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

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.