Transaction Costs and the Hidden Economic Cost of Inefficient Accounting Workflows

All accounting firms have that "person" who just seems to know where everything is at all times.

Need to find a client file that nobody else can find? Ask Sarah.

Wondering what happened to the onboarding checklist that lives somewhere in between email and a shared drive? Ask Michael.

Want to know the status of a tax return that seemingly disappeared from the workflow? Someone likely texted about it last Thursday or posted a message in a Slack channel.

Initially, all of this operational chaos may feel manageable. In fact, for some firms, wearing it like a badge of honor seems to have become the norm - a symbol of a busy firm with lots of clients. Eventually, however, the imperfections of these systems will start to show through. Deadlines are getting tighter, even when staff are putting in more hours to get things done. Staff members are frustrated with many little things. Partners are spending more time managing processes than advising clients.

For this reason, more firms are beginning to pay attention to accounting workflow automation. Not necessarily because automation is an innovative concept, but primarily due to the fact that inefficient workflows quietly turn out to be very, very costly - in fact, they can be extraordinarily expensive.

What makes the problem even trickier is that in most cases, these inefficiencies do not show up as defined costs on a firm's financial statements.

Many economists classify a significant portion of these hidden inefficiencies within a firm as transaction costs. Transaction costs represent all of the resources utilized by the firm to coordinate activities, share information, monitor progress and ensure work is performed correctly. While these costs are often overlooked, they can have an enormous impact on the overall productivity and profitability of a firm. Therefore, many firms are beginning to look at accounting workflow automation not simply as a piece of new technology, but as a means to reduce transaction costs throughout their entire organization.

The Real Problem is Transactional Costs, Not Workload

Firms find out too late how busy vs. efficient are different.
I’ve witnessed quite a few teams spending an entire afternoon looking for missing client documents that existed somewhere in various systems, inboxes and conversations. The issue was not difficult to work through; however, the major issue was that information lived in too many different locations which created friction resulting in time lost to the firm; firms seldom measure this.

Although a few minutes of time may not seem significant, multiply this throughout an entire department during tax season, and there’s suddenly 10 to 100 hours of billable time being lost per week due to administrative clutter.
Searching for documents. Clarifying assignment responsibilities. Following up with clients that have fallen through the cracks. Having to enter the same information in multiple systems.

At the moment, it doesn’t feel overly dramatic. This is the problem with it.
Every one of these tasks is a transactional cost that requires resources to be consumed without providing any value to the client.
Firms tend to carefully track revenue; few track how much operational drag is negatively affecting the profitability of their firm.

One of the best ways to determine how much operational drag is occurring within your firm is to request your staff compile a list of tasks they do each day that feel repetitive and/or unnecessary. You will likely notice trends in no time.

Burnout Rarely Starts With the Actual Accounting Work

dislike the accounting part of their jobs. They leave because the workday has become tiring in ways that aren’t related to solving problems for our clients. These people need time away from the office to recharge.

There is a noticeable difference between being productive by doing meaningful work vs. having your entire day consumed by disconnected administrative objectives. Most accountants love to help their clients. They enjoy finding solutions, identifying problems, and giving strategic advice — that’s the rewarding aspect of being an accountant.

What creates burnout is continual mismanagement of daily operations, or the operational clutter of daily operations. Many of these frustrations are created through transaction costs that are embedded in everyday workflows rather than attributable to the accounting work itself.

For example, the constant need to request a document from a client, to communicate with another team member, or to remember who last had the original document creates stress at the lowest level all day, every day, especially for accountants in growing firms where the workflow developed quickly due to a lack of established structure within the organization.

Additionally, there are hidden costs associated with replacing an employee who has burned out. Such costs are incurred when recruiting costs grow, training takes time, productivity declines while the new staff is ramped up, and clients notice they’re not receiving consistent service before most firms do.

For this reason, workflow efficiency is more than just an operational conversation; it’s increasingly becoming a retention conversation as well.

The firms who retain good people for an extended period of time are also the firms who are proactively managing unnecessary friction to prevent it from overwhelming their teams.

Clients Don’t See the Mess, but They Feel It

Although your clients may not know that your internal workflow is a mess, they absolutely sense the effects of the disarray on their experience with your firm.

Clients experience these effects in small, everyday moments.

For example: a client uploads the same document twice because no one confirmed receipt of their first upload; a client sends an email and receives no response because different team members are unsure who is responsible for responding to the email (and that’s assuming that they can even find the email); and a client is asked to provide information that he/she previously provided to you two weeks ago.

Individually, these instances do not appear to have very much impact on the client's experience with the firm; however, when you add all the different instances together, you begin to create an impression of how professional and organized your firm most likely is.

Therefore, clients experience the negative impact of transaction costs even when they can’t see your firm’s internal processes.

Customer service expectations are changing quickly. Clients now compare the experience of all service interactions, not just accounting firms. Consequently, if a client perceives that communication is fragmented or slow, their level of frustration is likely to increase at a faster rate.

Many companies are trying to fix this by simply working harder manually—by sending additional emails, having additional check-ins, and providing additional status updates.

However, adding additional effort will not fix a broken workflow.

A strong customer service experience is usually the result of having an effective operational workflow in place behind the scenes. When your communication, task tracking, document management, and approval processes are functioning smoothly together, internally your team expends less energy coordinating and more energy building a relationship with your clients.

Ironically, an increased level of operational efficiency will typically result in an increased frequency of human interaction with your clients.

Growth Becomes Difficult Following Early Changes in Scale

There is confusion among many business owners as to which is the right approach—adding more bodies or establishing a better infrastructure for their growing businesses. Business owners will recognize the signs of operational complexity outpacing their growth when they notice that they have had difficulty onboarding new clients and that their team members have developed their own unofficial processes. Additionally, firm owners will notice that neither team members nor partners are trusting the existing operational systems for making decisions, resulting in partners becoming the default operational decision-makers for the firm.

Organizations begin to overcome the increasing pressures associated with operational complexity simply through sheer effort. Employees are willing to work longer hours to find creative ways of compensating for the problem. Forcing managers to step into these situations adds to their workload. All of this is a result of each employee adapting, but eventually, the stress associated with growth begins to outweigh the momentum created by scaling.

A very good description of this moment is that of many firm owners: “We were growing; however, growing did not feel scalable.”

This moment occurs when operational workflow problems evolve into business problems.

As firms continue to grow, the costs associated with transaction processing increase, making expansion more costly and difficult to manage.

Successful companies scale faster and more effectively than those that don’t by providing their teams with clear processes and systems that improve the efficiency of completing transactional activities.

Companies with the ability to scale successfully do not wait until their operational processes grow to a point of being cumbersome before they begin to centralize their communication, automate key repetitive activities in their operational processes, or create a consistent client delivery process. Companies that successfully scale tend to build their systems prior to being forced to do so under pressure.

Companies that can remove friction from their business processes will soon have an advantage in an increasingly competitive environment.

Involving Teams Creating Growth—Efficiency Enables the Higher Value Work

Many accountants will agree that they did not become accountants because they wanted to manage spreadsheets of internal process and relationship status updates. Most accountants desired to help businesses make better financial decisions so that they could reach their goals.

Businesses that focus on building advisory relationships with their clients know that in order to deliver valuable advice to their clients, the employees providing that advice must not spend all of their productive time supporting the operational processes required to manage the business.

As a result of the effectiveness of their operations, companies that generate efficiencies in their workflow process simply provide more time for their employees to engage their clients in a deeper conversation. This engagement can lead to more opportunities to identify strategic solutions for clients as well as opportunities to assist clients with initiatives to further their growth.

Companies that create workflow efficiencies also minimize operational chaos. Chaos results from inefficient workflow processes that increase the costs of processing transactions, reducing the ability to deliver productive output, consuming valuable employee time, and providing opportunities that the firm may never see.

The next several years will most likely not be kind to business owners that rely on hard work and personal contributions to thrive. Instead, the next several years will be the most successful for business owners who can identify and remove enough friction to enable their people to perform at their highest level and consistently produce high-quality work.