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.

Regrets? They’ll have a few

OK, so we’ve all got them.  You know, those things that we look back on and think “what the hell – why did I do that?” or, (even worse) “why didn’t I do that?”

I’ve had plenty – more of the former type than latter, but it all forms part of the rich tapestry of life that we humans form part of.  And, much as we may regret things, it helps us develop into the people we are and forms the foundations of who we will be.  Great.

apple

BUT, what would happen if you knew that something was going to happen and, despite every nerve in your body screaming at you to do something, you didn’t “do it” (whatever “it” might be) – is that really a regret?  If you adopted a stance of denial, does that turn into a form of regret?

How is it that, even when confronted with massive amounts of evidence supporting a reality that is going to occur (and I’m not talking “consensus” here) – I am talking incontrovertible facts – you still don’t make the moves that are required?

I’m not going to launch into semantics here (I will leave that to my far more learned colleagues in Verasage), I am just trying to posit the argument that often times, people do not do what they should and don’t take action when they should or find a million reasons not to do something they know they need to because, well, they have lost something.

What is the loss they have made?

Consider if you will the current state of the accounting profession.  We are seeing massive changes set upon us – mainly from technology/cloud solutions, but also from offshoring operations.  Did you know, for example, that most of the Big Four have established offices throughout Asia to which they “in-source” their compliance work at (about) AUD10 per hour?  I know of an Australian example where a large corporate has moved a significant volume of their processing/admin work to a Pacific nation as the effective wage rate there is AUD1.20 per hour – a bit better than the award rate over here!

This is all happening now.  Today.  To our beloved accounting profession.  And what are the vast majority of our colleagues around the world doing about?  Nothing.

I posted some time ago about the changes that were occurring to our profession.  The changes that were coming then are rolling out even more quickly than I anticipated.

So, what is the profession doing to adapt to this change?  Not much.  Some of us a screaming to all who can be bothered to listen that there needs to be a change in business model.  Hardly anyone seems to be listening.  Or caring.  And we are not, by the way, being “chooky looky” – the sky is falling in!

What are most accounting firms doing to try and combat the inevitable?  They are trying to be more efficient.  Making better time recording platforms and putting greater emphasis on staff productivity.  Anyone recall Danny DeVito in “Other People’s Money”?  Buggy whips.

To make the process more precise isn’t what’s required in the accounting profession today (or tomorrow).  As Ron Baker is fond of saying – “I’d rather be approximately right than precisely wrong”.  Bravo Ron!  But tell that to the Luddites who persist with a 1950’s business model 65 years after it was made common place and 64 years after it became redundant.

The time-sheet is an anachronistic tool that does not fit with today’s requirements.  Staff hate them, admin hates them, managers hate them and Partners/Directors hate them.  The people who hate them most however, are the second most important people in your business – your customers.

In some respects, I am advocating a “back to the future” scenario – get rid of time-sheets – but with some important changes.  Changes like agreeing the scope of work and price up front with your customer.  The change which includes and involves your people in determining scope – and price!  The one where you truly empower your people to shine rather than record their misery in 6 minute increments.

Ed Chan of Chan & Naylor last week posted on Linked In.  Chan’s argument is that accountants sell time.  No.  We don’t.  We sell solutions to our customers’ problems.  His argument is that the “solutions” (I am expanding his argument a little here, but I believe it is in the same vein as what he has written) are all compliance-based whereby all we are doing is the “same thing” for each client.  As I have illustrated above, the basis of a lot of the compliance work is going to be automated or off-shored.  So scalability only applies if you’re doing basic, processing and bookkeeping work.  Not exactly what we’re trained for is it?

Similarly, setting an arbitrary hourly rate to charge them for your time isn’t reflective of their need or the value that they place on the work to be done.  Using the same rate for everything you do makes you pretty “average”.  And remember – average is where the best of the worst meets the worst of the best.

My belief is that every customer is unique and have their own set of fears, needs and the like.  To try and put them all in one basket is to demean both them and the people who work on their files.

Chan’s argument is also based on the premise that all you have to do is to hire more people and more customers will come to you.  Oh, to live in such a wonderful world!

From my experience (such as it is), the only way you can achieve this is to discount your offering to a level that drives people to you.  And then, what happens to “the margin” that Ed believes is the Holy Grail?  That and the fact that you’ll generally get the bottom-feeding clients who don’t value what you do anyway and will bring a whole heap of their “friends” along with them – High School Chemistry – like attracts like.  You will also not exactly engage your people as they merely become cogs in a never-ending grind out of tax returns.  Inspiring isn’t it!

So, in Ed’s world, where “you build a business to prepare a tax return”, I believe there will be regrets.  Lots of them.

Customers don’t want tax returns.  They want advice.  Support,  Counsel.  Encouragement.  SOLUTIONS.  The tax return work is only there because the government stipulates it.  Nobody really “values” it in the true sense of the word.  And the ultimate disruption?  I know of at least one of the Big Four that will be offering their clients compliance work for $0 in the coming years.  How’s “the margin” on that?

Getting the business model right for accounting firms is critical given the disruptive times we are in.  Making a bigger or cheaper version of what exists won’t answer the challenge – it merely cements in a race to the bottom for those firms that don’t adapt.

Regrets?  Yep, I have them.  A number of them.  One I do not have however is getting rid of time-sheets and moving to a business model that will sustain our business, our people and our customers for a long time.

Oh – the loss they have made that I referred to above?  It’s a loss of self esteem and belief in why they do what they do.  And that, my friends, can be scaled!

How would Charles Darwin see you?

DodoIt isn’t about survival of the fittest. Darwin actually held that the most adaptable were the survivors. So, are you and your business adapting or are you heading down the path of the Dodo?

The current environment is one where there are so many changes taking place that the firm of 20 years ago will find it hard to compete. I know looking at my business and the work we do that to produce our current output, 20 years ago we would have required a heap more people and resources. Thankfully, technology has developed and enables us to create the results etc that our customers want and need.

But, there are two other components that are vital – your people and your customers. Unfortunately, a lot of firms “out there” have taken on (some very grudgingly) the technological change, but they have made few, if any steps, toward adapting their approach to their people or their customers.

Most of my thinking here comes from the “Growth Curve” approach which looks at “Three Gates” – people, process and profit. The technology has helped us deal with and adapt to the process gate, but I am seeing very little in the way of adaptation to the profit or people gates.

The profit gate needs to be adapted to by looking at the way that you engage with your customers, the service you offer them and the methods by which you price and they value what they get from you. The arcane approach that is the timesheet is becoming less and less popular (as can be evidenced by a brief review of other posts on this site) and customers are demanding more certainty, clarity and comfort that they are not signing on to an annuity stream for the advisor whereby they are being charged and billed for the advisor’s inefficiency or learning. In effect, given the timesheet places the customer and the advisor in directly opposed positions, the customer is now waking up to the fact that they want to know in advance what the price for the work will be. Those firms that do not adapt to this emerging reality will find it very difficult to retain or attract customers where other firms out there offer this as an alternative.

The people gate is the other area where firms are finding it difficult or are not wanting to adapt. The blunt object that is the timehseet that is used for performance management in many firms is rapidly becoming redundant. As an example, we recently advertised for an accountant and one of the headlines in the ad was “no timesheets”. We have had some sensational applicants for the role who are currently working in accounting firms in town where they are managed and measured by the timesheet. I don’t know about you, but if my performance is being measured in 6 minute increments, it is going to be fairly meaningless to me. I want to be judged on results and outcomes. Inputs are irrelevant. Hence – particularly with our Gen Y guys – our people want to be and remain relevant and highly valued based on what they have added to the business, not how much time they have spent doing it.

Many of the firms with which I speak are afraid of moving from the timehseet and adapting their business model to what the world is slowly going to demand of them. These poor bastards are going to be wondering what hit them in about 5 years’ time when it will be all to late.

They will have few staff and fewer customers but they will be able to account for every single minute of their day.

They will be preceisely irrelevant.

And a future Charles Darwin will wonder why they chose not to adapt.

Some Super Posts on PM

Late last week, I received the email from Wes McClure, a software development consultant and coach at Full City Tech Co.

He writes:

Hey Ed, I’ve been writing a lot about why value is important in the software development process from my personal experience. I’ve been consuming a lot of content from the VeraSage website and felt like some of this might help software development professionals make the leap to value based pricing. I wanted to share this with VeraSage if it’s of interest for the resources collection:

If it looks helpful, let me know what I can do to help you share it with others.

Thanks

-Wes

While Wes writes primarily about software and technology, he clearly understands the importance of the value conversation in the process.

Enjoy the posts!

Hawaiian Seminar-At-Sea

Seminars-At-Sea presents “Knowledge is Profit” CPE cruise, October 26 through November 2, 2013.

We will be onboard Norwegian Cruise Line’s “Pride of America.”

This will be fully tax deductible and provides 32 hours of CPE credits.

For more information, contact: 1-888-377-7962

For Good and Evil

This is the single best book ever written on the history of taxation.

Here’s my recent book review from the Minnesota Society of CPAs publication, Footnote.

Also, you can watch a one hour interivew with the author, Charles Adams, from 1993.

If you have any interest in taxation and how it alters history, you find Adams fascinating.

Book Review: How Will You Measure Your Life?

image

Harvard professor Clayton Christensen is one of my favorite business thinkers, right up there with Peter Drucker, Henry Mintzberg, Gary Hamel, and a couple of others.

Unlike most business writers, Christensen understands the importance of theory. He writes:

MANY BUSINESS RESEARCHERS, consultants, and writers create and sell us static views—snapshots—of technologies, companies, and markets. [These] tell us little about how they got there. Nor do they tell us what is likely to happen in the future. My colleagues, my students, and I have eschewed the profession of photography. Instead we are making ‘movies’ of management.

This book applies the same concept of using theories to what’s important in your life. He begins by talking about knowing some of the leaders caught up in recent scandals, like Jeffrey Skilling from Enron, a Harvard graduate. The book sets out to help you answer three questions with respect to “How will you measure your life”:

  1. How can I be sure that I will be successful and happy in my career?
  2. How can I be sure my relationships with my spouse, my children, and my extended family and close friends become an enduring source of happiness?
  3. How can I be sure to live a life of integrity—and stay out of jail?

The last one about staying out of jail may seem unnecessary, but given the number of Harvard MBAs who have ran afoul of the law in recent times, perhaps not.

What’s interesting about this work is that it applies the same logic of using theories, which Christensen uses in his work with business leaders, to your personal life. It’s only theories that allow us to peer in the future, since conclusive data is only available about the past.

I Don’t Have an Opinion, the Theory Has an Opinion. When people ask me something, I now rarely answer directly. A good theory doesn’t change its mind: it doesn’t apply only to some companies or people, and not to others. It is a general statement of what causes what, and why. Good theory can help us categorize, explain, and, most important, predict.

You shouldn’t need Liz Taylor’s record on marriage to know what it takes for a good marriage. Theories help us explain what will happen before you experience it. He suggests you ask:

What are the most important assumptions that have to prove right for these projections to work—and how will we track them?

You’ll learn a lot of interesting things about business strategy, which surprised me at first given the subject of the book. Yet given his approach of using theories, it makes perfect sense.

One of the most intriguing discussions is the “full versus marginal thinking” that will help assure you live a life of integrity. He compares Netflix with Blockbuster.

Netflix didn’t have an existing profitable business model to compare to, it’s baseline was no profit. Blockbuster, on the other hand, based its decisions on marginal costs and revenues, which is dangerous because it

biases companies to leverage what they have put in place to succeed in the past, instead of guiding them to create the capabilities they’ll need in the future. If we knew the future would be exactly the same as the past, that approach would be fine. But if the future’s different and Blockbuster should have been thinking: If we didn’t have an existing business, how could we best build a new one? What would be the best way for us to serve our customers?

He then asks an interesting question:

Why is it that the big, established companies that have so much capital find these initiatives to be so costly? And why do the small entrants with much less capital find them to be straightforward?

The answer is when you’re new to the scene, the full cost is the marginal cost. This is the beauty of creative destruction, and it’s why economists don’t care if a business exists in the long run or not. Something will always come along that’s better.

So what’s this have to do with integrity?

The marginal cost of doing something ‘just this once’ always seems to be negligible, and hence it’s easier to hold to your principles 100 percent of the time than it is to hold to them 98 percent of the time. Decide what you stand for. And then stand for it all the time.

Good advice. Teaching ethics has convinced me of the wisdom of Oscar Wilde: “No man is rich enough to buy back his past.”

He ends on the importance of purpose, for which he recommends three parts:

  1. What do you want the enterprise to have become at the end of the path it is on?
  2. Commitment
  3. One or a few metrics that can measure progress

God, in contrast to us, does not need the tools of statisticians or accountants. [He has] no need to aggregate. His only measure of achievement is the individual.

Christensen, like Mitt Romney and Harry Reid, is a devout Mormon. He also discusses being diagnosed with follicular lymphoma, a cancer similar to that which had killed his father. It went into remission, then he suffered an ischemic stroke right after beginning this book. He’s learning to speak again, one word at a time. I wish him well, and pray he has a speedy recovery.

He’s certainly helped clarify my thinking, and this book, while not your typical self-help book, is quite useful (in fact, all of his books are). Rather than telling you what to do, he helps you construct a theory of cause and effect. It’s much more difficult than reading platitudes, but far more useful. Highly recommended.

Why the Consultants to the Professions are Whipping us into Irrelevance

The following is from one of our latest Practicing Fellows, Matthew Tol, from Australia.

Apparently, the 50 Shades trilogy is one of the fastest selling books (for those with matching chromosomes) ever. Quite a feat when you see that all “serious” reviewers describe it as appallingly written. It must have something to do with the escapism that the books engender—something a lot of writers apparently strive for.

In many respects, the consultants to the professions (and I”m mainly talking about accounting and legal professions here), fall into the same mould as that adopted by E. L. James in her books. They offer up a fantasy, some escapism and possibly a somewhat removed from reality view of what a “normal” firm should look like. Although, I do think that a large number of firms out there have a number of “Red Rooms of Pain”—they’re known as Partners’ Offices at review time!

Having endured a range of sessions with consultants to the accounting profession over the past 20 plus years, it appears that they have a view of the world which is based largely on some experience they had many years ago. They have leveraged off this to create a story which they sell to everyone in an attempt to enable them to believe that they are able to do what the Consultant had done. Similar to Anastasia Steele, in the book, the submissives are taken on a journey for which they are unprepared and are convinced to adopt certain behaviours even if they are outside their comfort zone.

Whilst there are some things that the consultants to the professions do well—mainly cause people to think, their approach is possibly not relevant in the current environment. They have updated their stories based on stories they have been told rather than learnings they have experienced.

Take the younger staff engaged in professional firms. They are very different to where I and my colleagues were when we started out! They have a greater focus on results, less need to be measured and a greater desire to “make a difference.” They don’t like being managed with a stick and they have been taught that they are good enough.

How do we then reconcile that with the command and control processes that are promoted by the consultants? How do they “fit” with their performance being measured by productivity rather than results? Do they feel like Ana who is satisfied after received 20 whacks on the bum because that is what makes her “owner” feel good?

For the consultants to the profession to be truly effective and act as the catalyst they should be, they need to assist the firms they work with to develop new and innovative strategies to manage and inspire their staff. Sorry, but a goal of 80% productivity just doesn’t do it!

A large part of this revolves around being aware of the “soft” skills needed in developing people. Most of us have been trained to be technically very competent and have further developed that with many years of practice. When you get good enough technically, you get to a senior or ownership position and you are often simply not aware of the methods that need to be adopted to mentor and develop younger staff.

“When your only tool is a hammer, the rest of the world looks like a nail” is an old adage. Lots of firms base their existence around timesheets. This is a measurement tool that is so subjective as to be fictional and which bears no connection to quality or creativity in problem solving by the people on the job.

Senior people in firms have been managed and developed using the blunt object that is the timesheet and are now passing this insanity on to the next generation. The trouble is the next generation is not buying it.

I received an email the other day from one of the consulting groups to the profession talking about concepts like “value billing” and the like. Great. But then they go on to discuss the need to measure the time spent on the job to see whether it is profitable.

Taking this the other way—you agree a price with the customer based on the results you’re going to deliver. You then spend time recording the time you spend so that you can get to the end of the job to spend more time determining whether it was profitable? At what hourly rate were you working? This is like driving your car in the rear vision mirror.

Don’t get me wrong, there are significant benefits from doing after-action reviews at the completion of a job. If it’s done based on time spent, you’re losing the value you can get from these. You need to look at the qualitative factors instead. This is what the younger people in professional firms want.

We also need to remember that the younger people entering our professions have spent a large part of their developmental years playing computer games. These games teach them strategy and process and help them to understand that there are ways around things for those “in the know.” How good would it be if we were to utilise these skills in problem solving for our customers (or, heaven help, our own firms!)?

I must admit that I have not read any of E. L. James’ books—and probably won’t. The information I have used in here has come as per a consultant—I have spoken to people who have read it. Hence, I am not an expert on that topic.

However, the message that is in those books about consensual agreement to being flogged bears a striking (couldn’t resist the pun) resemblance to the way the professions are going and the perpetuation of this silliness by the consultants to the professions.

At some point in the not too distant future, the 50 Shades trilogy will be consigned to the discount bins. I can only hope that the focus of the consultants on timesheets and forgetting about the new generation is also remaindered. For the sake of the future of our professions, we need to move from the Greyness that leads to Darkness and be Freed.

Book Review: Negotiating with Backbone

Reed Holden is my mentor, so I’m extremely biased. Still, this is a great book, especially for any firm pricer who has to deal with procurement, which Reed writes is the new normal.

image

The final frontier of good pricing is the customer negotiation, and Reed explores this with verve, and an enormous amount of tacit knowledge accumulated from years as a salesman and pricing expert.

He points out “that 80 percent of procurement managers give the other 20 percent a bad name.” I have to say, this has not been my experience with the procurement folks I’ve met, but that’s probably because I only deal in the professional sector, not with general procurement.

What makes this book so useful is Reed documents all of the games procurement plays—from delays, waiting for the end-of-period discounts, to using vendors as “Rabbits” simply to drive down the price of the preferred vendor. There’s many effective tactics offered to deal with each of these scenarios.

And this advice needs to be shouted from the rooftop:

Discounting is a fool’s response. Those who live and die by discounting don’t live very long. Trad[ing] margins for revenues, they undermine the success of their business, which needs profits more than revenue to survive.”

The most important strategy, though, is to know your value, and to be an equal with procurement, not a supplicant. Only equals can negotiate. If you don’t know your value, procurement will drag you to the one topic they know well: price. You must change the conversation to value.

I also love this advice:

Spending the time on the proposal is actually easier than going to the customer with the tough questions.

Here are some of the questions Reed insists you answer before submitting a proposal:

  • What is the process for evaluating vendors and proposals?
  • What are the names and positions of everyone in the process?
  • Who is the ultimate decision maker?
  • What is their timeframe for evaluating vendors and finalizing the deal?
  • How many other vendors are approved to supply the product or service?
  • What are their names?
  • Do any of those other vendors have existing relationships with the decision maker?
  • Which vendor is the preferred vendor?
  • What are your criteria for selection of vendors?
  • Are you interested in vendors that might be able to provide more value to your firm?
  • When and how do we get an opportunity to understand how we can add more value?
  • Are you satisfied with your current vendor?
  • If you have no prior relationship with the customer, why are they asking you to bid?
  • Do budget dollars exist for the requested products and services?
  • How much is the budget?
  • What is the process to get approval to use budget dollars?

If you don’t know the answers [to three or more of these], pack up your bags and look for another opportunity.

The book documents eight different scenarios you can find yourself in. You’ll learn excellent strategies for dealing with price buyers, value buyers, and relationship buyers. The tough buyer is the poker player, who are value or relationship buyers in drag.

Counter intuitively, price buyers may be the easiest to deal with, since at least they are upfront about their expectations of the lowest price. Reed cites research that only 30%-35% of buyers were real price buyers, and that’s in commodity markets. For professional firms, it’s much less, probably single digits.

Reed’s ten tactics for winning the procurement game are exactly right:

  1. Qualify, qualify, qualify
  2. Understand your foundation of value
  3. Develop give-get options [lower price, strip out value]
  4. Map the buying center
  5. Where appropriate, build trust
  6. Use the policy ploy
  7. Delay, delay, delay
  8. Redefine risk
  9. Dealing with reverse auctions
  10. Do your homework

Being a William F. Buckley fan, I appreciated the story of when he was hired to speak at the University of Texas in the mid-1960s, when he was just starting his career as a lecturer. The Daily Texan university newspaper criticized the amount young Buckley was being paid, which was a record amount.

At his talk, Buckley read the most accusatory part of the article aloud, and said to a thundering applause:

I never said I was worth it. I only said I wouldn’t do it for less.

My only quibble with this book—Reed and I have discussed this before—is his use of the poker analogy. He writes:

The way is to consider the negotiation with the economic buyer as a game of poker.

Wagering, like a customer negotiation, is a zero-sum game. That is, every dime that ends up in one pocket is taken out of another.

Remember, you’re in a zero-sum game. The goal of procurement is to grab as much of the pot as possible.

Yet enterprise is not a zero-sum game, otherwise their could be no growth or value created. In the long run, both parties to a transaction benefit, no matter what price is finally agreed upon.

The zero-sum mentality has many deleterious effects, and I believe this analogy needs to be buried. Linguistics matter—a lot.

We must change the conversation to value, something both sides want to maximize. It’s the one area where interests are aligned—the opposite of a zero-sum game.

That quibble aside, this is a fantastic book, and a must-read. Even if you don’t deal with procurement, you will learn strategies from one of the world’s foremost pricing experts.

It’s also an optimistic book, as Reed believes that high value products and services are not dead. With all the talk of the “new normal,” this is a refreshing and empowering message.

IQPC 3rd Pricing & Revenue Optimization Summit

I am proud to be speaking at the 3rd Pricing & Revenue Optimization Summit on July 30th, being held in Chicago.

The workshop I am leading is titled “Behavioral Economics: A Look at the First and Second Law of Pricing” focusing on how the anchoring and framing effect influence pricing, and to help attendees gain an inside look at behavioral economics to create a pricing strategy that satisfies corporate goals as well as customers.

Visit here for more details and use the code “3PROS_Verasage” to receive a speaker referral discount.