33-33-33: Legacy Mentality Continues to Harm CPA Profession

Recently I received an email from a VeraSage friend, Richard Muscio, a CPA in San Diego. Richard has been value pricing for many years and has frequently discussed his observations about our Profession's blindness to the obvious. I will let Richard's voice present his comments now:

"Hi Dan! I went back in time last week when I was talking to a CPA about outsourcing and CPA practice management. I mean, back in time to the point where I was contemplating pulling my old leisure suit out of the closet (yes, its still there) and heading on down to the Disco Palace (oh wait, the Disco Palace is now a Yoga studio...).

This CPA, a partner in a 6-partner, approximately 50-person firm, said that as long as partners" compensation is about 33 % of their firm's gross fees, their practice is great. He added that team members" (although that's not what he called them...) compensation should also be about 33 % and general overhead should likewise be 33 % of gross income. Finally, he stated that this "33-33-33" model is very standard for the CPA industry. This conversion took me way back in time because the last time I heard about this practice management concept was in 1979. In 1979, I was a 21-year old junior staff accountant at a 7-person firm. The firm's owner told me about this "33-33-33" model. And, I know what he told me was approximately true for his firm, as I in my status as most junior accountant did his firm's books.

When I went out on my own a few years later, with two team members, I immediately priced our hourly billing rates to try to achieve this 33 % net to owner result. However, as I proceeded to develop a specialized estate planning practice, I realized that the only way to make more money with this model was to do more work. And, since I wasn't married yet, I preferred spending time at the Disco Palace to spending time in my office. So not only did a profit goal of 33 % seem both arbitrary and low-reaching, it make no sense. In terms of my specialized practice, I evolved into a "fixed price/value billing" model for my estate planning practice, and suffice it to say the "33-33-33" model wound up in my closet, next to my old leisure suit.

But what also occurred to me during my conversation with this CPA is that in 1979 my former employer had no line item on his P & L under general overhead for technology expenses. The only technology expense was for land-line telephones. We didn't even have a FAX machine in 1979. Further, the firm billed our customers for the costs of using outside processing firms for income tax preparation and financial statement preparation. In fact, we marked every charge up by $10. Now, the firms that I consult with have huge expenses for technology in their general overhead 33 % piece: computers, servers, laptops, FAX machines, scanners, sophisticated computer programs, cell phones, Blueberries and all that other high tech stuff that when it doesn't work I get my 11-year old daughter to fix it for me. Plus, they pay IT management firms to maintain their systems.

I seriously doubt that today any CPA firm averages its technology costs among its customers, and then passes those costs through on customer billings like we did in 1979. My understanding and use of technology has always been to attempt to use it to become more efficient and thus more effective at providing value to my customers. By providing more value, my customers make or get to keep more money. Following this, I make more money. So do my team members. So my second complaint about the "33-33-33" model, besides the fact that is represents an arbitrary and low-reaching goal, is as follows: how can a CPA practice management model that existed before all of our new-fangled technology (even the FAX machine...) have any relevance to today's CPA practice in a high-tech world? This question assumes, of course, that the "33-33-33" model was even valid way back in 1979. Or are most CPA's just sheep, and stuck in the disco era to boot?

Further, assuming 33% net income is a worthy minimum goal, why don't CPA's (if they really are business consultants...) finds ways to improve their own firms' bottom line, not just in real dollars, but in terms a achieving a higher percentage result. Why not a 60% or 70% bottom line?

I know that you and Ron have a lot of knowledge about devices like this that keep the profession shackled, such as the dreaded timesheet and hourly billing. What do you know about this "33-33-33" model? Is it really still prevalent in our profession? Where did it come from and why is it still here?  What else about it makes no sense? Whatever light you might be able to shed on this topic would be most appreciated. You can find me at the Yoga studio...best wishes for a wonderful Holiday Season!"

Richard presents several keen observations about the toxic nature of legacy mental histograms that distort professional knowledge firm leaders' belief systems and how they define success. Clearly the 33-33-33 paradigm is simple. However it is not elegant. And, although I don"t know its origins, I am certain that in large pyramid style firms of lore, that the top third was happy enough and either didn't desire additional profits or worse yet, didn't believe they deserved additional compensation for transferring knowledge in exchange for compensation.

Although Richard has a few years on me (not many but enough) as my leisure suit was lime green and stopped fitting me around tenth grade, I do appreciate his perspective that it was more fun to be dancing at the disco than racking up billable hours at a low rate.

I have noticed that our profession holds onto legacy thoughts and concepts well past their useful lives. We still treat people as resources and assets instead of knowledge workers. We over-stress supervision and management at the expense of leadership. We lack dynamic innovation and creativity. We simply lack curiosity (the worst offenders appear to be the auditors based upon recent experiences of leading discussions with over 300 California auditors and when asked how many had read a business book of any kind in the last year, less than 10 hands went up - the smallest percentage of book readers I have witnessed in years - shame! shame!).

CPA firms tend to be happy when gross revenues per professional team member approaches $200k. Cisco desires $1M in revenues per FTE (not just producer). The difference isn't $800k. It is beyond astronomical. The difference is that for Cisco, there are no limitations. For CPA firms, everything is limited based upon inputs (mostly time and time is too limited for greatness when it comes to far ranging vision).

Managers of the Firm of the Past will continue to perpetuate old myths associated with operating a CPA firm. Leaders of the Firm of the Future will experiment, create, and innovate securing a future not limited to a prehistoric business model.

Comments welcome as we can all assist Richard better understand the chain of illogic and below par business practices that refuse to die and continue to endanger our profession's future.