Profit Points #2 - Handling Scope Creep

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Profit Point # 2 - Handling Scope Creep

During this great recession it has never been more important to manage client expectations.

Remember you get to set your fees.

Unfortunately out of scope work very often becomes a negotiation with the client when it should be a simple change order.

Change the wording in your engagement letters
from “If any matters come to our attention that will increase the scope of our work…”
to “When we discover matters that require us to increase the scope of our work we will discuss the situation with you, amend our engagement letter and increase our fees accordingly.”
Then act promptly when these situations arise.

Standardize your change order process and have materials readily available for everyone’s use.

Realization and profitability will increase... guaranteed.

We recommend having all of your employees and partners sign up for the weekly blast and start your firm profit improvement efforts now!

Profit Points #1 - Stop quoting in ranges...

We've got a new weekly, 1-minute profit tip you can subscribe to!

Get useful tips that you and your entire team can start implementing right away to improve your overall profitability. They'll be posted here over time, but you can get them each week, in order, free!

Here's the first Profit Point:

Stop quoting a range of fees when clients ask about your fee, as the bottom of the range is irrelevant.

You seldom bill the lesser amount and lock yourself into a cap on your fees.

Rather than telling you clients that you estimate the fee to be $12K to $15K, tell them that your fee could be $15K or more and that you will keep them informed about the fees as the engagement progresses.

We recommend having all of your employees and partners sign up for the weekly blast and start your firm profit improvement efforts now!

We have also now completed our 2010 EMPLOYEE CAREER DEVELOPMENT SURVEY and the results are now available to the public... get yours, free, today!

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http://www.SteveEricksonLLC.com/profit-points

The Current Economic Reality for Accounting Firms

A message you must share with your staff!

During my speaking and consulting travels this year, partners and managing partners say they are frustrated with their staff’s expectations in spite of the effects the “Great Recession” has had on their accounting firms. Prior to the past two years, staff members became accustomed to receiving automatic annual salary increases while the economy was booming and are now having some difficulty adjusting as the economy has deteriorated. Unfortunately the market values for goods and services have declined and all of us must now deal with this new reality.

These challenging times require diligence, increased efforts and sacrifice by everyone in order to retain your current clients and remain competitive. Failure to do so could result in losses far greater than those experienced to date in this recession. None of us have ever experienced anything like this so now is the time to communicate clearly to your staff and then ask for their help and understanding.

Team Members: How you can help us build for the future and for your long-term success.

Since 2008 the accounting profession has experienced events that have had a profound impact on how firms must operate. The “Great Recession” has reduced the spending of countless millions which has a negative impact on the clients we serve. As a result, our revenues have been relatively flat or decreasing while our costs have continued to rise. This trend will have to be reversed if we are to remain viable and able to serve our clients successfully. Here are some of these major trends:

• Pricing has moved substantially from a cost-plus model, where a multiple of a person’s hourly salary was charged for services, to a fixed fee for many of the services we provide at a time when regulatory agencies are imposing ever increasing requirements and standards. As a result, our realization has decreased on many engagements due to budget overruns that cannot be billed to our clients. Since our clients are also experiencing the downturn in the economy many have requested fee decreases from us.

• Competition for off-peak seasonal work has become extremely intense as firms vie for those few engagements where work can be done over the summer and fall months to keep their staff busy which has resulted in net realized fees that are extremely low during this time of the year. Staff utilization rates continue to be a concern within the entire profession due to the seasonality of our work and our inability to keep everyone fully utilized during the June to December time period.

• Employee costs and benefits have increased over the years and now in many firms exceed 50% of net revenues which is an historic high. As a result of the down economy and client fee pressures we have been very limited in our ability to give pay increases to our employees for several years and in some cases we have had to adjust our staffing levels and salaries. Dealing with the effects of the recession has not been pleasant or easy. Our objective has been to keep as many people working as possible.

• Our need for technology has continued to increase requiring substantial investment by the partners of the firm not only for equipment but also software, training and the loss of efficiency while employees are learning how to apply the new technology. Software vendors continue to look for ways to increase their revenues from their software which has put further pressure on our cost structures.

• The aging demographics of our profession and our society. Baby Boomers represent approximately 25% of our population and they are just now starting to retire. This is having a direct impact on the services required by clients and our ability to provide those services as many CPAs, 50% of which are baby boomers, begin to retire. The resulting “brain drain” is concerning as we want to give our clients the very best advice and service possible while creating opportunities for everyone to grow professionally.

The good news from all of this is that there will be an ever increasing need for certified public accountants in the future. As the economy picks up there should be many opportunities for growth. There are many ways you can assist us during this time of change and uncertainty. Following are a few ways for you to help and at the same time enhance your career in public accounting:

• Have a great attitude and be a person that others want to be around. Negativity is not helpful or productive and we need to be in a positive state of mind to be creative and provide solutions to our clients. Take responsibility for your own career satisfaction by consulting with mentors and getting the information you need to be successful in your career. As you experience greater feelings of success you will be more positive and our clients will receive better service which will benefit all of us.

• Take responsibility for your assigned engagements and tasks and be accountable for successful outcomes. The key idea here is to communicate timely and effectively so that everyone involved in an engagement knows exactly where the job stands. This will allow for collaboration and timely problem solving by your engagement team which will be helpful in limiting cost overruns and client write downs.

• Manage your time. Email, voice mail, social networking all take time and can be disruptive when trying to do work requiring critical thinking skills. Block out time to devote to your client work exclusively. While at the office work with intensity and then go home on time to be with your family. In the long run this approach will make you happier in your career and also at home.

• Talk positively about our clients. They need our services and we have an obligation to provide those services in the most professional manner possible. Clients are not a burden. They are the life blood of our firm and allow each of us to provide for our families. We have the responsibility to communicate our needs and manage their expectations for a great outcome every time.

• Leverage your knowledge. In this way you become much more valuable to the firm and will assist in the “institutionalization” of our clients. Holding on and hoarding work that is beneath your level of expertise will limit your ability to grow at some point in the future. If you really want job satisfaction make sure you are doing work that is commensurate with your experience and value.

• Help us get the word out in the community about our firm. Everyone has an opportunity to participate at this level and should choose to do so in order to get new clients and achieve our mutual goals. If you belong to an organization participate actively. It will not only be more personally satisfying, it will also show everyone else that you approach your work with purpose and dedication which clients see as great qualities for an accountant.

Working together we will get through these times, serve our clients more effectively and make our firm a satisfying and rewarding place to work. We must be prudent in our business practices while at the same time be innovative and creative in serving our clients. Help us make our firm and our profession even better. We need you! Hopefully with these efforts we will all benefit economically and personally in the future. Thanks for all of your hard work and understanding.

Serve More, Sell Less. It Works!

During this current economic crisis I have seen many articles emphasizing the need for increased sales and marketing efforts and virtually none on improved client service and strategies to differentiate accounting firms from their competition. While extraordinary client service is not a substitute for marketing or making sound and persuasive presentations to current and prospective clients, it is a mindset that gets everyone in the firm thinking about how they can better serve and cross serve their clients. Serving clients in a selfless, trusted advisor manner always focused on each client’s value proposition. A rare and valuable commodity in these hectic times as it requires time and intentional action on everyone’s part at a time when there are so many people competing for our time. A client centered service strategy in your firm will not cost any money yet will differentiate your firm and blow away your competition. If you want to have meaningful value added conversations with your clients you must first have a high level of trust in your relationship.

Trust in professional relationships is built through participatory positive experiences that benefit both parties so it is very important that your client interactions be as positive as possible and focused on solutions that create value for the client. If the majority of your conversations with your clients are about the late delivery of your products and services and misunderstandings about fees it makes it difficult for the clients to trust that you can provide truly exceptional service and value to them. Accountants must get past these most basic administrative matters to move into the trusted space of their clients. Failure to do so may result in the client thinking that you are trying to “sell” them when you offer them additional services. Many opportunities will be created with your clients when you are able put these routine matters to rest and then focus intently on their specific needs and wants.

Here are a few places to start:

1. Most accountants’ idea of client service is to react when the client calls. Unfortunately this strategy fails when too many client requests are made at the same time and their ability to react quickly and meet the client’s expectations is limited as everyone in the firm is busy. Of course the clients really don’t care that you are busy as they just want their needs satisfied. The first step to extraordinary client service is to manage client expectations by scheduling their work and then delivering on time. A very simple concept, however, it is difficult to implement due to the many matters that compete for your time and attention. This is without a doubt the #1 challenge facing accounting firms today and one that must be overcome if a winning client service strategy is to be successfully implemented. Sit down with your staff and discuss how everyone can make this happen. Successful implementation will take innovation as well as some restructuring of your processes.

2. Place yourself in situations where you can have meaningful conversations with your clients. One study at UCLA found that communication is 55% body language, 38% intonation and volume and only 7% the spoken words. You cannot communicate effectively and you risk losing 93% of your nonverbal communication effectiveness if you do not meet with your clients. In today’s competitive business world be very careful when you use email as it’s great for distributing information but horrible as an effective communication tool. Meet with your clients face to face. There is no substitute!

3. Learn about your client’s perception of value. Start by asking them questions about the decisions they will be making at some point in the future and then listen carefully. The following are but a few examples:

a. What business decisions will you be making in the future? (Month, year(s) etc.)
i. Equipment, personnel, product lines, locations, etc.
ii. Sale, acquisitions, merger, etc.
b. What are your personal goals and what decisions do you need to make to get where you want to be?
i. What are your plans for retirement?
ii. Where are your children going to college?
iii. Are you comfortable with your liquidity and reserves if your business experiences a downturn?

4. Assist your clients by helping them make the decisions that make their life better. The cognitive process (how we think) results in the acquisition of knowledge, experience and problem solving ability. When you participate with your clients in making decisions their experience with you will be positive and they will want to repeat the process when the next decision needs to be made. You can participate by:

a. Furnishing pertinent information.
b. Analyzing and synthesizing complex financial information to make it more understandable to the client.
c. Giving your clients your best selfless professional advice. (Independence for your attest clients must also be a consideration)

5. Remember that we think as we speak so I recommend that accountants start talking more about “service” and a little less about “selling” when discussing how to implement an extraordinary client service strategy. Get everyone in the firm involved and make sure they understand their roles and responsibilities for exceptional client service.

Once you develop and implement an exceptional client service strategy in your practice you will soon find that clients are happier, making more referrals and gladly paying their fees. It could well be the most important strategic decision you ever make to truly differentiate your firm. Your competition will not know what happened or how to compete effectively, guaranteed!

Steve is now on Linkedin, Facebook and Twitter

Clients Want to Talk About Fees!

During this busiest time of year it is very important that CPA firms focus on client service as a large percentage of client interactions will take place over the next few months. Great client service is all about managing your client's expectations about your fees and then doing what you say you will do rather than having them form in their mind their expectation of your services and fees. Why leave this to chance? Most client disagreements involve fees. In this first of several articles on client service I discuss fees and their impact on client expectations and client service.

Fees

Most conversations with clients about fee disputes occur after the engagement has been completed which puts many accountants on the defensive. Have you had some of these discussions?

"I had no idea it was going to cost this much".

"You said the fee would be between $20,000 and $25,000 and now you're billing me $40,000".

"My fee was $7,500 last year and now you're billing me $10,000".

Clients don't like to be surprised with your fees just as you don't like to be surprised by professionals you engage. Here are five things you can do immediately to substantially eliminate the confusion and misunderstandings with clients about your fees.

1. Stop quoting fee ranges. The moment you quote a range you are setting your client's expectation for the maximum fee. Rather than say "We estimate our fee will be between $10,000 and $12,000" use the phrase "We estimate our fee could be $12,000 or more". This dialog helps to eliminate the upper limit fee expectation and allows you to have a discussion with your client if additional fees are warranted. In all of my years of practice I very seldom experienced an engagement where we were at the lower end of the fee estimate so why even include it in your quote. If a client insists on a maximum fee be sure to build in the contingencies you might experience during the engagement. Fee estimates always need to be realistic rather than overly optimistic.

2. Initiate the conversation about fees with all of your clients. Draft a general letter about fees that you can include with your engagement letters and in addition formalize and distribute a copy of your firm wide credit policy. The general letter about fees should start with a discussion that you want every client to receive the maximum value for the fees they pay and that there are certain instances where this can occur. Follow with examples of how additional fees are often incurred. These examples might include incorrect accounting records, incorrect accounting methods, failure to provide agreed upon information and starting and stopping work. If you need an example please send an email to Steve@SteveEricksonLLC.com with the subject line Fee Letter and I will send you one.

Another essential document is a Firm Credit Policy. It should cover your receivable policy, interest on unpaid balances and the fact that the firm will stop work if payments are not made as agreed to in your engagement letter (this is not a substitute to having a stop work clause or receivable terms in your engagement letters) simply it is a document that partners can use to take the edge off of fee conversations with long standing clients. "The partners of the firm have agreed to abide by our firm credit policy. I have no ability to override the policy". Of course you want to be sure that your credit policy is in compliance with the laws of your state.

3. Negotiate the scope of work not your fees. The moment you agree to unilaterally reduce your fees you then have lower fees. I'm encouraging my clients to negotiate the scope of services rather than just lowering fees without consideration. If clients continue to insist on a unilateral fee reduction consider calling the reduction a "2010 Recession Rebate" so you don't permanently reduce your fees. I know that times are tough out there but firms really have to look at their pricing decisions strategically for the long-term viability of their practice.

4. Use scheduled billing techniques. The only thing worse than doing work for a substantially reduced fee is doing the work and not getting paid. Firms need to stop extending excessive credit. Get retainers (50% of estimated fee is due before starting work, the balance is due upon delivery of the product) especially for new work. Use scheduled billing techniques for larger engagements (i.e. 30% now, 30% in one month, 30% in 2nd month and 10% due upon delivery of the product) to mitigate your risk. Before discounting your fees please consider how you have to pay just about any service provider you engage. I can't think of too many that don't get some money before they start work. After you deliver the work many clients think there is no rush to pay until they need more services.

5. Call before sending an unexpected bill. The absolutely biggest fee mistake an accountant can make is to send a client a big bill that they didn't expect. I've actually seen cases where clients refuse to pay anything until they have the invoice adjusted in their favor. If you find yourself in the situation where you have cost overruns that have not been discussed with the client rather than just sending the invoice (I call these letter bombs) and wait for the client's reaction make a call before you send the bill. The conversation might go something like this, "Mr. Jones I was just going through the time on your engagement and wanted to explain why we were over our budget estimate. (explanation here) Before I prepare the bill I wanted to make sure you understood what happened". At this point there are three possible outcomes.

a. The client tells you they understand and to send the bill. You get paid.

b. The client wants to negotiate the overrun. You agree on an amount, send the bill and get paid.

c. The client informs you that your engagement letter stated that you would inform them before incurring any fees in excess of the estimate. You did not inform them and they will not pay for the excess. Send the bill for the estimated fee and get paid. Evaluate the client relationship and decide if you want to provide further services.

For many years I have contemplated why it is so difficult for accountants to discuss fees with their clients and have come to the conclusion that most don't like conflict and don't want to risk their client relationships. In my opinion not talking about fees with your clients leads to a much greater likelihood that misunderstandings, hard feelings and the loss of clients will occur. It is very important that both the client and the accountant feel they are getting a fair deal if the desire is to perpetuate a long-term relationship.

It takes a little time to deal with client fee issues but the rewards are well worth the effort. Become not only a great biller but also a great collector of fees and watch your stock in your firm soar. Here's wishing you a prosperous 2010.

Time, Time, Time is on Your Side. Yes it is!

Use it to your advantage and watch your profits soar!

This past weekend I was listening to an old Rolling Stones song, Time is on Your Side, and it brought to mind that time is the most precious asset we have and yet too often we waste it or give it away. Given that this is a new year I always like to reflect on the past and make plans for the future. Positive things I can do that will make my life and the lives of those around me a little better. It would be appropriate at this time to have the same type of conversations in accounting firms in addition to the discussions about charge hours, job budgets, realization and efficiency. I thought it might be timely (no pun here) to offer a few ideas and share my thoughts on how you can get more value in exchange for your time during this next year.

1. Take control of your calendar and appointments. Too often appointments are scheduled in such a manner that there is open time between appointments but not enough time to dig into a project. The result, idle unproductive time which usually leads to working later in the evening or on the weekends. To the greatest extent possible try to schedule appointments consecutively. Remember just 20 minutes per person per day billed and collected is over 5% of your annual revenues. These little things have a profound impact on profitability.

2. Block out time to work. How many times have you gotten to the end of the day and said “What happened today, I didn't get one thing done that I planned to do”? You can avoid much of this frustration by blocking out undisturbed time to work. Consider it an appointment with yourself. If you don’t value your time others will certainly not value your time. If someone interrupts you, ask them if you could schedule a time to meet with them later because you don’t have time right now. If anyone approaches you with a client question, ask for the client number and tell them you are going to charge your time. Soon you will have fewer interruptions. Believe me, this works!

3. Conduct better meetings. Here are a few tips to make your meetings more productive.
a. Have an agenda. It doesn’t have to be fancy. Include length of the meeting, the objective for the meeting and the decisions that will be made.
b. Don’t use meetings to push out information. Distribute the information before the meeting and then use the meeting to answer questions and make clarifications.
c. Don’t allow others to automatically schedule meetings on your calendar. Remember you control your calendar.
d. Participate in the meetings you attend otherwise why are you there?
e. Cancel nonproductive meetings. You know which ones are nonproductive.

4. Limit your time dealing with email. Email is one of the greatest time wasters in business today and according to a recent article 80% to 97% of email traffic is junk. Turn off the dinger so it doesn’t distract you from your work. The vast percentage of email doesn’t have to be answered immediately. Also create folders with rules for important projects to get your emails to the right place. Use email as the wonderful tool it is rather than letting it be a diversion that wastes your time.

5. Write time sensitive bilateral engagement letters. Include important matters:
a. Date or period of time the work will be performed
b. Date by which you must receive required client information
c. Mutual responsibilities to include required documentation
d. Dates for expected payments (Limit the extension of credit and get paid earlier, a retainer if possible)
e. Premium rates for work that is late, incomplete or difficult personally. If you would like to see a few ideas for sample wording send an email to steve@steveericksonllc.com with the subject line Fee Enhancement and I will send them to you.

6. Shorten the work process cycle. Over 20 years ago one major CPA firm conducted a study of their practice and found that the longer a job was in the office the less profitable it became. Time is directly related with efficiency and profitability as anyone that has practiced public accounting for any period of time knows. Many practitioners fail to review files timely and thus become a bottleneck in the process while sending the message to their employees that getting work out the door is not a top priority. Work with a sense of urgency and move projects along by saving time every day for review or if you can’t find time get someone else to do the review which is just about always better than letting the project sit on your shelf for weeks. One of the biggest complaints that I hear from managers and staff is that partners wait far too long before reviewing their projects which further contributes to their own inefficiency. Move work through your office faster, competently and efficiently and I guarantee you there will be fewer upset clients and even fewer discussions about your fees.

7. Leverage and then leverage some more. Don’t do lower value work you shouldn’t be doing. If you continue to perform these lower level services you clients will eventually value you less. For the last 15 years or more I have asked accountants about how much of their work could be delegated to a lower level and consistently get back that over 50% could be delegated. As total personnel and benefit costs are now approaching 50% in many firms significant thought needs to be given to find ways that labor costs can be reduced through using processes that allow less experienced personnel to do the work while maintaining high quality. Every person in every firm should be asking themselves continually “Could someone with less experience and less cost be doing this task”? It is only through questioning our current processes that significant improvements can be identified and implemented. If you are complacent you face the risk that some of your clients will make the decision to use another accountant.

Remember just 20 minutes per person per day billed and collected represents 5%+ of your annual revenues. If you are diligent with the use of your time I’ll bet you could easily pick up an hour a day in productivity! Use the time you have on your side for your clients and they will “keep running back” for more of your great client service. Wishing all of you a most productive and fruitful 2010!