Beware the Progressive Promise

With more firms moving to the Verasage pricing model (good on them – great move), we occasionally come across examples where firms haven’t really arranged their systems and processes to support the delivery of services.

idea

We are fortunate enough to be picking up a new customer (via referral) from a competitor who has “productised” their offering and built their model around cloud accounting.  Terrific.

The customer in question has been working with their accountant for many years and supported them as they moved the model to an agreed pricing platform (I don’t believe based on our discussions with the customer that the firm is anywhere near value pricing their services).  They had been paying the monthly direct debit to cover all the services required.  They had been providing all the information required to enable the firm to do what was required.

Now, put yourself in this customer’s shoes.  They’ve been paying a monthly amount to the firm for the various compliance obligations for the past three years.  However, they have only just now received the financials and tax returns for 2013/14 and 2014/15.  Are they frustrated?  Bloody oath.

To be clear here, they are pretty happy with the quality of the work they were getting – when they got it.  They were driven up the wall by the constant chasing up to get information from the firm.  They like the accountant they have been working with.  But they feel like they have been “left for dead”.  The experience they have had has been very unsettling for them. As they said – “we’ve paid for the work, why hasn’t it been done?”

Many firms are making the move to productising their offerings and moving more to an agreed pricing model.

They fall down badly though when their focus is on marketing and “brand building” rather than service delivery.

Having your customers pay into your account regularly is great for your cashflow.  When you’re not delivering the services agreed to under that model, you have a problem.

The firm our new customer was going to is widely lauded as a “leader” in its field.  It is held up as a paragon of virtue and “a major disruptor”.  The problem is, the lived experience of their customers doesn’t support the hype.

We will be making sure we deliver our agreed services to them on time and support them up hill and down dale.  We will also regularly check in with them to ensure they are happy with our delivery and service.  The great thing is, once they get embedded into our firm, they are wanting to refer a whole heap of their mates to us who are also with this “progressive” firm as they are all having the same experience.

The other thing is, we are value pricing the engagement with the customer.  They are wanting a heap more real-value services and they are more than happy to pay for them.  This is money the “disruptive, progressive” firm was leaving on the table by productising their offering.  The firm’s focus wasn’t on the customer, and that has created a marvellous opportunity for us.

When you do go down the path of changing your model, please ensure that you deliver what you agree to and keep the customer in the loop.  It’s no use being a “leader” in the industry/profession if your walk doesn’t match your talk.

You also need to have the value conversation with the customer and listen to their needs and wants.

Ends up being a far better outcome for all concerned.

Could not say it better myself!

Only just received the 2015 copy of the “Good, Bad Ugly” report on the Australian Accounting profession prepared by Business Fitness.  Makes for interesting reading.

head in the sand

There are a couple of points that are worth repeating:

  • revenue per partner has decreased by 8.9%;
  • average client fees have reduced by over 18% in the past two years;
  • for firms using timesheets, productivity is falling;
  • lower marketing spend over the past three years; and
  • 6% increase in firms using outsourcing (reasonable number, but not very many firms are doing it).

There is one very telling comment made in the introduction to the statistics in the report (my highlights):

When analysing the 14 years’ worth
of data relating to high-performing
firms, we can conclusively say that
productivity based on chargeable
hours has no correlation to
profitability.

Having just returned from the Verasage get-together in Boston, it has become even more apparent that the old models of firm management are not only redundant, they are dangerous.  Much of the discussion at the symposium related to the way successful firms focus on relationships – both internal and external.  This has to do with building, maintaining and honoring decent relationships.  Not relationships where everything is about flogging the crap out of your people and billing the hell out of your clients.  Relationships which are based on trust, accountability and common goals.

Having seen the damage done by the Almighty Billable Hour and looking at the impact this approach has on the cultures of firms, it amazes me that so many firms still use this model.

There is change already here in our industry and, as the GBU report reveals, this change is having an all-pervasive impact on our profession.  Either adapt or die.

Does this Really Work?

Ohhhh, the frustration!

I recently posted about a seminar I attended last week.  The feedback I have received from that post has been significant.  The responses have ranged from “Oh my Lord – that’s us” to “so, there is a way forward”.  Great, but I want to concentrate on the first type of replies received.

So many firms understand that the way they operate and their business model isn’t great, but it’s all that they know.  To try and move them to a new, more effective model takes a great leap in mental construct on behalf of the owners and managers in those firms.

One of the responses I received was from a bloke I know well who has just taken over as CEO of a professional knowledge firm.  Well established, reasonable size and “good, traditional” brand.  And he is frustrated up the wazoo!

It would appear from his email that the following issues pervade the organisation:

  • staff are rewarded with bonuses for hitting “productivity” targets;
  • The transfer from WIP into debtors (you know – actually billing the customer) is fraught in that, once the bills are raised, the customers get pissed off;
  • Consequence of this is that a lot of work remains in WIP as the senior people responsible for billing the WIP are too scared to raise the bill as they don’t want to have to deal with an angry customer;
  • Debtors ledger is out of control as there are a large amount of accounts “in dispute” which means that the whole thing is taking a massive amount of time and effort to clean up.

Now, from my view, this appears to be the antithesis of everything a professional knowledge firm should be.  Let me posit my view of the warped thinking that enables such an environment to exist, let alone continue:

Productivity

We want our people to be working – agree on that.  But, do we want them to be working on things that make a difference to the customer and are valued by the customer or do we want them doing things that waste a heap of time on customer accounts?  The behaviour you reward is the behaviour that continues.  By tying rewards (bonuses) to productivity targets, we are encouraging our people to bill as much time to the Holy WIP Ledger as possible.  The argument goes that, when we record everything, it gives us a basis for billing everything to the customer (more on this below).

But what is the real message that we are sending to our people when we bonus (often ridiculous) productivity?  Is it a message about effectiveness?  And is it really a message about efficiency?  Too many times, firm leaders sprout on about efficiency but the bonusing system actually penalises people from working more efficiently as their productivity targets won’t be met (the thinking goes: if I do this job more quickly, I won’t spend as much time and therefore, I stand less chance of getting the bonus).  Where is the incentive for them to be more “efficient”?

As part of this system, you get the inevitable build up of your Holy WIP Ledger.  Many firms see this as a “lead indicator” (as per last week’s post) when, in fact, it is a wish list that often bears very little resemblance to collection.

The other message you send to your people with the focus on hitting production targets as far as time spent is that they will only see a customer as something to be billed, not valued.  The training that occurs as a consequence is that the “up and comers” get taught that to get ahead, you need to focus on pleasing the partner/manager with high productivity rather than pleasing the customer by delivering great outcomes.

As an aside, it is often the case that the less senior people very rarely (if ever) get to meet with the customers.  How is this going to play out in their career development?  How is this going to assist them with understanding the file and the customer needs?  All information is “filtered” through the senior people before it gets to the actual “doers” of the work.  The outcome – they flog their guts out to get promoted and then have no experience in dealing with customers face to face.  I know of one firm in town here where the only people who see customers are the partners.  Talk about rate limiting factors!  An obvious outcome of this is that there is more rework required and heavier partner involvement in getting a file “customer ready” as the instructions are, more often than not, “lost in translation”.  This though, in the warped world of timesheet based billing, is good – more chargeable hours to bill, higher “productivity” and a bigger Holy WIP Ledger.

Holy WIP Ledger (HWL)

So, we have a whole heap of people billing the Holy WIP ledger as hard as they can as this is the basis on which they get rewarded.  The HWL is seen as a current asset in the books of the business and the financiers and owners of the business see it as “money in the bank”.  All that needs to happen is for it to be billed.

Herein lies a bit of a problem.  I have yet to meet with a firm where they state, honestly, that the HWL is fully recoverable.  I know of one firm I have been dealing with who ran a HWL that was a pure estimate.  They had timesheets to (sort of) back it up, but they knew that they were all rubbish so they just did an estimate.  It was probably as approximately right as the timesheet based one anyway.

I recently did some work for a customer in a professional knowledge firm regarding the exit of a Partner.  The HWL was obviously an issue to be addressed as the approach they were considering was one based on a mixture of profit and net assets.  To get a true picture of net assets, there needed to be a full review of the HWL as everyone recognised that it was not valid and certainly not all collectible.  In this circumstance, I suggested that we not go through this process.  Instead, we developed an approach which looked at what the exiting Partner was happy to receive for his equity and what the continuing equity holders were prepared to pay for the share.  As I said to the Managing Partner – “We can go through the whole process and get a result.  The real risk here is, whilst it might be very right as far as the number goes, someone is likely to be pissed off”.  The approach we used meant that my business didn’t get a whole heap of extra money for going through the valuation process, but, we did ensure that the Partners (exited and remaining) have kept very very good relationships and our customer very much values the creative approach we have adopted to solve their problem.  In short, we provided value rather than a number.  And we have further strengthened our relationship which will lead to more referrals and customer longevity.

The HWL is never right.  The term in most professional firms is “lock-up” – how many days the firm has “locked up” in WIP and debtors.  Often time, this number is horrendous – I know of some firms who have nearly one year’s worth of revenue “locked up”.  For what purpose?  You can’t spend it as it’s not real.  Why bother measuring something that is so subjective as to be useless?

Debtors

To get a bill done from your HWL, it needs to go through a process.  Often, it will be a senior person or Partner who goes through this process.  More often than not, they will sit down and agonise over the process “If I bill them what’s on the HWL, they will have a melt-down”.  So, what happens is that a bill will be raised against the customer for some portion of the HWL balance outstanding – in effect, what the person doing the billing believes they can get away with.  Conversely, if you do bill them for everything that’s on the HWL, you are almost guaranteed to get a pissed off customer on the phone three days later (or, worse, never – as they quietly leave and have no intention of using you again – or paying your bill).  There is no positive outcome that arises from this.  For anyone.

Now, the current thinking with regard to this is that firms should budget for “write-offs”.  In other words, they are saying (in words and deeds) that they know the HWL is crap.  But they then hold that the basis of their charging of the client is on time spent.  So, if the client has agreed to appoint them on time spent and they don’t bill the full time, are they really engaging them on that basis or on a “best estimate” at the end of the job?  This is where “estimated ranges” of accounts come in to it.  The client is told the cost of doing the work will be in the “range” of (say) $5,000 and $10,000.  The client hears “$5,000”, the Partner hears “$10,000”.  When the bill ends up being $8,000, both parties are pissed off.

What happens more often than people care to recognise is that there is a lot of “stuff” on the HWL that the senior guys are just too scared to bill.  I have seen some aged HWLs which record work done up to two years prior that is yet to be billed.  Seriously?  Is it ever going to be billed?  Or is it just there as a tacit admission that the system ultimately doesn’t work?  This then leads to other KPIs in firms about the ageing of HWL.  Most of these are there but not adhered to.  If the WIP isn’t billable, write it off – with all the “appropriate” consequences.

But, back to the staff posting time to the HWL.  How do they feel when the time they put in to a client is then written off?  Where is the feelgood out of this?  For anyone?  What is their thinking at the end of a job when, they are encouraged and incentivised to record all the time only to have it written off?  How will they think about the Manager/Partner who has “done this to them”?  What message does it send about the “system”?

So, after much navel gazing and internal brinkmanship, the bill is sent out to the unsuspecting customer.  The customer gets angry.  Now, one of two things happens.  The customer ring the Partner to have a whinge about the bill – the firms sends out a detailed HWL report to the customer detailing everything they have done (including the 15 minute phone call – billed as 18 minutes – where the customer recalls at least half of it was spent discussing the football results) for the period the bill covers.  Guess what, they get more angry “They’re charging me for what?”  Then they start to do the maths.  “If he is $500 per hour and he spent 8 minutes talking about the football, he wants me to pay him $100 for that?”  Not a great outcome.

Source:  geektoauthor.blogspot.com.au

Source: geektoauthor.blogspot.com.au

The other thing that can happen is that the customer simply doesn’t pay the bill.  So, they start to get harassed by the ever-vigilant accounts department in the firm.  The “friendly reminders” come out, then the “is there a problem” letters and so on until the letters get more threatening.  Really good, positive stuff about customer engagement through this whole process.

At the end of the day, it gets nasty and people start defending positions.  The firm will (usually) relent and write-off a part or the whole bill or, sadly, take the customer to arbitration.  On this note, I remember a number of years ago when Ron Baker did his “Firm of the Future” tour around Australia.  During this tour, I met with a number of the Legal Services Commissioners from various states around Australia.  Their major source of work?  Fee disputes.  Their fervent wish was that all firms priced up front as the firms that did this hardly ever had a fee dispute.

So, we have a debtors ledger that is somewhat suspect as to the real collectability of the balance.  Which means, when coupled with the HWL, the “lock up”metric used by a number of firms is inherently questionable.

After all of the above, is it any wonder why my firm dumped timesheets in 2007?  It has saved innumerable hours, it has reduced customer complaints and has meant that the team in here are far more focused on delivering positive customer results rather than inputs.  As stated above, the behaviours you get in your firm are the ones that you reward.  Is your reward program incentivising the right behaviours?  Is your firm business model one which is team and customer focused?

There is a better way of running a professional knowledge firm.  Far less stressful, more enjoyable and one where you actually want to come to work.  if you look after your people and customers, the profits will (generally) look after themselves.

The frustration of firm management can be reduced and/or removed.  There are a band of highly experienced guys and girls at the Verasage Institute who can help you make the move.  But you have to make the first step.  I strongly encourage you to do so.

The Pain of Old Firm Management

This week, I attended a seminar where, to be frank, there were some arguments put that had me considering the option of tearing my skin off and rolling in salt – it would have been less painful.

Hell

Consider some of the points made at in one of the presentations at the seminar (and this is not an exhaustive list, my comments/thoughts are in italics):

  • You should get your “star performers” and keep loading them up with work as they get in front of the pack.  In effect, reward them for their great performance by loading them up even more and putting more pressure on them – what an incentive that is!;
  • Apparently, your WIP balance is a leading indicator for your firm (!) – not sure how this works, but some in the room lapped it up – how exactly is the WIP report a lead indicator other than for the bills you are going to raise at the end of the month which will be the cause of the client complaints in the month following?  So, maybe it is a lead indicator – of client complaints – the higher the WIP, the more complaints;
  • The seminal approach to customer happiness: “If you touch the client, you bill the client – for everything”.  This phrase reminded me of a discussion I had the other week with a somewhat more visionary firm in Adelaide.  They have some folk who are not all that happy not recording the time they spend working on/for/with/around their customers.  I asked them during the discussion “Do you record the time you spend thinking about your customers over the weekend or at night when you’re at home?”  Of course they don’t.  However, according to the approach being promoted, you should.  Work that out, or, better yet – set a budget for it!;
  • You need to budget for write-offs each month;
  • References to “fixed price estimates” – what, exactly, are these? I have been racking my brain about this – if someone can provide some clarity for me around this concept, I would be grateful;
  • Apparently, client satisfaction is important, “but we do have to make a profit though” – in essence, the firm’s goal is profit first – if that has anything to do with happy customers, all well and good.  To me, this seems somewhat arse-about;
  • You need to ensure that your clients understand that their actions reduce firm efficiency – OMFG.  So, we should punish the clients for interrupting our work – actually laughed out loud at this one; and
  • Clients need to pay for the inconvenience they cause – as it would seem that they are the cause of all the problems that exist in the first place.

According to the sage presenting this, “clients don’t understand how accounting firms work”.  Really?  Do they need to?

It was argued that firms need to focus on productivity and efficiency at any cost as these are your major drivers for profit.  You need to ensure that you are flogging the be-Jesus out of your people (they will apparently love you for it) and encouraging them to work harder so that you can load them up even more.  This bit I found offensive.  People are volunteers in your business – they can choose to turn up or not.  I hear many firms complain about staff-churn and turnover – any bloody wonder!  If your culture sucks, you get the team you deserve.  Culture is the result of the language, behaviors and focus of a business.  If these are all based around profit at any price, then they get the culture that supports that.  Won’t be happy or contributory or collaborative, but it will be, well, there.

I have been a willing recipient of the famous “Verasage Headache” on numerous occasions.  They are positive, challenging and serve to help me grow.

Unfortunately, the headache I received from this session was entirely different.  It is a headache based around people being measured on productivity and chargeable hours rather than on effectiveness and customer relationships.  It is a headache that resulted from arguing that the customer is there to be charged heavily and charged often – this based on the theory that any bill they get from you will be a good bill (driven, of course, by your “leading indicator” WIP report).

So, at the end of the session, I felt sad.  Very sad.  There were owners and managers of accounting firms in the room who were assiduously taking notes – picking up tips to make them better at flogging the crap out of their people and not really giving a shit about their customers.

Tim, our GM, was at the session with me.  His words at the end of it summed the whole thing up beautifully – “Pretty scary shit actually”.

The salt room beckoned.

 

The Medical Approach – The 3 “Abilitys” (and Cheese)

Friday night last week was not a bad night – a bit cold and wet, but with a roaring fire and some lovely wine and cheese, the evening progressed very comfortably ( I can highly recommend the Tarago River “Shadows of Blue“).  One of my best mates came around to watch his football team get flogged – it was such an enjoyable spectacle that we ended up watching soccer and the Tour de France.

Over the course of the evening, we discussed many things and one of the topics we covered was the “ideal” approach that Doctors should have with their patients.  To provide some context, my mate is a specialist Surgeon and has built a wonderful reputation in his field.  He also teaches trainee surgeons and is on the examination panel for the Royal Australian College of Surgeons.  All this is very surprising considering he supports Carlton Football Club.

As our conversation opened up, he shared with me the three factors that make for better doctor/patient relationships.  His view was that where these three factors are in place and in order, the patient is happier, the health outcomes are generally better and there are fewer claims for adverse outcomes against the specialist.

The factors and the order?  They are:

  1. Availability;
  2. Affability; and
  3. Ability.

In precisely that order.

patient satisfaction

Expanding this approach through to other professions, it appears to me as though this might just be the most simple and easily understood “guide” for all of us.

Think about the customers whom you love dealing with.  They will be the ones you make yourself readily available to.  They are also the ones where you have a great personal relationship.  And, generally, they won’t be overly focused on your technical ability as the relationship is the thing that resonates most with and for them.  They respect your technical ability, but they value the relationship.

Over the weekend, I have reflected deeply on this approach and I believe it is something that we all should be aware of in our dealings with customers (in fact, everyone).

If you have a customer who is a pain and who you avoid contacting, nothing good is going to happen from the relationship.  This situation is one where you need to consider the real value that you are bringing to the relationship and determine whether it really is one that you should maintain.  Where you recognise that you don’t currently have the desire to be as available for a customer as you should be, is the relationship able to be recovered or should it be terminated?  I know that over my career, I have had numerous situations of this type.  They are really hard work and, even though you might get great results for them, there is very little satisfaction derived from the outcome.

Secondly, if you have a customer around whom you cannot be yourself and where you find your communication stifled and difficult, does this allow you to bring your “full game” to the relationship?  If you aren’t being yourself (or worse, if they aren’t being themselves), can this be rectified or should it be discontinued?  Again, there have been numerous occasions where I have had customers around whom I had to adapt my style and deliver with a very “serious” (so-called “professional”) demeanor.  This is hard work – for them and me and my experience tells me that the absence of this factor in a relationship makes the whole process less satisfying for all concerned.

The ability thing I am leaving out here as, if the first two factors aren’t present, it doesn’t matter how good your ability is, the relationship will be difficult to nurture and develop.

This is only a short post to introduce the approach to this forum.  I would love to get your feedback on this – it appears to be so simple, concise and to-the-point that you may wish to consider using it in your customer selection and retention process.  I will be.

Now, where has that cheese gone?

 

 

The Measurement Focus

In recent posts here, I have argued as to the effectiveness of various forms of measurement and their utility in managing outcomes.

I have just posted in further detail on our firm website (and, to keep Ron and Ed happy, I haven’t referred to cricket, but rather Aussie Rules football).  I encourage you to have a read – let me know what your thoughts are.

It’s the focus on measurement that stuffs everything

Over the past few days, my understanding of “why” firms won’t move from the timesheet model has had a breakthrough.

It’s really quite simple – people feel they need to “measure” their performance in some quantitative manner.  This means that they prefer to use an inherently subjective measurement forms the basis of their perception as to how they have “gone” in doing their work.  This sheeted home to me the other day when I was having a chat with one of my gurus at work.  They wanted to know whether they had progressed over the past year and how successful they had been in delivering outcomes.
The discussion turned to the methods we could use to assess how they had performed. All good, but the conversation then progressed to a point where we were discussing the difference between qualitative and quantitative measures. Now, being accountants, we inherently prefer to use quantitative measures – things like gross margin, profitability, ROI, efficiency and the like.  All good and useful in some respects, but the measurement is usually only an indication of something else that relates to qualitative issues.

Let me explain.  In our conversation, we talked about the things that were really important to our firm – things like development of each other in technical and non-technical ways (communication, customer relations etc).  These things are incredibly difficult to measure – so difficult that I am not aware of any way of objectively assessing them.  As I pointed out to my team member, they had contributed incredibly to the development of one of their support people over the past 12 months. They had lead by example and created a more rapid pathway for the person concerned to develop their career – personally and professionally. The leadership provided and coaching and development have formed a platform for the support team member that will take them through their career.  As I asked “How do you value that?”  What method do we use to assess this level of contribution?  In my view, such an assessment is going to be subjective and no two people would come to the same conclusion as to the “value” of that work.

In assessing this type of contribution, if we were using timesheets, we would be able to point out that the estimated time (do we record it in 6 minute or 10 minute increments) that might have been allocated to “development” or “training”.  But, much of the training related to customer work so, should we allocate it to the customer?  If we did allocate it to the customer, they would have every right to get pissed off that they were being “charged” for training.  So many decisions!

How much time should we take in this work?  Is here a benchmark or average (you know – where the best of the worst meets the worst of the best) that we should use to determine the input required?  No.  Everyone is unique and learns in their own particular style.  There is no one over-arching approach that works for everyone and therefore, the time spent tailoring the training approach to achieve the best outcome is of incredible value (also, the trial and error process undertaken to work out the most effective approach).  The value that my resident guru added to her team member was the combination of a range of skills, talents and abilities that they have developed over many years.  And then, how do we attach an “hourly rate” to that?  At the end of the day, does the arduous quantitative process we would need to go through to get the result add anything valuable to our analysis or inform our decision making?

geniusThe thing that really matters is that the outcome is effective.  The process in itself is inefficient until such time as the trainer and trainee have worked out what works for them.  Using a “one size fits all” approach will only create average outcomes and no-one wants to be average!  Spending the time to work out effective outcomes is far better than recording the time spent.  For example, if we knew that it took Manager A and Team Member B 20 hours to work out the most effective training method for Team Member B, can we use that when we look at the potential training time needed for Team Member C?  Of course not. B and C are different people with different learning styles.  To use the metrics from B to design the process for C stands a wonderfully unlikely chance of being useful to anyone for anything.

The measure of effectiveness should not be merely based on some subjective assessments that inform us of little and guide us nowhere.  The effectiveness of what has been done in training lasts a long time (a lifetime?) and to try and reduce it to a number is devaluing the contribution that has been made.

And, because the analysis and assessment as to the effectiveness of what you do is so inherently subjective, most firms cling on to timesheets – they know they’re not right. They know they are subjective.  They know they are a pain in the you-know-what.  But they are too scared to let them go as they believe it’s all they have.  Sad really.

Pollen and the Professions

What’s in the Wind in the Accounting Profession?

A question posed recently by an accounting profession publication

I was recently asked to answer the question of What’s in the Wind in the Accounting Profession? I believe such questions are naively complex. I feel it leads to a drumming simplification of MeTu (aka me too) thinking. The collective of the various professional press and media along with national and state association leadership tends to rework an all too common concert of sound bites and feel good Kumbayah designed to placate the rank and file while providing a spin that there is something significant just around the corner if we could just stretch a little. This pandemic of Pabulum for the Professions eventually annoys even the most infrequent of listeners.

Now that I have that off my chest, I will share the following thoughts of What Should be in the Wind in the Accounting Profession? In my view, what is (and should be) in the wind is simply Pollen.

Profits over Production: The debate about effectiveness (doing the right things) over efficiency (doing things right) is over. The corollary is that firms need to focus. Focus on profits over production. Focus on Results over efforts. Firm leaders need to focus on profit improvements over gross billable hours. Customers do not care about the hours one works; they care about the results that are delivered. Effectiveness is far more superior then efficiency.

Efficiency is always a ratio and never, in and of itself, ever an output. FedEx is far more effective then the postal system. In order to be effective, they had to seek better outcomes and certainly FedEx improved its efficiency in the process of effectiveness but envision that FedEx designed a package system but still used the Pony Express instead of a fleet of planes? The result would have been highly efficient (they know where each and every package {and its horse/rider} but it would have failed as it is ineffective today to transport packages in such a manner. In essence, firms need to stop orgasming over top-line growth and instead need to focus on profit improvement.

Opportunities Abound: True professionals are naturally observant: Too many firm leaders look at their markets as closed pools of opportunities. They naively seek growth at the expense of competing firms. In fact I have heard partners of established firms specifically target another firm’s customers and operated as if all members of our Profession were competitors instead of colleagues. This is utter nonsense and such thinking destroys our Profession.

The first canon of our Profession as outlined in the AICPA’s Code of Professional Conduct (Principles) notes that we have an obligation, as members, to promote the well being of our Profession. This includes both improving the Art of Accountancy and, likely more importantly, to Cooperate with Each Other. We aren’t cooperating if we are poaching.

Learning and expanding by observation is simplistically easy yet requires infusing effort into the process. We grow our firms by investing in the opportunities we find and the ones we create. Waiting for the phone to ring is not a marketing and growth strategy. Firm leaders must learn to create their own futures.

Smart real estate developers have learned to look for leading indicators about where to build and what to build. For example, when it comes to mixed-use commercial style real estate what do you believe are the leading indicators as it relates to capturing early-stage value? It isn’t zoning or demographics. And, it isn’t merely location, location, and location. These indicators are either lagging (zoning changes occur after someone has figured there is a better use, acquires or options the property, and then seeks the changes they seek) or they are coincident, meaning they help us concurrent with the changes in the market. Neither of these is leading (predicting where the values are headed). It turns out that one of the best leading indicators is to watch where the artists go.

Artists are relatively poor (economically) and need to find inexpensive and creative spaces for their studios and residences. Artists seek out great value. Artists then tend to invite other artists to share their spaces. These new artist colonies begin a following. At some point these colonies of people draw the attention of supporting and cottage companies; (from creative coffee shops to stores to restaurants to dry cleaners) entire communities follow the artists to their new neighborhoods. And artists are creative and innovative as it comes to the quality of life of their buildings and neighborhoods driving up values by driving away dirt, dust, and decay. Artists, it turns out, are a great leading indicator for real estate developers who desire to be early adopters of profit opportunities by merely observing their own communities and where the artists are headed.

Firm leaders need to approach their growth the same way. Look for the leading indicators. Look for your firm’s equivalent of artists. Look for the innovators, the inventors, the new immigrant businesses, the prospects that are expanding, and look for value when others are blind to its beauty. Firm leaders need to get of out their offices and look around. They need to be active members in their communities and seek positions of influence in fledgling industries.

Firms mature, as do their clients.   Anyone can recognize a change is afoot after the proverbial tipping point where the innovators and early adopters have paved the way for the following majorities. The best firms and best firm leaders are at the left-hand edge of the diffusion curve. These mavericks inherently understand there will be many investments that fizzle and only a few that sizzle. It is those profits from the sizzling hot successes that drive the firm’s future value and growth.

 

Legislation and Regulatory Issues: Together with my VeraSage Institute colleagues, I have the opportunity to speak to and meet with thousands of fellow CPAs and CAs each and every year. One of our favorite questions to ask our audiences is: Have you recommended our profession to a loved one during the past year? Across the board and regardless of country (most common are USA, Canada, UK, Australia, and New Zealand) we receive positive responses from 10-15% of the participants. Inversely, this means that 85%+ of our fellow professionals have not and in reality do not recommend our profession to loved one (defined as a person one knows and cares about – unlike say a high school or college student sitting through some mind numbing “Feed the Pig” commercial).

This decline in advocacy about ones chosen profession is a leading indicator that something of a cancer must be present that is stripping away our enjoyment about what we do and how we do. Failure of firm (and profession) leadership to adequately diagnose and then cure this disease suggests the end is closer than we think to losing ourselves and becoming a trade or job rather than a career and profession. Personally, I do not want to see our profession go the way of the Scribe’s and be relegated to pages in a history book and postage stamp.

When asked why participants avoid recommending our profession, the most common responses include: regulatory overload, work load compression, and the sins associated with hourly billing as it relates to technological improvements and efficiencies via technology (think about the reduced time it takes to complete a tax return using software today then say 30 years ago when we filled in bubble sheets on CompuTax forms, or even 50 years ago when we prepared returns by hand and typed the values onto the forms).

Lets look at regulatory overload. This includes government regulatory matters from the SEC, the PCAOB, the IRS, the FASB, the AICPA SSARs, the GAO, the DOL, the 50+ State Boards of Accounting, the IFRS, and all other bodies deemed capable of dolling out but never retracting rules and regulations that impact what we do and how we do it. There is no joy in contorting ourselves to please the whims of bureaucrats residing in such cities like Nashville (home of NASBA), Washington, D.C., home of the federal morass of death by regulatory action, NYC and RDU (home of the AICPA). Such regulators act like they can use rules and procedures to triumph over common sense and good judgment. They can’t; but they sure try.

Leaders of our profession should seek ways to reduce the complexities of rules and regulations in exchange for more principled driven decision making that promotes the right answer, with the right disclosures, with the right outcome, so that users of our reports and services may make informed judgments about the economic activities of the businesses and individuals we represent.   Far too often, the so-called leadership of our profession is to cozy with regulators and rule making bodies and, in fact, support additional complexities under the misguided notion that more is better when in reality simpler is better.

As it relates to workload compression, this too is a function of an overzealous regulatory and ill informed bureaucracy and/or legislative body (or bodies). Much of this compression came about during the TRA 86 when fiscal years for pass through entitles was essentially abolished. This shifted more audit and assurance work along with the tax work to the front half of the year rather than allowing for a smooth seasonality of services. This has increased our need for people in narrow time frames and then we face an excess capacity of human capital in others. Firms burn out their people increasing the chance that our actually “best and brightest” leave our profession as it lacks the enjoyment they hoped to achieve in life. Firm leaders should continue to pressure their local, regional, and national officials to return to a time when natural business cycles could be used for associated filings and reporting periods.

Finally, the toxic nature of timesheets and billable hours drive talent from our profession. Time-based billing is the antithesis of professionally based pricing. Hourly pricing where one is compensated based upon recorded time does not align with the goals and objectives of our customers. Our customers desire a result. When we are compensated based upon our inputs and not our results, we are apt to add useless procedures, steps, and complexities that drive the billable hours up and hence charge the customer more. Also, timesheets are full of lies as people are unable to really capture in (6 minute) increments what they really do all day and so they tend to make a lot of it up. Ric Payne (the smart founder of Principa) has suggested that over time the lies balance each other out (e.g. I work a little for free for client A today and bill my time to client B, and sometime in the future it is reversed). This may be realistically true, but does not cure the challenge of misalignment of interests. Another toxic challenge of the timesheet mentality is that billable hours are rewarded for promotions, partnership, and influence.

Too many firm leaders list their billable hours like a badge of honor when in fact they should be ashamed. It is far better to produce results with effectiveness rather than efforts and price according to the value delivered rather then the time invested. I am reminded about the conundrum of hours invested versus the effectiveness of the team member via the following example shared by one of my former firm partners. His wife is a construction project manager. Her supervisor one time confronted her about the fact that the “men” on the job site were spending part of every Saturday working while she did not. The supervisor suggested this looked like she wasn’t pulling her “weight” as a team member and that come bonus time she might not receive an equitable share. Her response was superb. She responded with “if I were as wasteful and inefficient with my work during Monday through Friday, I would have to work Saturdays too.” – How right she was. And how wrong are firm leaders that value the inefficient worker over the effective one because the tool for measurement only records efforts and never results.

A final aspect to the tainting of the value of our professional lives is living within the childish nature of our elected officials. Their creation of complex rules and financing regulations designed to reward their patron saints (their donors) end up punishing their people by forcing unwarranted behaviors by citizens in order to minimize their individual tax footprint rather than supporting a culture where people seek to maximize their individual opportunities to expand their financial horizons. Too much of our national GDP is spent reporting and navigating the complex tax code. We need a simpler and fairer method to collect the necessary funds to operate our government.

Loyalty and Customer Economics: Firm leaders and members of our profession need to understand and operate within a customer loyalty framework. Too many firms reward the hunt, the capture, and the kill of a new customer while failing to understand why their best customers leave. It is far superior to enhance the value proposition of current customers then it is to invest heavily into new relationships.

Customers love to be loyal. Just ask any director of an airline loyalty program. Even if passengers dislike flying, they love ‘’their airline”. Ask a Nordstrom customer about loyalty and they will frequently advertise that they rarely shop elsewhere even if they believe Nordstrom is slightly higher priced (they generally are priced very competitively). Just look at American Express that captures great loyalty from all of their various card levels – from the inexpensive Green Card to the exclusive Black Card, American Express delivers value across the board or its continuing customers would use alternatives.

What is frequently missing in CPA firms is a reason for customers to remain loyal. This is partly because our profession focuses on efforts. CPAs extol how hard “we” work rather than focusing on helping the customer achieve her objectives, goals, and desires. When asked to rank those attributes that customers use to select CPA firms, firm leaders respond in the inverse to the customers. CPA firm leaders discuss their technical skills and acumen over their softer skills like communication, awareness, and creativeness. Customers on the other hand respond by relying greatly on communication, creativity, and engagement. Customers struggle to comprehend our technical skills yet too many CPA firm leaders only speak about their knowledge while ignoring their more important competencies.

CPA firm leaders need to understand why CPA firms are hired and why we are fired. We are rarely, if ever, hired or fired due to our technical quality.   We are almost never hired or fired because of our price (about 4% of all engagements are decided upon price). We are almost always hired and fired because of our communication skills, our ability be creative, our eagerness to help our customers, and our availability to help them when they want our help and not “after tax season”. Sometimes we are hired because we have nicer furniture or a better location. Sometimes it is because we will meet them at odd hours of the day. Sometimes it is because we offer a solution that others can’t. What I can guarantee you is that you aren’t hired and fired because of price or quality. It is all service related opportunities and challenges that drives customer decisions. Investing in customer loyalty metrics goes a long way to a more profitable firm. Simply remember that a current customer can be 11x more profitable then a new customer.

Experiment with Service Offerings: I believe that the best firms are the ones that experiment and expand their offerings. Many experiments will fail to deliver their desired results. That is a price of admission. There are two primary reasons for a firm to explore new opportunities and experiment with creative options: The first is that our complex customer base is not standing still and their wants and needs continue to evolve and if we aren’t at least with them or even better, ahead of them, they will naturally look elsewhere for solutions to their unfilled needs and desires. The second reason is that many members of our profession have signs of ADD. In essence, our best and brightest get bored and bored people become inattentive and inattentive people make mistakes.  Worse, bored team members daydream of better jobs and brighter futures and these daydreams become realities far too often.

I have concluded that our professional attention span is about 3 years. This is enough time to learn a skillset, master that skillset, and then teach that skillset to a new person and then be allowed to move on. I see too many firms with team members living the same routine for years and decades to the extent of missing the true needs and wants of their customers. Hence, they become my customers. Times are changing, generational shifts, web 2.0 to 3.0 – go head and add some R&D; experiment with new offerings, and take aware the boredom of our lives. Remember, each new mountain pass travelled generates a new world view and an ever-expanding world view is more necessary today then it ever has been.

Networking – Networking is not social media. Although social media is a part of networking it is not networking. Networking encompasses so much more than mere social media. Networking is the act of becoming an integral part of the multi-variant solutions to unknown problems. Thus positioning the professional in the middle of the necessary web of needed information and solutions to an infinite array of challenges.

We, as professionals, have the distinct opportunity to provide what I term as “bridges to structural holes”. The “structural holes” as I term them, are the distances between what a customer has and what the customer needs. Of course, one could substitute almost any synonym for customer. The key is that a well-networked professional is the key that opens many doors.

Most firm leaders undervalue networking; unless the participant is already a member of leadership. That is unfortunate. Networking should begin from the beginnings of student life, through early careers, into leadership, and into retirement. As Australians are fond of saying, “we all need Mates”. And Mates watch out for each other.

Networking is not about just providing referrals or leads. Networking is seeking solutions to problems that possibly don’t’ already exist and, concurrently, listening to wants and needs from those who will benefit from connections that we are only to provide.

Networking requires dedication and commitment. Networking is not about “you”, it is always about “them”. Networking requires in investment in time and resources. It requires your ears to be always open, your mind to be engaged, and your heart to centered on your clients, friends, and colleagues. Networking isn’t just slapping palms or sharing LinkedIn profiles. Networking is active engagement across all disciplines, across all strata, across all industries, and encompassing all opportunities.

Networking should begin even before the beginning of a career. Networking must begin most definitely concurrent with your professional work. Twenty years into a career, the connections made in one’s youth frequently pay dividends. The customers you meet, the contacts that are made, the alumni of your university, the town where you live, and the hobbies that you share are all part of a valuable interconnected web of opportunities and solutions.

The most important time for investing into your network is at the beginning of your career. Networking’s ROI is akin to the time value of money. The earlier your investment, the larger your return. Networks expand exponentially. They are not a zero-sum game. Young people must develop a network and they need time and opportunity to learn this craft.

Partners and other firm leaders must allow younger professionals time to attend meetings, events, lunches, professional society events, and community activities. Each and everyone one of these avenues provide an opportunity to meet someone whose individual return on investment is multiples greater than the average. And, when this occurs, the net present value of those future transactions is exponential.

Yet, such networking activities as described above run counter to the firm’s current objective of maximizing revenues. If, on the other hand, the firm had a long-term profit view, leadership would both understand the value of these early career investments and support return multiples of any “opportunity costs incurred today”.

A professional’s value is predicated on their ability to solve expressed and unexpressed customer wishes and problems. If you can’t do this, then the professional is really just a technician; nothing more than a hired gun to perform the work orchestrated by others. There is nothing extraordinary in merely following the recipe crafted by others. The value of a professional is primarily connected with one’s ability to craft excellent resolutions to an ever expanding list of unfulfilled opportunities.

My advice is to constantly expand your network, each and every day for your benefit and the benefit of others. In this way, you maximize your opportunities to really make a difference in the lives of others. There is nothing truer than a professional that makes a difference.

There you have it. Now you know what I believe should be in the wind of the accounting profession.

Now, enjoy your day.

 

Who is More Generous Bill Gates or Wal-Mart?

Blame Facebook. Actually it is really my fault as I was reading recent postings on Facebook and there it was: a shared post from a local television station positing that Bill and Melinda Gates (Bill, Melinda, or the Gates) are the most generous humans of all time (http://www.kgw.com/story/news/local/2015/06/05/bill-melinda-gates-biggest-philanthropists/28562631/).

When such statements are made, context matters. History matters. Definitions matter. And, even if it were true, why do I care? Really, why do I care about how Bill Gates spends his money? So I asked my friend who posted this item to Facebook “why do you believe that?” And she replied by asking me a question of “not true? Below is the full set of Facebook comments:

 

  • ‪Me to My Friend‪ why do you believe that?
Like Reply · June 5 at 7:50pm

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  • My Friend to Me: Not true?
Like Reply · June 5 at 7:51pm

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  • My Response to the Question:‪ Didn’t say that. Just is spending $ the criteria. Carnegie invested in infrastructures that lead to great things. Difficult to compare generations. The gates’ have certainly been generous but with very tax sheltered money. Warren Buffet talks about why rich pay less % of tax like him in dividends and capital gains while at the same time avoiding estate taxes of 40% by giving money to gates (likely because he believes gates will spend it wiser than the U.S. Congress and he is now fool. But possibly a slight hypocrite). How does one really define most generous? Thomas Jefferson created a university, as did the Stanford’s. Gates hasn’t done that? It is easy to look at their money and even their time but comparing across generations is dangerous. We can look back in 100 years and decide. History is too short for them at this point
Like Reply · June 5 at 7:57pm

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  • 

‪My Friend’s Friend Responds back to Me: 

Why do you have to disect generosity?
Like Reply · 2 · June 5 at 8:47pm

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  • My Reply to the Friend:    

Why? Well because I believe that we should consider such questions. How should one define such subjective terms? Does a rich person who leverages tax deferred assets that are contributed to something he controls more generous then the union labor family that quietly tithes and donates countless hours to community services but without fanfare and media? Are we, as a society, to over value money relative to spirit? What value has come from there efforts? Can you prove it or feel it? I am sure the world is better with their contributions then without. This is not a slam. But why the need for such a label? True generosity is frequently done in quiet and not in public. It is too easy for a perplexed media to pander such easy opinions that get repeated (posted at 9:14 PM June 5th)

 

 

The above conversation got me thinking not only about the state of our collective critical thinking skills, but also about the bias of media outlets and others to view donating a fortune as the most important generosity.

One of the lost skills of our current culture and society is the infrequent use of reflective critical analysis. I don’t mean political polarizations – the screaming from our political extremes – I mean an individual’s personal reflection and thoughts about the value of ideas and thoughts posited as facts. When such statements (like the Gates’ are the most generous in history”) are made in a factual framework, people frequently (and IMHO too quickly) jump onto the proverbial bandwagon and repeat the statement without confirming or understanding its validity or its limitations.

We all played the old telephone game when we were kids. The game was a lesson in our inherent weaknesses in communications, even within a small group and with nearly homogenous members. Statements by media outlets are merely a small segment (albeit overly influential) of our society’s infatuation with others and their lives and choices. It is too easy to simply accept what is spammed around the internet (or worse yet reported via a Google Search) and pass it on like it is a demonstrable fact (one reason the website Snopes is so popular with some people is to merely have some level of a Bullshit Meter available to inform the uniformed that the 65 year old Russian Woman really didn’t just deliver 17 children) but Snopes isn’t any good in cases where simple logic, inductive and deductive reasoning, and inquiry via questioning are superior to just accepting the statement as true, complete, and supportable by some level of independent verification . I’ll return to this topic in future postings, however for now, I believe my point has been made and you, the faithful reader shouldn’t be bludgeoned about this topic at this time.

Meanwhile, I decided to consider the value of the gifts of the Gate’s Foundation to that of Wal-Mart. Both enterprises benefit society: one (Gates) by endowing upon groups, institutions, and individual, grants, gifts, fellowships, and funding (frequently with controls, reports, strings, etc.). The other, (Wal-Mart) focuses on being the voice of the people. Wal-Mart is constantly reducing prices so that people (especially poor people) may receive the maximum value for their money.

Note: Unlike many people, I am a fan of Wal-Mart. Although I do not regularly shop there out of choice; I recognize the value Wal-Mart has created for our national and global economy. There are certainly many criticisms available to cast upon Wal-Mart and its practices. Many of these criticisms are (IMHO) overly jaundiced and lack the intellectual curiosity about the truth that I seek. For example, people will compare Wal-Mart to Costco as it relates to pay and benefits. Costco earns $2B per year from its membership fees. Wal-Mart is free. Costco reports a profit of about $2B per year. Hence 100% of CostCo’s net profits are from membership fees and not from profits generated by sales of their products. Wal-Mart does not have a membership cash flow. Wal-Mart is profitable for sure. However if Wal-Mart had increased its average wages back in about 2007 from say $9/hour to $12/hour – 100% of all of Wal-Mart’s profits would vanish and that would have created less stores, higher prices, and less choice (all of these are bad outcomes for poor people) – I will return to Wal-Mart and its complexities in future posts. The key part is that Wal-Mart kept inflation low in the USA for over a decade (the Government can’t do that); Wal-Mart lowers prices for the poor (what do anti Wal-Mart people have against helping the poor); Wal-Mart helps poor and rich in its communities by fostering lower overall prices at stores that aren’t even Wal-Mart (e.g. Safeway has to be competitive so it must balance its value proposition with options like Wal-Mart); Wal-Mart helps the environment by taking waste out of the distribution system (like excess boxes, wraps, etc.); Wal-Mart shares the savings of its innovations with all three of its constituencies (example – when Wal-Mart found a way to save 5 cents on packaging – the supplier was able to keep 40% of the savings, the customers received 40% of the savings, and Wal-Mart kept 20% of the savings {note this is not a sign of a greedy company – this is one that understands that value and profits must be shared}. These are just some of the benefits of Wal-Mart that aren’t widely discussed.

Lets now look at how the Gates Foundation and all of its PR stacks up against Wal-Mart (note – I will provide sources for statistics at the end of this posting for your individual reference):

According to the Gates Foundation website, lifetime gifts equal $33.6B (which is a boatload of money {and Gates has more for sure}). So, I will agree that Gates has provided a generous amount of money. Way more than I have; however I would like to believe I am at least as charitable but on a different scale.

Wal-Mart on the other hand as certainly provided community support, shareholder dividends, employment, and federal, state, and local taxes. I will ignore these societal contributions. I will focus on savings the customers have received by paying less at Wal-Mart then if Wal-Mart either didn’t exist or more likely wasn’t in their community.

For Wal-Mart statistics, I will reference only the past decade. Hence any value Wal-Mart provided during its first 35 years of existence only adds to my analysis. It should be noted that the values below are through my own analysis as Wal-Mart doesn’t provide statistics as to its “savings” provided. There are plenty of price comparisons though and you can use the link I provide below or perform your own research.

Some basic pricing savings for Wal-Mart as compared to its competitors averages 3.8% across the board. That means for every $1 spent a Wal-Mart, on average, a consumer would need to pay $1.038 in the general marketplace. More specific to say the North American market would be to compare Wal-Mart to Target. Target’s prices are (on average) 2% greater than Wal-Mart. This means a consumer is certainly better off shopping at Target as it relates to typical market-basket markets and stores and slightly worse off then shopping at Wal-Mart. In my analysis I will use a 1% across the board savings (which is likely at least ½ to 1/3rd of the actual savings – hence I wanted to be conservative with my values {e.g. less predictive savings value then to report more}.

Wal-Mart reported a total gross sales of 3.716 Trillion Dollars over the most recent 10 year period. Wal-Mart reports 144 million customers per week. For scale that means slightly more than 1/3rd of all Americans shop at Wal-Mart each and every week. The average sale is $61.17 (I did that by math). Using the 1% value noted above as net savings – that means each customer saves 61.17 cents per visit. This equates to a 10 year savings of $45.671B (the math is: 144M*52 (this gets us visits per year)*10 (now we get visits per decade)*.61 (the savings per visit) = 45.677B {rounded}) (see high school algebra does come in handy).

Comparing Wal-Mart benefits to the customer – freeing them up to spend their savings as they wish of 45.677B to Gates’ gifts 33.6B, we learn that Wal-Mart has provided 36% more benefit then Gates.

So who is more generous? Bill and Melinda Gates or Wal-Mart? Ultimately that depends upon how you want to value generosity.   I believe that Wal-Mart has provided tremendous real value and continues to provide that value each and every day and with each interaction with its customers, suppliers, communities, and shareholders. Gates provides value too – simply differently. Wal-Mart is likely more democratic about their contributions to society as they aren’t philosophically motivated to achieve any other objective then low prices and great value to its customers by constantly improving its supply chains, distribution, and watching any and all costs. Gates desires to have certain effects and outcomes. That is a value of spending one’s own money – you do get to choose where it goes (isn’t American great?).

Essentially, distinctions such as most generous, best run, nicest, most labor friendly, and any other type of ranking always needs to be analyzed to ascertain how the conclusion(s) were reached, why the conclusions really matter, and how do we confirm we have a reasonable understanding of the analysis necessary to draw our own conclusions as to the veracity of the statement. Otherwise we fall victim to our own ignorance as we propagate false and/or inaccurate statements as fact and hence contribute to the mental pollution that is all too popular in our current leap to quick judgments and fast answers.

Sources:

http://www.fool.com/investing/general/2014/07/20/everyday-low-prices-vs-expect-more-pay-less.aspx

http://www.gatesfoundation.org/Who-We-Are/General-Information/Foundation-Factsheet

Episode #38 Preview – Entrepreneur Heaven

They say you can’t turn back the clock and go back to the good old days. Yet this is precisely what is happening with the total quality service movement, the customer loyalty movement, CRM, and other philosophies that put the customer at the center of the business organization. Millions of dollars are being spent on consultants to relearn what was once common sense, practiced by the great entrepreneurs from the turn of the century to the mid-1950s. This show, the first in our Entrepreneur Heaven Series, will explore the wisdom of Thomas Edison, Henry Ford, J.W. Marriott, and Walt Disney. Wisdom is timeless, and occasionally turning back the clock is the wisest course of action. Sometimes history is our best teacher.