Recession is a time of great opportunity

“In times like this we get greedy.”

This is a statement recently made by Warren Buffett. It serves to remind us that simply following the rest of the pack, whether it be in stock market investing or investing in the growth of your business, is not smart. The time to be buying is when everyone else is selling. The time to be selling is when everyone else is buying.

In the March 08 edition of Harvard Management Update, reference is made to a Bain & Company study of 700 companies undertaken over a six-year period that included the 1990-1991 recession.

The study revealed more than 20% of the companies that were in the bottom quartile of their industries jumped to the top quartile during that recession. Interestingly, while that happened, more than 20% of the top quartile companies (the acknowledged leaders) fell to the bottom quartile of financial performance.

The study showed that firms that came out of a recession strongest were those that made gains during the recession rather than before or after it. In other words, the best time to grab a competitive advantage is when everyone else believes that poor financial performance is acceptable because of the state of the economy and therefore out of their control.

More than 70% of the firms that jumped into a leadership position were also able to sustain their growth in profitability after the recession while less than 30% of the companies that lost ground in the recession were able to regain their top quartile position.

This is exactly what happened to the firm in which I was a partner. We had experienced very little growth in the 40 years up to 1987–88, we then put in place a series of expansionary strategies that yielded more than 40% compound growth over the next 4 years.

The growth consolidated after that but the firm sustained its local leadership position and now has 13 offices and is part of the $300 million WHK Group in Australia WHK Group

Traditionally recessions are times when the weak get sorted out and the complacent get pushed aside. They are therefore times of great opportunity for firms that see and seek the opportunity to break from the pack.

When times are good virtually anybody can make a profit but in tough times true strengths and weaknesses are revealed.

Time and time again, I see new accounting firms pop up in a city and within a relatively short period of time (5–10 years) they are producing revenues of $500k to several million. One firm that I recently posted about achieved $4million growth in just 1 year!

The fee growth I’m talking about are fees that the established firms in those communities could have, and should have won, but too often they don’t even see it coming.

In a recession, the key for achieving growth and sustained profitability is to focus on your core business. If your core business is not sound you will struggle. Once you’ve taken care of that, you’ll be positioned to exercise some real muscle in the good years.

To do that you need to take a close look at your strengths and weaknesses and then formulate a simple strategy that embraces positioning, product definition and pricing, service protocols, team development and delegation, client selection (and de-selection) and most importantly, very focused attention on how to create value for your clients in a recession and how to capture some of it. This was a central theme in our 2008 Practice 2020 Annual Conference in Brisbane and will be the focus of my attention at our North American program this year.

Time based billing is unethical – what rubbish!

I was recently sent a communication that was published by a consultant to the profession in Australia in which he asserted that time based billing is a conflict of interest and unethical. He advanced several arguments in support of his position on this issue. I have been asked for my reaction to his suggestions so here they are.

He suggests: You are directly rewarded for how inefficient you are – the longer you take the more you get. That is not fair for your clients.

My thoughts: This is a gross generalization for which there is no empirical support. It implies that the profession has an incentive to be inefficient which, of course, is ludicrous. The writer seems to be ignoring the reality of intense competition in a fragmented industry between firms with low entry costs and high exit costs. Inefficient firms exhibit high write-offs and/or relatively low average hourly yields.

Empirical evidence supports the fact that technology has improved productivity and that this, coupled with an intensely competitive industry, has resulted in efficiency gains being passed on to customers. My research indicates that inflation-adjusted net profit per partner has dropped by 1% drop over the past 30 years (see my June 2007 blog called Missed Moments.)

In my opinion one of the main reasons for this has been the use of time sheets as a basis for billing, so rather than it being unfair to clients it could be argued that it’s actually been unfair to firms that have invested in labor saving technologies.

He suggests: It does not value the job properly. It assumes that the rate per hour is correct and the time to do it is correct – nothing could be further from the truth. That is not fair on you or your clients.

My thoughts: What on earth does “value the job properly” mean? If a seller chooses to price on a job based on how long it takes to complete then that is its value from the seller’s perspective. The buyer can take it or leave it and to say it’s an unfair price is absurd.

If the buyer accepts it then he obviously places a “value” on the job that equals or exceeds the price, if the buyer rejects it then he either does not buy it or if the service has already been delivered he has the choice of negotiating, or simply paying, a lower price (which is how post-invoice write-offs occur.) If he’s really unhappy he may never deal with the firm again.

The value reflected in a transaction is the price agreed between a willing buyer and a willing seller. How the seller determines the price he’s willing to sell at is irrelevant. All that’s relevant is that it is his assessment of the “proper” value and if a buyer decides not to pay that price then the seller may want to consider revising his pricing model or find other buyers who will will pay the price.

The statement about the time and the rate being “correct” or “incorrect” is absolutely ridiculous and irrelevant. The ONLY thing that is relevant is that the vendor sets a price for the service on whatever basis he chooses and the customer can accept or reject it. What can be fairer than that?

But there is one situation where the use of time based billing is unfair if not unethical that would reasonably fall within the context of this statement. That is where a fee is charged for time expended but no valuable outcome at all was delivered to the client. For example, an Australian colleague of mine was working in the US and needed some advice on his tax situation.

In the first instance he spoke to his US CPA who ultimately came back to him and said that he should seek advice from an Australian accountant. He did that at a cost of more than $6,000 (which he gladly paid) and he then advised his US CPA of the outcome and sent him a copy of the advice letter so that he could prepare his US tax return accordingly.

He was therefore very surprised to receive a bill from his US CPA for more than $1,900 “for time expended on researching his tax status.” When he challenged the fee he was told that “a lot of time went into the research”. What that CPA should have said right up front is “we don’t do this type of work so you should get advice elsewhere.” I submit that situations such as this are not the norm but they are the ones that get remembered and talked about.

He suggests: You do not have your client’s best interest at heart – you do not (generally) spend the time needed to solve your client issues because you are fearful the client will not pay the bill. You also do not recommend to your clients what they really need because you think they will not pay for it. Not fair for your clients again.

My thoughts: Another unsupported assertion. This rejects the very notion of professionalism and is a gross insult to the profession. There may be some practitioners who do not have their clients’ best interest at heart but they don’t generally last long in business. I do agree that accountants could and should do a lot more for their clients but this is not because they use time-based billing and are fearful that the client won’t pay. It’s because they are too busy doing other necessary things, often for clients who they should not be working for, they are faced by a serious talent shortage, they do not invest the time needed to determine how their clients could benefit from the work they do and they are reluctant sales people.

He suggests: You put a barrier between yourself and your clients – they are sometimes frightened, intimidated and concerned that every time they speak with you, they will be slugged with an invoice. You become untouchable and I know that’s not what you want. More client unfairness.

My thoughts: Of all the statements made this one does have some merit but it does not arise because of time based billing. It can be easily addressed by simply alerting clients that as part of your service protocol you do not charge them for any contact they make with you unless it gives rise to a service request that takes more than a specified period of time. Further, if that is the case you should also make it clear that you will give them an estimate of the cost and the opportunity to accept or reject it.

He suggests: You put a salary cap on your personal and team earnings. Many of your team can earn up to two times what you pay them in commerce or government. You think they are not worth it (well they are because others are prepared to pay it) because you think that you cannot get a charge rate out of them, there will be to many write offs and the clients won’t wear it. Not fair on the entire industry.

My thoughts: This is a bizzare and totally unsupported assertion. Does the writer seriously think that people will stay with a firm if they could command a salary twice as high in another job. Slavery was abolished a long time ago. Who is he kidding? Notwithstanding that, I’m confused by the rest of the paragraph. It seems to me the writer is saying “… you should be charging these people out at a higher rate (because they are worth more to another employer) but you’re reluctant to do that because you think there will be write-offs, clients won’t wear it and that’s not fair on the industry.” The writer now seems to have switched position from worrying about the profession’s conflict of interest and the ethics of time based billing to worrying about the welfare of the profession.

He suggests: In the majority of cases, your clients have no idea how much they are paying until after you have done the job. The work has already been completed, you send them a bill and they have no choice to pay it or you will sue them. Not only is that a raw deal for the client, it is completely unethical.

My thoughts: The adoption of time based billing is NOT the reason clients do not know what the fee is going to be until after the job is done. If this occurs it’s because of a failure on the firm’s part to discuss the scope of the job and the expected fee with the client at the time the engagement is accepted. If the service provider can see that the fee estimate is likely to be exceeded then the client should be advised accordingly and given a reason why. This is standard operating procedure in best practice firms.

Having been in practice, I know many (I’d be willing to say the majority) clients are quite happy for the fee to be based on time expended and are fine with the fee outcome because they trust the person they’re dealing with and the firm—and why shouldn’t they? It is customers, not practitioners, who have been the principal beneficiary of technology driven productivity improvements in the past 30 years. For the writer to suggest that this practice is unethical is absurd and is not consistent with the relationship most firms have with most clients or with industry economics.

My other observations:

The most successful practices I have seen in terms of fee growth, profit per team member, profit per partner, client loyalty (as measured by referral-generated fee growth and client retention), and team member retention, use a blend of time based billing in conjunction with fixed price agreements, they understand the value of what they can do for their clients and the importance of a strong communication channel with their clients.

These firms use time sheets to determine where their resources are being deployed and they embrace a value-pricing philosophy which cuts both ways—namely, value to them and value to their clients. Many of the jobs they do for clients are billed on the basis of time expended but a substantial proportion (from 30-70%) of their revenue is based on FPAs. I submit that these firms behave ethically and that there no conflict of interest with their clients. To suggest otherwise is an insult to them and to the profession.

I am not suggesting that the use of time based billing is the key to practice success. I do strongly believe, however, if you decide to move away from time based billing you must replace it with a robust and carefully designed and implemented alternative. It is dangerous in the extreme for example to move away from time based billing and replace it with a system such as “let’s take last year’s fee and add 10% and build that into a FPA.”

A case can certainly be made for the elimination of time-based billing but not on the grounds that it is unethical—if that were the case I believe the professional bodies would have banned it long ago. Time based job costing is an easy-to-use system (which explains its almost universal appeal) for determining a price based on resource cost that is underpinned by the economic concept of opportunity cost.

In my opinion, the problem with time based pricing is not that it rewards inefficiency, it’s that it penalises efficiency because the faster things get done by lower level people, the lower the price paid by the customer. Furthermore, the seller will, on average, be worse off than would be the case if he was able to find a simple way to capture more of the consumer surplus—that’s the price some people would have been willing to pay that is higher than the firm’s standard hourly charge rate.

Capturing the consumer surplus is what value pricing is all about but it’s easier said than done particularly for small one-off open-ended jobs. This is not the place to discuss this issue other than to say that a robust value pricing system calls for a focus on outputs (a customer perspective) rather than inputs (a firm perspective).

It also requires attention being given to workflow together with the systematic development, retention and management of intellectual capital rather than time expended and this mandates different management processes. Traditional time based productivity monitoring software does not lend itself to this process which is one of the reasons so many firms struggle to successfully implement value pricing.

However, some firms have successfully adopted value pricing and have implemented a business strategy and related management process needed to make it work. One such firm is O’Byrne and Kennedy, a UK practice at Goffs Oak in North London. Paul O’Byrne will be talking specifically about how they have done that at Principa’s Practice 2020 Annual Conference in Brisbane this May 12–13.

I have a feeling that the most successful firms of future are going to adopt an OBK customer-centric strategy as customers become more aware of the value their accountant can deliver and more aware of firms such as OBK who are delivering that value.

You should develop your sales skills – your clients’ wellbeing depends on it

I’d love to have a penny for every time I’ve heard someone say accountants can’t sell or accountants don’t like selling.

In my last blog post I talked about Brett Kelly an Australian accountant who has spearheaded the phenomenal growth of his firm Kelly+Partners based in Sydney. When I say “phenomenal growth” I’m talking about growing from $400,000 to more than $4 million in one year! Some of this growth came from acquisitions but 38% came from organic growth in fees from existing clients and new clients.

One of Brett’s simple sales techniques is to ask the following question when he gets in front of a prospect: “Do you have a great accountant?” From the research we have done, the answer from more than 60% of the people who are asked will range from “sort of” to “absolutely” not. This gives him the oportunity to show them how his firm works and what’s in it for them.

You might read this and think to yourself that there is no way you would open a conversation with another person like that. I understand that some people do not want to appear pushy and certainly do not want to be accused of just doing it for the money—something that David Maister talks about is his new fabulous book Strategy and The Fat Smoker.

However, I believe there is selling and there is selling. If you truly believe in yourself and the value you bring to the table; if you genuinely know that you can help another person achieve a better life because of the knowledge and skill that you and/or your colleagues are blessed with, then I firmly believe that you have a professional obligation to do whatever it takes to give that person an opportunity to benefit from the contribution you can make.

Accountants have the potential to be great sales people because, by and large, they are trusted advisors and deservedly so. Gaining trust is the first and most difficult aspect of a sales process so if you’re already there you have a head start. The second requirement of a great sales person is to confidently and genuinely believe in yourself and your product or service and to do so with obvious passion—as in OBVIOUS passion and confidence.

If you possess these characteristics then all you need do to have the opportunity to realize the value you can create for other people is apply a simple sales protocol. One such protocol is elegantly explained in a great little book written by Allan Pease. It’s called, Questions are the Answers and it contains the simplest and most effective summary of how to become a super salesperson I have seen for a long time.

The book focuses on network marketing but the concepts apply in any context. Pease talks about the four keys of selling. They are:

  • Melt the ice
  • Find the hot button
  • Press the hot button
  • Get a commitment

I’ll leave you to read the book for yourself but the section that I like best of all is the one on how to find the hot button. Pease notes that people make a buying decision for a variety of different reasons and your job is to find what he calls their Primary Motivating Factor (PMF). Their PMF may be anything but it will definitely fall into one of two categories—to make a gain or avoid a pain.

For most business people their PMF—that may change over time by the way—will be one of the following:

  • Extra income
  • Financial independence
  • More free time
  • More valuable and saleable business
  • Greater control over their life and their business
  • Leaving a worthwhile legacy

Pease goes on to identify what he calls the Five Solid Gold Questions that will enable you to uncover the PMF. They are:

  1. What is your number one priority?
  2. Why did you pick that one?
  3. Why is that important to you?
  4. What are the consequences of not having that opportunity?
  5. Why would that worry you?

These are all open-ended questions in that they can’t be answered with a yes/no response. It’s very important when you ask these questions that you do so in the order given and that you allow the other party to respond. Do NOT interrupt. Even if there is a long silence, wait until the other person has responded before proceeding. While that is happening, show genuine interest in what the person is saying (that will be hard if you are really not interested and if that’s the case you won’t make the sale very often) by leaning forward and looking into his or her eyes and keeping your hands out in front of you.

When your prospect gets through responding to these 5 questions you will know what your prospect’s PMF is and whether your solution is going to be able to address it. If that is the case then it’s a relatively simple matter to press the hot button by showing your prospect how you will do that and from there, gaining a commitment to move forward.

It’s so important to understand that this process is a means to help someone bring to the surface a genuine need that he or she would like to have fulfilled. The focus should not be on what you (the sales person) might get out of it but what your client will get out of it. This should be the only reason why you are interested in helping the other person articulate his or her number one priority.

If your service can help deal with addressing that priority then you are going to enrich that person’s life. If the person you’re talking to does not have a number one priority then move on. Attempting to continue to sell something that the buyer really neither needs nor wants is the reason some sales people have such a poor reputation. These sales people focus in on themselves not on their customer.

There is no question in my mind that any trusted advisor can easily become an outstanding sales person by applying the strategy that Allan Pease has described in his book. It is only 90 pages (and big print so even us old guys can read it) so it’s a quick read. If you’re interested in making a difference in the lives of people then it might be a good idea to get out there and show them how you can do that—you might even enhance your own life.

So with all that said, here’s something you might like to think about. If you’re a professional advisor and you aren’t identifying and selling solutions to people you are doing your clients and prospects a disservice. If that is the case, it’s because you have not developed the questioning skills needed to identify what is important to your clients and prospective clients, you do not really believe in the value you are capable of delivering or you just don’t care. If it’s a skill issue then the good news is that you can develop the skill through some reading and practice. But if it’s a “don’t care” issue then nothing will change and your practice will fail to achieve its full potential. Those of your competitors who do care will enjoy the bounty of opportunity that you are leaving on the table. I firmly believe this why some firms (such as Kelly+Partners) grow at an astonishing rate and most others don’t.

There is no talent shortage – it’s official

Recently I have been presenting a session on delegation in Australia at the Accounting Firm Efficiency Forum that has been organized by Business Fitness.  I had the pleasure of interviewing the Senior Client Director of one of Australia’s outstanding new accounting firms.  His name is Brett Kelly and his firm is Kelly+Partners.  Interestingly, although he describes himself as a Senior Client Director on his business card, he’s actually the CEO.  His business card designation reflects the firm’s focus on clients rather than themselves.

Kelly+Partners is the inaugural winner of Australia’s Most Efficient Firm Award.  This award is based on an index of performance built up from eleven criteria that cover everything from revenue growth, revenue per person, leverage, expenses, working capital management and so on.  The firm was started in 2006 with a fee base at the time of $400k.  Within 12 months, they had grown that to more than $4 million and this year they’re expecting fees of around $6 million — now that’s growth!  A solid portion of the growth came from acquisitions but a full 38%—$1.6 million of it was organic.

After receiving the award, Brett very kindly shared some of the secrets of his firm’s success and in the course of doing so made a several profoundly important points.  One of those points was his comment that Kelly+Partners has had very little trouble attracting and retaining talented people and in this context he mentioned that there is no shortage of talent, there’s just a shortage of firms that talented people are attracted to.

Firms that talented people are attracted to are those doing interesting work, they’re growing solidly (though not necessarily as rapidly as Kelly+Partners), they service interesting clients with a positive mindset and they encourage personal growth and continual learning e.g. Brett’s people are required to read a minimum of 1 book each month.  If this does not apply to your firm and you’re concerned about the availability and stability of your team then perhaps there’s something to learn from this.

Brett also mentioned that every time he meets a business person he asks if s/he is has a great accountant?  Based on our own research on this question more than 60% of people are either indifferent or unhappy with the service they are getting from their current accountant.  Because switching costs are quite high many unhappy clients stay with their service provider BUT they will never refer and some are so unhappy they talk about it even if they don’t switch and if another firm comes along and makes it easy for them to switch, they’re gone.

What this means is that if you’re like most firms and 60% of your clients are in this “at risk” category then if Brett (or someone like him) bumps into one of your clients there’s a 60% chance you’re in trouble.  The flip side of this observation is to make sure that 60% of your clients are not “at risk” and the first step in that process is to conduct a client advisory board and/or some other form of client delight survey to get a sense of your risk exposure and then re-build your service strategy.

The other thing you might want to take away from this thought is the suggestion that when someone asks what you do, your response might be along the lines suggested by Brett.  Namely, “I’m an accountant, do you have a great accountant?” <listen> “Would you like me to explain why our clients are delighted with our firm.”

The Madonna Effect

Last year I read a book by Oren Harari called Break From The Pack: How To Compete in a Copycat Economy. It is a book worth reading and certainly challenges the idea that the best way to build a great business is to copy what everyone else is doing.

One of the concepts Harari introduced that I particularly liked is what he calls the Madonna Effect. Madonna, he notes, is a phenomenally successful pop star having sold more than 140 million albums over 25 years but in addition to that her concerts are sell-outs, she’s done movies, written books and created videos. Robbie Williams, himself a gigantic star, says “she’s an absolute legend and makes us all look like amateurs.”

Madonna obviously has staying power in a very fickle industry. Harari notes that her success comes from her “extraordinary ability to reinvent herself in anticipation of many fashions.” Every couple of years she comes up with a new way of presenting herself and her work. She takes note of what other groups are experimenting with, then in her own creative way she gets in front of the pack and leads her audience there—far enough away from conventional wisdom to be considered somewhat of an edgy rebel but not so far to be labeled bizarre. This is not unlike the famous statement made by Wayne Gretzky when asked why he scored so many goals in his career he said, “I skate to where the puck is going to be, not where it has been.”

The ability to re-invent yourself is a characteristic of great business leadership. Our environment is in a continuous state of change and in such circumstances businesses need to cintinuously re-think their business model. You need only look at IBM under both Lou Gerstner and then Sam Palminsano and to all of the “Good to Great” companies documented by Jim Collins to realize that the difference between ordinary and great is a willingness to apply the Madonna Effect. The leaders of all of these companies took a critical look at where they were and made a conscious decision to go to a better place.

If you accept the proposition that winners stay ahead of the pack you should be behaving as a Madonna. Here’s a self test that I have put together based on Harari’s thoughts that you might like to use to determine how well you are doing at it. On a scale of 1 to 5 where 1 is a resounding NO and 5 is a resounding YES how does your firm stack up?

No matter how good you are now you know in your heart that change is inevitable and that good today does not mean good forever. You’re therefore constantly looking for better ways of doing things and for different market opportunities.

You closely monitor trends in your environment and visualize how your firm will be taking advantage of a different set of circumstances.

You are not afraid to walk away from current products, services or customers or if you believe there is a greater opportunity to deploy your resources for greater long term returns elsewhere.

You constantly experiment with new ideas and you invite your customers to experiment with you and help you find better ways to create value for them.

You are deliberately provocative. Your ideas may range from the sublime to the ridiculous but you could never be accused of being indifferent.

You passionately believe in a different future for your business and your ability to prevail but you are still firmly connected to reality. Jim Collins refers to this as the Stockdale Paradox and notes that it is a fundamental characteristic of all the great companies he studied.

You are always upbeat, optimistic and excited about the future and what opportunities it offers your firm to break from the pack.

How did you score yourself?