Category: Your Practice

I’ve been in Paris for the last couple of weeks taking some time out to think and reflect on our illustrious profession.

There’s a place not far from our apartment called the Place de la Concorde. It’s where 2,780 people lost their head to Dr Guillotine’s invention during the revolution of 1790’s.

Visiting this place reminded me of a thought expressed by Seth Godin in his book “Small is the New Big” when he suggested that in life and in business people typically fear advocating a product or process innovation because it’s accompanied by a risk of failure.

For this reason, he suggests, people will naturally tend towards the low-risk status quo. The status quo doesn’t have to be defended and because people are, by nature, optimists who believe the present will continue forever it is a safer refuge than advocating an edgy innovation no matter how important it may be to the future success and perhaps survival of the business.

Godin likens this to a preference for the rack over the guillotine. “… almost no one worries about the rack. We don’t quake in our boots about a layoff that’s going to happen in two years from now if we don’t migrate our systems before our competition does. We’re not afraid of stagnating and dying slowly. No, we’re more afraid of sudden death, even though the guillotine is probably a far better way to die.”

This might appear to be somewhat gruesome dialog but I think Godin is absolutely right. I believe one of the reasons so many organizations do not achieve greatness is because their people are intent on walking in step with the status quo. They will do this even when they feel in their bones that change is necessary if not to survive then definitely to get ahead of the pack.

Greatness is achieved when people think AND ACT outside the box. The status quo never lasts. Change is inevitable and firms that do something—anything—different are always the ones that end up leading the pack.

What’s really interesting about this is that it tends to be smaller firms that are the most innovative and who at the end of the day grab a lead in the “growth stakes” but then they get bigger and what got them there gets lost.

There’s a time honored principle that’s alive and well in the accounting profession which every client I talk to is well aware of, yet so many practitioners fail to act on.

Not all clients bring the same value to the table.

This is well understood by top performing firms. However, most firms are willing to accept any new client who walks through the door without giving consideration to whether a profitable relationship is likely to be created. It’s more like…”If you have a pulse? We’ll work with you”!

A North American study found that in the financial services sector, 20% of clients contribute on average 225% of a firm’s profit and the remaining 80% consume 125% of profit.

I’m not suggesting that this applies to your firm but I know from our involvement with thousands of firms that the cost of servicing the bottom 80% of clients is between 25% and 50% higher per hour than the top 20%.

I also know that the quality of referrals from the bottom 80% of clients is nowhere near as good as it is from the top 20% and yet for many firms, most new growth comes from acquiring low level clients.

The key to client selection is to identify and nurture clients on behalf of whom you can add most value. They have the greatest potential to grow as a direct consequence of working with your firm. These firms are fiercely loyal and become strong advocates.

Boot Campers and Principa firms around the world have been using Principa’s 11 point Client Selection Criteria for the past decade. Among other things, it recommends assessing the potential client on the basis of the number of years they’ve been in business, their willingness to listen to advice, the competitive landscape in their industry, their personality, their profit improvement potential, the degree of sophistication of (or lack thereof) their management processes and planning systems are important considerations when selecting clients.

It gives me a great kick to hear about the long-term effects on practice growth and the quality of life our members are enjoying as a result of applying the Client Selection Criteria. Like the email I received from Mike Amspacher (Vancouver, Washington) a little while back. In it he describes how the bulk of his referral work now comes from his ‘A’ class clients and new clients are coming to him specifically because of the value added services he offers.

In a similar vein I received a note from Tony Wolf, a Canadian practitioner, who told me that after 3 years of diligently implementing our client selection strategies he and his team are making more money than ever before, they’re loving their work again, they barely work overtime and have a fantastic group of clients.

And Peter Cox, a UK practitioner, has strict client selection criteria including a mandate that the minimum fee is £2,500 (about $US5,000). Guess what’s happened to his profitability since he implement these policies. More to the point, guess what’s happened to the quality of his clients and the quality of work he can now do for them because they are not totally focused on getting the cheapest job done.

The kings of client selection are my good friends Paul O’Byrne and Paul Kennedy who have an enormously successful practice in Goffs Oak, London, UK. They down-sized their client numbers from 550 to about 50 and super-sized their minimum fee from £1,000 to £10,000. Needless to say life is a lot better for them, their team and the clients they now work with.

To discover how they did it and how you can too, you’ll want to participate in the workshop they are leading at our Annual Conference in Vegas this October.

If you want your firm to shine you must have a shining client base.

Andy Grove of Intel once said “There is at least one point in the history of any company when you have to dramatically change to rise to the next performance level. Miss that moment and you start to decline.”

I wonder how many opportunities to achieve great things are lost because of the “missed moment”. I suspect it explains why so many practices grow rapidly to a point and then seem to stagnate and/or decline.

It also explains why some new kids on the block seem to be able to put firms together that have a refreshing feel about them and represent a viable alternative to the established organizations. These firms experience rapid growth and often race past the established firms with respect to profitability, the ability to hire and retain talent and the quality of new business they attract. These firms represent the new order.

But once the new order has become established, complacency sneaks in, a fear of losing market share emerges, innovative energy subsides and “the moment” is 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.

And those results are not always great. In fact they are scary.

The Australian Bureau of Statistics Accounting Practices Survey (2001-02) notes on page 4 “Despite a growth in the activity of accounting practices, profitability declined since 1995-96, decreasing 0.6 percentage points from 19.4%. Profitability continued to decline since 1992-93 when the operating profit (before dividends and drawings) was recorded at 20.5%”

Taken over the longer term it looks even worse than that. For smaller practices with less than 10 partners, here are some disturbing trends.

This graph shows accounting firms have been able to generate more fees (in CPI adjusted value) over the past 30 years. Technology has obviously played a role in that. Interestingly smaller practices have seen the highest productivity gains as shown below.

And as you’d expect this has enabled less people to do more work so the number of team members per partner has fallen.

So far so good. With labor costs rising all the time we might reasonably expect the productivity gains from technology to be reflected in a bigger bottom line. WRONG!

When Net Profit per Partner for 1971 is expressed in 2002 dollars we discover that it has actually fallen. What’s gone wrong?

Obviously this does not apply to all firms. I know lot’s of firms that are doing fantastically well. But I think the profession as a whole is suffering from a malaise.

Why is this happening?

My thoughts on this are as follows:

Technology has flattened firm structure so that higher level people are able to do lower level work, not because they should but because they can. Because clients are vocal in their concern with fees, some firms have been experiencing horrendous write-offs (in the range of 30-40% in some cases and typically in the 10-18% range).

Clients have become less loyal, more mobile and much more vocal about fees especially in the face of increased compliance requirements mandated by the government. Additional compliance costs are the necessary evils of business and the work is not viewed as being valuable. This has served to keep charge rates down and/or write-offs up.

The use of timesheets as the exclusive basis for billing is likely result in downward fee pressure for several reasons:

· To the extent that technology-driven productivity improvements leads to improved faster throughput because of better workflow management or higher first pass yield, the savings are passed on to the client in the form of lower real costs when timesheets are used for billing.

· Work that is considered low value by clients is assigned the same hourly rate (when done by the same person) as work that would otherwise be seen as being higher value but it is always the lower value work that sets the perception of overall value received.

· A reward structure that gives a strong emphasis on time causes higher value people to hoard lower value work which has a huge opportunity cost because although they are “busy”, they are neither seeking nor doing higher value work. Once again this negatively impacts clients’ perception of value and keeps charge rates down.

I believe inter-firm comparison and best practice benchmarking studies contribute to industry complacency and a migration towards mediocrity. Simply put, human-kind has a heard mentality. We tend to feel comfortable going with the flow and as long as we’re performing more or less at the same level as others around us we’re content with life.

At the risk of appearing to contradict myself, I do not believe that these studies are useless. In fact I find them very useful to identify potential and in particular to remind under-performing firms that there is room for improvement. But I also believe they can stifle innovation by encouraging under-performing 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 has very little product or process innovation.

Finally, the barriers to entry for this profession are low while the barriers to exit are high. This is one of the main reasons for the industry being so highly fragmented and explains why prices are below what they would be with a higher degree of consolidation. A discussion of this is best held over for another day because it addresses the whole issue of industry economics and structure. Suffice it to say that the price floor in highly fragmented industries such as the accounting services sector tend to hover at a level just high enough to keep the marginal service provider in the industry and this serves to pull all prices down.

The consequence of this is that the consumer of the services of accounting firms has been the consistent beneficiary. However, those firms that choose not to play by the “industry rules” and instead offer innovative (true value added) services, innovative pricing systems, innovative delivery models and innovative organizational structures can and are doing extremely well. These are the firms that are ready and willing to move when the “moment” arrives.

One of our North American PDA’s recently received the following email from an Alliance member:

“I delivered the tax return along with the additional financial reports from game plan, and briefly explained what was in the report to the general manager who is also one of the owners. As part of our plan for our firm for 2007, I raised the fee for the year end accounting and tax return by 15% and also added $495 to the invoice for the game plan reports. The general manager asked me how much more would it cost for additional copies of the report for the other owners to have for their next meeting. I told him there was no extra charge for additional copies. I left with a check for the total amount. Also it could result in more work after tax season is over. This is one of the game plan files I emailed you. I’ll want to get more ideas from you on this one as I move forward.”
David H.

How easy is that? Not every one of your clients will respond in this way but you might like to do the calculations on what the impact would be on your cash flow and profit if 25% of them did!

Most clients love this stuff and the perfect time to raise it is when you are delivering their tax return. Those that are not interested in an analytical review of their business should be de-selected as clients unless you can justify their presence in your book of business for some other very good reason.

One of the things that jumps off the page in David’s feedback is the phrase “…it could result in more work after tax season is over.”

I would love to see that language change to “… it WILL result in more work after tax season is over.” It’s certainly not too late for David to follow this up.

He’d simply do that by contacting the client and saying something like:

“… I’ve been thinking about the conversation we had back in March concerning your 2006 results. I’ve taken a quick look at the profit improvement potential for your business and I think we should get together because my preliminary analysis looks very promising. Would next Wednesday at 11am work for you?”

But the best time of all to get this conversation happening is when your client sees the GamePlan reports in the first instance. That’s when the client is thinking “WOW, that’s pretty neat.”

At that moment in time you can say something like:

“So much for last year . Let’s take a peak at what next year could look like if you were able to make a few minor improvements.”

In other words, switch the conversation from the past to the future—that’s where your clients like to be and frankly, that’s where their head should be. The Profit Improvement Potential screen in GamePlan is perfect for this discussion.

The dialog that naturally occurs when you talk about the 4 Ways to Grow a Business gets your client thinking about the idea that small (and therefore doable) improvements can have a dramatic impact on the bottom line and therefore the value of the business.

Your job is to help your client see that with your guidance all of this is possible and the payoff is significant. At the very least you can expect to get a periodic performance monitoring engagement using our Business Dashboard and occasionally you’ll get a full blown external CFO engagement.

Notice David also mentioned that, in addition to charging an extra $495 for the GP report, he increased his fees by 15% across the board. David has confirmed that he has had virtually no drop off in business. When clients are lost as a result of a rate increase they will almost always be clients you should not have been servicing in the first place.

When you accompany a fee increase with the delivery of additional value (at virtually no incremental cost to you) in the form of a GamePlan report I doubt that you’ll have much negative impact at all. Take a look at your own situation with FirmPlan and calculate what a fee increase of 15-20% would do for your bottom line.

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

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

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

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

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

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

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

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

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

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

I’ve always believed that a professional CPA has a duty to offer services to his/her clients that have the potential to create value. Clearly not every client will be open to such offers of assistance which is fine, but we must not mistake rejection by some clients to mean all clients are similarly disposed.

When I look back on my career in public practice, the moments that have real meaning are those when a client (or spouse) has thanked me for the work we did to take advantage of the many hidden opportunities in their business. It is so gratifying professionally to know you have had a big impact of another person’s financial wellbeing but more often than not, that will only happen if you sell yourself to your clients and prospects.

Having said that, CPAs (me included) are not known for our selling skills. I think it’s fair to say that most of us didn’t enter this profession with the idea that we’d be salespeople. However, unless our clients and prospects know exactly what we can do for them they will never think to ask for our assistance with anything other than those services they know we offer. To put that another way, if we keep secret what we could do for a client it will remain a secret. This is a lose-lose outcome.

After using the Mutual Commitment Statement (MCS) as an essential element of my sales process I found that I not only “closed” more sales but I also benefited from a steady stream of quality prospects who had been pre-sold on the benefits of working with us. This takes the pressure off the process of selling and enables us to focus our attention on “what’s in it for the client” issues.

If you don’t already know, a Mutual Commitment Statement is a one page document that recites the commitments you and your client are willing to make to ensure the success of an engagement you are about to start.

You can download a free copy of the Principa Mutual Commitment Statement here – if you haven’t yet registered on the Principa site, you’ll be prompted to do that first (it’ll only take a minute, and it’s free). It’s a valuable tool and I’d love to hear about your experiences with it.

Of all the mutual commitments, the last one on the page is the most important. It states: “you (i.e. the client) will consider referring us to at least one other business person who you believe will benefit from the type of work that we do.” It should not be confused with an Engagement Letter or Fixed Price Agreement.

Some people are removing this statement from the MCS because they feel it is too “salesly”. But the reality is, it is the very statement that gives your client the confidence to go forward with you and enjoy the benefits you will help create. Importantly, it gives you an opening to give the client confidence that you expect to get a great outcome.

To understand how to use the Mutual Commitment Statement to maximum advantage, I’ve put together a 20 minute audio presentation on why this tool is so important to the growth of your business.

Click the “Listen Now” button to listen to this presentation online or download a free WMA file now.

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