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Escape From the Vortex of Compliance

March 18th, 2007

I recently received an email from an accountant who was lamenting the fact that his firm is located in a community that’s very competitive. I’m amazed at the number of people who believe that it’s “the competition in [their] community” that’s making it so hard to grow their practice.

There is intense competition in the accounting services sector everywhere, not just in “your” community wherever that may be. The reasons for this are fundamental characteristics of the industry: barriers to entry are low, barriers to exit are high, firms in the industry use essentially the same technology and skilled labor to produce a “commodity” product that clients can’t easily (if at all) differentiate and there is limited to no opportunity to achieve significant cost advantage. In other words, most firms look and behave the same.

In this environment there is a general belief that to grow your firm you have to continually bring on board more clients and do whatever it takes to avoid losing your existing ones. This in turn leads to constant pressure on price because of the prevailing belief within the profession that price is the main, if not the only, way to grow and protect market share. However, in this as in other industries, profitable growth comes from innovation not lower prices.

Innovation in the accounting services industry predominantly comes from outside in the form of technology improvements. These improvements are transparent and are rapidly deployed by all firms so they do not confer a sustainable competitive advantage. Instead the commodity-like services offered by accountants look better, are delivered faster and can be produced with less people. BUT, margins are still squeezed because everyone is on the same playing field, costs do not go down for the typical firm and real prices do not go up. Oren Harari, in his book Break From The Pack: How to Compete in a Copycat Economy describes this as the inevitability of perpetual imitation. The score: customers 1, service provider 0.

Advances in technology enable greater efficiency in the form of more work output per person. This has had two very significant impacts on the accounting profession. First, it has dramatically flattened the structure of organizations and secondly, when coupled with timesheets as the basis for billing, it has caused an inexorable downward pressure on prices. This explains why my research has revealed there has been virtually no growth in inflation-adjusted profit per partner over the past 30 years. Technology improvements have resulted in higher level (i.e. better qualified) personnel doing work of intrinsically lower value to the client. This seems to be a contradiction for people who are supposed to be knowledge workers.

To put that another way, the industry has become more efficient (higher output per person) but in the process it has also become less effective (identifying and servicing unfulfilled, but higher value, client needs.) This is not to say efficiency is irrelevant. It is a necessary condition for survival but it is not a sufficient condition for growth. If you are not efficient you’re dead but being efficient is not enough, you have to be something more.

The dilemma faced by most small and mid sized practices is that they are trapped in the vortex of compliance not because that’s what they should be doing but because that’s what they feel comfortable actually doing. The more of this type of work you do the less time you have available to do other more valuable work or find clients who need more valuable work. The result is you have fewer clients who are suited to value-added work which, of course means you do less work that is of premium value and can therefore attract a premium price. This plays out in a search for even more of the type of clients you now have and you can’t break out of the vicious circle of compliance.

Building a great practice starts with your clients. My good friend and author of The Professional’s Guide to Value Pricing (the first of several books he’s written), Ron Baker, says “bad clients drive out good clients.” This is so right. Bad clients are not “bad people”; they are just not the type of clients you can build a great (and valuable) firm with. Great clients are those who value what you can do for them, are therefore willing to pay for that value and want to partner with you to take full advantage of their potential.It’s possible to build a portfolio of good clients but like any business re-engineering process, that can’t be done overnight. The first step is to know what a “good” client looks like so you can target them, then you need to have a service offering that they will relate to, then you need to be able to articulate the value that you’re able to create at a price that reflects that value and ensures you are properly compensated.

What break-away firms have discovered is a very simple formula but one that seems to be hard for others to copy. The great performers focus on ways to differentiate their firm and the services it offers. Specifically, they have a clear concept of the market they serve, they reject prospective clients (and will fire existing clients) in respect of whom they can’t add value, they relentlessly look for ways to design services that represent value to their clients, they price according to the value they create, they focus as much on the WOW of their service protocol and their firm’s climate as they do on the service itself, they empower their talent to get close to (as in partner with) their clients and they do not have too many partners. In essence, these firms do more or less the same services their rivals do but they deliver them differently.

Here’s the acid test: if you are a successful business person would you want your firm to be your accountant? Would you see your firm to be different (as in better) than other firms? Would you go out of your way to recommend your firm to other business people? If you can’t honestly answer “yes” and explain “why” to each of these questions then you have some work to do and we’ll be happy to help you. The success formula is quite simple. Why aren’t more firms adopting it? That’s a question for another day.