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The Creation of a Phenomenally Profitable Firm is a Matter of Choice

August 5th, 2017

I have been looking through some of my earlier writing and came across a report I wrote in 2013 on an analysis is did on the 2012 Good Bad and Ugly survey conducted on Australian firms by Business Fitness.

I was looking for the defining characteristics of firms where the owner(s) were achieving a net profit of $1 million or more and it reminded me that there’s no secret here, the success of a firm (and this applies to any business) is really a matter of choice about where your focus needs to be and how you perform your role as the leader of the firm.

I thought I’d share the concluding comments in the report that you can download by clicking here if you’d like to read the whole document.

This review confirms a view I’ve held for a long time and that is the key to building a very successful practice is exactly the same as building any other type of business.  It is to have a clear vision for where you want your firm to get to and then organize and execute relentlessly around that vision. To build a professional service firm with a high level of leverage requires exceptional management and leadership skills because professional knowledge workers are so fickle and can leave at any time. There will always be some firms that achieve the top 5 results that we see here but I do not believe it’s a sustainable model.

The one thing that leads to exceptional firm performance is creating value for customers. Whether that creates wealth for the firm in turn depends on two things: how much value is created for each customer and how many customers you can attract. The firms that have achieved high levels of leverage don’t necessarily have the most clients but those with less clients do have higher average fees per clients and vice versa.

As Peter Drucker said many years ago:

“Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

To build a great firm you can take many paths but the important thing is to decide which path suits you. Don’t jump from one path to the next simply because you see a nice shiny new toy on it. Most firms try to be all things to all people and when you combine that with the two brick walls you end up with a small firm going nowhere.

There are, however, firms that truly understand Drucker’s advice and focus on ways they can innovate with service design and delivery and do so in a way that gives them a strong marketing message to attract the type of customers they want (recall the example of OBK I spoke of) in numbers that produce serious returns AND attract and retain team members with the requisite attitude and aptitude to deliver the promised value.

What this is about is not looking to implement the latest technologies, best practices and managements fads. It’s about creating a business model that meets a real need and then executing with precision. To do that requires leadership at a high level. The essence of leadership is the process of creating and articulating a desirable vision that your team embraces and then investing in the development of those people to make it happen. But since you can’t give what you don’t have it all starts with developing yourself which is why I feel strongly that personal development comes before practice development. 

Accountants in public practice can do what the practice does and therein lies the heart of the problem. Jim Collins calls this the curse of competence. Michael Gerber calls it working IN your business rather than ON it. If you want to create a very profitable firm you can—the fact that we see the evidence for this is in this data set. But you will never do that unless you assume the role of leader and the quicker you make that a full time role the quicker you’ll see the results that are possible.