Joseph A. Schumpeter coined the term "creative destruction" in his book Capitalism, Socialism and Democracy, published in 1942.
Much has been written about it recently due to the fact that industry life cycles are becoming shorter. Environments are dynamic, not static, and therefore firms cannot simply focus on "core competencies" as a basis for firm strategy. If they do, they will be preparing for the past rather than the future.
The first thing that some consultants tell firms in a time of decline is to "get back to basics." This sounds like good advice, but is it? During the past five years, the basics in the accounting profession have changed significantly, as have the core business services and technology.
The real areas of focus in firms should be on how to re-create themselves to thrive in an environment of change and uncertainty. Most partners in firms agree that we are currently in a period of dramatic change; however, few are doing much to change their strategies, organization and values.
This statement requires additional comments and examples in order to be fully comprehended. Many firms are operating well below their optimum level due to a lack of aggressive leadership, and, in fact, in many cases with leadership that has chosen to stick with a strategy of stability rather than being open to adapting to environmental opportunities.
When I say optimum level, I am talking about profitability as well as creating an environment to attract and retain top quality personnel. In many cases, this is simply a matter of, "We have been successful, why change?" The reasons firms must change are increased competition and complexity. Do you think your firm would be better off if your strategies were fast, creative and aggressive? All firms are in a period of increased competition for quality people and quality clients. Promoting mediocrity is a sure formula for decline and shrinking profits.
Managing an accounting firm in today's environment is not an easy task - and it is rapidly becoming more difficult. It involves personnel, marketing, innovation, leadership, culture, technology and other areas that are critical to sustaining long-term success.
There is good news! If you are willing to change your strategies and paradigms, your firm can make a lot more money and people will love working for your firm.
Success is a choice, as is happiness
Assuming that your firm makes the choice to be successful, the road will not be easy, as you will probably have to make significant changes. Those changes will primarily come in management philosophy.
You must be committed to maximizing the future prospects of the firm, staff, owners and clients. The balancing act comes in managing both for today and tomorrow. The tendency of accountants is to cut people and expenses at the first signs of reduced profitability. Success belongs to the firms and their leaders who capture the future instead of waiting for it to occur.
Management of the firm must simultaneously manage a three-act play. First, they must maximize current opportunities and existing business ("in the box"). Second, they must lead and encourage others to think and act creatively ("outside the box"). Third, they must allow their people to discover the future ("ahead of the curve").
Sustaining success is never a result of one component. However, success can be killed by one component, such as a managing partner or chief executive who is over-controlling or out of touch with the future. While successful in the past, it is going to be increasingly difficult to sustain success in the future if the firm leader doesn't successfully manage all three acts at the same time.
In order to guarantee this type of leadership, most firms must change their philosophy toward management. In the past, firms have primarily valued chargeable hours and put very little value on managing the firm. The tendency has been to underpay for management and to over-utilize accountants (often owners) in areas such as human resources, marketing, sales and operations.
Waves of destruction
Let's get back to "creative destruction." The creativity of your competition destroys the value of what you currently do as a firm. This can come from within the industry or from global forces.
It is generally easier to understand a concept when it is outside of your industry or profession. Therefore, let's use the financial services industry. In recent years, financial services have become commoditized through increased regulation, lower margins and outside competition (some of which comes from the accounting industry).
Competition is not a succession of repetitive events, but rather a succession of different events. In today's world of the Internet and globalization, different events are coming at an increasing rate of speed. In other words, competition is increasing at a rapid pace.
Firms must be prepared to deal with these events rather than simply ignoring them. Will your firm be able to compete like its competitors? The answer, of course, will vary depending on your size, market and firm life expectancy.
First, your firm owners must understand if they have a leadership problem. Second, if a leadership problem exists, they must develop a strategy to solve it. Consultants frequently get fired when they point out the fact that a leadership problem exists. Under-performance in the bottom line is almost always traced to the leadership of the firm.
Therefore, if owners want to increase firm profitability, they must focus on firm leadership rather than on charge hours. All progress starts with the truth.
Your firm's competitiveness is related more to your structure and leadership than anything else. The business environment should drive your strategies. This may sound relatively simple, but it isn't, due to the complex business environment.
Much like an orchestra, everyone in your firm must be in sync in order to make music. The weakest performer can cause a disastrous performance. The same holds for the profitability of the firm. Firms fail because they are out-innovated and out-marketed by competitors.
Too many firm partners today are focused on the past and just trying to "hang on" until retirement. This is cancerous and will be the death of your firm if not aggressively addressed.
Given the business environment, what are the most important business strategies for the future? It is impossible to prescribe without adequate diagnosis, but for the majority of the accounting industry, a number of basic strategies are applicable. (See box.) While this list is not all inclusive, it should provide your firm with the basics for improvement and strategies to compete in today's rapidly changing environment.
While success is a choice, it depends upon speed, appropriate risk-taking and trust. If your firm doesn't have these characteristics, its future is at risk. If it does, be grateful and support your firm's leadership.
L. Gary Boomer, CPA, is the president of Boomer Consulting, in Manhattan, Kan.
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