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Archive for July, 2008

Whenever you find yourself on the side of the majority, it is time to pause and reflect.

July 31st, 2008

The title of this post is something Mark Twain said many years ago. It is indeed time to pause and reflect for many firms in the accounting profession. The economy is tough, it’s hard to attract and retain talent, baby-boomers are looking to retire in the near future, clients are hurting, competition both within and from outside the profession is intensifying … need I go on.

Despite all of this I’m reminded of words that I have been chanting for as long as I can remember: in any industry, at any time, there are some businesses that out-perform the rest by an order of magnitude. The accounting services sector is no exception.

In his best selling book Good to Great, Jim Collins makes the insightful point that the reason we don’t see many great companies is because the vast majority are quite good. Good, he says, is the enemy of great. Collins’ book is a must-read for anyone serious about improving the economic performance of their business and who want to escape from the sea of sameness that characterizes most industries. He also has a website that’s worth visiting (www.jimcollins.com).

For the most part, mature industries, e.g. the accounting profession, tend not to be hotbeds of innovation. Rather, the “rules” of the game are well known and practiced and most firms are reasonably good at playing the game by the rules they all know. This is why the vast majority of firms drift aimlessly in the sea of sameness.

Mankind exhibits a heard mentality. People, by nature, tend to feel comfortable going with the flow and as long as they’re performing more or less at the same level as others around them they’re content with life. The wide availability of inter-firm comparison data and best practice benchmarking studies might even contribute to industry malaise because they give comfort to the 68% of firms that are content to be within 1 standard deviation of average performance.

However, the great firms view benchmarking studies in a totally different light. They are the ones that leap ahead of the pack, not by following “best practice” performance but by innovatively creating and defining “best practice”.

Clayton Christensen in his seminal book, The Innovators Dilemma: When new technologies cause great firms to fail, noted that new entrants are much more likely than incumbents to innovate. Although Christensen is not talking about the accounting industry his observation explains why new kids on the block often seem to be able to create a firm that has a refreshing feel about it that appeals to both customers and team members and represents a viable alternative to established practices.

These firms experience rapid growth and often race past established firms with respect to profitability, the ability to hire and retain talent and the quality of new business they attract. They exhibit a vitality that older firms lack but once the new order has become established, complacency inevitably sneaks in, a fear of losing market share emerges, innovative energy subsides and opportunities are ignored and missed. The firm settles comfortably into the role of being an accounting business like all the others and gets more or less the same results as all of the others. Best practice in that context becomes nothing more than “typically quite good practice”.

Notwithstanding the above comments, studies of best practice can be very useful to identify potential and in particular to show under-performing firms that there is room for improvement. But they can also serve to stifle innovation by encouraging firms to mimic the strategies and operations of the best performers and while this might help the under-performers lift their game it manifests a me-too industry that exhibits very little product or process innovation.

There is no panacea for migrating a good firm to a great firm. Many roads lead to the desired destination and each individual firm needs to decide what road suits and then set out on the journey with confidence and conviction.

My advice is to look at metrics from benchmarking studies from a holistic perspective and use that information in conjunction with innovative “out-of-box” thinking to decide how to implement change in the way you operate your business.

One of the world’s best studies of accounting firm performance is the annual The Good, The Bad and The Ugly of the (Australian) Accounting Profession (sorry if you’re not an Australian firm) study carried out by my friends at Business Fitness. The 2008 study has just opened and I urge every firm in Australia to participate in the study. There is no charge for participating and you will receive a bucket load of value:

  • Insights from leading industry commentators (e.g. me!!!) with the theme “How to Use Benchmarking to Frame Your Practice”.
  • Your firm’s ranking plus Comparison Tables highlighting your results as either ‘Good’, ‘Bad’ or ‘Ugly’ against all firms, firms in the same revenue group, by location and charge out rates.
  • Efficiency Factor™ (a pretty cool Business Fitness innovation being a one-number summary that brings together profitability, productivity and financial management efficiency to paint an overall picture of how good your firm is on multiple management fronts) together with a one page report highlighting your firm’s efficiency result against the high achieving firms.

The survey closes on August 22, 2008 so get it done now. The small amount of time you put into completing the survey will yield an extraordinarily useful report that will be invaluable for your strategic planning. Perhaps more importantly, the process will give you insights into your own business (one of which might be how little you actually know about it) that will give you reason to pause and reflect on what you could and should be doing to migrate your firm from good to great. In my next post I will be giving you a raft of ideas you can implement right now to accomplish that goal.

The second half of your life

July 18th, 2008

When I was in practice many years ago I vividly recall walking into the office very early one morning not long after the beginning of a new financial year and finding one of my partners staring vacantly out the window of his office.

I asked him what he was thinking about and his response surprised me. He said, “I’ve just realized that I have another 25 years of doing the same thing over and over again, it’s quite depressing!”

We got to talking about life goals and aspirations and he confided in me that when he was at school he decided he wanted to be a Chartered Accountant and that he’d set himself very specific goals at various stages of his early career.

For example, his first goal was to get a job with a CA firm after graduating from high school that would allow him to study for his degree part time [goal accomplished], then to complete his degree as quickly as possible while getting good grades and working diligently for his employer [goal accomplished – he was an outstanding student and employee], then to complete his Professional Year for full CA qualification [goal accomplished], then to get noticed in the firm and assume ‘manager’ responsibility with the goal of early admission to partnership before he was 30 [goal accomplished].

Now, at the tender age of 33 he felt he’d run out of goals! He didn’t aspire to be the managing partner, he had already built and/or inherited a full book of business, he was busy all the time, often doing things he really didn’t get must satisfaction from and as a new financial year dawned, he couldn’t see what was going to change.

My recollection of this meeting jumped into my mind when I was reading an article written by Peter Drucker called Managing Oneself that was published in the HBR in March-April 1999.

“When work for most people meant manual labor there was no need to worry about the rest of your life. You simply kept on doing what you’d always done and if you were lucky enough to survive 40 years of hard work in the mill or on the railroad you were quite happy to spend the rest of your life doing nothing. Today, however, most work is knowledge work, and knowledge workers are not “finished” after 40 years on the job they are merely bored.”

“We hear a lot about mid life crisis of executives. It is mostly boredom. At 45 most executives have reached the peak of their business careers and they know it. After 20 years of doing more or less the same kind of work, they are very good at their jobs. But they are not learning or contributing or deriving challenge and satisfaction from the job. And yet they are still likely to face another 20 if not 25 years of work. That is why managing oneself increasingly leads on to begin a second career.”

I refer to this phenomenon in one of my Boot Camp presentations as career peaking. A career peak is a point in your life where you feel your career ceases to hold the allure it once had. A time when you don’t feel inclined (or can’t think of how) to set goals you really want to strive for and which therefore act as a motivational force for you. At this point in your career you go to work because you need to make a living to maintain your lifestyle (you “do it for the money” as David Maister so eloquently says.) If your career is within striking distance of your planned retirement date you can put up with the boredom but if it’s 20 years this side of retirement you have a personal challenge that should be managed.

Some people career peak early in their life and others peak later but from talking to lots and lots of people in the profession I believe it’s the norm rather than the exception. Personally I have career peaked twice, once as a university lecturer when I left to become a partner in a public accounting firm then subsequently I moved to start Results Accountants’ Systems with Paul Dunn. Each time I dramatically changed my career and each time I personally felt I moved to another level of personal accomplishment if for no other reason than I had a new set of higher goals to achieve.

In his article, Drucker talks of three ways to develop a second career. They are: (1) change jobs – move from one organization to another; (2) develop a parallel career e.g. become the part time CFO of a nonprofit organization and (3) create a new organization e.g. by becoming a social entrepreneur or active philanthropist (Bill Gates is an example.)

I’ll leave you to read Drucker’s article if you’re interested but I think there’s another variation on his first two ways and that’s to find a new career or focus within your existing business.

For example, you might do something like transfer 50% of your work commitments to another partner or manager and dedicate that time to building a “new” practice within a practice by bringing on new clients (or old clients with a new service offering) who you really get a kick out of working with because they have potential to grow, are keen to have your assistance and are willing to pay for that privilege.

Another variation might even be to transfer all (or most) of your clients to someone else and start from scratch. Remember how much fun you had in your early days of building your business.

If you’re a managing partner and you sense that one of your colleagues is suffering from career peak perhaps you could engage in some useful mentoring to help him or her understand the condition and put some professional development goals in place.

I have had the opportunity over the years to get close to several hundred partners in accounting firms and I’m amazed at how many of them related to the story I opened this post with and the concept of career peaking.

When I ask “what are you doing about it?” Their answer is almost always along the lines of “there’s not much I can do because I have made a commitment to my colleagues and I owe it to my family to put my head down and deal with it.” But this does not solve the problem. Career peaking leads to resentment, discord, leadership malaise and under-performance not only by the person concerned but also from the people he/she works with.

I’d be interested in your thoughts.

How to turn a recession into a time of great opportunity

July 4th, 2008

I recently posted a blog that talked about a recession being a time of great opportunity for business and I thought it might be useful to share some ideas on why this is so and what you can do to take advantage of the situation. I have written this post from the viewpoint of how you might talk to your business clients.

In good times every man and his dog can run a successful business and many will even to be in great shape. But good times hide from view the real weaknesses that exist in so many businesses and they also hide from view underlying strengths. When the going gets tough both the strengths and weaknesses are revealed.

A recession is a time when the business landscape is cleansed. It’s a time in the economic cycle that presents you with an opportunity to lay the groundwork to build your bottom line by addressing the things you should have been doing right irrespective of economic conditions. For already well run business it is a time for them to drive home their advantage by focusing even harder on the things that have made them successful. What follows are some thoughts on how to do that.

Your pricing strategy. Typically people think nothing comes to rest on the bottom line unless it first appears on the top line. That line of thinking leads to the mistaken belief that revenue is the major profit driver and a price reduction enables you to hold or even grow market share and thereby maintain profitability. It isn’t that simple.

If you’re servicing a market where price elasticity is high or at least rising because of the recession (i.e. customers become more price sensitive in tough times) then some price reduction might make sense but if you try this and don’t see an increase in sales (both in terms of revenue and units shipped) then market demand may not be as elastic as you think so don’t continue with it. Furthermore, in tough times customers tend to have smaller order sizes which means your cost of supplying the order is relatively higher (this would be obvious if you used activity based costing) with the result that if you discount your price, your margin shrinks even more.

It’s fair to say that typically customers do become more price sensitive during a recession but not as much as many business people think. However, rather than drop your price it is far smarter to explore ways to introduce a lower priced alternative to your main service or product with some “value” removed. In other words maintain your margin on your main lines and introduce a lower priced alternative to service your price sensitive customers. In other words, give your customers two opportunities to say ‘yes’ instead of either ‘yes’ or ‘no’.

My candid view is do not consider a discounting strategy unless you can introduce an additional lower priced alternative or you have a cost advantage over your competitors and you have available capacity and the demand for the product or service you offer is sensitive to price.

Because price cutting is so transparent it is by far and away the easiest initiative for competitors to copy so the minute you do it you not only lose margin on all your sales but you’ll probably lose some of your physical volume as well. At the end of the day, the game of business is about the bottom line, not the top line.

You should jump on to GamePlan (the pricing & volume calculator in the GamePlan Tools module) to see the impact that a price reduction has on the need for additional sales to maintain gross profit. For example, if your GP% is 30% a price reduction of 10% (a common discount used) will require a 50% increase in sales to maintain your gross profit (it’s even higher than this if your GP% is less than 30%). Quite frankly, it would be amazing to achieve a 50% increase in sales from a 10% price reduction during an economic boom but you’d have to be living with the fairies to believe that would be possible in a recession.

GamePlan’s pricing & volume calculator will also show you that as long as you hold your price (and therefore your margin) your competitors could take 33% of your business before your gross profit declines—this is most unlikely to happen but to the extent you do lose some business you just might find it’s from customers who are not profitable for you in any event—this is discussed below.

This is not to say pricing is irrelevant. Pricing is a critically important issue in any economic environment and there are some pricing and related product bundling strategies that should be especially considered in a recession but I will be spending some time on that at our up-coming training programs in the US later this year so for now let’s move on.

So if price is not the answer, what is?

Identify your very best customers and your most profitable products and/or services then focus all your attention on both of those elements of your business. If you do a thorough analysis of your customer base you will inevitably find that between 10–30% are unprofitable for you, a great starting point for this is to do a Pareto Analysis that will tell you what percentage of your customers contribute 80% of your revenue and a separate analysis of the percentage that contributes 80% of your gross profit. Get rid of the low profit contributors or allow your competitors, who are implementing a price reduction strategy, “win” them. You’ll benefit in two ways: first, your immediate profitability will improve because you are generating quality revenue by ridding yourself of unprofitable business and secondly, you’ll ultimately gain market share when your competitors go out of business as a consequence of them trying to service your bad customers on their lower margins.

Strengthen your balance sheet. Many businesses get away with murder in good times. They have way too much debt that is incorrectly balanced (e.g. too heavily weighted to short term), their shareholder distributions (drawings) are too high and their receivables and inventory are poorly managed. This is a time to clean all of these things up. Dispose of unused or under-utilized assets (and under-performing non-core businesses) and if those assets are required for some aspect of your operations, out-source that service. Even if this ends up costing you a little more, the benefit you will get is some debt retirement (assuming the proceeds for the sale of the assets is used for that purpose) and secondly, a reduction in your break-even point (assuming the increase in variable cost does not out-weigh the effect of the reduction in fixed costs) which give you more capacity to deal with sales volume fluctuations. Use GamePlan to make this assessment.

Improve the quality of your financial reporting and financial management processes. In boom conditions people don’t worry too much about the quality of either their financial reporting system or their financial management. As long as there’s money in the bank to pay the bills everything’s OK. Unfortunately when these bad habits spill over into difficult economic times we you have a recipe for disaster.

You should have a full set of financial that are accurate and available within 3–7 days of the end of each month. This is where Principa’s DashBoard comes into it own. A monthly review meeting with your business coach, with the DashBoard at the center of discussion and supplemented with your GamePlan analysis, can make a dramatic difference by helping you keep focused on the things that need to get done in your key result areas—view a video of Bob Bowley talking about the results he has achieved as a business coach using the DashBoard. In addition, a weekly flash report should be available by COB Friday that shows your sales, receivables, payables, cash, sales pipeline, orders on hand, your primary activity metric (e.g. transaction count) and average transaction value. The KPIs will depend on the business but this is an indicative list.

Focus on your core business and supporting operational processes. Successful businesses have a laser-like focus on their core business. This is what makes them very good at it. In difficult times it often happens that people look for non-core activates to boost revenue which distracts them from their main business, confuses their customers and starves their principal activities of resources. My advice: stick to your knitting and concentrate on improving the productivity of your existing processes.

Don’t cut back on discretionary expenses without good reason. In tough times it’s normal to think we should cut expenses because with a gross margin of say 30% then for each $1 reduction in costs we do not need $3.33 in revenue. This is something that can’t be ignored because these numbers speak for themselves. But simply cutting any expense simply because it’s possible does not make sense even though that may appear to be counter intuitive.

A discretionary expense is one over which management has discretion in the sense of that it can be cut, increased or eliminated. Expenses that fall into this category would include R&D, team training, marketing, customer service initiatives, some team salaries and discretionary bonuses and so on. In contrast, non-discretionary expenses are those expenses in respect of which the business is either contractually obligated or are absolutely necessary to “keep the doors open.”

For the most part, discretionary expenses are associated with activities and initiatives that grow the business or to put that another way, they ensure the business will be vibrant tomorrow. In contrast, non-discretionary expenses are the ones that are associated with what the business must do to meet today’s operational needs. Lazy (or ill-informed) business managers tend to look first at discretionary expenses when they launch a cost cutting exercise which is precisely why a business that is going to come out of a recession stronger than its competitors always employs a different strategy. There are always some discretionary expenses that should be cut or eliminated (even in good times) e.g. business/first air travel for short trips, long lunches and $100+ wine, chauffeured limos … need I go on?

You should not cut any expenses that directly impact the strength of the relationship you have with your profitable customers. Nor should you cut the investment you’re making in developing and delivering your most profitable products and services. You will find that as a result of reducing your unprofitable products and purging your unprofitable customers you will have opportunity to reduce some of you non-discretionary expenses. To keep an eye on how your customers feel about you it would be a great idea to implement the Net Promoter Score customer monitoring system advocated by Fred Reichheld and his colleagues that I wrote about in an earlier blog posting.

The key here is to undertake a customer and product line profitability analysis in conjunction with an ROI review of your expense line items and seek out better suppliers who will offer better service at lower prices (remember, your suppliers are also in a recession). This of course is a strategy that should be in place irrespective of the state of the economic environment but good times breed lazy managers.

Work with your suppliers to find ways that you can help them lower their cost of servicing you. Intuitively, one way to achieve cost reduction would be to put pressure on your suppliers to lower their prices &/or offer better payment terms. That might be possible and should be pursued but it also makes sense to work with your suppliers to find ways to help them achieve cost savings that can be passed on to you as lower prices. Having a good relationship with your suppliers is critical to your continued success when the economy improves and the quality of the relationship you enjoy during tough times will influence that. The last thing you want coming our of a recession is an inability to meet demand because your suppliers are no longer in business or they give preference to your competitors who were kinder to them in the hard times.

Keep your team in the loop. Your team are the key to your success. In a recession people always worry about their job and the last thing you want is your best people jumping ship and joining a more successful so that you’re left with under-performers. Your people need to know what your strategy is and they need to feel confident that their job is not on the line. If they feel secure but at the same time realize that everyone has to pull his/her weight you’ll find they’ll step up to the challenge and you’ll not only be able to grow your bottom line, you’ll build a stronger team that will remain loyal to you for many years to come. You’ll also position yourself nicely to bring on board people who have been retrenched by your competitors so you might want to pick the gems out of that to strengthen your team by letting go people who don’t want to roll up their sleeves and get behind you.