What happened during the early 1900s within the power industry presents an excellent lesson for firms today about the adoption of emerging technologies. It also reveals how existing IT strategies may be inefficient, expensive and difficult to leverage into the future.
As a firm leader, you don't have to know how to build the watch, but you should at least know how to tell time. Timing is critical when considering any trend or industry transformation, and each always has its early adapters, late adapters and resisters. The Gartner Group refers to this as the Hype Cycle, with five distinct steps:
1. Technology trigger: A new technology generates the interest of the press.
2. Peak of inflated expectations: The technology experiences only marginal success.
3. Trough of disillusionment: The technology fails to deliver as expected, and the press starts to ignore it.
4. Slope of enlightenment: Experimentation and practical applications of the technology re-ignite interest.
5. Plateau of productivity: The technology becomes stable and evolves into the next generation.
The accounting profession has typically operated in the later stages of this cycle, but I strongly recommend that firms step to the front and become industry leaders.
ELECTRICITY AND THE POWER INDUSTRY
In his book, The Big Switch -- Rewiring the World from Edison to Google, Nicholas Carr offers compelling insights into the parallels between electricity and computing.
As an inventor, Thomas Edison first imagined the whole and then built the necessary pieces. Many of you may not know that his accountant and business manager, Samuel Insull (who joined him in 1881), was ultimately responsible for the delivery and ubiquity of electricity. Like Edison, Insull was a systems thinker (business, rather than mechanical). In fact, he often referred to his thinking as "the accountant's way of viewing things" and was responsible for keeping Edison's cash-poor operation running.
In 1892, Insull became president of the Chicago Edison Co. for a third of the salary he was making at General Electric. He immediately began to acquire and develop power plants, incorporating them into a utility company from which consumers could purchase electricity more cheaply than they could produce it themselves.
His biggest challenge was to convince industrial businesses that they should stop producing power and purchase it from central plants. With the rotary converter and transformers he was able to incorporate all of his plants into one system. The demand meter also allowed him to change his pricing model because it offered a combination of fixed and variable fees.
Insull was a master on both the financial and technological levels. He used marketing and advertising to convince businesses to switch to central power. He focused first on streetcars and elevated trains (which comprised the transportation industry at the time). In 1910, there were 50,000 private electric plants compared to 3,600 utilities producing electricity in the US. By 1940, 90 percent of the electricity in the U.S. was produced by utilities. Industrial businesses reduced their fixed costs, labor and capital requirements by switching to utility production. Today, few companies produce their own power (except for backup and emergency purposes).
How does this relate to computing and what's happening today? The accounting profession started to utilize computers in the 1960s with mainframe service bureaus, expanded with mini-computers in the 1970s, and introduced the personal computer and networks in the 1980s. Throughout the 1980s and 1990s, Microsoft and IBM led in networking and client-server computing. During this period, Tim Berners-Lee developed the World Wide Web (1989), and fiber-optic cable was installed throughout the U.S. and around the world. Software was designed to run primarily on a desktop computer. Microsoft was the dominant player.
Ten years ago, few people would have predicted that e-mail would become a mission-critical application and that security would be a paramount concern. Apple and Google have become the technology companies of this decade. Having gained enormous popularity for its search engine, Google is now also a leading player in Software-as-a-Service technology. Apple has focused on the consumer market, which is now driving business technology. The iPhone and iPad are now prevalent in most businesses and have changed the way end users think about technology and especially applications - faster, better, cheaper and easier!
The power of thousands of computers located in a data center connected by enormous bandwidth will continue to impact the accounting profession greatly over the next few years. Large firms that have built their own data centers resisted initially, but smaller firms are embracing these more efficient, secure and affordable solutions. The transformation will parallel electricity, but happen at a much faster rate. Larger, multiple-office firms will ultimately change for efficiency, improved integration and security reasons.
Think of Microsoft as Thomas Edison and Google as Samuel Insull. Microsoft has been, until recently, interested primarily in selling software in the client-server model. Interestingly, on Oct. 30, 2005, Bill Gates sent a message to the company's top managers and engineers titled "Internet Software Services." The memo was intended as an alarm to warn the company about utility computing and the threat to the company's traditional business. Microsoft has responded to the competition and now offers MS Office Live, SharePoint, CRM and other online applications.
Google's model is all about sharing resources. They built the Dalles Data Center in Oregon close to inexpensive electricity and water for cooling. These centers house thousands of servers comprised of components purchased directly from manufactures, and were assembled in metal racks using Velcro. The servers are in clusters and virtualized. Oracle, IBM, HP and others have done the same.
Microsoft also followed suit with a data center in Quincy, Wash. Typically, these data centers are connected directly to an international Internet hub. The challenge for all of these companies is to transform from the "current" company to the "future" company. Based on a model developed by economist Joseph Schumpeter (1883-1950), they risk the downside of a cycle called "creative destruction." Hanging on to an old business model for too long can result in destruction. No doubt they could learn a great deal by studying how GE and Westinghouse re-invented themselves.
RETHINK THE FUTURE
What does this mean to a five-person accounting firm? A 20-person firm? A 100-person firm? A 1,000-plus-person firm? It means they should rethink the future and develop a technology plan that integrates with the firm's strategic plan, harnessing the ever-increasing capabilities of the Internet. They should also review the important lessons offered by the history of the electric industry. Some of these lessons include:
1. Expect resistance to change, especially from larger firms that have built data centers and staff who may be threatened by a different model.
2. The transition requires time and will progress through Gartner's Hype Cycle.
3. Leadership, financial management and IT governance are imperative. They must work together.
4. The pricing model will change.
5. Effective marketing and advertising will be critical during the transformation.
6. Simultaneously managing the current and future firm will be challenging.
7. This requires leadership and different skills.
For some smaller firms, I see the move to be relatively easy and rather quick. For midsized and large firms, the challenges will be greater due to leadership, control, politics and resistance to change. This could very well be a five-plus-year shift for many firms. The primary vendors to the profession will also play a key role with regard to core applications such as tax and audit software. The availability of bandwidth and connectivity will also be an issue.
Under the current model, the requirements for an IT specialist in most firms are broader than any one person, e.g., engineering, planning, communications, help desk/support, networking, integration, application software, and end-user training. In the SaaS model, the vendor will usually supply engineering and communications specialists. Business analysts will bridge the gap between the technology and the end user. The need for a training and learning culture will continue to increase in most firms.
The first applications to which firms typically move under the utility model are e-mail and document management. Microsoft Office Live is getting significant attention. Microsoft will continue to be an important vendor for most accounting firms. CCH and Thomson Reuters are transitioning their applications. Once in the cloud, there is better integration, less friction, improved reporting and business intelligence, improved aggregation of data, and generally improved security. Does your firm have a roadmap? If not, now is the time to establish a roadmap and budget to ensure success.
Think, plan, grow!
Gary Boomer, CPA, is the president of Boomer Consulting, in Manhattan, Kan.
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