The top 10 percent of American Institute of CPAs member firms have annual revenues of over $3,000,000. According to Accounting Today's recent listing of the Top 100 Firms, the 100th-ranked firm had revenues of just over $31,000,000. Approximately 500 firms represent this elite group (above $3 million in annual revenues). What will these firms look like in 10 years? How will they grow? How much will they grow? Will the majority of their growth be through mergers, organic growth or lateral growth?
Surprisingly, the breakpoint for the Top 100 Firms has not changed that much over the past 10 years, yet the revenues of those firms have increased significantly, much of it due to mergers. A trend that is becoming more prevalent is the addition of new capabilities through the acquisition of or alliance with a firm that provides services needed by clients, but often not currently provided by the accounting firm (e.g., technology or various kinds of planning - strategic, succession and technology). Historically, most accounting firms have not been successful when attempting to combine these services into one entity and manage them as the traditional CPA firm has been managed.
Another difference is that compliance services are generally driven by independence, while higher-level services are typically driven by advocacy. The focus of this article will be on the trends, the steps to ensure growth and to project what the service offerings of the top 500 firms will look like in 10 years.
10 TRENDS AFFECTING FIRMS
1. Clients are requesting services that require the role of advocacy, rather than independence. They also have global reporting and tax compliance requirements. Can and should firms offer both services requiring independence and advocacy?
2. The Internet (cloud) provides collaborative platforms allowing firms to offer a broader spectrum of higher-value services without geographic restrictions.
3. Consumer and mobile technology is driving the demand for real-time information, rather than after-the-fact reports. How do CPAs maintain relevance in reporting?
4. Work is what you do, not where you go. Fewer employees work in traditional offices and space requirements per employee are decreasing. How do firms plan and commit to office leases in the future?
5. Value comes from leadership, relationships and creativity. Leadership provides direction, relationships provide confidence and creativity provides new capabilities.
6. Technology is the accelerator and is being driven by the consumer market. Just look at the impact of the iPad and iPhone over the past three years. How do firms protect client privacy and data in this highly connected world?
7. Talent with the necessary skills is becoming scarce. Life-long learning is required in order for skills to remain relevant.
8. The traditional education model is broken and must be transformed to a continuous learning model with multiple delivery methods for different types of learning.
9. The currency system is digital, reducing the requirements for large work-in-progress and accounts receivable balances.
10. Change management is a required skill.
10 STEPS TO GROWTH
1. A shared vision and strategic plan focusing on firm leadership/management, client development, talent development, technology and compensation. These are the five components of the missing structure that differentiate the best firms from the rest.
2. Implement a corporate governance system with professionals in key leadership roles (firm management, talent, technology, marketing, sales and market segment leaders). This leadership group should focus on the implementation of the firm's strategic plan and holding themselves and others in the firm accountable.
3. Know the unique abilities of your talent. The breadth of service not only requires multiple skill sets, but also requires a synergistic team for delivery. Utilize tools like the Kolbe Index to determine unique abilities and team assignments. The tendency in many firms to hire "Mini-Me's" is limiting and often results in burnout. As Jim Collins says in Good to Great, "Get the wrong people off the bus, the right people on the bus and into the right seats." A significant percentage of your team will not be CPAs, so different types of education, certification and licensing will be required.
4. Naming, packaging and pricing of service offerings is required in today's commoditized economy. If you name the service, you own it. Packaging and pricing multiple services increases the value to the client and provides larger opportunities for the firm. We currently see a minimum of three service levels, with the foundation, Level 1, being more of the traditional or compliance services like tax, financial reporting, payroll and tax compliance, etc. Accurately capturing transactions at this level eliminates much of the data entry and reconciliation that occurred with older systems. Level 2 services are classified as CFO-type services, including budgeting, cash flow and financing. Level 3 services are associated with planning (strategic, succession and technology). As firms move up the value chain, there is less commoditization. A comment often heard from CPAs is, "We are too busy to focus on Level 2 and 3 services."
5. Change will be occurring at an increasing rate due to new technology and global markets. Firms should be capable of acquiring or developing these new services niches.
6. Select a standardized accounting platform that enables the firm and clients to collaborate on Level 1, 2 and 3 services. Firms that have accomplished this report the biggest advantages at Level 1 are timeliness and accuracy of information, which increases automation and produces more reliable information at Levels 2 and 3. Some of the more popular platforms for client collaboration are AccountantsWorld, Intuit, Intacct and Xero. CCH and Thomson Reuters are both moving their core applications to the cloud.
7. Pricing is important. A 1 percent price increase typically results in a 3 percent increase in net income before owners' salaries and bonuses. The key to value pricing is to discuss scope and pricing before the work starts. Change orders protect both the client and the firm and can result in significant revenues and profits if executed properly.
8. Define your target clients, rather than accepting just any type of work. Successful firms focus their resources on the top-producing market segments, rather than trying to compete in all segments. The same filter system can be used in targeting as well as filtering clients. The following are sample criteria:
Utilization: How many services does the client utilize?
Appreciation: Does the client appreciate your services, and are they coachable?
Reward: Does the client pay promptly and willingly?
Enhancement: Does the client enhance the firm's capabilities?
Risk: Are potential risks manageable?
Referral: Does the client have a good reputation and will they refer business?
9. Implement project management, workflow, and client relationship management systems to ensure the on-time and profitable completion of work. In the past, firms have utilized time & billing systems to manage audit and tax engagements. As firms increase their service offerings, they must improve their project management skills and capabilities, as well as increase their marketing and sales activities. Many of the older practice management systems provide few of these capabilities and lack integration with other applications. These needs can be better met in the cloud.
10. Not only is the current economic model in question (hours x dollars), the billing and collection processes are outdated and inadequate. Many firms have between one and two months of revenues in WIP and two-to-three months of revenue in accounts receivable. This is generally due to poor billing and collection practices. Larger businesses utilize ACH payments, rather than credit cards, to reduce payment cycles, reduce fees and increase cash flow. Firms must also implement these practices if they want to remain competitive. Tools like Bill.com will save time and improve cash flow.
New technology is being developed at an increasing rate, resulting in less duplication of data and less friction when it comes to integration. Once firms and their clients get into the cloud, collaboration and increased services become available.
The key characteristic of firms of the future is leadership. Even though it seems like everything is changing, leadership is still the key to success. Does you firm have leaders that can take your firm to the next level? If yes, you have already differentiated your firm. With great leadership and by following the three rules of success recently published in The Harvard Review, your firm will be fine. The rules are:
1. Better before cheaper: In other words, compete on differentiators other than price.
2. Revenue before cost: That is, prioritize increasing revenue over reducing costs.
3. There are no other rules -- so change anything you must to follow Rules 1 and 2.
This may be too simplistic for some, but in complex times simplification is needed to break through the ceiling of complexity.
Gary Boomer, CPA, is the president of Boomer consulting, in Manhattan, Kan.
