When they get busy doing the technical things the business does i.e. the IN stuff, they take their eye off the ON things and the business stagnates.  Worse still it tends to drift towards mediocrity.  Growth comes from trying new things, getting out there, looking for and taking advantage of opportunities just like you did when you started your business.  If you are not the person who started the businesses you’ll have a special challenge to address and that is, you don’t really know what “growth hunger” is all about.

I have a simple (perhaps over simplistic) theory: the reason many, if not most, established practices hit a growth brick wall is that the people who inherit a leadership role have not been mentored and seasoned as “business growers”.  Their training, experience, performance expectation and financial reward has been as “business doers”.  So here’s a very simple thought: if you were able to grow your business at 40% a year from start-up and keep that up for 3-5 years, which is not at all unusual, then you should be able to do that from any starting base at any time BUT NOT IF YOUR TIME IS TOTALLY CONSUMED WITH DOING THE THINGS THE BUSINESS DOES.

And there’s a flip side to that theory.  The reason most most practices that were started by the present owner(s) hit a brick wall after a few years is that they start to make enough money to get by and are not willing to “risk” what they’ve built up in the pursuit of more growth.  This is rationalized by the statement “I’m too busy servicing my clients to get out and do the things I should be doing to grow the business.”  I would argue they face a much greater risk by standing still and the risk will become even greater in the future if only because:

(1) quality team members will not hang around in slow growth, no opportunity, environments and

(2) practice values in the future will increasingly be based on growth prospects (reflected by growth experience), client quality and loyalty, team member quality and loyalty, service design and margin.  These are not typically things that score very highly in slow (or no) growth firms.

Strategic planning is very important but it can also be very limiting. The key is to take the “limits” away and the most constraining limit is a mediocre growth target set in your plan. If you want to double the size of your business you need to start with that as your goal then ask yourself what will it take to do that?  Now, you might not do that overnight but at just 15% a year, you will do it in 5 years.  I’d add to that, if your practice revenue has not doubled in the past 5 years then it won’t double in the next 5 unless you start to do some different things.  And, I’d also add — 15% is nowhere near what I know you’re capable of doing!  To quote Herb Kelleher, when he was CEO of Southwest Airlines: “we have a strategic plan, it’s called doing things” which explains the amazing sustained success of that business despite it being in a horrible industry.

Here’s one more thought. Peter Drucker told us in 1973, there’s only one purpose of a business: to create a customer.  He goes onto say “the business has two–and only two–basic functions: marketing and innovation.  Marketing and innovation produce results; all the rest are ‘costs’.”

So here’s something for you to ponder: what marketing and innovating are you doing?  Those firms that are doing this, knowingly or otherwise, are stealing the march on the rest. Let me conclude with Michelangelo’s famous words.

The greater danger for most of us is not that our aim is too high and we miss it, but that it is too low and we hit it.

I made the point that …

(1)   Change is what provides both threats and opportunities and unless an organization is changing at least at the same rate as its environment it has a bleak future, and

(2)   The difference between great organizations and mediocre ones can be tracked back to the quality of leadership and management.

The leaders of today’s accounting firms should take particular note of this.  Leadership is essentially about vision and vision is about the future.  When we are talking about the firm of the future we must therefore be talking about leadership.  David Maister, I believe, said somewhere that “most firms are over-managed and under-led.”  I agree with him.

One of the reasons for this is a natural tendency for those leading a business to orientate their energy and attention towards improving efficiency as the means of improving short term profitability.  This is totally understandable but to the extent that it diverts attention away from thinking about, and preparing for, the future it results in a loss of perspective that usually results in lost opportunities and stagnant growth.

Stephen Covey describes this natural characteristic of most businesses with the analogy of a team hacking it’s way through a jungle when the team leader decides to climb a tree to take a look at the environment.  On reaching the top he yells out to the people below “stop hacking, we’re heading in the wrong direction” to which the team below yell back in response “shut up we’re making great progress.”

Leadership is about getting up into the canopy of the jungle you’re in and taking a look at the environment.  From that vantage point you need to make choices as to where you actually want to be heading.  The vantage point takes the form of asking yourself questions that relate to the future of your business.  The big question is: What is the vision I have for our firm 10 years from now?  In framing that vision you need to be thinking about the following issues.

• In what ways are our clients’ businesses changing and what does that mean for the services we should be offering now and in the future?
• What do our clients value i.e. what is “value” to them?
• What are our strengths? Are they the right strengths to create and deliver value to our clients? Are we adequately endowed with these strengths? Are they currently deployed where they produce results?
• Who are our future competitors from within and outside the industry going to be? What are we doing today that will help us really stand out from these competitors?
• What technologies should we be using now to better service our clients, in particular how well appraised are we of what firms in adjacent industries are doing?
• What process, product or business model innovations have we introduced in the past three years to better service clients and offer a more valuable business value proposition?  Do we lead or follow the pack when it comes to introducing new ideas?
• To what extent are we really adding value to our clients, by that I mean, is their business performing better as a direct result of our firm’s involvement or are we simply providing a service that any accounting firm could do for them?
• Do we know the profit contribution made to our firm by each of our clients? What % of our clients are at break-even or below?
• To what extent are we being held captive by some of our clients who, for their own reasons, do not see any need to change their service requirements but who we allow to consume our valuable resources for fear of losing some short term revenue that has little or no growth potential?
• In what ways are we attempting to change the culture of our organization to better accommodate the work preferences and environment needed to attract and retain talented people?
• What are we doing now to implement re-training of our people to equip them with the skills that are going to be needed in the future?
• What are our plans to align with a network that will be able to provide back office research and development support, global reach and a source of colleagues we can collaborate with to quickly and effectively offer affordable solutions to our clients without risking them being lured away from our firm?
• How adaptive is our firm to change?  Specifically, based on our past behavior, have we been willing to cast aside legacy mindsets and systems so that we are better equipped to accommodate new opportunities?
• And the final but critical question: what resources in the form of time and money are we willing to invest to ensure that our firm not only transitions successfully to a new service model but takes rank with the top performers in the industry?

As you think about the above questions it might be useful to reflect on what Charles Darwin concluded in relation to species generally: “It’s not the strongest nor most intelligent of the species that survive; it is the one most adaptable to change.”

Ideally, a costing system for a service firm should be able to provide management with information relating to the profitability of different customers and different products or services.  It should also be able to be tied back to the firm’s budgeting system and I would expect it to be able to be used in pricing decisions and for determining whether to accept or reject engagements etc.  I have yet to discover a time-based “practice management” system that does more than price jobs.  If you know of one please tell me and I’ll do what I can to promote it to the world.

No matter what pricing methodology you decide to adopt you would be wise to know your costs.  That statement almost sounds trivial and yet I have come across very few people in professional service firms (PFS) who actually know their costs or show any real interest in them for that matter.  They are taken as a given because, at least in the short term, most costs are fixed and the gross margin is generally so high that any revenue is assumed to contribute something to the bottom line.

Your firm’s P&L will obviously tell you whether the aggregate of your revenues exceeds the aggregate of your expenses but it tells you practically nothing else of any significance. It’s a little like using a thermometer as the sole indicator of your current state of health.

Now let’s take this further. Your so-called “time costing” system will tell you what time went into producing your revenue, it will even tell you whose time it was and you’ll get a crude idea of what work was done for each of your clients.  However, for the most part, the “cost” attached to the “hours” will be the cost from the client’s perspective.  That is, the targeted charge rate for the time allocated to the task.  This is quite different to the cost of resources used by the firm to service its customers and therefore you will not know how profitable that work was.  This is why the vast majority of PSFs are harboring unprofitable customers without even knowing it.

If the cost of resources utilized to service a client is greater than the revenue generated then, unless there is a reasonably clear expectation of a future profit stream i.e potentially high lifetime value, it makes sense to implement one or a combination of the following strategies: (1) increase the price of the service, (2) re-allocate lower cost resources to the work process, (3) reduce the cost of resources used through negotiation with suppliers, (4) seek to  improve productivity of the work process, and/or (5) cease to service that client and redeploy the resources that are released to more profitable work.

If the published research conducted by people such as Fred Reichheld (Loyalty Effect guy) and Bob Kaplan (Balanced Scorecard guy) is any guide, the cost of unprofitable customers is likely to be very high in PSFs.   For example, the following graph relating to an insurance business is from an article written by Bob Kaplan that was published in the Balanced Scorecard Report (August, 2005) called “Add a Customer Profitability Metric to Your Balanced Scorecard”.

Commenting on the graph, Kaplan notes:

The shape of the curve occurs in virtually every customer profitability study ever done, (emphasis added)  in which 15 percent to 20 percent of the customers generate 100 percent (or more) of the profits. In this case, the most profitable 40 percent of customers generate 130 percent of annual profits; the middle 55 percent of customers break even, and the least profitable 5 percent of customers incur losses equal to 30 percent of annual profits. With its most profitable customers, the company worked harder to ensure their continued loyalty and to generate more business from them. For customers in the middle break-even group, it would improve its processes to lower its cost of serving them. It focused most of its attention on the 5 percent-loss customers, taking actions to re-price services and asking them for more business in higher-margin product lines. If the company could not transform these customers into profitable ones by these actions, it was prepared to drop the accounts.

My research confirms that Kaplan’s findings seem to be replicated in accounting firms.  With the cooperation of several members of the Principa Alliance I have generated a client profitability graph for their firms.  The diagram shown below is for one of those firms (a sole practitioner) and reflects the pattern that is typical for all the firms I analyzed. For this particular firm, 141% of its final net profit is generated from 53% of its clients.  The next 30% are approximately at break-even and the last 20% of clients “cost” the firm about 41% of its potential profit while utilizing 45% of its capacity.  Applying the Pareto Principle, 80% of the firm’s maximum profit potential is generated from 14% of its clients!

Before turning our attention to the loss makers, let’s talk about the ones at break-even.  This is an interesting group and may represent 40-50% of your clients.  Some of these clients will be your stars of tomorrow so they’re not candidates for firing.  However, the fact that they are break-even suggests that you should at least look at the effectiveness of the process you are using to service them, the services they are buying and especially the pricing of those services.

Now to the loss-makers.  Other things being equal, if you fire the bottom 20% of your clients the costs that they are now absorbing would need to be absorbed by the remaining clients so you’ll end up with another group of loss-makers and so on. This is the rationale that most people use to justify keeping these loss-makers on their books.  However, I will strenuously argue that is NOT usually the smart thing to do.  Here’s why. …

The clients I’m referring to are, for the most part, the most difficult to serve, they are the 20% who contribute to 80% of your challenges, they are probably small, have high write-offs, they only require low level services, they are uncooperative or your service protocols are not well suited to them.  In short, they are not a good fit for your firm but may be a great fit for a different firm.  Of course, some of this group may be new clients with strong potential who you see as being solid in the medium to long term in which case you’ll want to hold on to them and develop the relationship.

What is important is that the clients in this group are certainly consuming resources that could be better deployed if you could find more “better” clients and as long as you’re allocating capacity to them you will not have time to look for and attract “better” clients.  With the exception of the high potential group I previously mentioned, the gutsy strategy is to refer them to a firm that is better suited to their needs  and then go out and replace them with better quality clients.  Based on my experience this is the fastest way to improve the quality of your client base and I never cease to be amazed at how easy it is to implement.  My colleague and friend Ron Baker tells me that’s been his observation as well.

The less courageous, but nonetheless very sensible, strategy is to replace lower level revenue with higher quality revenue as it comes in.  That is, suppose, you sign up a new client with a revenue estimate of say $10,000. You then go to your unprofitable group and remove $10,000 worth of clients. That way you preserve your immediate revenue, increase your immediate profit and better position yourself for profit growth from that better quality client than was likely to be the case with the ones you got rid of.

You may be thinking “wait there, the people I have working on the low level clients will not be able to do the higher level work our new client requires.”  If this is in your mind then you’ve just fallen into a huge but common practice development trap.  The keys to developing a robust, profitable practice are to be found in client selection, service line offering (hence your pricing options), people development and delegation (hence your productive capacity leverage.)  It makes no sense at all to be looking for higher quality clients if you are not simultaneously creating higher quality team members and offering higher quality services. You will not develop (or keep) high quality people by giving them low quality, less challenging work to do.

I have also heard the argument that “we know some of our clients are not profitable and on a full costing basis, may even be unprofitable but we accept this on the grounds that some of these clients will blossom in the fullness of time.”  This is the “oak trees out of acorns grow” argument.  I don’t have an issue with this argument but I wonder if you should have 40-50% (and in some firms more!) of your clients in the “acorn” category or, more to the point, are you aware that this is in fact the case for many firms?

A healthy cumulative profit curve would be one that rapidly increased to say 80% of your final net profit (probably from 20-30% of your clients and 30-40% of your available capacity) and then steadily increased for the remaining 20% of your net profit.  This would be in keeping with Pareto’s Law — which, in my view, seems to be a natural law of business and it would reflect the fact that not all activities undertaken in a firm yield the same level of profit.  It would also serve the purpose of keeping attention on the return that the firm is getting from a very large proportion of its available capacity and in the process, remind management of the need to continually monitor not only value created by value captured.

A Simple Costing Model

The profit contribution graph illustrated above is a useful framework for analyzing the contribution clients make to a firm’s overall profitability.  Even in cases where there is no decline in the graph it will highlight what percentage of clients account for 80-90% of a firm’s profit.  This in turn raises the question of whether resources consumed in servicing the remainder of clients might be better deployed or, as Kaplan suggests, it indicates there is a need to improve your processes to reduce the cost of servicing these clients.

How long something takes to complete does not reflect what it is worth to a customer.  However, time is one of the major drivers of what it costs to provide the service and is therefore relevant from the perspective of the producer of the service.  The rationale for this is simple, if you are paying a knowledge worker say $30 per hour and that person takes 1 hour to complete a task, part of the cost of that task is $30 – this is payment for the intellectual capital provided to the firm by that team member.

In addition, the knowledge worker will utilize other resources that are provided by the firm to its knowledge workers e.g. application software, telecoms, paper, utilities, postage, internet access, library resources, office real estate etc.  Some of these resources are fixed costs and others are variable but they are an expense incurred by the firm and to determine the profit associated with the work done for clients they should be charged to that work in some way.  In a perfect world, we might use an activity based costing methodology to assign all of these costs.  However, we don’t work in a perfect world so we need to use an alternative simple approach.

I believe that the amount of time involved with each client is a good basis for determining the total cost.  To accomplish that it is obviously necessary to use timesheets.  I have built a spreadsheet costing model that determines client profitability in the following way:

Step 1: The total expense of the firm is determined.  Fully burdened labor costs are separated from other expenses. If owners are not paid a salary an imputed cost for owner salaries is determined and is reflected in the total labor cost – this will include both direct labor (i.e. people who work on client engagements) and indirect labor (i.e. support people.)

Step 2: An estimate is made of the firm’s chargeable capacity.  We start with an estimate of the number of hours that would be available in a standard work year by an effective full-time team member after allowing for annual vacation, public holidays, sick leave, training time and “other” time not available for client engagements.  We’ll call this available capacity for a client-facing team member.

Step 3: Not all available direct labor capacity can be expected to be engaged in client work.  For example, people need to attend meeting’s, they are involved in training, selling, general administration and a wide range of other activities associated with a normal accounting business.  Some people may refer to these activities as being non-productive but that is far from the truth.  They are an essential part of the business of accounting so there is little point pretending that all available time is potentially chargeable time. For costing purposes we use an average firm-wide estimate of the percentage of chargeable time that the firm targets and we apply that to the total available capacity for all of the people in the firm who are engaged in chargeable work. We’ll call this the firm’s Practical Attainable Capacity (PAC).  See the pop-up form used in the software to calculate this.

Step 4: We calculate an indirect charge per hour by dividing total non-labor expenses by PAC.  This is an hourly cost that we suggest should be added to the firm’s costing system so that the “cost” of a job will show separately, the fully burdened labor component and the indirect expense charge based on the number of hours.  When this is done the person responsible for billing can immediately see the cost of resources used.  If it is the firm’s policy to use cost-based pricing it will simply be a matter of applying a mark-up factor.  Alternatively, it may already have a fixed price agreement in place (or a value price in mind) in which case this information will enable it to review the profitability of the engagement and if necessary, revisit its work processes or its pricing next year based on this cost information.

Step 5: It is quite usual for a single client to be associated with several costing entities e.g. a company, trust, personal tax returns, audit, company secretarial services etc etc.  To determine overall client profitability, these need to be aggregated and placed in a spreadsheet that contains the information below shown below.  It is then imported into the costing model:

Client entity name
Total gross revenue
Write-(offs)/ons – if applicable
Total hours involved from all team members
Direct labor cost for all team members (including owner imputation if necessary)

Step 6: Once the data is entered, we simply click the analyze button and the estimated net profit for each client is determined and the client entities are sorted from highest net profit to lowest and the cumulative profit graph and calculations are performed.   An on-screen report pops up to deliver the verdict.

Timesheets, Profitability Analysis and Productivity Monitoring

This costing model requires the use of timesheets that some people consider to be not only a waste of time but, they argue, also negatively impact the firm. I don’t want to engage in this debate here other than to say that in my opinion time sheets used for service pricing are not only a waste of time and effort but have been a major reason why the profession has experienced a real income-per-partner decline of approximately 1% over the past 30 years despite being handed unbelievable commercial opportunities and access to amazing productivity-enhancing technologies during that time.  I refer to this as a Productivity Paradox and have addressed this in an earlier post in November, 2009.

Having said that, if timesheets are used for resource costing purposes as describe here they will provide useful management information.  I have heard of one consultant to the profession who has suggested that timesheets be used to monitor “productivity” but not for pricing and his recommendation was (is) to carry the “cost” at $1 per hour to effectively force a pricing strategy based on value or whatever he had in mind.  That doesn’t make much sense in that if you are already collecting data relating to time spent why not tie it to the direct labor cost and indirect enterprise costs so that you can get a comprehensive profitability picture to review. The “productivity” metric implied by his advice is irrelevant I believe – what’s the point having high levels of productivity on clients you are losing money on?  That’s like traveling faster in the wrong direction–you get nowhere quicker.

On reflection, the traditional concept of productivity being measured by the ratio of hours charged to hours available certainly tells us something about activity but very little about results.  In fact it doesn’t even tell us much about productive efficiency it just tells us how much time a person entered on a time sheet–the idea that the more time a person puts on the time sheet the more productive that person is but it might reflect how unproductive that person is in fact. By that I mean, suppose Bill and Mary each work on a task that is exactly the same and Bill does it in one hour and Mary completes it in two hours, who is most productive?  You might say “the answer is obviously Bill and this will be reflected by him creating more work output in an 8 hour day.”  But what if neither of them has any more work to do on a given day.  Whose timesheet for that day would indicate higher productivity?

A more useful concept of productivity might be one that talks to value created from the customers’ perspective and value captured from the firm’s perspective.  For example, we could say the firm described previously exhibited productivity of 55% that being the percentage of its capacity that actually yielded a profit.

If you would like to download and used the spreadsheet to analyze your own client base, click here.

In view of the fact that all firms utilize more or less the same technology, employ similarly qualified and skilled people, operate out of similar facilities and follow more or less the same work-flow it follows that the cost structure for firms of equivalent type and size is much the same.  To put that another way, few firms have any demonstrable cost advantage over their competitors which means that if they attempt to use price as a competitive weapon to build market share they do so at the cost of margin and their bottom line inevitably reflects this.

There is no doubt that price can be used as a valid strategic differentiator but a necessary condition for its profitable deployment is always going to be possession of a cost leadership position and .  If you do not have a cost leadership position that you can defend then using price for anything other than as a means to clear unwanted inventory or utilize genuinely surplus capacity makes n sense at all.

So given is what are you differentiation options?  There are several.

1. Product/service – bundle or unbundle, give it a sexy name e.g the ABC Business Management System or the XYZ Management Control Process.  Partner with other service providers to add service features not typically found in a standard offering.
2. Relationship – get closer to your clients.  Send them unsolicited information including books that you know would interest them – calculate the lifetime value of a client then assess the cost of a book against that.  Call them on their birthday or at least send them a SIGNED-BY-YOU birthday card, make sure your DOFI (Director of First Impressions) maintains a record of their preferences and relevant details e.g. how they like their coffee, childrens’ names etc. Visit them periodically – don’t pretend you don’t have time.  This is the most important marketing initiative you can implement.
3. Experience - WOW your client.  Do something, anything, unexpected.  Go the extra mile e.g. give them an umbrella when it’s raining, arrange for their car to be washed while they are visiting you. Brainstorm this with you team members.  Notice service experiences you have that delight you then copy them.
4. Work process – critically look at the process you use to get the job done and especially the client touch-points – these are the points where the client interfaces with you or your team members.  May it as easy as possible for your client to deal with you e.g. do you have a client portal that enables them to communicate with you and upload, download and review documents securely?
5. Communication technology – how do you communicate with your client.  Do you know how to use text messaging?  If you have any clients under 30 years of age it would be a good idea if you did. Does your firm have a Facebook presence, do you use Twitter, have you posted any YouTube videos that clients and prospects would consider to be useful e.g. how you can help people build shareholder value. Don’t tell me you’re sending out a Newsletter – that’s great but cut it up into smaller chunks and throw it onto your Facebook Wall.
6. Brand - does your firm have a brand.  What do you stand for?  To be successful it needs to reflect direction (where you’re heading), breadth ( your range of service deliverables) and/or depth (your specialized deliverables and deep knowledge).  Do you know what the difference is between a Core2Duo and a Celeron processor? I don’t, but I do know that a Core2Duo is better – how do I know that? because Intel told me!  Do you get the message?  What does your firm’s name reflect – is it a name or a sentence?  One of my very good friends had an accounting practice called Igor Loutkovsky & Associates – he changed the name to Richfields and saw a dramatic increase in business.  There’s a lot more in a name that you may think.

The big challenge most accounting practices face is their desire to be all things to all people.  This seriously impacts their ability to differentiate.  There is noting they can really hang their hat on that distinguishes them from the rest of the pack so they grab at things like “we’re a full service firm”, “we have been servicing Yourtown  for 50 years”, “our partners have combined experience of 500 years (and it shows!)”, “we pride ourselves on client service”, “our business is your business”.

Let’s face it, not one of these platitudes has a “what’s in it for me” element.  What you need to do is develop a business value proposition that is customer-centric and then use that as the basis for developing your firm’s business model.  This includes, what processes you will use to deliver it, what resources you will require to implement those process and what your profit model looks like.  This and many other strategies will be covered in the totally new Bootcamp that I’ll be running in the UK (June 15-18) and US (July 19-21).  For way too long the profession has been focusing its attention on productivity improvements through technology implementation.  This is a necessary, but not a sufficient, condition for long run growth and success.  By far and away the most successful growth firms have been those that have embraced business model innovation but that will have to be the subject of another post.

The service experience I have at Starbucks stores is, for the most part, very good.  But like all businesses it’s occasionally disappointing.  The challenge for every business is that the bad experiences will always be judged by reference to the good ones so the better you are on average the worse your customers feel when you let them down.

Earlier this year I made several bad choices when I was skiing at Heavenly, South Lake Tahoe where I spend most of my time when I’m in the US. The consequence of these choices was a broken arm and two broken ribs.  Needless to say I was not a happy chappy.  In fact, because the arm was broken at the top of the (not so) humerus bone it could not be set and all I could do is wear a sling for 5-8 weeks.  This stopped my workouts but it did not stop my Starbucks visits.

The first morning I visited the Tahoe store with my arm in a sling the delightful baristas on the early morning shift who always give every customer the warmest greeting imaginable wanted to know the full story so, basking in the attention and looking for sympathy, I naturally obliged.  While I’m talking about this I want to share a very important point.  The “welcome” you and your team give to your customers and prospects is one of the most, if not THE most, important drivers of customer delight.  In his great book, The Invisible Touch, Harry Beckwith reports on a survey of 200,000 customers of VetSmart, the business that provides the veterinary facilities for the Petsmart chain of stores in the US.  The survey revealed that the greeting was the single key to customer contentment.  He said:

Of the pet owners who reported that they felt “very welcome” when they entered VetSamart, 98% reported that they were very satisfied with their overall experience.  No other factor–the reasonableness of the fee, the cleanliness of the facility, or the clarity with which the vet communicated to the pet owner–mattered remotely as much as the greeting.

This is precisely what we hear from the clients of professional service firms all the time when we conduct Client Advisory Boards and it’s why we believe your Director of First Impressions is so critical to the success of your own customer service strategy.  The welcome establishes the mindset that frames the rest of the visit and therefore the entire experience.  If the welcome is ordinary or, worse still bad, it’s downhill from there but I digress…

Two days later when I visited the store one of the baristas who I shall call Heather (because that’s her name) gave me a get-well card signed by her and her co-worker Nina.  It literally blew me away.  Jan Carlzon, when he was the CEO of Scandinavian Airlines coined the phrase “Moments of Truth” in his book of the same name which is listed amongst the 100 most important business books of all time and definitely worth reading.  This phrase is now well entrenched in the customer service vernacular.  Now, the great service I always get from (most) of the Starbucks crew is not a Moment of Truth–I’ll call it a MOT, that has become my expectation, but receiving that card was a MOT.  It told me that these people actually care as opposed to just going through the motions of customer service.

However, there can be “good” MOTs and “bad” MOTs often from the same establishment.  Here is a bad MOT that I experienced at the same store, same time in the morning (5:30am) but different baristas.  This store opens at 5:30am every day.  I’m there withing 5 minutes of that time. About 2 weeks ago, I get to the store and I see a guy walking around outside and frantic activity going on inside the store.  I attempt to open the door and the barista inside looks at me with a frown and waves me way as he goes on with stocking the food cabinet.  His co-barista goes about her work intentionally not having any eye contact with me or the other gentleman standing at the door.  That was bad enough but it was 28 degrees F which is 4 degrees below zero or, to put that another way, damn cold. I waited for another 5 minutes then decided to visit another coffee shop.  This was a bad MOT.

The following day when I visited Starbucks, the young man who was on the previous day’s shift was there and I asked what had happened.  He gleefully acknowledged that it was his fault, he was late getting to the store and went about this work as though nothing had happened.  I think he apologized but the moment certainly was not memorable.

This experience begs the question: what could the baristas have done on the day they were late opening?  One option was to do what they did — piss off a couple of customers while they work like crazy to get the store ready.  Another, much better choice in my view, would have been to let us into the store (remember there were only 2 of us and there are rarely more than 3-5 customers before 6am anyway.)  The baristas could have then said “We slept in, sorry.  It’ll take us a couple of minutes to get ready.  If you’d like to take a seat we’ll get your order ready as soon as we can and your the beverage of your choice will be on us.”  A response like this would have immediately turned a bad MOT into a good MOT.  I know what the margins are in this business and I know the lifetime value of a customer.  It would have cost the company a few pennies, it would have given me and the other guy something positive to talk about and it would have given the baristas a sense of having recovered from a bad situation.

I’m not going to stop going to Starbucks because of this experience.  It is one bad one out of several great ones and many very good ones.  The team at this particular store, and the one I frequent when I’m in Reno, deliver a consistently good experience so the business has a good solid balance in what Stephen Covey calls its emotional bank account with me. Because the balance of the emotional bank has steadily increased, the occasional withdrawal for bad service or an unpleasant experience can easily be accommodated but a string of bad experiences will ultimately result is a lost customer. Importantly, a successful recovery from a bad MOT results in a large deposit but an unsuccessful response to a bad MOT results in a large withdrawal.

Most businesses today offer their customers a reasonably good service experience when things are tracking along in an orderly manner.  But they get tested when things go wrong and it’s precisely at those times they have a great opportunity to actually show what they’re made of.  These are the MOTs that should be embraced as opportunities to exhibit greatness.  The biggest challenge to delivering a great customer experience comes not from a willingness of team members to do the “right” thing but their failure to know what that could be (i.e. a lack of ’scenario training’) and, perhaps most important, the company’s failure to empower them to make fast decisions in circumstances where a rapid response is called for.  Once team members “get into the swing” of delighting customers it becomes second nature.

Regular scenario training is one way to get this happening.  Use Towards Awesome Service as a catalyst.  This needs to be supported by a policy of publicly celebrating service failures and recoveries so that all team members fully understand that failure is an opportunity for greatness to be revealed.

First, it is time centric rather than customer-value centric which means the firm is neither specifically seeking to address nor capturing the value created for and perceived by the customer.  Some customers would be willing to pay more for the firm’s services but are not being asked to and some customers are unhappy with what they are paying but are consuming the firm’s valuable resources that might otherwise be deployed in more effective ways e.g. doing more higher value work for more customers who appreciate value.

If you have customers who would be willing to pay more for your services then so too do your competitors!  Your attention and marketing efforts should focus on these people NOT on the ones who are looking for lower prices.
Customers who are price sensitive are never going to be as profitable to the firm as the former category because they are not good referral sources, they are not inclined to buy additional services, they lower your sense of value and self esteem by constantly questioning your fee and they are more likely to switch to lower cost suppliers.  As Harry Beckwith says in The Invisible Touch “if people come for your price they will leave for someone else’s.”

Second, when the performance of a team member (including the owners of the firm) is judged on the basis of hours billed with little or no attention being given to customer satisfaction, people tend to hoard work rather than look for ways to better identify and meet the long term needs of the customer.  The growth of the firm suffers as a result but as is the case with most lost opportunities, it is not immediately visible.  Paradoxically, striving for high productivity based on hours billed is considered to be a good thing but the celebration hides opportunities for profitable growth from the attention of management.

Third, when time is the focus and customers have a fee expectation that is not too far from what they paid last year there is very little incentive to explore ways in which greater value can be created. By focusing attention on time expended rather than value created a key element of business success is ignored.  Successful businesses in any industry are those that exceed the service expectations of their customers.  These businesses are the ones that enjoy very high levels of customer loyalty and quality referrals, they are also the ones that attract and retain customers who are less price sensitive and who are more likely to buy additional services.  A time-based focus is not likely to result in expectations being exceeded.

A fourth challenge is that as a firm gets more efficient through, for example, the use of technology all or most of the productivity gain is passed on to the customer in highly competitive markets with low barriers to entry (i.e. the accounting profession).  This is made even worse if people are reluctant to delegate so you end up with higher skilled people doing lower skilled work simply because technology makes it possible for them to do it.  In other words, we see higher skilled people doing lower skilled work because they can not because they should.

Contrary to the more popular argument that time-based pricing encourages inefficiency the cost of which is passed on to the consumer,  my research suggests otherwise and that, in fact, it works against the firm rather than against the customer.  Published industry surveys conducted over a 30 year period in Australia (and I suspect it’s the same in other countries) reveal that inflation-adjusted net profit per partner has fallen by 1%.  This has happened despite a massive injection of productivity enhancing technology and a huge growth in demand for accounting services from individuals and business entities.

Technology has resulted in an improvement in output per person that’s reflected in higher revenue based performance metrics such as revenue per person and revenue per partner.  But these metrics are misleading indicators of performance because technology improvement has flattened organizations by enabling higher skilled and experienced people to do what lower skilled people previously did and could continue to do!  As a result, average labor costs have risen, leverage (i.e. team members per owner) has declined, owners are working longer hours and profitability per owner in real terms has declined.

On the surface, time-based pricing appears to offer no incentive to improve efficiency but in my experience, most accountants are honest ethical people who do not expect customers to absorb the cost of their own inefficiency.  And if that’s not enough then the possibility of losing a customer (or having an unpleasant confrontation) if price is considered to be “too high” tends to drive prices down and results in the firm, not the customer, absorbing the cost of inefficiency. This incidentally is reflected by write-offs of between 5-20% that are common in PSFs.

A fifth challenge with time-based pricing is that it is not possible (without further analysis) to use it to identify the most profitable customers or service lines because the cost of resources other than labor used to deliver the services are for all intents and purposes ignored—they are just assumed to be recovered through the direct labor cost multiple used to set the charge rate.

Although time and billing systems have become commonly known as “a costing system”, that is not the case at all.  Let’s face it, they’re a pricing system.  When people talk about the “value” of WIP they are actually talking about “the amount we have charged to tasks performed for clients and hope to recover” it is not a “cost we have incurred and hope to recover.”

Because management’s attention is not being drawn to its most profitable (and by implication least profitable) clients and services these are going unnoticed.  I consider this to be one of the main reasons so many firms are failing to achieve their full potential and importantly, why they continue to service clients they should have fired long ago.  But the solution to this weakness is not to trash time-sheets in my view.  The solution is to design time recording systems so that they are a source of valuable management information rather than as a pricing system.

I will address how that might be done and how to undertake an analysis of client profitability in my next post.

Where work is done should not be of any concern as long as confidentiality is preserved, it is competently done and it is cost-effective.  What seems to me to be the important issue is that this work is low value and it becomes high cost when it is not performed with lower cost resources.

Think back to the mid 70’s to the mid 80’s.  At that time, many firms were generating quite substantial fees from write-up work and they saw the “computerization” of bookkeeping as being a threat to their revenue and their “control” over clients.  Indeed, they should have been concerned.  The emerging hardware and software technology was quite obviously going to change the ball game because of its functional power and affordability.  However, those people who resisted this evolution went nowhere.   In adversity there is always opportunity and those firms that embraced it and looked for ways they could actually help their clients implement IT solutions and then re-deploy their resources in higher-value service activities have prospered.

Throughout history we’ve seen major shifts in employment that precede new waves of economic growth as new technologies change the shape of the playing field.  For example in the 1930’s there were 30 million people employed in farming in the US.  Within 50 years that number had dropped to 3 million but during that time farm output increased tenfold!  Where did the displaced farmers go? Manufacturing of course.  Then, again citing US data, in the 60’s 40% of the workforce was employed in manufacturing but by 2000 employment in that sector had dropped to 20% even though output had increased fourfold.  Interestingly, total employment in 2000 was at historical highs so what happened to all the people who were displaced from manufacturing? Answer: they re-skilled and were re-deployed in other industries.  This cycle has been going on since mankind started playing around with fire and wheels.

The big lesson here is that technological innovation radically changes productivity AND industry structure which leads to unemployment which in turn frees up resources that are then able to be utilized doing much more valuable work for clients.  That in turn leads to an increase in wealth and the standard of living for most people.  In other words, a rising level of unemployment is a lead indicator of impending economic growth and new wealth creation!

However, not everyone immediately participates in the growth in wealth.  Success goes to those who adapt and learn new skills the fastest.  Their economic potential is driven by how quickly they abandon old ways of doing things and adopt new innovative ways to use their intellectual and physical resources.

So … here’s a thought.  Why not take a look at outsourcing and instead of focusing on the implementation challenges that are inevitable with the introduction of any new way of working look at the huge upside your mastery of this service offers.  The challenges you might experience will be the source of your competitive advantage because most of your competitors don’t have what it takes to risk embarking on such an initiative (for the record, history reveals that not embracing change is far riskier than embracing it but let’s keep that to ourselves!)

There are several proven successful outsourcing solutions out there one of which is offered by Rydge Business Management—it’s run by wonderful people I’ve known for nearly 20 years based in Melbourne.  In the US I like Xpitax based in Boston, MA and in the UK I’m impressed with IRIS’s solution. When (not IF) you successfully overcome any outsourcing challenges you’ll be able to create a business model that has outsourced compliance capacity at its core with high value-added, premium priced services wrapped around it.

However, I want to SCREAM a word of warning. DO NOT, I repeat, DO NOT implement outsourced tax returns as an opportunity to do more returns at a lower price in order to build your practice.  That is a very un-smart (un-smart is code for “dumb” or “really silly”) thing to do because all you’ll achieve is the opportunity to do more work at a lower margin for people who come for price and will leave for a price.

One of our favorite mantras at Principa is “you are only rewarded to the extent you add value to those people you’re privileged to serve.”  If you want to create more value for yourself you need to create more value for those you serve and they include your team members, your clients and your business partners.  I believe outsourcing is one way you can position yourself to create more value for all stakeholders in your firm.

It’s way easier to get more leverage from your strengths than it is to do so from your weaknesses.  This is not to say your weaknesses should be ignored but they should not take up more than 5-10% of your attention, energy and effort.  The whole point of having a team is to surround yourself with people who complement you, who you are able to delegate those tasks that you are not suited to or that you don’t need to do.

In the course of my research on this I came across this vintage Drucker quote:

The great mystery isn’t that people do things badly but that they occassionally do a few things well. The only thing that is universal is incompetence. Strength is always specific! Nobody ever commented, for example, that the great violinist Jacha Heifetz probably couldn’t play the trumpet very well.

To be successful you must focus on and be remembered for your strengths. Are you doing that? And what about your practice – as Jim Collins says in Good to Great, you should ask yourself the question: what are we capable of being really good at (as in “best in the world”)** and then ask yourself: is that something I/we are or can be deeply passionate about? and finally, will people pay for that?

You’ll notice I asterisked my comment about “best in the world”.  I did so because some people will look at that and immediately say I/we can’t be the best in the world and then forget about it.  BUT, it’s not the destination or the goal that’s important in and of itself.  What’s really important is what you and your team become when you set your mind and direct your actions on that goal. Collins and every “management expert” I have ever read or met all agree that having robust, challenging and worthwhile goals are what brings out the best in people and businesses.

Which wolf are you feeding?

In today’s busy world it is so easy to be drawn into negative thoughts, to complain, to blame circumstances, to become angry and impatient.  And the more we allow this to define our behavior, the worse it seems to get and the less content we are.  In other words, what we give most mental attention to seems to be what actually becomes our reality–a self fulfilling prophecy so to speak.  Now, it is said that 90% of what we do each day is driven by habit.  A habit is simply “learned behavior” so if you can learn a habit you can unlearn it i.e. replace it with a better habit or as the Cherokee might say, feed the good wolf.

My point here is that if you are not enjoying a great life then you are most likely feeding the wrong wolf.  You need to change your habits by consciously eliminating those that you know are not useful to you and adopting those that you know are useful.  I’m told that a habit (of any sort) can be broken withing 3 to 6 weeks but you have to work at it.  Having been a very heavy smoker, I know exactly what this means but I also know that it gets easier over time.  If a smoking habit can be changed so can any behavioral habit!  You can, in other words, dramatically change your life simply by consciously looking at your behavior and taking a decision (i.e. thinking about then acting upon) to adopt a different thinking habit.

I’m in the process of reviewing questionnaires from people who will be attending a Boot Camp in London and a fairly typical response to a question I ask on “your key frustrations” is something like: “lack of original thinking from the team and the speed with which they deliver.”  I have heard this a thousand times and I can say with confidence that as long as you believe (i.e. think about) your team members lack the ability for original thought and/or are inherently slow, that will continue to be the prevailing outcome.

People under-perform for one of two reasons: indifference or incompetence.  If it is the latter get rid of them.  If it’s the former, you need to ask yourself why is that person indifferent?  I’ll bet you’ll find the answer in the area of communication and since what you think about (that person and his/her ability) determines what you talk about I suspect you’re allowing yourself to be drawn into negative thoughts about that person.  This will result in you being unwilling to stretch that person through delegation, a reluctance to invest in training and a failure to help that person see the “big” picture (your vision) for your business and how s/he fits in with that.

When I meet with the Principals of firms that are doing extraordinarily well financially, the defining characteristic that separates them from those that are not doing anywhere near as well is in the way they talk about their people, their clients, their vision for the future of their firm and their passion for what they are doing both personally and professionally.  These firms are drawing their team members from exactly the same labor pool,  they service the same type of clients, offer the same type of services, use the same technology as other firms and yet they are getting superior results.

It is not, therefore, a question of what resources you have to work with it’s how you work with these resources and the “how” comes back to what you think about.  If you think the same thoughts as “winners” and if you believe you will experience the same outcomes as they do you will be a winner, it’s really that simple; it’s called modeling excellence.  This is something that Kerry King will be talking about at our Annual Conference in Brisbane next week.

I’ll leave you with this thought from Jack Canfield, author of the best selling Chicken Soup series of books.

Do you realize that your life at this very moment is the result of everything that you have ever thought, done, believed, or felt up until now? You can start right now to consciously and delibrately attract whatever you desire in the lifetime.  Through the Law of Attraction, you can attract people, resources, money,ideas, strategies and circumstances–literally everything you need to create the future of your dreams.”

Something to think about?  I’d welcome your thoughts!

I recall reading an excellent comment on this by Hans Finzel in his book, The Top Ten Mistakes Leaders Make.  I quote:

No one likes to live under dictators–they take all the fun out of life and work! Dictators in the business world hog all the decision-making. They feel that by virtue of their ownership, position, intelligence, or birthright, they are in charge of every key decision that will be made in the company or organization. These traditionalists do not see the value of facilitative leadership or the power of teams.  Needless to say, dictators attract weak workers and cannot create a positive, empowering workplace.

I often wonder how common this style of leadership is in professional service firms.  I believe it’s more common than many people think or are willing to acknowledge.  What a huge cost that is to the growth of the firm, its clients and especially its team members.