The holistic analysis of root problems plaguing China’s accounting service industry

A few days ago, I got an inquiry of Megi (China’s cloud accounting software for SME business) from an accountant (anonymously named Shirley) working as a full-time employee of a small business in Shanghai. And two days ago, they decided to adopt Megi to manage their financials.

Shirley actually knows Megi for a long time as she used to work with an international accounting firm. She was in the team to whom I demonstrated Megi a couple of years ago. The client whom she serviced actually hired her recently from that accounting firm. 

Shirley told me that her income from the new business employer is higher than the package paid by the previous accounting service employer, and she is performing more meaningful jobs as she is working closely with her boss assisting him to build more robust internal controls and working on financial modeling of the business.

Actually most of the accounting practices here in China pays consistently lower salary to accountants, which leads to high turnover rate with especially capable employees hardly retained in the accounting service sector.

Here two questions which seem intrinsically illogical arise:

Why the accountant, after becoming an internal accountant, proactively recommended Megi to her new boss, whereas her previous accounting firm did not implement Megi, which can be used by business client and external accountant in integrated collaboration?

Why did the client hire the same accountant, who serviced them from the service provider, at a higher salary? Actually the cost was supposed to be much lower as the accountant was servicing 5 businesses prior to her being employed by that client.

The underlying dynamics of the accounting service sector in China:

The cost structure of the accounting practices illustrated by this diagram illuminate the underlying dynamics of the current status of the accounting service sector.

The root problem lies in buyers (foreign companies operating in China, particularly the new comers) being unfamiliar with the Chinese business settings, especially in the accounting and taxation sphere.

1. Foreign companies perceive a magnified complexity of compliance requirements in China, which is caused by information asymmetry, artificially created by manipulative and distorting marketing communications. 
2. And they are unaware of many pitfalls, which are of management accounting and business controlling nature, unique to the Chinese business environment that create risks and financial losses that prevent them from effectively executing their strategy and maximizing profits. (What I mean by pitfalls unique to Chinese business environment which are not well addressed? Please approach me by leaving a comment below this article to acquire a 50-pages whitepaper ‘The Business Management Playbook for China’)
3. A rather large percentage of accountants in China are poorly qualified people, and they are hardly capable of ‘working inside clients’ business’ to bring value to business owners in the nature of management accounting. Why? ask the educational system.

Holistic analysis of the problems plaguing the accounting service sector:

When a buyer has little knowledge of the problems they face and the associated professional service products, they have to give their trust to and pick out a seller by resorting to the branding and image presented by the service providers.

And that leads to the sellers spending a large percentage of budget to marketing communication and image positioning

- Creating expensive marketing contents

- Organizing an excessive amount of events,

- Hiring costly foreigner marketers and account managers

- Renting luxury office at central business districts

And portray themselves as a ‘China expert’ and purposefully exaggerate the complexity of the compliance requirements in China, so that they can overprice their service products which are actually of low value.

As it is difficult to find and develop the qualified accountants anyway, the service providers end up hiring only incompetent people and keep to a low-salary policy. Our observation shows consistently that those who has a career ambition to upgrade to management accountant would leave this industry and those who have the mindset of only crunching the numbers remain.

This sheds lights on why most of these conventional practices fail to adopt cloud accounting software to work in close integration with their business clients, as their service delivery department resists change and operates only as general-ledger book keepers. Cloud accounting is actually not only about technology, but it is more about the accounting practice being empowered to deliver higher value services to clients. And how can you expect poorly paid and lower qualified people to adapt to that level?

And also, this explains well why lots of better-qualified people are eventually hired by clients. After a while, clients either find that they can pay a salary similar to the fees they pay to the service provider, and employ their service staff fully time. Or they come to realize that their vendor throws large amount of the fees they pay into the marketing related activities and is giving little attention to improving the delivery standard of the services. 

The new breed of cloud accounting practice:

In sharp contrast to the conventional practices (most of them are big and have international branding), a small group of new breed firms harnessed the opportunity of technology-driven transformation to deliver higher customer satisfaction and grow their business. It is not difficult to discover a pattern of organic business model that creates win-win situation with their clients and employees.

- Devote to pick out and retain the best human resource, willing to pay higher salary and develop their management accounting skills.

- Acquire sales leads primarily through referral by satisfied old clients, leading to the same level of pipeline with much reduced marketing communication and sales cost. 

- Introduce value added-services into the product portfolio, such as financial health check, SAAS applications implementation, financial planning and analysis, etc.

- Adopt cloud technology to work in closer collaboration with clients, and improve the efficiency of the operations and reduce the cost.

Some of these new breed firms were and are being formed by exiting managers of the old-fashioned international practices who have a forward-looking perspective of the industry and are ambitious to take advantage of the industry transformation.

There are also international firms with pioneering mindset and a long-term strategy adapting and operating out of their comfort zone.

Here is a post about how to identify these new bread practices offering value added services.

And these practices proved their overwhelming success by growing tremendously their business in 2020 in the face of the coronavirus pandemic. Here is a post about one of the star practice which is a partner firm of Megi.

#megi #cloudaccounting #compliance #doingbusinessinChina