November 29, 2009

Actively Manage Your Practice for Higher Profits in 2010

Many accounting firms are managed by continually looking at past events to analyze their practice and make business decisions. Whether it is discovering job overruns in their work-in-process that can’t be billed or reading their financial statements 3 or 4 weeks after month end only to discover that significant losses were incurred the previous month. These events are history at that point in time and cannot be changed. The conversations between partners and employees usually focus on finding fault and to blame the guilty parties. Have you had many of these conversations lately?

• “Why do we have all of this extra time in the ABC audit”?

• “We did this return in 8 hours last year. Why did it take (pick a time) this year”?

• “What happened last month? I had no idea we were going to lose so much money”.
• “Why did (pick a name) only have (pick a number) charge hours last month”?

• “Why did we have such a bad year”?

• And the list goes on

These are not productive conversations. It takes time, spends emotional energy and costs money to measure and respond after the fact or event, waiting to see what has happened and then reacting. Passive management is very costly, especially during these economic times when business decisions need to be made sooner rather than later.

It is most difficult to run any business successfully without current information, defined roles and responsibilities and communicated decision rights. Yet in many public accounting firms this is the case as typically there isn’t the availability of current information, especially concerning hours, budgets and production, roles are confused and in many instances people in the field defer significant responsibility for the job to the partner or manager back in the office. This lack of responsibility does not work in these times of rapid change and economic turmoil as significant economic events often take place quickly. To support this fact you only have to look at what has taken place in the profession since the end of tax season last April. In many firms revenues are off 5%-20% for the year as clients hold back on their discretionary plans and transactions and limit their spending for accounting, auditing and especially consulting services. Requested fee concessions have become routine. In many cases relationships between accountants and their clients have become strained as loyalties have been set aside as competing firms bid for the work at ever lower fees. Where will it stop? I don’t know but I do know that salaries and benefits are now approaching 50% and in some cases exceeding 50% of net collected fees and utilization percentages are near an all time low. The present accounting firm fee structures and costing strategies cannot be sustained in the long term. 2010 is the year to start actively managing your practice for profitability and success.

Active Practice Management

Active management techniques do not require more people or ever increasing layers of management. It does require individual accountability and self-management. Start your profit planning process now by gaining agreement on what needs to be accomplished in 2010 and how it will be done. Here’s what I consider are some the most important profit improvement steps.

Take Action Now

1. Have every partner prepare a plan for 2010 by month which includes net fees by month, hours managed by month and a budget of their time by month. The total of these partner plans will equal the revenue and production budget for 2010 by month. If you need examples of a plan email me Steve@SteveEricksonLLC.com with the subject line Partner Plan and I will send you a detailed excel worksheet.

2. Have every employee prepare an annual plan for 2010 by month that includes charge hours, marketing hours, admin hours and personal time.

3. Prepare a firm wide budget by month for 2010. As the months pass add on another month and make a rolling monthly budget your format.

4. Adopt a firm wide credit policy. Profitable firms must not over extend credit in these difficult times. Also collect your money sooner by using a payment schedule to get payment in advance of the work rather than after the fact. Make sure you are using “stop work” clauses in your engagement letters to limit losses for those clients that can’t pay.

5. Adopt and implement a change order process and use it! “Scope creep” is rampant in auditing and you must manage the process and your clients’ expectations.

6. Prepare budgets for all jobs. Make sure that everyone in your firm understands what is expected of them. Schedule weekly and make sure everyone has something to do.

7. Manage and limit time wasters. Meetings and email waste more time than just about anything else. Hold more efficient meetings and teach your staff how to manage their time and email.

Take Action Monthly in 2010

1. Drive monthly revenue and production goals by managing weekly performance by partner, employee and job.

2. Modify the budget for changes and unforeseen events that invariably happen.

3. Schedule! Schedule! Schedule! Resource management has never been more important. On average the loss of 20 minutes per day per person represents over 5% of your net revenue. The little things have a huge impact on profitability. Keep people scheduled and working.

4. Make sure everyone in the firm knows their assigned roles and responsibilities.

5. Revisit your plans regularly and adjust the rudder. People are dynamic and plans need to be dynamic to make sure they continue to be relevant.

Profitability will soar by managing in the present and making sound decisions for the future. Yes we learn from the past but we want to keep the cost of that education (school of hard knocks) to a minimum. Wishing you improved profitability in 2010!

August 10, 2009

IMPROVING ACCOUNTABILITY IN YOUR FIRM

Improving partner and staff accountability is essential in these economic times. I think many partners associate accountability with increased conflict and typically shy away from addressing the issues. As a result most accountability discussions take place after the fact when there is no possible chance of changing the results. These conversations usually focus on fault and blame and in most cases are not productive and in some instances have had a very negative impact on partner and staff relationships. There is a better way to improve accountability which starts with individual motivation.

MOTIVATION

In Abraham Maslow’s book, Motivation and Personality, he discusses two types of behavior, coping and expressive. Coping behavior is where an individual is reacting to the behavior of others while expressive behavior is doing what is important to you. He further states that an individual cannot be motivated when they are coping with another person’s behavior and will only be motivated they are in an expressive mode of behavior. Of course it is impossible for us to avoid both of these behaviors every day of our lives but what we do want to focus on as effective leaders is to make sure our people are in the expressive mode as often as possible to improve their motivation.

In public accounting the work and in most cases the feedback concerning that work is given after the fact. Review notes about the job, annual performance reviews and in many cases discussions concerning why a promotion or a raise is not going to happen because some unknown expectation has not been met. The one excuse given to most staff when they are not getting a promotion is “You’re just not ready yet” but in most cases they have not been told what it takes to be ready. In effect we place most of our employees and in some cases even partners in the coping mode much too often. If you want your employees more accountable you have to have to define success in advance of the task or period of time by using what I call success plans.

SUCCESS PLANNING

Smart younger individuals joining the accounting profession have in most cases been very successful in their educational pursuits and are not used to failing. This typically is not the case in their first few years of public accounting as it’s not uncommon to feel a little inadequate for the first few years in the profession. I know I felt like I didn’t know much when I first joined the profession and was reminded of it constantly by those above me. Everyone wants to be successful but to do so they have to know how to achieve that success in advance of their performance. Our profession in general does a very poor job of communicating performance expectations according to a national survey of non-owner accountants I conducted several years ago. A significant number of the respondents replied that they did not know exactly what was required to get a raise or get promoted nor did they get the feedback they felt they needed to be successful. What is needed is a formalized process to communicate the requirements for a specific task or position and how success will be measured. If improved accountability is the goal all parties need to know what is required in advance. Review notes and backward looking evaluations might well have some influence on future performance but do not have any impact on what has already taken place. There is a better way to get to get your partners and staff to take ownership and agree to be accountable.

THE CYCLE OF ACCOUNTABILITY, PERFORMANCE AND SUCCESS™

To begin the cycle of accountability, performance and success (CAPS™) the person in the supervisory roll must clearly communicate the ultimate goal and help develop a plan to achieve that goal. Whether the task is doing a tax return, auditing cash, responsibility for an entire client engagement or annual job performance the time needed to complete the cycle will vary significantly but the CAPS™ process follows the same flow.


Too often we try to shortcut the process and then are disappointed when we don’t get the result we wanted because our expectations had not been clearly communicated and success had not been clearly defined.

DIRECT AND SUPPORTIVE SUPERVISION

Staff accountants with less experience need more direct supervision as they haven’t been exposed to the complexities of public accounting before. Specific instructions concerning the steps to be performed, the time expectations and frequent checking and feedback are needed to make sure you get the result you want rather leaving it up to chance.

Supportive supervision techniques are used with those individuals that have more experience. General instructions are given as to expectations and we generally tell the experienced accountant that if they have any questions to please let us know.

Using an inappropriate supervision technique can lead to not getting the job completed timely or successfully or in some cases it can demoralize your experienced staff. Inexperienced accountants getting supportive supervision don’t know when they have a question and experienced accountants will accuse you of micro managing if you use direct supervision techniques with them. You should always consider the individual and the task to be performed to determine which supervision technique to use during the course of the project.

IMPROVE ACCOUNTABILITY IMMEDIATELY

Here’s how you can immediately improve accountability and performance in your firm:

• Communicate your expectations clearly
• Discuss the plan to accomplish the goal
• Make sure the plan is understood and agreed to and that success is defined
• Use direct or supportive coaching/supervision techniques appropriately
• Give timely feedback
• Celebrate success

In future articles I will be discussing success plans for partner and employee annual performance, job performance and career coaching. Please feel free to share your thoughts on these subjects by emailing me or on my blog.

July 24, 2009

CONTROLLING LABOR COSTS IN CPA FIRMS

Salary and benefits expense as a percentage of net revenues is approaching and in some cases exceeding 50% in many CPA firms at this time. Fifteen years ago these expenses averaged around 35% of net revenues. The revenues of accounting firms have not increased at the same rate as salaries and benefits during this period when technology was supposed to save time and help accountants be more efficient. In order to address this issue I think we first need to understand the changing dynamics in the profession and the past events that have brought us to this point.


DEMOGRAPHICS OF THE PROFESSION

The following chart reflects the age and gender demographics of AICPA members:





Source: Misean E. Reed Manager - Diversity, Work/Life & Women's Initiatives, AICPA


For many of you this is not surprising as there has been much discussion in the media and at conferences about the aging baby boomers and the succession crisis. What I would like point out is that the vast majority of CPAs are now 46+ years old, experienced and expensive yet still doing much the same work they did 10 or 15 years ago. The value of the work has not kept up with the salary costs of trained professionals. Yes, a number of individuals have become partners and provide high value services, however their numbers are relatively small when compared with the total number of CPAs. At conferences and meetings where I have given presentations most accountants tell me that at least 50% of their work could be done by someone with less experience. It is no wonder that salaries and benefits as a percentage of revenue are at an all time high as many accountants are not providing commensurate value for the fee being charged. The recent downward pressure on partner income will only become greater as time passes if we continue this current trend. To further understand this problem we have to look at the staffing models and client service strategies presently being used in many firms.

STAFFING MODELS AND CLIENT SERVICE STRATEGIES

When I ask partners why they are doing work that could be done by someone with less experience I typically get two answers, “there is no one to give it to” or “because I have the relationship with the client”. As a result of this type of thinking, the staffing model in many firms looks like an inverted pyramid or an hour glass that is bigger on the top. Using a high cost relationship service delivery structure to provide routine compliance services is typically not economically successful. To demonstrate my point, if a doctor practiced in the same way many accountants do they would call the patient in from the lobby, take their blood pressure and temperature, do the examination, write prescriptions, do the billing, collect the fee and schedule their next appointment. Just think what impact this would have on the cost of healthcare! The accounting profession needs to change from the labor intensive models of the past to a more process driven model that will take advantage of the time and labor cost savings when technology is used correctly. Please note that I am not saying that client relationships are not important, they are extremely important. It’s just that the work needs to be done in a more cost efficient manner.


PROCESSES AND TECHNOLOGY

In most industries, the use of technology replaces labor intensive activities or allows less experienced labor to perform tasks previously performed by higher cost employees. Just the opposite has happened in public accounting. As CPA firms have increased their investment in technology their labor costs have increased to an all time high. This has happened because most CPA firms have evolved and are designed around people rather than processes. When I inquire about certain processes in many of the firms I visit I usually get back the response that “Joe does that” and when I further inquire to see if what Joe does is written down, the answer is “no”. If Joe leaves the firm that part of the process handled by him goes with him. If the firm can’t find another person with Joe’s skills, which is often the case, they split his duties among several different employees making their processes ever more complex! I cannot begin to count the number of times I have seen processes in CPA firms designed to meet the needs of employees instead of designing a process and then hiring staff at an appropriate level to perform the needed tasks. It is time to reengineer CPA firms in a way that will allow for sufficient time to develop and maintain client relationships and provide value-added services while still being able to produce a quality product back at the office in a timely manner. Our industry needs to start thinking about how we can incorporate the “front office/back office” model used in many service industries.


A SUCCESS STORY

I recently gave a presentation at a meeting of an international accounting association on the subject of benchmarking and profit improvement. As part of this presentation I analyzed the member firms financial results for the past year and found one firm that was bringing 50% to the bottom line. This piqued my interest so I had the managing partner from this USA firm explain to the other attendees how they had accomplished this achievement. He stated that he and his partners had started over several years ago and decided that they were going to do business differently. Their oldest staff accountant is 28 years old and their salaries and benefit costs are about 30% of revenues. Partner income is on par with the top 100 firms yet they are about $3 million in size. This is quite a success story and one that can be replicated in most CPA firms with persistence and improved processes.

DON’T TEAR UP THE HOUSE

I told you this wouldn’t be easy but before you tear up the house and make drastic changes let me caution you that this is a journey not an event. Process improvement takes time and thought. If you set a goal of 2% improvement per year for 7 years, a 36% netting firm would become a 50% firm at the end of that time. The important thing is to start this profit and process improvement journey now in order to institutionalize the value of your practice. Here’s where I would start:

Standardize EVERY process in the firm that can be standardized
Document all standardized processes
Deal with exceptions individually, don’t change the process
Gradually reassign appropriate work and tasks to lower level staff
Actively manage the delegation process to insure success
Use non-CPAs whenever possible
Analyze the contribution margin for all clients and develop a profit improvement plan which includes using less expensive labor to perform some of the services
Don’t get side tracked. Keep moving the agenda forward

July 13, 2009

HOW TO REALLY DIFFERENTIATE YOURSELF AND YOUR FIRM

When I’m working at a retreat, a seminar or speaking at a conference just about everyone in attendance rushes out of the door at the break and immediately calls their voice mail. Once they come back in the room I usually ask them why they are so tied to their voice mail and now email. The answer is always the same, “To provide my clients with great client service” but is this really the case? More often than not there eventually will be a client service failure when an individual tries to use a reactionary client service strategy. This is especially true as an accountant grows their practice and their managed work increases significantly. I wonder how an accountant can go to the office every day with the client service strategy that they are going to react to 50, 100 or even more clients they are serving.

EMERGENCY ROOM SERVICE MODEL

The reactionary service model is used in emergency rooms in hospitals; they staff up and wait to see who comes through the door. If you have been to an emergency room lately you have seen that during certain times there are few patients but on the weekend, especially during the night, the waiting area is overflowing and patients are upset about the length of time it will take to be seen. Does this sound like how it is around your office during the middle of tax season? We have the best of intentions however at these times we are just not able to deliver our services to our clients as well as we would like. Almost universally, managing partners tell me that the quality of their client service is not where they would like it to be.

There is one very big difference between our work and the work performed in an emergency room; our work is not dealing with life or death. Some client work might be urgent but most of the work we do is routine, predictable and can be scheduled. Why then are we using a very expensive and hard to manage client service model to deliver our services?

I DON’T KNOW WHEN THE CLIENT WILL GET THE INFORMATION TO ME
The greatest pushback I get from most accountants is that they simply don’t know when their clients will get required information to them. As a result most accountants must react to the actions of their clients rather than execute their own client service strategy which can be very risky. I like to improve my odds of being successful more often rather than less often. In my opinion outstanding client service is the one true differentiator of compliance based practices. Outstanding client service involves defining and then managing your client’s expectations about your services. If you don’t take the time to tell them what to expect they will develop their own expectations which in many cases is not reality.




MANAGING CLIENT EXPECTATIONS

Several years ago my wife had to have some very serious surgery and was understandably worried, concerned and anxious. On the morning of the surgery her young surgeon visited her in the pre-op area of the hospital and we both listened intently as he told us about the surgery and how he planned to accomplish it successfully, what would happen in the recovery room, the pain management epidural in her back that would be used for 3 days and how she would experience significantly increased pain when they removed it and finally, how they would use oral pain medications to again control the pain. He literally painted a picture of the process and clearly managed our expectations and on the third day after surgery when they removed the epidural and she began to experience significant pain I was able to reassure her that it was only temporary and to try to relax and not panic. This young surgeon was a master at managing client expectations; wise beyond his years. It then struck me “This is one reason we don’t always meet client expectations in public accounting because we don’t tell them what to expect”. How could anyone know exactly what our services are and how they will be provided unless we tell them?

SETTING EXPECTATIONS

Partners tell me that they aren’t able to communicate client service expectations to their clients mainly citing three reasons:

1. My clients will not comply with my expectations as to when I will receive their information so why try.
2. If I try to hold my clients accountable and responsible for their required information they might choose to use another accountant that won’t have such a requirement.
3. What happens if we can’t perform as promised?

After hearing these excuses I usually ask them what would happen if they had a dental appointment today and called their dentist stating they couldn’t be there for today’s appointment but will be able to be there at the same time tomorrow. Of course they laugh and say that’s not possible as it might take a month or two to get another non-emergency appointment. This is just my point. The dentist and for that matter most other professionals are better at managing their client’s expectations. Would we change dentists if they told us we couldn’t have another appointment at the same time tomorrow? Of course not as we value the relationship we have with them. As a profession we need to get much better at managing our routine services and not making every engagement a fire drill. Getting the work done becomes too stressful, our employees burn out and our client service suffers.

DIFFERENTIATE YOURSELF AND YOUR FIRM
Delivering a quality product is the minimum ethical and legal requirement for CPAs. Delivering that minimum requirement makes a firm just like everyone else. I do know that a few firms have quality issues but that is clearly a much greater problem than being differentiated in the marketplace. If you really want to stand out in the crowded world of public accounting you have to have client service at a level significantly higher than your competition.

CLIENT SERVICE

As Susan Scott says in her great book Fierce Conversations, you must have great conversations to have great relationships. Break through service starts by having great conversations with your clients. When was the last time you sat down with your best clients off the clock and had a conversation like this?

I want to provide you with the absolute best service and the greatest value possible for the fees you pay me. In order to meet that objective I need to know what decisions you anticipate having to make in the near future and in the long-term with regard to your personal goals and your business?

These conversations are essential because they define your client’s current life situation and their value perspective. Without the conversation you can only speculate about what is really important to them.

After learning more about what they want and where they are going you can participate by helping them get where they want to go and achieve their goals. Your value will skyrocket in the eyes of the client as their perception of your service increases.

Action steps to differentiate yourself and your firm.

• Over deliver and under promise
• Explain your service to your clients
• Change your voicemail daily telling your clients about your availability
• Schedule time to meet with your clients to discuss their life and how you can help
• Pick up the telephone and call your clients to discuss your services. Email isn’t as nearly as effective
• Create a culture of client service in your firm
• Survey your clients and make it easy for them to give you feedback

There are many more ideas to improve client service but these should give you a start.

AS always I would very much like your thoughts and feedback.

May 7, 2009

THIS IS CRITICAL! TAKE IMMEDIATE ACTION!

Client fee pressure is a reality at this time. I recommend that firms take the initiative and discuss this matter with their clients rather than setting back and waiting for them to come to you. When you wait you are placed on the defensive which is a difficult position as their expected response to their fee reduction request is “yes” and the discussion is then “by how much” or even worse yet your competition has already been there and you have lost a client.

Meet with your clients now to discuss their fees and your relationship. In many cases you might be able to reduce the scope or the amount of work you do which results in a lower fee to your client without giving away the store. It also gives them an opportunity to discuss their business concerns with you which in many cases might result in more value added services for more fees.

I call this current economic downturn “prime time” for the accounting profession. Everyone is talking about money, expense control and profitability, the very essence of public accounting. Take advantage of this time by meeting with your clients, discussing their fees and how you can help them in their time of need. This is your opportunity to shine in “prime time”.

Please share any ideas you have to increase the value of accounting services and how to discuss the fee issue with clients.

April 26, 2009

Trust Me on This One

For the past few years I have noticed that more and more firms have started using words like integrity, trust and ethics to describe how they do business. We serve as “trusted business advisors” to our clients. We have “integrity” and operate with the highest “ethical” standards. When I see these words used to describe professional services my first thought is why do they feel a need to say this to the public. Has there been a problem with trust and integrity in the past at this firm? It certainly tells me that they have some questions about it and feel the need to communicate with others.

I can’t imagine going to my doctor and having her tell me that she practices with integrity and high ethical standards that can be trusted. We have never had this type of conversation but she had better practice in that manner or she won’t be practicing for long! The same is true for the accounting profession. We don’t need to be “telling” our clients about trust and integrity, we need to be “practicing” with integrity and letting our clients judge our trustworthiness which immediately makes me think of core values.

Many of the firms I have visited over the years have wonderful core value statements that are not practiced. “We have the highest level of integrity” but yet they talk badly about clients and coworkers. Promises are made to clients but not kept. “I’ll have it to you tomorrow” and then deliver next week, “I’ll call you right back” and then fail to call, “The fee will be XXX” and then send a bill for more than the client was expecting. “We value our clients” and then discuss how to fire them or call them the “clients from hell” as described recently in one publication. The conversations and actions in many accounting firms simply don’t support their flowery core value statements. Their employees see this and so do their clients.

Over the years I have found we think as we speak. If you want to be the firm that practices with integrity and high ethical standards that is trusted by its clients all you have to do is clean up your language and do what you say you will do. Rather simple concepts that will be noticed by everyone in contact with your firm. Your values and your actions will be congruent. Employees will have a higher level of respect for the core values and practice accordingly and clients will share with others that the firm practices with the highest level of integrity and can be trusted as business advisors. Trust me on this one.

April 13, 2009

Little Things Make for Greater Profitability

I've had many managing partners tell me they run their practices are much like the cobbler that walked around with holes in his shoes ran his business. They know better and usually pretty much know what needs to be done. It's the execution that is the issue. How to herd the cats and get everyone marching in the same direction when everyone appears to have differing opinions on what needs to be done. I would hate to tell you how many times I have heard that "we tried to do that one time but I couldn't get everyone on board so I just gave up". Hopelessness creeps in and execution and accountability fly out the window. A very tough way to run a practice.


I find that success is the best motivator to change behavior so I recommend that partner groups start managing the "now" for success. Here are a few ideas:


Not getting charge time-Schedule weekly (see previous post) and monitor daily.


Partners won't bill-Pay a significant return on each partner's cash basis equity or if it still doesn't work only allow draws based upon cash basis equity (sorry partners this is a business, not a job)


Partners won't charge adequately for their work-Set minimum contribution rates per hour for each month of the year and schedule accordingly (contribution rates fluctuate based upon actual utilization each month. I'll have more on this in another post later this month.)




April 10, 2009

START PROCESS IMPROVEMENT EFFORTS NOW!

The first step in your process improvement efforts is to survey your employees to better understand their perceptions about their job responsibilities and daily tasks. Where is time being spent and what tasks add value to your clients and which tasks don’t add value? It is my firm belief that you will be surprised by the amount of non-value added time that is being spent by high cost professionals in the months May through December.

Some of the tasks that come to mind are making copies, watching the printer, e-mail management, the internet and data entry just to name a few. As you can see these tasks do not add value to the client and a CPA license is not required to get them accomplished. Clerical tasks need to be performed by clerical staff. Professionals need to be leveraged. Triage the tasks in your firm and I assure you that profitability will improve significantly. By the way be sure to charge for clerical tasks.

Be prepared for the arguments and barriers put up by your staff by preparing your responses in advance of your process improvement efforts. Here’s a few that come to mind:
  • It’s easier to do it myself.
  • I can’t find anyone to do it.
  • They don’t understand what I want.
  • I like doing the work.
  • The client wants me to do the work.
  • I need the billable hours.
Notice that most of these excuses are put forward to avoid management and leadership responsibilities which are a huge issue in the profession at this time. As you go down the path of process improvement your will find that not only profitability improvement but also improvement in the management and leadership skills of your experienced accountants.

Please share your thoughts and questions concerning profit improvement and process improvement in your firm.

April 7, 2009

STOP EXTENDING UNLIMITED CREDIT!

During these times every firm needs to be more prudent when extending credit to their clients because once the services have been rendered and the tax return or audit is complete your firm does not become a priority for payment for another year. Don't fall into this trap.

A life long friend and mentor who practiced law told me very early in my career to "Get your fee when they need services or risk not getting paid". Over the years this became some very sage advice as it played out several times during my career. In almost every case where I was not getting paid I could look back and see where I was not assertive in collecting my fee.

Many practioners tell me that the collection of fees is stressful as they don't want to upset their clients and risk losing their business. Go figure! This argument reminds me of the housing crisis mess and the number of mortgages that were given to people that couldn't afford the payments. Who is ultimately responsible? The one extending the credit of course.

I recommend that every firm adopt a firm wide credit policy to make sure every client is treated consistently. In this policy require payments in advance of the services being performed and if payments are not made the firm will stop work until the money is received. In addition make sure you have a "stop work" clause in your engagement letters to support this policy. Once adopted, publish it and furnish a copy to each of your clients. Do this now. Life will be less stressful and your firm will be much more profitable.

April 3, 2009

IT'S TIME TO "RIGHT SIZE" AND "RIGHT STRUCTURE"

I wish I had worked to change the framework, rather than to work within that framework”
Timothy Geithner looking back at his time with the New York Fed and how he addressed the banking crisis as quoted in The Washington Post, April 3, 2009

There are times in life when we just can’t get there from here. That was clearly the issue in the banking system and I assume the same could be said about many of our perceptions and traditional ways of doing business. Do we try to manage within our current framework or is it time to change the framework to address the challenges of our current reality? At this unprecedented time in our history I think accounting firms have reached this fork in the road. Is it business as usual or is it time for a new structure and framework for the practice of public accounting? Here’s my take the current situation:
  • Labor costs as a percentage of net revenues have continued to increase for the past 8-10 years now approaching 50 of net revenues in many firms.

  • Fees have not increased proportionately to compensate for this increase in labor costs.

  • Accountants consistently tell me that at least 50% of their work could be done by someone with less experience.

  • As the baby boomers retire there has been and will continue to be a loss expertise in our profession.

  • Many partners are more concerned than ever about the quality and timeliness of their services.

  • Utilization is a major concern in most firms.

  • Technology is not sufficiently leveraged in most practices. In many cases partners have become data entry specialists because they have the software on their desk.

I'm sure there are many more practice concerns that need some attention that I have not addressed but this list should give us a few ideas to begin the discussion. I want to help partners develop new efficient practice models and client service delivery systems that mitigate risk, provide for significantly improved client service and satisfaction as well as enhanced partner profitability.

Please share any thoughts you have about the current situation in your firm as well as any other observations about how this profession can be improved. It is only through public dialog and debate that we will find the solutions to these problems and allow you to achieve the professional life you desire and deserve. I look forward to taking the journey with all of you.

March 27, 2009

IS 50% PROFITABILITY REALLY POSSIBLE?

Yes it is if you change the way that you do business. And this is what this blog is all about, finding ways to improve accounting firm profitability through process improvement, process efficiency, revenue enhancement and expense management. These improvements are necessary due to what I like to call the “perfect storm” that is now taking place in the profession: age and gender demographics, technology, labor costs and the commoditization of core services. CPAs will have to change the way they practice by better utilizing technology and redesigning processes. My premise is that as long as this transition is taking place why not seize this opportunity by redesigning the client service delivery model to increase profitability. Let’s start with some low hanging fruit.

Inefficiency

From current surveys of accounting firms the total utilization of all personnel in most public accounting firms range between 50% and 55%. This means that 45%+ of the total labor efforts in most firms is not being charged to clients and the value of these efforts are not being captured. Increasing the utilization by 5 percentage points (i.e. 50% to 55%) in a ten million dollar firm would drop an additional one million dollars to the bottom line.

The Question: What could you do to improve overall utilization in your firm?


My first thought is to schedule weekly to make sure everyone’s plate is full. After tax season you will start getting those “need work” emails usually from some of your less experienced staff. Keep them busy by requiring that more experienced people push down work that they shouldn’t be doing anyway. Hold a very brief scheduling meeting every Wednesday or Thursday afternoon for the following week. You want have everyone fully scheduled so they can hit the ground running on Monday morning. When firms implement this system 10% improvement in utilization is fairly common.

March 26, 2009

AUDIT FEES NEED TO BE ESCROWED

Given the significant number of audit failures in recent years and now the meltdown of the financial industry in the United States the issue of auditor independence, audit fees and audit quality needs to be addressed. The relationship between auditors and their clients is a fee-based relationship that creates an inherent conflict of interest that can have significant influence over an auditor’s judgment and decisions, whether consciously or subconsciously, as a debtor-creditor relationship is created. In many of the recent audit failures I find they very often have happened due to flawed estimates and judgments. It is my belief that this inherent conflict of interest could be substantially mitigated or avoided altogether by escrowing the audit fees at the start of the audit engagement. This would remove the risk of not getting paid and lessen a clients ability to hold the fee hostage subject to the ultimate audit results.

Audit fees need to be escrowed with a third party in advance of the performance of work. This would minimize any negotiation of audit and accounting standards resulting in more independent and objective audits. There could even be oversight by a third party to make sure the audit has been completed in accordance with Generally Accepted Auditing Standards (GAAS) prior to the disbursement of the final fee to weed out those auditing firms that are not performing their audits in accordance with GAAS. This step alone would have been a real deterrent in some of the recently discovered Ponzi schemes and maybe could have saved investors millions if not billions of dollars.

What the public needs from the public accounting profession is increased accountability. Separate the decisions about money from the audit results and watch the quality of audits improve dramatically. The accounting profession needs to pass a standard that requires that audit fees be placed in escrow before the start of fieldwork. This would also have a positive impact on firm profitability.

March 23, 2009

All Business Is Not Equal

About this time during tax return filing season, CPAs begin making a list of all the clients who have yet to bring in their tax return information. Then they begin calling and begging; “Please get your tax information in to us as soon as possible. If we don’t receive it by April 1st we might not be able to get your return completed by the April 15th filing deadline” (keep in mind there are no additional fees for this). Many clients ignore these idle threats, as they know that most accountants and their staff will work day and night, weekends included, to serve their clients and meet their expectations; even though they are incurring additional costs for overtime and other expenses. Much of this last minute work is in fact, less profitable than the work that can be scheduled in the ordinary course of business.

Most CPAs charge the same rate regardless of when work comes in, or when the services are performed, even when incurring additional expenses. All work is not the same, and CPAs should charge additional fees for work that is more difficult to complete because of client procrastination. Here's the policy I recommend you use to manage the last few weeks before tax filing deadline:

When clients wait until the last few weeks before the filing deadline to bring in their information, we incur additional overtime pay and expenses to get tax returns completed by the due date. Returns that come in after April 1st will be billed a XX% surcharge to cover these additional expenses. We sincerely appreciate your business and thank you for your understanding.

Typically accountants ask me what the surcharge should be. I suggest 50% as it would be enough to get most clients’ attention. Of course any clients that don’t want to pay the additional fee can simply bring their work in on time. Give it a try, it just might work!

If you have any thoughts or comments, or if you have any other ideas to get clients to bring in their information earlier, share your ideas.
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