Accounting Firms Struggle to Deploy AI Under Hourly Billing Model

Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding! Chelsea Summers: [00:00:00] I can't wrap my brain around how we're going to utilize technology and make our work more efficient, even just research or some of that data entry, like that's going to make things quicker. How do we build that if we're billing by the hour, like are we going to start having reduced fees on on their invoices? No. So what does that look like? Blake Oliver: [00:00:22] Are you an accountant with a continuing education requirement? You can earn free Nasba approved CPE. For listening to this episode, just visit earmarked app in your web browser, take a short quiz and get your certificate. Hey everyone, and welcome back to the earmark podcast. I'm Blake Oliver. Today I'm joined by Chelsey Summers of Inside Public Accounting, one of the best sources in the profession for understanding what's actually happening inside accounting firms. Ipa's benchmarking and survey data gives us a rare window into firm performance economics, staffing, pricing, technology, adoption, and more. So instead of talking about what firms think is happening, we're going to talk about what the data actually says heading into 2026 and beyond. And what firm leaders and operators should take away from it. Chelsea, welcome to the podcast. Chelsea Summers: [00:01:15] Yeah, thanks for having me. I'm super excited to be here and talk about my favorite thing, which is Accountingfirm data. Blake Oliver: [00:01:20] Let's start at the highest level. You've got access to data across multiple survey cycles. So as firm leaders look ahead, what are the top 2 to 3 trends you're seeing based on the latest survey cycles? Chelsea Summers: [00:01:34] Yeah. So the latest survey data we have is for 2025. We're currently in our data collection period for the 2026 survey. So I can't wait to talk about that when we have more data in. But based on what we saw last year, there were a couple trends that emerged. I think a big one is the operating model of firms is really changing faster than maybe the service mix. So advisory revenue continues to to grow, but gradually across the firms. And tax and assurance really still makes up the majority of revenue across most firms, which is kind of contrary to the all the talk that we're hearing on, on advisory. And that's really the next frontier. And I think it is, but the data just isn't showing that that is yet the predominant model inside most firms. But I think the bigger shift is, is how work is being delivered. There's more outsourcing, more nontraditional staffing roles and more technology layered into workflows. So that's, that's a big trend that we're seeing. And then the second one is that the productivity metrics are really mattering more than ever. Revenue per FTE is the big one. That's the one we talk about a lot. So revenue per employee inside of the firms last year, that rose to 220,000, which is about a 4.5% increase over the prior year. So that's great. Firms are making more money per employee. But when you overlay inflation on top of that, they're still barely keeping up, if not not increasing at the rate of inflation. So I think the firms that are outperforming the market are ones that are improving their productivity faster than they're adding headcount to their firms. Blake Oliver: [00:03:09] What types of firms are we talking about? Who are the firms that respond to your surveys? Chelsea Summers: [00:03:13] Yeah. So last year we had a little over 600 firms participate. Those firms are typically 5 million and above in revenue. Ipa names the IPA 500, which are the 500 largest accounting firms in the United States, starting with Deloitte, down to about a $6.5 million firm. So most of the firms are mid-size and large firms that participate in our survey, all in the United States. We do have some participants from Canada, but North American based survey. Blake Oliver: [00:03:41] Was there anything that surprised you in the latest results? Chelsea Summers: [00:03:45] Um, yes, there always are some surprises. And I think a big surprise that came out was how resilient firm profitability has been despite intense cost pressures. There's a lot of, uh, increase in labor costs. Technology spend has increased quite a bit. And, and we are not seeing yet that that is cutting into the firm profitability. Most firms are maintaining their margins through their price increases or increased leverage. Blake Oliver: [00:04:15] So salaries are going up, technology spend is going up, but the firms are able to maintain margins. Chelsea Summers: [00:04:21] Yes. Blake Oliver: [00:04:22] And and revenue is growing. Margins are staying the same. Chelsea Summers: [00:04:26] Yeah. It is growing. Um not quite at the rate that we've seen in the post Covid years of ten, 12, 15% growth across firms. It's more normalized to what we saw in the early 20 tens, um, through 2020 of like that 6 to 8% growth is a lot closer to what we're seeing right now. Blake Oliver: [00:04:45] You mentioned something about how there's been a lot of focus on advisory. I think client accounting services as well. Yeah. But you said that tax and audit still dominate the revenue. Chelsea Summers: [00:04:56] Yes. Blake Oliver: [00:04:56] What's the breakdown? Chelsea Summers: [00:04:59] So the data showing that most firms still generate less than one third of their revenue from advisory services. Of course, in those larger firms that is higher. And in the smaller firms it's a little bit less. And there are firms that are the exception to that rule that are very dominant in Cass services or technology consulting. Um, transaction advisory services. But for the overall, for all of our survey participants, about a third of revenue from advisory services. Blake Oliver: [00:05:28] Okay. And, and client accounting services. Are you able to see that specifically? Because I remember a few years ago, there was some data, maybe it was from the AICPA that said it was it had reached 10% of firm revenues. Are you seeing that grow? Are you seeing that stay the same? Chelsea Summers: [00:05:44] Yeah, we are seeing that as an area of growth. We're not seeing it as an area of super high growth, but we're seeing firms start to make investments in client advisory services. I think that I'm hearing the conversation shift a little bit away. Whereas a year or two ago it was like, oh, that was the foot in the door of advisory services. And it seems like a lot of firms, especially the larger firms, have shifted away from feeling like that's a foot in the door to like, that might be a strategy, but that's not our only strategy going forward. Blake Oliver: [00:06:12] So compliance revenue still dominates. It's for now, two thirds compliance. A third advisory. Chelsea Summers: [00:06:19] Yep. In our average firm. Yes. Blake Oliver: [00:06:21] Let's talk about performance. How do we as a firm do better than the rest? When you look at the top performing firms in the data, what are they doing differently operationally? Chelsea Summers: [00:06:35] Yeah. Ipa names what we call the best of the best firms. So those are the firms that we think are operationally the highest performing. We look at 30 different metrics on that. So it's not just you make the most money, it's you have low turnover. You have um, you know, succession plans in place, marketing plans in place. Like operationally, you're a high performing firm that's going to succeed. So when we took a look at those firms, there are some metrics that stood out for those best of the best firms and how they're performing differently. They have a higher revenue per FTE 272,000 versus 220,000 for the rest of the firms. They typically have better leverage inside of their firms, so more professionals per partner. Their leverage ratios are 17.7 versus 11.8 for all firms. Blake Oliver: [00:07:16] So that would be 17 staff for each partner versus 11 staff for each partner at a typical firm. Chelsea Summers: [00:07:23] You got it. Blake Oliver: [00:07:24] That's a big difference. Chelsea Summers: [00:07:25] It is a big difference, yes. And the other big thing that we're seeing is stronger pricing discipline. So the average partner bill rate across best of the best firms is $588, 448 for the rest of the firms. So big discrepancy there and what a partner is billing. Blake Oliver: [00:07:41] Is there a myth about high performing firms that you're benchmarking disproves? Chelsea Summers: [00:07:47] There are. And I think the big myth is that high performing firms push people harder, and that's why they're making more money. Their staff are billing more and working more. But in reality, those high performing firms are best of the best firms. They often have healthier capacities because they're using that leverage and they're using more specialized roles. So our best of the best firms, when we take a look, have nearly identical utilization rates to all firms and have nearly identical chargeable and work hours. There's relatively no difference between those best of the best and the other participating firms. Blake Oliver: [00:08:29] So they're not working their staff more hours necessarily. They're just they just have a higher staff to partner ratio and they're leveraging them better. And you said specialization, like what does that mean? Chelsea Summers: [00:08:42] Specialized roles. So making sure the right person is in the right role inside of their firm. So maybe they have more client service staff doing the work and they're utilizing their administrative staff differently. They're utilizing paraprofessionals. Um, but I really think you hit the nail on the head with the leverage. And the other piece of that is those bill rates I talked about. So there's pricing confidence in those high performing firms. They're billing what they're worth, and that is leading to a better performin