On the inevitability of Stamped

When launching a new business, the founders make a tradeoff between the likeliness of the outcome and the rewards associated with it. Startups usually have the odds stacked against them and through a series of operations over time, they shift the stakes to such extent that their success becomes inevitable.

When devoting so much time and efforts to a single purpose, it makes sense to formulate and test the assumptions that support everything. These are ours:

1) Incumbents with the help of software vendors can’t compete

This is a reasonable threat, but for the reasons explained here, we think the odds are significantly on our side.

Essentially, we make these arguments:

1. A patchwork of software vendors coupled with a traditional operational structure yields less efficiency and productivity gains than a custom-built software stack and a revamped operational structure.
2. A patchwork of software vendors can hardly help audit firms to improve on customer experience, which is critical in a commoditized market.

Custom-built software over off-the-shelf

In most industries, pressure for being faster, better and operate with higher margins is only getting stronger. Audit firms, like most organizations, are looking for gains through innovation.

When the usual question of whether to build or buy innovation comes up, audit firms choose to buy, since building software is far from being their core competency.

With this strategy, organizations end up relying on a patchwork of software vendors, where staff acts like human glue between screens, and workflows get bloated quickly. The lack of seamless integration often results in limited productivity and efficiency gains.

Our strategy is the opposite: we’re building tailor-made software for our own operations team. Being able to shape the operational structure and the tools our auditors use simultaneously leads to higher productivity gains, faster innovation, and a more flexible approach. This path has the added benefit of creating a tight feedback loop between our power-users and the product team, leading to fast iterations.

The importance of customer experience

The audit market is commoditizing:

• Audited financial statements are considered as a cost of doing business and companies are pressuring their audit firms to deliver more at a lower cost.
• The market is mature, and prices are stable or slightly decreasing.
• Innovation is distributed evenly across incumbents, leading to an undifferentiated offer.
• Financial statements are heavily regulated deliverables, and the expectations are that they should be similar for a given business, whoever the auditor is.
• Audit firms have more or less the same workflows and operations, leading to similar time involvement from the customer’s finance team.

Considering this landscape, CFOs tend to view audit firms as interchangeable, and usually pick one based on personal relationships with the audit firm’s staff, for the lack of other discriminants.

By creating a customer experience that is faster, simpler, and more affordable, Stamped offers the market a significant alternative to the status quo. For a CFO to consider changing his service provider, the alternative only needs to be as good as the perceived cost of switching. Everything above that is just gravy, and for Stamped becomes added defensibility against incumbents.

For traditional audit firms in the journey towards improving customer experience, software only plays a small part. The bulk of it lays deep at the organizational level, where the significant changes required are hard to make.

This is one of the main advantages of building a company from the ground, where we can lay the foundations and create the right culture from day one.

2) Software vendors won’t start service businesses

We think it is unlikely that MindBridge, AuditFile, CaseWare, and other software vendors in the audit space will start hiring CPAs and build service businesses.

Even though each of them would have a head start by using their own software, they would still have to build all the other tools required to operate a competitive audit operation. Once built, they would have to refrain from selling the new tools to their existing clients, otherwise, their service business would lose its competitive advantage.

Additionally, for any of them, this would require a major company pivot and put the company in a position where it is competing against its clients, thus cannibalizing its existing software business.

3) The 5x CPA is possible

Let’s bifurcate slightly and acknowledge how software developer productivity has been increasing rapidly in the last 20 years. This growth is not due to a single tool, but to many: code linters, text editors, collaboration platforms like GitHub, code review automation, performance monitoring, StackOverflow, IAAS, and the list goes on.

Before these existed, developers would spend significant time on low-complexity and repetitive tasks, like applying code patches in a codebase. They now increasingly spend their time in deep-work, focusing on high-level thinking and coming up with creative solutions, which is where humans excel over computers.

We think the same dynamics apply to audit.

When we breakdown how time is spent in an audit, it becomes clear that work is composed of hundreds of small tasks, and that many of them are low-judgment and repetitive: vouching invoices, gathering and cleaning accounting data, formatting financial statements, gathering confirmations, assessing risk in large datasets, etc. These are usually assigned to junior staff in traditional audit firms, and this is the area where we are looking for improvements.

All audits also have their part of high-complexity issues, where deep experience and professional judgment are essential. These are usually handled by managers or partners in traditional firms, and we think it will be for a long time.

Stamped’s strategy is to empower auditors by building better tools and workflows, where CPAs still need to know exactly what they are doing but spend most of their time problem-solving complex situations.

With the help of Stamped’s methodology and suite of tools, we aim to make our CPAs up to 5x times more efficient than those in traditional firms.

To summarize, we bet that:

• There are significant parts of an audit that can be automated
• It is possible to build a suite of tools that automates those tasks