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February 2019

ARE PROFESSIONAL FIRMS HEADING TOWARDS EXTINCTION?

By Shariq Contractor
Chartered Accountant
Reading Time 12 mins

The Industrial Revolution 200 years back completely transformed the way businesses were conducted. Work was standardised into small repetitive steps which increased productivity not by 20% to 30% but by a factor of hundreds. The technology revolution is today similarly poised to transform the way in which professional practice is organised.The existing way of conducting professional practice is undergoing a paradigm shift and proactively managing these changes is not a matter of choice but a question of survival. In this article an attempt has been made to articulate some of these fundamental changes and how we need to respond to the challenges.

 

THE OLD WAY

Professionals as a class emerged in the nineteenth century and today they are an indispensable part of society. They are highly respected for their knowledge and expertise and the apex body (ICAI in our case) under which they function has the responsibility to ensure that those who are admitted into their fraternity are not just professionally competent, but carry the profession with integrity.There is a tacit understanding that in return for their specialised knowledge, the professionals would be granted the right of self-governance in their field of expertise.

 

In 1939 the sociologist T.H. Marshall remarked; “the professional man, it has been said, does not work in order to be paid: he is paid in order that he may work.” So the core value of the profession has been service and not profit. Some of our seniors remember with nostalgia that we were in the profession of chartered accountancy and not in the business of chartered accountancy.

 

The very foundation of the relationship between a professional and a client is that of trust. Clients who seek the help of professionals in matters of critical importance themselves lack the requisite knowledge and expertise and would therefore follow implicitly the advice of the professional. Similarly, the client would be in no position to ascertain or even estimate what is the fair remuneration that must be paid for such services. Indeed, the senior professionals would also reminisce about the days when it was considered inappropriate to question a professional about his fees.

 

The very basis of this relationship is now under stress. The distinction between profession and business is getting blurred and the concept that professionals will always put the interest of the client above their own and act with utmost professional integrity is being questioned. The very idea that certain tasks should be the exclusive domain of professionals is also being questioned. Above all, technology is transforming the manner in which professional services are rendered and professional firms organised.

 

PROFESSIONAL AS THE GATEKEEPER

It is under this backdrop that one has to try and understand the future of professionals, including Chartered Accountants. The society expects us to be not just gatekeepers but conscious keepers of the businesses we audit. We are expected to detect and flag off financial impropriety and frauds; however, we continue to believe that this is way beyond our scope of work. It has been ingrained in auditors that they are watchdogs and not bloodhounds. However, this is a distinction that the world at large does not understand. As John C. Coffee, Jr. asks in his book Gatekeepers, “why did the watchdog not bark when Enron happened?”

 

Today, most professionals believe that this so-called “expectation gap” needs to be bridged and that public awareness needs to be created on the real role of the professional. However, may be we need to look at this issue from the perspective of the public and the regulator, who expect us to detect frauds and other financial misdemeanors. We are expected to raise an alarm well in advance when the entity is going under. Is it possible to fulfill these expectations by using technology, artificial intelligence (AI) and data analytics? If not, there is a possibility that alternatives will emerge as that seems to be the crying need of the times.

 

THE FEES MODEL

Also what will come under stress is the age-old fees model that professionals have employed, where fees are predominantly charged based on “time spent”. Clients seek professional advice for solutions to problems that they have not fully comprehended. So professionals don’t just help solve problems, but often also help in articulating the problem itself with clarity. If this be the case, how can the client even estimate the time that is expected to be spent by the professional on a given assignment? It is hardly surprising that more and more clients want to know the fees upfront or want a cap on the fees. Their argument is that as professionals we have a better understanding of the problem and its intricacies and hence are best placed to estimate the time. In other words, the risk of time overrun (and conversely the advantage of efficiency) should be borne by the professional.

 

Of course, time basis is still the only effective and preferred fee determinant, but as professionals we must make a conscious effort to move away from this model wherever possible for the following reasons:

 

1.   It is in the interest of the professional to prolong the time, clearly leading to a conflict of interest situation.

2.   The client has no means of judging the time required or actually spent for the job. So there is an inherent reason for heartburn that the time spent was padded up.

3.   The system rewards the inefficient as those who take more time are paid higher.

4.   It stifles innovation and the need to bring about efficiencies as there is no incentive to reduce time spent on the assignment.

 

Fees charged on the basis of time spent focuses on effort rather than results and professionals should consciously move towards a fees model based on “value provided”.After all it is in our interest to communicate to the client the value derived by him rather than time spent by us.

 

TECHNOLOGY THE GAME CHANGER

But these are relatively minor challenges confronting the profession. The elephant in the room is technology and artificial intelligence that is encroaching upon all spheres of human enterprise. According to research by Frey and Osborne cited in a 2014 article by The Economist, Accountants and Auditors were the second highest vocation that would be affected by technology. One of the jobs that was 10 years back believed to be immune from technology was that of a truck driver. It was argued that driving required human skills and hence it could not be automated. Google has now turned that argument on its head. In fact, it is not inconceivable that children 30 years from now may be amused and amazed that their parents actually physically drove their vehicles.

 

The initial efforts of using artificial intelligence (AI) was based on trying to replicate the way the human mind functions and these efforts only met with limited success. But today machines have become much more adept by following a completely different path. As Patrick Winston, a leading voice in AI stated, “there are lots of ways of being smart that aren’t smart like us”. Chess for example was considered as an epitome of human intelligence, intuitiveness and ingenuity. But the programme “Deep Blue” beat the chess champion Gary Kasparov not by mimicking the functioning of the human mind, but by applying brute computing power. The machine lacked creativity or insights, but compensated by its ability to analyse 200 million possible moves in seconds and winning with brute number-crunching force.

 

In the light of these inevitable changes, professionals will have to bring about transformative changes in the way they conduct and organise their professional practice. A decade back it was common to state that only those who will use technology effectively and integrate it with their practice will survive. This meant the application of technology was limited to automation and for incremental increase in efficiency and productivity. This barely touched the tip of the proverbial iceberg in terms of actual potential to bring about structural changes. The fact is that technology today is no longer the enabler, it is the driver and it must be used to bring about transformative changes. As professionals we must be prepared for the future where judgement may be replaced by Big Data mining, experience by analytical tools and intuition by computing logic.

 

BRUTE FORCE OF COMPUTING POWER

Moore’s Law predicted in 1996 that the processing power of computers would double every two years. This sounded improbable and certainly not sustainable, but the consensus today is that this law will hold true for decades. Which means machines will be ever more versatile and competent.

 

In the face of this, the argument often put forth by professionals that however much one uses technology, the final solution requires judgement and hence professionals will always be indispensable, needs to be critically examined. The argument goes that routine, repetitive work can be standardised and transferred to the machines, but tasks requiring judgement and strategic inputs will still be the domain of humans. However, the trend seems that machines with intelligent systems are bound to become more and more sophisticated in making connections, identifying patterns, forming correlations and finding solutions that may till now have been considered well beyond human cognitive capabilities.

 

Already in a lot of areas, machines are outperforming humans. By using their processing power, they are able to analyse huge amounts of data to reach conclusions that are more accurate than those reached by humans. As humans we make decisions emotionally/intuitively and then justify them rationally. The ways of working of future machines are unlikely to resemble the human way of working, but they will be effective and perhaps less fallible. Deep Blue proved that human intuition and analytical capabilities are no match for the brute computing and processing power of the computer. Ominously, increasingly capable machines, using Big Data, AI or some other new technology are poised to encroach upon more and more areas that were the exclusive domain of human experts.

 

Audits can no longer be conducted behind the shelter of test checks. 100% of the transactions can not only be verified, but organised and analysed from different perspectives and this analysis can be on real-time basis. Data can be drawn from varied sources, in different and even unstructured formats. Analysis of this data collected both from within the company and from other comparable businesses, may give remarkable insights into the functioning of the auditee. At the core, Big Data is applying math to huge quantities of data to infer probabilities and make increasingly accurate predictions.

 

STANDARDISATION AND DELEGATION

Professionals also believe that their work cannot be standardised beyond a point. It is highly intellectual and unlike manufacturing work it cannot be spliced into small repetitive tasks. This thinking is also under challenge and if one were to really break down the work of a professional, a large portion can indeed be standardised and systematized. Once that happens, it can easily be delegated to machines, and what’s more, it can be digitised and be made available to be downloaded online. So tasks considered as non-routine will increasingly be routinised and even genuinely non-routine tasks may also be performed by smart machines of the future.

 

We have also seen that semi-qualified staff with the aid of sophisticated technology are often as effective as highly knowledgeable professionals. Paramedics with minimal training and good equipment have transformed the health care in rural places. So it is not difficult to visualise that a semi-qualified person with the help of appropriate processes and systems will deliver the same end results as qualified professionals. Technology-based companies could replace a lot of functions performed by professionals with the help of semi-trained staff equipped with the right technology support.

 

Would then professionals only be required to tackle situations and problems where there are no clear-cut precedents? Without precedents, the professionals would also be blind guessing and in such a situation once again the computer would be better equipped to find solutions through programmed simulation.

 

EXCLUSIVITY VS. COMPETITION

One big protection for professionals is that they are insulated from competition. The rationale is that professionals with intensive training alone can competently handle complexities involved in a professional task. Opening out professional tasks to non-professionals would expose the lay person to not just poor quality of service, but to wrong and potentially damaging advice from quacks.

 

Surely, in today’s knowledge world, it would be increasingly difficult to argue that certain spheres of knowledge should be the exclusive domain of certain professional bodies. Transparency ensures quality and as professional work is standardised and streamlined, it is likely that in future customers will rely more on peer review of fellow clients to decide the quality of the professional service rather than a self-governing disciplinary mechanism.

 

So let’s not be surprised if more and more tasks reserved for professionals are opened out to others.

 

TO SUMMARISE

The present form of professional practice is under threat from multiple forces:

1. AI through brute computing and processing power is encroaching upon more and more areas of professional practice and human endeavour.

2.  Machines with Big Data analytics are poised to produce consistently better results than those possible by the best of professionals in ever-increasing areas.

3.  Even intellectual work can be defragmented into smaller tasks that can be standardised and hence be machine-programmed.

4.  Para professionals with sophisticated access to databases and technology can do a large amount of work that till now was the domain of qualified professionals.

5.  The exclusivity protection to professionals from regulators may be under threat and public opinion may compel changes to allow many more service providers.

So the big question: are professionals doomed to extinction? Probably not, but professionals who are unwilling to transform their professional practice in response to the above challenges may find it difficult to survive. Nobody can predict the future. Yet, in a technology-driven world that premise is nuanced as there may not be any future things that may have flourished for centuries. As Peter Drucker put it, “the only thing we know about the future for sure is that it will be different”.

 

Note: Some of the thoughts in this article are inspired from the book “The Future of the Professions” by Richard Susskind and Daniel Susskind.  

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