Energy retailers are faced with a slide in profitability and declining relevance unless they succeed in broadening their market offering especially with the steady increase in the number of households installing solar photovoltaic systems.
In a blunt warning, the outgoing head of Momentum Energy, who lifted annual revenue of the retailer to $1 billion in his three years at the helm, says all of the industry’s major players are at risk of declining relevance.
“Retailers have to participate in more parts of the value chain,” Nigel Clark said…”Your advantage is the customer relationship.”
But the difficulty is building on that as more and more customers begin generating their own electricity by installing rooftop solar systems which is eating directly into the volume of electricity and in some instances gas purchases.
Even as the federal government looks at winding back the solar subsidy, any impact will only slow the take up of rooftop systems for a time, since the ongoing slide in the cost of these systems will fuel their continued roll-out.
“It’s senseless fighting against PV systems,” Mr Clark said. “You have to create ‘stickiness’ in your value chain to ensure your customers stay.”
‘Momentum Chief Warns of Energy Retailers Wintry Outlook’, SMH 7th September 2014
In a previous blog post I made the comment that incumbents are increasingly competing with their customers.
While that post was about the software industry, it is a story which is playing out in numerous other industries including energy (renewables), manufacturing (3D printing), and education (MOOCs).
The above comments from outgoing Momentum Energy CEO Nigel Clark provide accounting (and other professional services) firms with guidance as to how they should approach the strategic direction of their practice.
Structural Shifts in the Accounting Profession
Recent comments from former Class Super CEO David Smith regarding the challenges facing the accounting profession mirror those that have been made in the Mclowd Newsletter over the last two years.
The harsh reality is that disruption (digital and otherwise) is occurring at a speed and on a scale for which there is no precedent in modern economic history.
For accountants there are three key drivers behind this disruption:
• Regulatory change
• Changes in work practices
For many years continual regulatory change has generated much of the bread and butter work of accounting and tax practitioners, but this trend is now shifting.
In the personal tax space the ATO is effectively relieving a proportion of lower income taxpayers from the obligation to submit to the self-assessment regime.
This is because below a certain threshold the marginal cost of compliance is greater than the corresponding marginal revenue outcome.
(This is being driven by the government’s need for greater efficiency, which has previously been focused on the expenditure side, but is now being progressively applied to revenues).
As David Smith indicated, standard business reporting and other technology-driven initiatives will progressively automate much of the periodic reporting obligations of many entities (SMSF, SME, etc).
Compliance work that is not eliminated or automated will come under increasing pricing pressure, whether because of offshoring or crowdsourcing. Per unit price deflation of 70% will not be uncommon, driven by new work practices that will see tasks undertaken at a globally-defined cost.
The Current Value Chain
There has been a historical correlation between the complexity of accounting and tax work, and the actual / perceived value, as illustrated by the following (simplified) diagram.
This correlation has allowed practitioners to operate at various points (or ranges) within the value chain, based on their technical skills or preferences.
Value Chain 2020
Over the next few years that flexibility is going to be taken away, as the actual / perceived value of lower-value compliance work steadily evaporates.
In effect a large proportion of the value on the table will disappear, as illustrated by the following diagram.
At present accounting firms are subject to an exemption that permits them to provide limited advice in relation to SMSFs, an exemption that is schedule to expire in 2016.
This leaves them with a very simple decision tree.
Without an AFSL (and the change in core capabilities which it implies), practitioners face an uncertain future, as they become progressively isolated from the assets they are tasked with managing and the clients on whom they rely for their income.
Practitioners who remain wedded to their expensive offices and the billion-dollar valuations of incumbents such as MYOB and Xero face rapid disintermediation by a new breed of clients who are empowered by technology and the transparency it provides.
In that context a small group of professionals are coming to the realisation that building a practice inside the Mclowd Community is one of the best ways to address this disruption, and in doing so manage their careers while leveraging the above trends to the benefit of their clients.
Mclowd will do everything it can to support these practitioners by providing access to:
• A free technology platform (which will eventually support multiple entity types as well as geographies)
• Crowdsourced resources and the practice management tools required to manage online workflow
• A transparent and competitive market for related products
For professional service providers networked communities such as Mclowd are both an existential threat and a global opportunity.
Just which one will depend on the way practitioners choose to respond.