Accounting for Innovation

Blending Tradition and Innovation: Lessons from the Accounting Trenches

• Jody Padar & Matt Tait • Season 2 • Episode 4

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How do you balance new -vs- old when growing your firm?

In this episode of Accounting for Innovation, Jody Padar and Matt Tait discuss the dynamic between traditional and innovative practices in the accounting industry. You’ll hear the strengths and weaknesses of both approaches, highlighting the reliability and proven methods of traditional accounting alongside the efficiency and scalability of innovative practices. These methodologies can lead to a more robust and adaptive accounting practice, emphasizing the importance of evolving business models to stay relevant and competitive.

In this episode, we cover:

  • The benefits of traditional accounting practices such as reliability and proven profitability
  • The drawbacks of traditional practices, particularly resistance to technological adoption and innovation
  • Innovative accounting practices' advantages, including increased efficiency and scalability
  • Challenges faced by innovative practices, such as over-reliance on technology potentially degrading client experiences
  • The importance of balancing tradition with innovation to enhance service quality and client satisfaction
  • The integration of technology and traditional values to optimize practices
  • How traditional firms can embrace changes necessary for modern business environments

This episode is brought to you by Decimal and the Radical CPA.

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 CPA, 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.

Jody Padar:

Welcome to the Accounting for Innovation podcast. I'm Jody Paydart, the Radical CPA. I've been at the forefront of innovation and accounting in the accounting industry for over 15 years. My co host, Matt Tate, is the CEO of Decimal, one of the fastest growing accounting companies in the country and an accounting innovator.

Matt Tait:

thank you, Jody. I am excited to be back in season two, but also I think this is a really great topic that we have today. I'll Because as you and I know, we both love talking about innovation, but there's a lot of traditional firms, traditional accountants and really good stuff with traditional practices and businesses in the accounting space. And today, as we dive into some of the good, some of the bad with innovation, some of the good, some of the bad with traditional practices, I'm really interested to have this discussion, but to start, Jody, you know way better than I do. Let's talk about traditional practices. What are some of the good things and some of the bad things? about these traditional practices.

Jody Padar:

So I think it's really good too, that we talk about tradition, because I think there are lots of good things in firms. And a lot of times when you talk to the innovators, they don't always remember the good things that are, are in front. So let's start there. So what are, what's the good thing? So there's proven reliability, right? The traditional practices have with, stood the test of time. they're consistent and they're profitable, right? Like the reason that accounting Accountants are still in business and why people want to be connected to them. It's because they're very profitable businesses, even with all their flaws Yeah, even with all their flaws, their standards, right? Like they have Everybody knows what the standards are. They kind of have processes people know how to do compliance reporting the the thing about Compliances. It makes a reoccurring revenue. So every year someone has to file a tax return every year, they have a financial statement or whatever, but also that consistency means that like next year, your client's going to come back. Right. So it may not be traditionally reoccurring revenue in like the software sense of it, but every year, those same clients come back and back and back. And like the traditional, I think, client of a firm. Stays 10 years, at least 10 years, right? So there isn't a lot of turnover in your client base as well. Right. And then I think there's like this strong ethical foundation, right? as a CPA, you've gone to school, you're required to take ethics classes. We adhere to professional standards. not only do we up our game and skills every year, but like we really have. I would say most CPAs have a heart of serving the public, even though we're not doing, you know, audited financial statements, right? Like it's truly about making a better financial life for our customers. And I think that shines through in most CPA firms, right? Like how, how, how they really care about their, their customer, even though it may not always get shown that, but they really do care about their financial wellness. Right. Here's the bad resistance to change, right? Traditional practices are slow to adopt new tech methods and hindering. They hinder progress. Part of that I would argue is the billable hour model. It, it inhibits you from changing, right? Cause if like you don't need to change your price, if you don't change, if you're billing by the hour, what. What makes you wanna do something faster, quicker, more innovative, right? So that's part of it. also, we're busy, right? Like we have these seasons. We, we go from month end to quarter, end to year, end to tax season. And it's very hard when you have so much work and you're in that rat race to say, okay, I'm gonna step back and I'm gonna, I'm gonna change something, right? So it's hard. when we think about the inefficiency. Of, some of the traditional methods, they're time consuming, they're labor intensive. And part of it is we just been doing it for so long, but we're on that rat race and we haven't changed it. So again, kind of self fulfilling, we kind of make these problems for ourselves. And then I would say. You know, CPAs are a little bit risk adverse and they have a little bit of limited flexibility. Right. So they, they, they adhere to the way it's always been done to the pros, the, the procedures. You know, if you ever talked to CPA, the first thing they're going to say is, well, what does circular two 30 say about that? Or what is the, the, the standard on that? Right. And they go and they look up the law. So, whereas we know innovators, a lot of times they're like to break things. And let the regulations follow the innovator as opposed to following the regulations so You know Those are inherent that regulation and that strong connection to regulation is part of a cpa firm's dna so so those are kind of the The handful of things, that have made up this traditional firm for the last, I don't know, a hundred years or

Matt Tait:

so.

Jody Padar:

So what are the innovative things, Matt?

Matt Tait:

Well, first off, I want to say that I just had this conversation with my kids about, they said, dad, this is the way we've always done things. And it was my daughter, Madeline. I said, Madeline, that's an excuse, not a reason. If you have a better reason, use it. And I think that encapsulates a lot of us that think of things from an innovation first perspective is the way we've always done things isn't a reason, it's an excuse when you can't come up with a good reason. For us, I do think there are good things in the traditional space, but oftentimes We run away from them. So let's talk about the good first. Good is way increased efficiency. It's rebuilding the business model from the bottom up and top down. And to me, that's looking at a profit first, efficiency first perspective. So as you and I have talked, one of the things I like about running an accounting company versus a firm is as the CEO, my leadership team has a decision to make, and then everybody does it. Firms are more like a confederation of states, and you have to convince everybody to do the same thing, and it's just never really possible, so it makes change very slow. In innovative practices, in innovative companies, change is very quick. It can be. You also can have enhanced accuracy. When you remove people from doing too much work, you can move them to reviewing work, and that means that all of a sudden you've put them in a better position to do higher level thinking, higher level thought processes, rather than the economics of trying to pay for people to do lower level work. Scalability is another thing. As a firm or as a company like ours that's gone from 0 to 650 clients in four and a half years, We're built to scale. We're built with the idea of scale in mind from the beginning versus traditional firms, much more thinking about the 5, 10, maybe at max 15 percent growth a year. And so that ability to scale quality, and it's not just quality of work, but quality of experience is built into an innovative practice. Now it's plenty of bad. And I would say a lot of the bad comes from the, what you mentioned, running away from the fact that there are some great things with traditional stuff, with traditional work, there are really good parts to it. And you have to figure out what those are. When you don't, you have implementation challenges. You over implement too much technology and it creates an over reliance and the client experience degrades, or the quality of work degrades, or you're, you're cutting corners rather than improving. Product and product or service. If and that's where a lot of these innovative practices look too much at the financials and not enough of the quality of output and quality of experience. The other thing is, if you move too fast, change can become a problem. You have to really balance out the need for change with the desire to change and and figure out the right balance and a lot of these innovative companies and firms change for the sake of change and that's problematic. So it's all just like traditional practices, innovative practices, innovative companies also have a lot of good and a lot of bad. The best ones are the ones that take the good from both and try not to repeat the same mistakes.

Jody Padar:

Yeah. I mean, I think that that's the ideal of the firm of the future of the new firm is right. Like how do you merge, how do you marry that old school and new school together and get a really good relationship first technology driven practice that is really You know, putting the client first from an advisory, advisory standpoint, and not just the tech. And, and that's, I think the hardest thing that I've seen or the, where a lot of these, I'll say new firms fumble is, on the relationship side. And as AI comes in more and more, it's even going to be more important, right? Because you don't just throw the bot at it, right? Like you have to figure out how does the human interact with the bot and then have that conversation with the customer, right? And I think that's the, that's the struggle that innovators have. And they, they're, I don't know if, it's so funny because too, like working in a technology company too, it was so funny because I, you know, I was talking to an engineer and he was saying, well, how did people do it in the past? And I was like, you know, I'm old enough. We used to type it in. Right. and it's they just kind of think engineers think, Oh, like, why wouldn't it just be automated? And it's Oh, well, guess what? Like in the old days, we used to do it by hand first. Right. And then, and then it got automated. And I think some of where firms get caught up is even in the, if I learned to do it by hand, how do I teach my team to not do it by hand and not, and still learn? To be a really good advisor. If I've only learned, if, if you're coming in at the next level and you're not having to do all the data entry yourself. And I think that's one of the things that like traditional firm owners struggle with is like, how does the next gen learn how to do this if they don't actually have to ever do the work?

Matt Tait:

Well, and I think what's interesting is I actually think traditional firms and innovative firms have the same problem in client experience. They just come at it from opposite directions. The. Innovative firm thinks we have to figure out the economics of this as quickly as possible and as well as possible. And that makes them cut corners on experience. I think the traditional firm heavily weights the quality of work and the quality of accounting needs to be so great that they spend too much time on that to spend time on the client experience because they're not getting the billable hour for it. And so both firms, both companies end up with the same problem, but they come at it from the opposite direction. And. I think the true answer with a really good company in the space is you set your values as a business up front and equally. So for us at Decimal, we say we want to have high quality output. An extremely great client experience. Those are of equal importance along with great internal economics. And so those are the three things that are always balanced equally so that you never let one overweight the other. And when you don't do that is when you have the Innovative companies having the mistakes that create experience and output problems. And you have the traditional firms that create the quality of work is great, but the rest stinks.

Jody Padar:

Yeah. And I, I, I think you hit the nail on the head there because it's like somewhere we have to meet in the middle. And I think, unfortunately, Right now, when you look at who's in the space, like you don't have the right blend of people who are sitting at the table, kind of making these decisions. Right. You have the pilots of the world or like the, the true tech people. Right. And then you have the professional services firms. Now, of course, there's you Matt, who's kind of in the middle, but I mean, if you think about it, most people who have either funded or An innovative technology company come at it without having a professional services background. or the professional services people don't come at it from a tech perspective. They come at it from, you know, the, the professional services perspective. So how do we change that?

Matt Tait:

I think that's a great question. And. I think when you're looking at one of the things that you and I, you and I talk so much about the future and how to bring the future forward, I think one of the things that people should talk more about is when you look at these big traditional firms or even the smaller ones that are very much set up and structured in a traditional way. How do they change? Can they change? Will they change fast enough? I think those are some of the questions that need a lot more unpacking because it's easy for somebody like me to change. I'm built to change. We are built as a company with that entire mantra. But a traditional company and a traditional firm, how do they change the economics? How do they change The efficiencies of the business. How do they do those things that are so hard? And a question that I have that I think is inherently and I'm a recovering attorney. So that's the other side of the coin from an accountant. How do you look at at accountants and say you haven't changed quickly in the past? You need to now. Here are your first steps, Jody. What would you tell them?

Jody Padar:

So I, you know, I go back to pricing and that's why I believe that people haven't changed is because the billable hour and the time sheet method mentality prevents you from changing. And so how can you innovate if you're getting paid for an hour and they're, they're at odds with each other, right? So I would say you start by changing your pricing model first. And along with changing the. The way you position, the way you sell, the way you price, you have to organize your backend, right? Which is the productization of services and, you know, the standardization and all of that. Right. But that takes time. Right. And I think the hardest part is the mindset. It isn't the how to, it's the mindset to say, Look, I realize what I'm selling today doesn't fit what the market wants to buy. And I need to look at myself. I need to look at my business and I need to start making a change. And that's the story of Blockbuster, right? if you don't change, what's going to be in 2030 and 2030 is not that far away.

Matt Tait:

No. And I think, you know, one thing that we don't talk about enough in that, billing model that I think needs to change and actually could be one of the first places to change is compensation structure. Having spent some time in an accounting firm, one of the things that I noticed was you had your billing model, which was hourly, but your compensation, compensation structure was also built on that hourly billing model. And as long as compensation is built around the hourly model, even if you change pricing, You're still going to have people working towards that hourly model. And that's where I see the idea of going to more of a productized service and fixed fee pricing fail is when the compensation model doesn't change along with it. And to me, compensation should be about book size. How much can you do for how little cost?

Jody Padar:

So I just saw a ad from a very innovative firm. And they said that they're looking for a tax person and the compensation is up to 150, 000. It's a 90, 000 base. And that 000 differential is based on your customer feedback, your scores, all of those other things. And I think that's the way things have to go is there has to be some sort of incentive. For a price on your labor because otherwise and that that's why people who like work in the billable model say like what's the incentive for them to work harder based on bonus hours or whatever make the bonus based on. Customer experience or customers scores, right? Like, how are, how are they being rated? Right? how they, how they interact with their customers. Cause quite honestly, that's a better value to the firm than just getting them off the phone right away. You can be technical as all heck, but if you can't explain it to your customer, it doesn't matter that you're technical or not. Right. Right. So, I think that's truly the way and I, and I think too, it rewards the next gen. I think it would reward everyone, but like when you think about the next gen, what's to incentivize someone to work harder or not even work harder, work smarter, just work smarter.

Matt Tait:

Well, and that brings up another thing that I think is a difference between the innovative firm and the traditional. When we first started decimal and we were doing a lot of hiring, you know, a lot of bookkeepers, and that's who we hire a lot of, not only are required in a traditional firm to do monthly bookkeeping work, but they're also required to do additional work during tax season. And in that tax season, they just get slammed. And so our promise to them was you'll never have another tax season again. In fact, we require you during tax season to take a vacation and post a picture on LinkedIn so that all your friends know that while they're just in tax hell, you're vacationing and it still, to this day, we have people that apply for jobs that bring that up, but it's, it's measuring output. It's clearly defining roles. It is, it's really looking at everybody as equal value. The lowest level bookkeeper is of as much value potentially as the highest level partner. And with, when you start to remove that hierarchy, that's when you have the chance to let everybody succeed based on their own ability to output profit.

Jody Padar:

Absolutely. And I, I think too, it gets ownership of wanting to stay at a firm. like you get to actually engage and want to be there. I think that's the talent retention thing, right? everyone says they can't find people, but if you really made a quality place where people didn't want to leave, they felt challenged. They felt well compensated for the work they did. And here's the other thing. Once you start pricing on value, all of a sudden your employees, they understand now the value prop, right? Like maybe they never understood what, what it meant to be value or they never had, that had never been explained to them, but now they actually realize how valuable they are to the firm and they're going to start requesting to be compensated as such. Yeah. So, Yeah, that's why it totally shifts everything in your firm. It's not just one piece of it, which I would argue for years, as everyone talked about fixed pricing and value pricing, it was, they only talked about the, the sale side of it. And that's why firms that tried it, they struggled with it. It didn't work. It was because it fundamentally changes your whole firm at its core.

Matt Tait:

I think it does. And one of the other things you talked, retention. We have a younger generation of people. That are really struggling to see the future in accounting. And I think you and I would agree that the right type of accounting is one of the most exciting potential places to be in a services industry because it's one of the most impactful places for technology to be. And if you can start to really focus on that, like I used to laugh that these young accountants would come into the CPA firm and quite frankly, they'd have to dumb themselves down to use technology that was older than me. That needs to change. And when you start to change that, you'll get people excited about the future people today. Young kids today, people younger than you and me like change. They like that new technology. They like getting an iPhone every year or two. They like that adaptation. And you need to bring that mindset into a traditional practice because it's already there in an innovative one. Well, Jody, I absolutely love this topic. I think you and I could probably go on for multiple episodes on just this one. We'd probably say that about every episode, but thank you everyone for tuning into the accounting for innovation podcast brought to you by decimal. And the radical CPA, you can find more insightful episodes of the accounting for innovation podcast, wherever you listen to podcasts. And please don't forget to pick up Jody's new book, radical pricing, how to optimize profits, delight clients and build a top value firm. It's been selling like crazy. interested in joining the conversation, please connect with Jody and I on LinkedIn. We look forward to talking more.