CPAs and the Reselling Game

Can traditional accountants find happiness peddling software?

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It was only in the last year that his reselling operation was part of the CPA firm Virchow Krause that Steve Krueger was able to get an incentive program. "It was the first year that we made our goal for chargeable hours," says Krueger, who has spent most of the last 18 years operating a technology consulting business within a public accounting firm.

That was, he worked with a CPA firm most of the time until a few months ago, when Krueger purchased the operation he had been running for the last three and a half years.

This year, he purchased the former Virchow Krause Technology Solutions, which is now known as Business Technology Systems. That six-person operation, which has annual revenue of about $1 million, sells Sage Software's MAS 90/200, BusinessWorks, and Peachtree.

Partner Insights

Plante Moran: Boxed In

Plante Moran got into the reselling business two years ago with the acquisition of another firm, Gleeson Sklar, that brought with it a Great Plains reselling practice. In June, the Michigan-based firm got out of the business by selling the reselling operation to the group's leader, Al Voss.

That decision was largely driven by the squeeze that the firm found itself in regarding conflicts of interests.

"We found ourselves being conflicted out of a number of assignments on both sides of the coin," says Doug Wiescinski, Plante's partner- in-charge of the technology consulting and solutions group.

Plante has provided evaluation and selection services for vertical market products. But it found that Microsoft, which owns the Great Plains line-now known as Dynamics GP-was pushing into vertical markets itself. That made it tough to be independent in that area.

In the same niche areas, the firm had 400 to 500 clients with which it had audit relationships, Wiescinski continues. That presented independence concerns if the MBS group attempted to sell into that market.

Plante continues its historic effort in helping clients select systems. It also sells systems in some verticals. Its products include a long-term care application, along with electronic medical records tools and business intelligence applications for some specific segments.

Krueger has worked for three different CPA firms since 1987, including two stints at Schenck CPAs. Operating a reselling operation within the confines of a CPA organization, he notes, was always a struggle.

One problem cited repeatedly by reselling and consulting firms owned by CPAs is the issue of chargeable hours. Many CPA firms expect 1,800 charge hours per year per person, while many resellers expect 1,200 hours, and a Sage Software survey finds that 1,100 hours is closer to reality. The sales process produces a lot of unbillable hours. But it also produces profit that is not easily handled by an accounting firm's time-and-billing system.

The difference in metrics that are utilized by the two disciplines often produces two sets of frustrated people: firm partners who don't understand why consultants can't produce more charge hours and consultants who are baffled at the CPAs' inability to realize that the profits they bring in more than compensate for the difference.

To counter the difficulty, Krueger implemented a system in which the profit margin is divided by a consultant's hourly billing rate to yield charge-hour equivalents. It is a system implemented in the 1990s by Sam Allred, a partner of Anderson ZurMuehlen of Helena, Mont., in solving the billable-hour problem.

"We kept track of this on paper, because it never happened in the [time-and-billing] system because the firm's system didn't have the capability to do," Krueger says.

The compensation plan was also a problem. The incentive plans for CPAs did not match the needs for providing a carrot to sales people. CPA firms hand out year-end bonuses to partners and provide salary increases to staff.

"It's not performance-based," notes Krueger. That's a problem for an organization relying on sales people for its revenue. They work better with incentives that are awarded monthly when they hit their goals.

However, Krueger says CPA firms worry that if they provide a plan for one set of employees, they should implement it for all. But once the incentive formula was adopted, it worked so well that once the unit became independent, rewards were doubled.

Another problem was that Krueger's group was expected to serve Virchow's clients, while Krueger wanted to focus on specific industries, size of clients, and products. That was a much bigger problem at Schenck, where Krueger says the tech group ended up providing free service to clients that used MAS 90. He also faced a problem that occurs at many smaller firms-the partners expected the technology consultants to support the firm's internal system.

"At Schenck, a lot of time was spent on internal systems," says Krueger. "It is a problem, especially if you are a small group within a small firm."

Krueger's experiences are hardly unique. Across the country, CPA firms are disengaging from selling accounting software. Over the years, firms like Grant Thornton and Moss Adams have sold their mid-market accounting software practices or spun them off as separate entities.

"CPA firms are saying it's a niche, we're not sure we're interested in playing in anymore," says David Cieslak, a principal with the Information Technology Group, an Encino, Calif.-based Sage reseller that grew out of the CPA firm Hamilton Boynton & Associates. That firm, along with the Capital Economics Group, changed its name to Arxis Financial on July 1. "It [reselling] has dropped pretty far down the list of things you would want to add to the practice."

CPA Resellers: Limited Room at the Top?

CPAs were once the rage in reselling. State of the Art, which was acquired by Sage in 1998, built its MAS 90 business by authorizing thousands of them.

By no means having accounting firms ceased to be a factor. Four of the ten largest reselling operations in 2005 were CPA organizations-BKD Technologies and Clifton Gunderson, which are part of traditional firms, and RSM McGladrey and CBiz Technologies, which are part of nontraditional practices. Two more, Crowe Chizek and Wipfli, were in the top twenty, while four more ranked between No. 21 and No. 28. But the group thins out rapidly after that. From No. 29 through No. 100, there are only eight reselling operations that are either part of CPA firms or are affiliates.

That may reflect the fact that resellers need to marshal resources to handle increasingly sophisticated and expensive product lines. The bigger firms are surviving in the face of those demands. The smaller ones often aren't.

"There are still plenty of CPA firms that do well by building a reasonable-size group. You can't get by building a one- or two-person group," says Taylor Macdonald, executive vice president of channel and sales operations for Sage Software's Mid-Market Division.

"If it's cyclical, it's definitely in a down cycle. People are getting out of the game at a faster rate than they are getting into the game," says Ron Eagle, chairman of the Information Technology Alliance, an organization that includes VARs and CPA firms interested in both internal and external technology consulting issues.

Eagle says that where once surveys showed IT services among the top five practice areas that firms considered adding, "In the last MAP [management of an accounting practice] survey I saw, I didn't even find IT services."

What has happened to the love affair between CPAs and technology? It has changed.

"It was a strategy that had promise, but culturally, mechanically, and financially, it just didn't work," Eagle muses.

Part of the change stems from the differing values of CPA and reselling firms. Some of it comes from different ways of measuring performance. A lot of the conflicts stem from different mindsets.

Look at typical Web sites. When CPA firms have a section labeled "Partners," it invariably includes information on the firms' owners. However, reselling organizations usually feature third-party vendors in their "Partner" sections.

Another big difference is how the two types of firms compute revenue. CPA firms often net out the margin on software when reporting net firm revenue. VARs don't.

The contrast between these two views was shown early this year when Sikich, the Aurora, Ill.-based CPA firm, volunteered for publication the revenue figures for ICS Advantage, as $6.3 million for 2005. That came as a surprise to ICS, which said that the firm had netted out millions of dollars in product margin from the results.

"We always argue about that. But it's the top-line revenue that counts," says Jeff Rudolph, the partner-in-charge of consulting. Add back the margin dollars and ICS had revenue of $11.3 million for 2005 and is on pace to hit $14 million this year. ICS merged with Sikich in 1998 and with a corporate reorganization this year, became a division of the firm. ICS sells Dynamics GP and NAV, but that's only one of several businesses. The separate networking group produces $5 million in revenue annually.

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