Ric Payne's Blog: The Consulting Accountant

Jim Press, a senior executive at Ford Motor Company, laughed when he heard Henry Ford II announce that Ford would “push the Japanese back into the ocean” with their new vehicle, the Pinto. Realizing the writing was on the wall, Press left Ford in 1970 to join Toyota and went on to become its North American President. By 1971 Toyota had sold more than 300,000 Corollas in the US which was considered “nothing” compared to the big guys and the company was considered to be a mere fly in the ointment (but one to keep an eye on) by the big US car makers.

They held this view despite the owners of Corollas considering the vehicle to have far superior quality and value than anything the US was producing at the time with vehicles in that class (its price was under $2,000). By 2008 Toyota had grown to be the biggest car maker in the world. It is also the most consistently profitable, never having made a loss since 1950 while the others have had a bottom line that traces the path of a roller coaster.

Toyota’s success is generally accepted as being due to its never-ending pursuit of excellence in everything it does. The Toyota Production System (TPS) is the world’s leading “lean manufacturing” system and while other companies have tried to emulate it, few have succeeded.

If you’d like to learn more about Toyota’s success I strongly recommend David Magee’s book How Toyota Became #1: Leadership Lessons from The World’s Greatest Car Company. I’d also recommend Jeffrey Liker’s book The Toyota Way if you have clients in manufacturing and would like to talk to them about the essence of lean manufacturing. I’d also recommend Liker’s book for your own business.

This is all interesting stuff but the big point I want to make is that Toyota’s success is attributed to 4 things:

1. Its total focus on delivering quality to its customers and giving them what they want through a process of continuous consultation and continuous improvement (kaizen). The underlying philosophy of its business model is the customer comes first, employee satisfaction and happiness is paramount and stable corporate management.

2. Its willingness to take a long term perspective on everything it does. It takes quite a long time to figure out what it’s going to do but once it knows that, it executes very quickly and effectively.

3. Its realization that time to market, waste minimization and customer retention drive improved quality and lower cost. At Toyota, management concentrates attention and resources on getting these things right (“it pursues perfection relentlessly” according to Magee) which then drives earnings and shareholder value growth.

4. It gives total attention to detail and makes sure that the “little things” in every facet of its business get done extremely well.

And point 4 brings me to broken windows.

I have just finished reading a fascinating book by Michael Levine called Broken Windows, Broken Business: How the Smallest Remedies Reap the Biggest Rewards.

The broken window theory was first posited by James Wilson and George Kelling in 1982 in an article published in the Atlantic Monthly. They suggested that something as small as a broken window in a community signals a lack of care and attention by the owner. This in turn suggests that more serious infractions such as graffiti, theft and violent crime might also be condoned.

Wilson & Keeling (together with police departments around the world) suggest that if a broken window is left it will not be long before all the other windows are broken. This hypothesis is supported every time you see an abandoned motor vehicle on the side of the road—if it’s left for a few days it’s not very long before everything is stripped off.

When Rudy Giuliani became mayor of New York City in 1994 he and his new police commissioner, William Bratton, decided that they would attack serious crime in the city by eliminating graffiti on the subways and moving the hookers and pimps out of Times Square to make Manhattan more family friendly.

Giuliani and Bratton were laughed at by critics but their actions sent a clear message to criminals and citizens generally that a “zero tolerance” policy would apply to ALL crime in the city. Over the next few years there was a dramatic reduction in the number of murders, assaults, robberies and other violent crimes. Social psychologists argue that by giving attention to what might be regarded as the little things, serious lawbreakers are being sent a message that much harsher penalties will apply to more serious crimes. Furthermore, the law-abiding community also gets the message that someone is in charge and the improvement in the social climate invites community pride which in turn encourages even more community improvement.

Levine addresses the relevance of the broken windows theory to business in a fascinating manner. Every business has some broken windows and customers notice. As a result, opportunities are lost without anyone ever really knowing why or what they could have done about it. The book is about how broken windows happen, why they are ignored and the consequences when they are allowed to go on unchecked.

Way before Giuliani became mayor and Levine wrote his book, Paddi Lund, an Australian dentist, understood the broken window concept and its relevance to business.

Paddi understood better than anyone (it seems) that people could not make a judgment about how good his dental work was because they were unqualified to do so. If his patients (or prospective patients) could not make this judgment then it would be very difficult for him to differentiate his service from other dentists. This would make it difficult for him to market his business even if he was allowed to by his professional body—which he wasn’t. And even more important to Paddi was the desire to create a business that he and his team enjoyed being a part of—a happiness centered business—if you will.

So Paddi came up with some of the most amazing strategies you could imagine built around giving attention to the little things—he refers to them as Critical Non Essentials—that change customers’ perceptions of him and his business. Things that turn them (and his team members) into raving fans who have enabled him to create a phenomenally profitable dental practice and an equally successful publishing business.

Paddi Lund was a keynote speaker at our Practice 2020 Annual Conference in Brisbane, Australia. He talked about the systems he’s developed and implemented for marketing, customer service and building a harmonious organization. If you’re looking for a way to differentiate your own firm whether you make cars or fill teeth, or you would like to be able to help your business clients look for a different way to get a competitive advantage, you should read his books. With uncertain economic times ahead it’s going to be even more important for businesses to find ways to get ahead of the pack and Paddi holds a key to that.

In a recent interview recorded on one of Australia’s leading radio networks Paddi talks about some of his ideas. Click here to listen.

A friend of mine gave me a copy of a “wish list” he created when he was looking for an accountant to do his work. I thought you might be interested in what he regarded as being important. You could even take it further and ask yourself how you and your firm stacks up. Here is his list:

Simplicity – systems and advice to keep our accounting processes and a hand-over easy.

Truth – if you don’t know the answer, say so. If you make a mistake, say so and let’s move on.

Expectations – accurate estimates of fees and time to complete before the work starts, no more than 10% out when it is finally billed.

Proactive – look over my shoulder and tell me when you think what I’m doing could be improved, share your knowledge and experience with me.

Aggressive – but don’t over-complicate and not at the risk of an audit by the taxation authorities.

Stability and accessibility – a consistent Key Contact person to deal with so there’s no chopping and changing contacts and having to re-explain structures, goals and setup each time. If you do want to change your team members around please introduce me to my new “contact person.”

Fees – reasonable and transparent, don’t make me pay for your mistakes or lack of experience.

Cashflow – ability to balance payments over the year (happy to do that in advance).

Management – if work can be done by a member of your staff that’s fine, but don’t abandon me completely.

Timing & Contact – two main contacts a year initiated by you: tax planning during the last 2–3 months of the financial year and a review meeting within 2 months of you receiving my books.

In response, his new accountant (who incidentally committed to all of his documented expectations) gave him a list of characteristics that reflected what he was looking for in a client:

Trust – I need to be trusted to be able to a proper job.

Openness – In working with any client it is frustrating, and prevents me doing all I can, if you do not give me all the information I need. Because of the nature of my job this requires that you be totally open about your affairs, otherwise I may give inappropriate advice.

Feedback – I would much prefer clients to be totally honest about how they feel about my firm’s performance – feedback (good or bad) is how we’re going to improve.

Defined Expectations – I prefer to know what you expect from me. Do you just want tax returns and no advice, or are you looking for more than that.

Response to queries – Obviously a timely response to requests for information from clients assists me greatly and enables me to provide you with a much better and faster service.

Time frame for work – I need clients to understand that we are all busy and work can’t always be done instantly – I expect my clients to be reasonable in terms of times frames for work my firm does for them.

I would be interested to hear what you think your clients are looking for in the relationship they have with you and, importantly, what characteristics you consider to be important for defining a good client.

“In times like this we get greedy.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

My other observations:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I read lots of journals. But Vanity Fair is typically not one of them. However, I hang my head in shame and fess up to glancing at the April 2008 that was sitting on our coffee table. I noticed an article about Calvin Klein’s recent sale of his business for $400 million and some change ($30 million) in Phillips-Van Heusen stock.

A paragraph about Klein’s early life jumped off the page and once again reminded me that irrespective of the business you are in the fundamental rules—truths if you like—are much the same in all industries.

Klein, like most extraordinary people, came from a rather humble beginnings. His father was a very hard working owner of a grocery store in Harlem. From an early age Calvin would spend a lot of time at the store helping out and talking to his father about the business and especially the cost and pricing of things.

“I would see grapefruits in the fruit-and-vegetable department, and some of them were 29 cents a pound and others were 49 cents,” he recalls. “I’d ask ‘What’s the difference between the two?’ My father said ‘Some people like to pay 29 cents and some like to pay 49 cents.’ I thought, Hmmm, I learned later that that’s the fashion business to a great deal. You pick the spot where you want to be, where you want your products to be.”

After reading this I could not help reflecting on something we have been advocating for as long as I can remember. And that is … you decide what position you want be on the industry value chain and then build your entire product, pricing, communication and delivery strategy around that position.

If you want to be in the 29 cent grapefruit market then you’d better make sure you can sell a lot of them and your costs are less than 29 cents each. On the other hand, if you want to focus on 49 cent grapefruits you won’t need to sell nearly as many given the same cost structure. In fact, let’s assume, just for fun, that at 29 cents Calvin’s Dad was making a GP of 9 cents then he could sell 60% less grapefruits at 49 cents and make just as much as his 29 cent offering.

Now, you might be tempted to say that Mr Klein Snr. was meeting the wants of a wide customer spectrum because that essentially defined the walk-in market he faced, like it or not. So if there’s a lesson to be learned from this it would be that it makes sense for a small local professional service firm to do the same? This is a good point.

Here’s my response. In the 40’s and 50’s small local stores like Mr Klien’s were common and by necessity did have to meet the market which included a wide customer spectrum of people who lived within walking distance of the store. But that was before people moved into the suburbs and began to patronize suburban shopping centers featuring Wal*Mart and the other major supermarket chains. The face of retailing dramatically changed in a relativey short period of time. The big guys are the ones that now sell grapefruits for 29 cents and although there are still businesses like Mr Klein’s in the inner cities the ones that are doing well (e.g. Seven-11 stores) have implemented a different strategy. They no longer sell 29 cent grapefruits, they sell convinience which is the generic industry name they have assumed. Because they sell “convinience” they are now firmly entrenched in the 49 cent grapefruit business. These stores would not even think of trying to compete against Wal*Mart et al.

The most successful small firms I see today as measured by net profit per owner and growth, are smaller firms (generally in the $1–$10 million fee range) that know exactly where they are on the value chain—the upper end. They do not deal in the 29 cent grapefruit market but provide a wholesome, client centric, value priced range of services that many customers are willing to pay for; those people who do not want to pay are referred elsewhere. These firms do not try to be all things to all people, they are focused on creating value for people who acknowledge the value they offer.

There are four lessons I think we should learn from this story.

First, when industry structure changes the firms that recognise the direction of change early and adapt will thrive.

Second, it’s amazing how changes that occur in one industry can be observed in the evolution of other industries. This is a valuable learing opportunity.

Third, as the distance between buyer and seller shortens (whether because of location, transport infrastructure or communication technology) the best performing small service providers are the ones who specialize in a niche (market or product) that is hard for large firms to cost-effectively replicate e.g. one built on an intimate relationship with the client.

Finally, and most important, as Calvin Klein discovered, “You pick the spot where you want to be, where you want your products to be” then build your business operating model around that position. If you want to simultaneously be at another point on the industry value curve then create another brand with a different price point and a different value proposition.

I was talking with a member the other day and she promised to send me a document by the end of the week. A short time later she said “you’ll have it by am Saturday.” I said, “is Saturday the end of your week?” to which she replied, “it is during tax season!”

Rick Telberg, who writes a great newsletter for the AICPA, reports in the February 4, 2008 edition that 98% of CPAs he surveyed report some level of stress and a very significant 57% admitted to being frequently stressed or at crisis point. The US may have a worse “busy season” than most other countries but accountants I talk to around the world tell me that they are working harder and feel a lot more stressed than they have in the past.

More than 90% of CPAs work more than 50 hours a week during busy season and a staggering 30% are working more than 70 hours. Equally importantly, 58% are working more than 50 hours over the full year! During tax season, a 6–day week is the norm for most firms. If nothing else this gives meaning to the phrase “…for goodness sake get a life.” It also explains why young talented people are looking for a better way to earn a living than a career in public practice.

For the past several years the top challenge faced by accounting firms has been the attraction and retention of talent. Various reasons are commonly advanced for this including: the buoyant economy (until recently anyway), more legislation-driven compliance e.g. SOX, a shortage of graduates (that is now changing) and I’ve even seen time sheets being blamed for the high attrition rate.

This situation seems to be accepted as the “given” and the solution I see most often has been to try to change the environment. For example, let’s bring in pizza, have fun breaks, close at noon on Friday’s after busy season is over.

But it’s not an environmental problem. I firmly believe the problem is that leaders of firms that are suffering have lost sight of their own and their firm’s purpose. Is that purpose to create value for clients and capture a reasonable share of that value for the firm? Or is it to be all things to all people and to provide a service that is as cheap and fast as possible to as many clients as can be accommodated?

Ron Baker, of the Verasage Institute, says “bad clients drive out good ones” — he considers it to be so important he refers to it as Baker’s Law. I agree with him and think we should add an extension to define Baker’s Law 2.0 as “bad clients drive out good clients and good team members and in the process, drive down the capacity of the firm to create value for its clients, its team members and its owners.”

There is one over-riding characteristics of a good client and that is someone who is willing and able to benefit from the work you do. If the client is too small (or too large for that matter) to really benefit from a professional relationship with you then you’ll be unable to create much value and therefore you’ll be unable to capture much value. Your effort, in other words will be wasted.

I would also add a few other criteria that I consider to be important. Is the client pleasant to deal with (life is too short to put up with arrogance and rudeness)? Does the client have a positive disposition (beliefs become outcomes)? Is the client organized and willing to do his/her part to ensure that a mutually beneficial relationship exists (this includes being willing to work with the delegates)? Is the client growth-orientated (when your clients grow you grow)? Is the client in an industry that has a bright future (you can help turn a client around, you can’t generally do much to save an industry)? Is the client receptive to your advice and assistance (for advice to have value it must be acted upon)?

You’ll notice I haven’t said anything about the client’s value as a referral source or his/her promptness in paying your bill. My reason is these outcomes generally follow when you have clients who meet the criteria I have described. Delighted clients are those who recognize the value you have created, they are therefore willing and able to pay you, they are also willing to refer you (to like minded people) because they’re confident that you will not let them down.

I believe poor client selection (and retention) is the root cause of work-related stress, mediocre financial performance and the inability to attract and retain talented people (which in turn leads to stress and under-performance.) Sadly, most firms have way too many “poor” clients. These are not necessarily bad people but they are consuming the firm’s resources that could be much better deployed.

Tom Vermeulen, a member of the Principa Alliance who has a practice in Ripon, California, was diagnosed with a terminal condition several years ago. Fortunately, the diagnosis was subsequently found to be incorrect but it caused him to re-think what he was doing with his personal and professional life. After he recovered from this traumatic experience he attended a Boot Camp and proceeded to implement change in his firm.

Tom truly understands the meaning of the phrase “I choose to work with clients who will benefit from the work I can do.” In fact in the past year, he has been engaged by 20 clients to provide monthly or quarterly monitoring as part of a Management Control Plan. His total fee from this group of clients exceeds $100,000 but not only that, he’s enjoying the time he spends with them and both he and they know he’s making a difference. I should also add that he is amongst the top 5% of income earners for firms of his size (11–12 team members) in California.

I believe there is no excuse for being stressed in busy season. Purge yourself of work that is low value and use the time that would otherwise be invested with those clients in a much more productive way. That might even involve taking some time off to reflect on what you want your business to do for you and to do so while remembering that if you continue to do what you have done in the past you will continue to get the same results. The stress will not get less.