By Gideon Botha CA(SA), Senior Financial Manager:
Nedbank Group, and Professor David Venter of Vlerick Business School
Consider the following timeline that illustrates the shift in the rise of the service economy: your child or grandchild who turned 18 in 2019 is younger than Amazon and Google. That child turned three with the arrival of Facebook, four with the creation of You-Tube, five with Spotify, six with iPhone and eight with WhatsApp (Joyce, 2019).
The exponential growth in service organisations means that jobs and businesses will in the foreseeable future be driven by services. The completely diverse set of attributes of service organisations will, in comparison to manufacturing organisations, have far-reaching consequences for small and medium accounting practices (SMPs). Their clientele will increasingly consist of service organisations, and the form of the services provided to them therefore need to be adapted to the requirements of service organisations. To better understand the impact that the growth of service organisations will have on SMPs, it is essential that the nuances between manufacturing and services be unpacked by way of an example. When a manufacturing organisation decides to launch a physical product to market – say a digital camera – it needs to ensure that the product will have a compelling market impact and that it possesses both the manufacturing and technical expertise to produce the camera. This is vastly different from rendering a service, which is intangible by its very nature. Because service organisations are not able to store their input and outputs, the associated failure cost increases. Also, their output needs to be customised for different customers who are not merely consumers of the service but could also be integral to its production. Drucker (2001) stated that profit is the cost of the future; the cost of staying in business and operating a profitable service. Running a profitable service business was highlighted as a challenge by Frei (2008), with many of the management tools and techniques used by service managers having been designed for tackling the challenges faced by product companies, not service organisations. She consequently developed four guidelines for running a profitable service business. We will first discuss these guidelines, and then in each case the practical application thereof by SMPs.
1. The service offering
In service organisations, the most important element of providing a service is the design thereof, which needs to effectively meet the needs and desires of an attractive group of clients. Whereas product designers focus on characteristics that buyers will value, service designers need to make a shift in mind-set, focusing on the experiences that their customers desire.
When SMPs engage with service organisations, they need to expand their assessment of the services these organisations require, which may necessitate that they think outside the accounting, auditing or tax services frames. Thus, their involvement may also include advisory services that are tailored to assisting their clients with the costing of different services that are being offered. Because the services they offer are intangible, and in many cases unique to a specific client service, this is one of the biggest problems service organisations face.
In future, it will no longer be sufficient merely to provide clients with financial statements that are a historical record of the past financial year, as these statements will in future be increasingly developed in-house with the help of user-friendly software. SMPs will need to shift their emphasis towards becoming value-adding business advisers that guide companies in their decisions on how to take their businesses forward by restructuring, divesting and investing.
2. The funding mechanism
The pricing of services differs from that of physical products. Physical products use price to differentiate a superior product, whereas services often bundle various elements of value or rely on subscription. This results in clients deriving varying amounts of value for their money. For instance, a mechanism that could be used to enhance client experience while providing a decrease in price, is self-service offerings.
SMPs could provide service organisations with the software they require to perform their own accounting function, while providing them with advisory services to decrease the cost of this service and simultaneously offering alternative services to the client.
3. The employee management system
Organisations tend to live or die based on the quality of their workforce. This is even more pronounced in the case of service organisations, as they tend to be people intensive, placing an even stronger emphasis on employee management.
A well-integrated employee management system departs from the answers to the following questions: “What do our employees need in order to achieve excellence?” and “What motivates our employees to achieve excellence?” By considering the answers to these questions, organisations are able to translate their answers into company-specific policies and programmes.
The increase in service organisation clients may also require SMPs to redefine the skills sets of the employees servicing these clients. This may, for example, require that they consider appointing employees with dual degrees that afford them a competence in both accounting and coding, which then enables them to provide automation as well as data analysis services to their clients.
4. The customer management system
In a service environment, clients and employees both affect the cost and quality of the service that are delivered. The customers themselves can be involved in operational processes – sometimes to a very large extent – and their input influences their experiences and often those of other customers too. Thus, a proper customer management system should be implemented.
Due to the role that customers play in service organisations and consequently the influence that they have on the services provided by the SMP, very strict terms of engagement need to be drafted between the service organisation and the SMP. Furthermore, a proper customer management system will need to be implemented to address concerns in terms of the service provided by the SMP.
PROFIT IS THE COST OF THE FUTURE; THE COST OF STAYING IN BUSINESS
AND OPERATING A PROFITABLE SERVICE.
Drucker, P.F. 2001. The essential Drucker. New York: Harper Collins.
Frei, F.X. 2008. The four things a service business must get right. Harvard Business Review. [Online] Available from: https://hbr.org/2008/04/the-four-things-a-service-business-must-get-right
Joyce, H. (2019, May 2). Kids these days. Economist.
Originally published in SAICA’s SMALL & MEDIUM PRACTICES NEWSLETTER 2020 Quarter 1 p.12-13 [Online] Available from: https://www.saica.co.za/Portals/0/documents/SAICA%20NEWSLETTER%202020%20QUARTER%201.pdf