GamePlan Does It Again: It’s Like Taking Candy From Baby

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.

Escape From the Vortex of Compliance

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.

Is the CPA industry on the whole in a hole?

In 2006 Intuit Inc., the giant financial software company sold US$700 million worth of TurboTax. That was a 25% increase of the previous year. TurboTax is just one of several tax preparation packages on the market today and they are all experiencing rapid growth.

Most CPAs that I hang out with (read Chartered Accountants for my friends in other countries) don’t seem at all phased by the growth in tax prep software and the trend towards DIY services. After all they’ve never really wanted to work with clients at that end of town. But I wonder if we’re missing something.

I have been taking a close look at the US Census Bureau’s 2002 Economic Census that was published in 2006. I know it is based on data relating to 2002 but there are some very disturbing trends that I think most people in our professional are choosing to ignore.

Let me share some thoughts with you.

Back in 1998 I suggested that there would not be consolidation in our industry. That’s turned out to be correct. Average firm size (from both a revenue/establishment and number of team member’s perspectives) has remained virtually unchanged in the 5 years ending 2002. It’s true that there has been a lot of M&A activity going on BUT new firms are popping up just as fast. In fact there was a 19% increase in new firms in 2002 alone.

I also suggested in 1998 that there would be an inexorable downward pressure on margins irrespective of economic conditions. That has also turned out to be correct and, as predicted, has been caused by competitive pressure from new industry entrants, payroll growing at a faster rate than revenue and clients having more choices as to how and where they get their services.

CPA revenue growth per employee has only been 13% in the 5 years to 2002 but payroll per employee has grown at 22% over that time. Margin per employee has therefore dropped by 9 percentage points.
But it’s even worse. This data is not adjusted for inflation which was 12% over the 1997-2002 period! Revenue has only just kept up with inflation.

In fact, my research going back 30 years to 1971 has shown that the average annual growth in net profit per partner in real terms (i.e. inflation adjusted) has only been 1% per year. The beneficiaries of productivity improvements in CPA firms have been clients partly because of ‘competitive’ pressure, partly because timesheets have been used for billing purposes but mainly because CPAs have not appreciated the value they bring to the table and have not been innovative in either their service design, their service offering or their marketing.

This is not what I’d call an industry in great shape.

Little wonder CPA firm owners have found themselves working harder and longer and using every bit of technology to help offset the migration of revenue sharing from owners to employees. Little wonder also, that employees are not lining up to become owners.

So is the industry as a whole in a hole? Perhaps not.

If we include in our industry, firms that are not CPA Offices but nonetheless are engaged in Tax Return Preparation (North American Industry Classification System Code 541213) then we see some impressive growth.

In fact the we see a 50% increase in the number of these firms, we see that their revenue per firm has grown by 66%, we see their revenue per employee grow by 35% and they have only experienced a 27% increase in payroll per employee.

Here’s one conclusion: the tax-only guys are doing a lot better than CPAs. They are stealing CPAs market share big time. On average they pay a lot less per employee and on average their prices are lower. They are largely responsible for holding prices down in the industry as a whole and as a result are causing margins to shrink in firms that are paying higher salaries to their team members. They are not going to go away.

One legitimate strategy that a CPA firm might adopt is to distance itself from the low-level tax preparation business. Frankly I think it’s game, set and match. If the software tax guys don’t get you, the low end tax preparation ones will.

The significance of this suggestion is quite simple. If you are doing any significant number of low level tax returns then you need to organize your business as though you are an H&R Bloch or Jackson Hewitt location – tell your clients that they can see you in Wal*Mart.

Interestingly the NAICS 54 series also includes Management Consultants. These are firms that are primarily engaged in providing operating advice and assistance to businesses and other organizations on administrative management issues, such as financial planning and budgeting, equity and asset management, records management, office planning, strategic and organizational planning, site selection, new business startup, and business process improvement. This industry also includes establishments of general management consultants that provide a full range of administrative; human resource; marketing; process, physical distribution, and logistics; or other management consulting services to clients.

It seems to me that there’s not much in this list of services that a CPA could not do and in fact many are doing. So what’s happening in the consulting sector of the industry?

BINGO!!!!!!

Management consulting firms have grown by a whopping 76% in the five years to 2002. CPA firm number grew at 6% during the same time. To put that another way, the demand for the type of services that management consultants offer (and which CPAs could provide) has grown 13 times faster than the services CPAs typically offer for sale.

There has been enormous growth in revenue in the management consulting sector – 83% over the 5 years ending 2002 and the number of employees working in this sector has also grown by 84% (the CPA sector had a 11% increase) — ever wondered where your potential talent might be going?

Revenue per employee was $148,000 in management consulting firms against CPA firms generating $113,000 and that number includes the big guys as well. Take them out of the picture and CPA firm average revenue per employee in 2002 was just $95,000.

My conclusion here is that the consulting guys are creating more value, therefore getting higher prices and even though they are paying higher wages to employees they are enjoying a higher margin spread.

Interesting stuff no matter how you look at it and this is why we have such a close relationship with Ron Baker and his passion for Value Pricing.

US Census Bureau – 2002 Economic Census

$ Amount 2002 Growth 97-02

Firms

Revenue / Firm

Revenue/ Employee

Payroll/ Employee

New Firms 02

Number of Employees

CPAs

56,720

855,938

112,477

47,650

9,072

431,832

5 Yr Growth

5.7%

19%

13.4%

22.3%

19%

10.9%

Tax Preparers

19,222

283,330

19,992

6,559

5,261

272,411

5 Yr Growth

49.8%

66.4%

35.2%

22.3%

37%

84.4%

Management Consultants

48,260

1,083,503

148,468

64,026

14,849

352,195

5 Yr Growth

76.1%

4%

8.5%

4.9%

44%

68.8%

You will not cut yourself to greatness

There are two ways to view an expense. One is to consider it as a cost and the other is to see it as an investment in a resource that contributes directly or indirectly to the revenue your business generates.

The cost perspective tends to invite us to think “reduction” whereas the investment perspective invites us to immediately ask the following questions: What is the return I’m getting for this resource – that is, how does it contribute to revenue directly or indirectly? What can I do to get better value from this resource? Should I be considering increasing my investment here? Is this a long term investment or can I expect to see a return in the short term? How is the effectiveness of our other resources impacted by this one? It is important to think of cost control not simply as cost reduction, but as resource utilization management.

No business can cut itself to greatness. Typically when people look at cost reduction as a basis for profit improvement, they quickly discover that there are relatively few things they can do other than look to deal with a lower cost supplier. The saying “you get what you pay for” is true and unless alternative vendors can match the total service you now receive, switching needs to be considered with caution.

One of the main reasons cost-cutting exercises rarely achieve the desired results over the long term is that the wrong criteria are used to determine what costs to cut. If you look at each line item on a P&L you should be able to classify each expense as “discretionary” or “non-discretionary”. Discretionary expenses are those that you can actually eliminate or reduce by means of a management decision in the short term. Non-discretionary expenses are those that you are contractually tied to or which simply can’t be reduced unless you closed your doors.

If you take a closer look at these expenses you’ll find that the non-discretionary expenses are the ones you must incur to produce this year’s revenue whereas the non-discretionary expenses are the ones you need to grow your business, that is, produce next year’s revenue.

When you cut expenses, more often than not you are limiting your future. To put that another way, a focus on cost cutting is going to keep you where you are and over time you’ll find you’re left behind by your competitors. The key is not to cut costs but to continuously perform a return on expense analysis (ROEA) and to implement process improvement initiatives to ensure that the get the most out of the resources your expenses are giving you.

This type of analysis, by the way, is an invaluable service you can provide for your clients.

The biggest cost of all. This is related to the above comments on cutting costs. The cost of the lost opportunity is by far the biggest cost incurred by most businesses, and because it is rarely associated with a transaction its impact is never known.

For example, the value to the firm of a client who left because a phone call wasn’t returned, the prospective client who never signed on because your firm did not appear to be any different to the rest of the pack, the team member who left because the firm didn’t listen to a grievance. You won’t find the cost of these sitting neatly on your P&L Statement. They will be hidden in the revenue that was never earned, in the write-offs that you have suffered and in lower levels of resource productivity across the board.

Commitment as a Sales Strategy (Without Selling).

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.

http://principa.net/images/listen_now.gifClick the “Listen Now” button to listen to this presentation online or download a free WMA file now.

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