A growing issue is emerging around artificial intelligence and whether it represents an existential threat or the opportunity of a lifetime.
This isn't the first time you've heard of, or read about, AI. Its implications for virtually every sector are completely rewriting the script. Companies are investing in AI and implementing it day-to-day. We are at the same pivotal point with the Internet in the late 21st century. It's an uncertain time. Will this replace jobs? Will work be replaced with computers?
Done right, AI is not automation. It is augmentation.
In the book Mindshift, author Brian Solis observes that most organizations are still approaching AI as automation (getting things done faster, cost reduction, speed) when its real power is augmentation (better decisions and higher value output).
And large firm tax practices are a perfect example of the effect of these two different frameworks. An automation frame asks, "What tasks can AI replace?" That answer leads to incremental efficiency, cost savings, reduced return prep time and fewer staff hours per tax return. All of these are laudable goals. But the ubiquity of AI means that every CPA firm, from the largest in the world to the one-person shop, will have similar automation tools to bring to bear. At its best, this means tax practices become an amplified more efficient version of what they currently are. At its worst, it creates unavoidable margin compression and a race to the bottom.
In contrast, an AI augmentation frame asks, "What is possible now that wasn't before?" Augmentation allows tax advisors to model multiple tax scenarios instantly, proactively identify planning opportunities across clients, simulate outcomes before decisions are made and turn every compliance relationship into a much "stickier" advisory relationship. This is where it gets interesting.
The economics of friction in a tax practice
The economics of professional services have always been shaped by friction. Historically, firms have been paid, in part, for navigating work that was time-consuming, opaque and operationally difficult. Some of that friction created real value. At the same time, much of that friction added no significant economic value to the client. Tasks such as gathering data, organizing it and calculating outcomes were tasks that needed to be done before the client even sat down with their tax advisor.
AI changes that balance. It removes large amounts of low-value friction such as mechanical work, coordination overhead and first-pass analysis. Work that used to require time and effort becomes quickly accessible and ultimately taken for granted. As mechanical work becomes easier, it becomes harder to charge for. This can be especially problematic for firms that made a lot of margin in this layer of friction.
It's important to note that AI doesn't remove friction altogether. It shifts it. As low-value friction disappears, high-value friction becomes more visible and attainable:
- Interpreting ambiguous facts;
- Making defensible judgments;
- Communicating risk to clients;
- Understanding client needs at a deeper level;
- Designing strategy in uncertain environments.
This friction has always been where the clients find value and are willing to pay a premium. AI augmentation compresses the bottom of the stack and elevates the top. For years, firms have been forced to spend a disproportionate amount of time in the mechanical layer simply to get through the work. Until now, that has limited their ability to scale judgment and advisory, despite those being the highest-value activities. Now that world is changing.
What could the future look like?
Over the next several years, the changes will be uneven. The mechanical layer will compress faster than most firms expect, which will make existing staffing models uneconomical. The traditional pyramid — large teams of junior staff supporting a smaller group of reviewers and an even smaller group of highly-compensated partners — was built to manage a paradigm that will no longer exist. The best firms will experiment with smaller, more capable teams. There will be fewer handoffs and broader scopes of responsibility. It will require tax professionals operating at higher levels, earlier in their careers, supported by AI.
This will then require firms to reshape recruiting and retention. The best professionals will be drawn to environments where they can operate at a higher level earlier in their careers, engaging directly with clients, exercising judgment and seeing the impact of their work. Firms that continue to rely on long, linear promotion tracks and narrowly defined roles will struggle to attract and keep this talent.
In an AI-enabled model, the value of a professional is less about years of experience and more about their ability to think, relate, communicate and apply judgment. Firms that redesign around that reality, offering faster progression, broader responsibility and more meaningful client engagement, will benefit from advantages in the talent market.
All of these changes will create capacity. The temptation for firms will be to look at this increase in capacity as a new normal, as opposed to the first iteration of the long tail effect of AI on their firms. As such, some leaders will take this capacity gain as efficiency, doing the same work faster, at lower cost and leading to higher profit per partner. Others will redeploy that capacity into developing and training for judgment and advisory, expanding the parts of the work where friction still exists, and where clients are willing to pay.
This will create something of an arms race. The firms that win and choose to reinvest their gains will create more agents, bring on higher-caliber staff and engage in more sophisticated planning. They will have more relationship managers who are in the marketplace attracting and retaining clients. They will be employers of choice. And they will ultimately pull away and capture disproportionate market share. For them, the tax return becomes the entry point, not the product. And the smart ones will continue to expand into adjacent services such as wealth, transactions, HR and advisory, and sit at the center of the client relationship.
