The past few years have certainly put a new emphasis on firm management. The basics generally come into play when times get tough, and the past few years have been no exception.
The management of a CPA firm has become more complex due to the breadth of the service offerings, advancements in technology, required skills and rapid change. Simplification is necessary in order to break through this ceiling of complexity.
The first step most firms took during the recession was to manage expenses. After all, aren't CPAs known for their ability to cut costs? The results actually haven't been too bad for most partners. I have often referred to the actions as "the partner income protection program." In reality, many firms have been able to maintain partner income or even grow it in the past couple of years by managing head counts and controlling expenses.
I see the next step in the management evolution as focusing on growing the revenue side organically. In most firms, a 1 percent reduction in labor costs only drives a 1 percent increase in net income before partner salaries, while a 1 percent increase in revenue generally drives a 3 percent increase in net income before partner salaries.
Before you discount this simple solution, ask yourself if all of your partners and managers know the implications of a 1 percent increase in revenue. The accompanying simple table points out the results of a 1 percent reduction in labor, a 1 percent reduction in overhead and a 1 percent increase in revenue (see "The 1% Solution," at right).
Granted, most costs do not remain static, and your firm's labor and overhead percentages may differ. But you cannot continue to cut your costs and expect to increase partner income. In fact, recent studies by the American Institute of CPAs indicate that a high number of employees are prepared to look for employment opportunities as the economy improves. Is your firm positioning itself to retain your best employees, or have them leave the firm for better opportunities?
Most will say that they don't want to lose their best people, yet they are doing little if anything in the area of talent development and promotion. Both talent development and promotions require growth in order to provide opportunities for advancement. It is not uncommon for a firm to be top-heavy, with limited opportunities for advancement.
There are several things firms can do to increase revenue. Many strategies are obvious, but not necessarily easy to execute due to existing paradigms. The first and probably the most important is with regard to pricing. Internal attitudes may be your biggest obstacle. Most CPAs are taught from their first day on the job that time is money. In other words, value is determined by the amount of effort extended. Value is actually determined by the client, and is your firm doing enough to make your clients perceive value?
Value, like beauty, is in the eyes of the beholder. What experiences do clients encounter with your firm? Are you always rushed and barely meet deadlines? Do you promptly respond to client e-mails and phone calls? Do you spend time with clients discussing their dangers, opportunities and strengths? Try it; you will be pleasantly surprised to learn of the many new opportunities for providing additional services.
NOT AN ADMINISTRATIVE FUNCTION
Pricing of services is an art, not a science. Pricing should definitely not be an administrative function, and too often firms treat it as such. Price signals to your clients what you believe you are worth. Pricing is often left to individual partners, which is a mistake. This generates inconsistency within the firm and often results in lower revenues.
If you study pricing - and most industries spend considerable time doing so - you will find communication with the client is extremely important. There is no way around communicating with the client. You will have to do it either before or after you do the work. You lose all leverage if you wait until the work is complete, yet many CPAs find it difficult to address pricing up front.
Communication is just one of the five Cs of value as documented in The Strategy and Tactics of Pricing by Thomas Nagel. You also must create value for the client. This goes way beyond quality of work and includes the experience. It will also require convincing the client that they must pay for value. This is much easier if you are working for the right clients. The fact of the matter is that many clients are better negotiators than technical partners and managers! This fact alone should alert firms that they need a person who understands value and negotiations as the primary person in charge of pricing. The only way a firm can capture value is with their pricing strategy. Hours time dollars does not capture value, it captures effort.
Finally, comprehension of value comes from thinking like the client and ensuring that you understand their motivation. Client motivation is often much different than perceived by the accountant, and far more valuable. Typically, clients are not motivated by the technical aspects, but rather by the experience. Always remember that leadership, relationships and creativity create value. Leadership provides direction, relationships provide confidence and creativity provides new capabilities.
The results of focusing on revenue only compound as you go from a 1 percent to a 5 percent increase. Many accountants remember the days when this was easy based on demand and a less cost-conscious market. In today's market it is more difficult and requires planning, people and processes to achieve, but it can be done. Here are five steps that can help you get there:
1. Name a person in charge of pricing. (Some firms can't agree on one person, so they use a pricing task force. In my opinion, it works best to have a chief value officer.)
2. Educate all partners and managers about the firm's economic engine and the impact of a 1 percent price increase. Do not assume they know the intricacies of the firm's economic engine.
3. Conduct new opportunities conversations with your top 20 clients. Ask them what keeps them up at night. What are their best opportunities and what strengths can they leverage to take advantage of the opportunities? Just listen. You will be surprised to learn about the number of opportunities that exist, and your client may be surprised to learn your firm has the capabilities to address their needs. Clients have been cutting head counts also, and are looking for ways to source financial and technology needs.
4. Communicate value and ask your best clients for referrals. Talk about how your services are transformational.
5. Develop talent. Firms that are known for talent development do not have to worry about retention and attraction. They have a steady stream of talent.
Don't tell clients how good you are; tell them how good they will be if they utilize your services. Clients buy solutions and feelings. Don't ever forget about the feelings. You are the most trusted business advisor and should take the role seriously.
Gary Boomer, CPA, is the president of Boomer Consulting, in Manhattan, Kan.
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