ “Rules to be observed in Taxing”:

  1. “When the opportunity for evasion exists, taxes must be moderate. It is unjust for a legislature ‘first to tempt and then to punish’ for yielding to temptation.”
  1. Taxes that are expensive to levy should be avoided.
  1. Arbitrary taxes are “disgustful to all.” The amount paid is determined by the “vague and conjectured opinion of others.”
  1. To remedy the “inequity of riches,” the poor should be relieved of any significant tax burdens.
  1. Taxes that sap the strength of a nation should be avoided. Such taxes “contradict the very nature of government, which is to protect not oppress.”
  1. Taxes that require an oath are to be avoided. Said Kames:

Perjury has dwindled into a venial transgression and scarcely held an imputation to any man’s character…Lamentable indeed has been the conduct of our legislature: instead of laws for reforming and improving morals, the imprudent multiplication of oaths [for tax enforcement] has not only spread corruption through every rank, but by annihilating the authority of the oath over conscience, has rendered it ineffectual.

The U.S. Supreme Court condemned the use of oaths for tax administration as late as 1885, Boyd v. United States, 116 U.S. 616, 631.

How many of these tests would our present-day tax system meet?

Very important question:

                        Have we squandered our inheritance?

Those who have no concern for their ancestors will have none for their descendants

–Edmund Burke

To know nothing of what happened before you were born is to remain ever a child

–Cicero

You can watch an hour long interview with Charles Adams from Booknotes here.

Episode #39 Preview – For Good and Evil: Taxes and Civilization

tax-dayIn celebration of April 15th, Ron and Ed will explore the history of taxation. All good tax systems tend to go bad, and throughout history tax laws have taken away liberty more often than foreign invaders. As Charles Adams explained in his book that will be discussed on the show, For Good and Evil, “The prosperity as well as the decline of nations has always had a tax factor…” We will explore the priceless legacy the Enlightenment thinkers passed on to posterity that comprise the components of a just tax system, as well as Adam Smith’s four marks of a bad tax system, and what a good tax system would look like.