Transcript Accounting Firm Competitiveness CCH Singapore 22nd April

Profitability & Competitiveness in
CPA Firms: The factors that shape
success
CCH Singapore
22nd April 2010
Robert Sawhney
Managing Director
SRC Associates Ltd, Hong Kong
www.srchk.com
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The Power of Context
• Experiment at Princeton University in the US
• Good Samaritans (seminarians of The Princeton
Theological Seminary) were asked to deliver a
short talk on the bible at a nearby venue
• The Samaritans split into two groups: one told
they were late, the other told they were a few
minutes early
• Variable: ‘victim’ outside building
• 68% of the early group stopped to help, only 10%
of the late group?
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(Source: The Tipping Point by Malcolm Gladwell)
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The State of Play
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GFC
Globalization
Regulation both locally and internationally
Demanding clients
Knowledge sharing and application
Technology
Social media and Web 2.0
Consolidation
Competition
BPO
Talent retention and management
Firm culture and ethics
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CDAS
• Strategic Thrusts
• This vision is anchored on three strategic thrusts:
• Strategic Thrust 1: Leading Global Centre for Accountancy Talent,
Education, Thought Leadership & Professional Development;
• Strategic Thrust 2: Leading Centre for High Value-Adding Professional
Accountancy Services; and
• Strategic Thrust 3: Strong Accountancy Sector’s Infrastructure and
Institutions.
• Goals Set
• The CDAS has set a challenging, but compelling goal for the sector to strive
for over the next 10 years:
• to double the accountancy sector’s contribution to Singapore’s Gross
Domestic Product from the existing 0.4% to about 1% over the next
decade; and
• to double the exports contribution of professional accountancy services by
the sector to the region from the current 22% to 50%.
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What is the problem then?
• Hourly billing that does not recognize value and creates
conflict of interest between client and firm
• Focus on billable time and utilization rates
• Associates trained in technical skills but not in management
• Professionals with high IQ and little EQ
• Firm structure that inhibits cross functional sharing of
information
• Professionals with little formal business training
• Senior partners with high resistance to alternative ways of
working
• Fixation on practice areas as opposed to client problems
• Focus on cross selling without understanding client needs
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What the CDAS says
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GAP??
• What leads to client satisfaction and
profitability – who is going to assist with
this???
• Listen to Ron Baker (Firm of the Future)
• http://www.journalofaccountancy.com/Multi
media/RonBaker.htm
• Synthesize knowledge, knowledge for profit,
effectiveness, thought leadership…value!
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PSFs are Different
• Product resides in the structural, social, and human
capital of firm – knowledge and learning key
• Key marketer is the professional who interacts with
client
• Differentiation is harder to achieve – ‘we do better
audits’
• Marketing and BD coupled together –
misunderstanding?
• Professionals don’t take easily to being ‘managed’,
strategy bottom up and involves all or no one (are they
interested)?
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So what factors do shape success?
An example
• Big push for consolidation, internationalisation,
and alliances
• Research suggests up to 50% of alliances fail. In
an article published in the MIT Sloan
Management Review (2008), Bettina Buchel
highlights a number of minefields that can impair
alliance performance. These include unclear
partner roles, unequal sharing of risks and
benefits, not being prepared for the inevitable
crisis, and no formal exit mechanisms.
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Cont’d
• Patricia Anslinger and Justin Jenk (consultants at Accenture)
suggest six key factors to enhancing alliance success
chances:
• (1) develop clear, common objectives and definition of
success;
• (2) ensure proper alliance form;
• (3) determine appropriate governance model with clear
decision-making;
• (4) anticipate the most likely conflicts;
• (5) plan for evolution; and
• (6) establish clear metrics to track and measure success.
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So what factors do shape success?
Answer: it’s the cultural orientation of
the firm – but not how you think
• These are (and they explain up to 70% of the
variance between firm performance)
• KM
• Marketing (culture)
• Learning
• Strategy, KM, and marketing as one
• Leadership and values management
• …coming up, these explained and the ‘internal
strategy’ of one of the Big 4!
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Leadership and Values
• From David Maister (Practice What You Preach)
Nine key statements that explained over 50% of variations in firm performance
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Client satisfaction is a top priority at our firm
We have no room for those that put their personal agenda ahead of the interests
of the client or the firm
Those who contribute most to the overall success of the firm are rewarded the
most highly
Management gets the best work out of everybody
Around here you are required, not just encouraged, to learn and develop new
skills
We invest a significant amount of time in things that will pay off in the future
People within our firm always treat others with respect
The quality of supervision on client projects is always uniformly high
The quality of the professionals in our office is as high as can be expected
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His Model
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Quick note on values and ethics
• In a paper published in Behavioural Research in Accounting
by Jenkins et al (2008), the authors set out a number of
areas whereby culture can impact a firm’s governance and
the role that seniors within the firm play through their
behavior such as mentoring, client interactions,
communication, and social influence. They highlight a
number of studies and situations whereby firms have
engaged in unethical actions (lowered audit quality) due to
the cultural conditions of the firm. The authors also go onto
discuss a number of actions that firms can take to limit this
overtly risky behavior and ensure a higher level of firm
governance. Readers are referred to this paper for a
substantial overview of the area.
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Leadership
‘motivation, inspiration, commitment’
• Leadership is crucial because it sets the agenda and tone for
action within the firm
• Supportive, participative, consultative, transformational (the 4
I’s).
Setting
direction
Building
commitment
Personal
example
Ensuring execution
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Knowledge and Learning
What do professionals really sell?
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“Know-What” for sales and business growth
Provision of Knowledge about clients, targets, their industries, and their (and your) competitors through
External news services and business periodicals
Business, economic, and industry analyses
Service Offering databases providing market analysis, proposals, client presentations, qualifications & value
statements and Thought Leadership around the specific services you provide
Competitive Intelligence knowledge bases
“Know-How” for quality service delivery
Provision of professional guidance; reusable approaches, solutions and deliverables; as well as connections to team
members and subject-matter specialists
Technical and regulatory information and guidance
Methodologies and tools
Service Offering databases providing “Best Practices” and deliverables
“Know-Who” for people management
Provision of tools for managing your business processes: sales, service, people and knowledge
Team and community-of-interest discussion forums
Engagement Management Systems
Office and personnel directories
Service Offering databases providing communications and people skills information
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Cont’d
Learning
• Do you question the assumptions, beliefs,
practices and ways of operating in your firm
on a continual basis?
• Do you question what clients value in terms of
what you think they need and what they really
need?
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How Do Clients Choose Firms?
Value Criteria in B2B Professional Services
During
After
Technical Quality
Reliability (budget/schedule)
Information understandability
Information practicality
Technical expertise
Specialized expertise
Creativity
Financial
Cost reductions
Revenues
Profitability
Functional Quality
Integrity
Responsiveness
Strategic
Better decisions
More enlightened
decisions
Professionalism
Relational Variables
Partnership
Involvement
Confidence
Image
Reputation
Credibility
(Source: Adapted from Lapierre, J (1997) What Does Value Mean in Business to Business Professional Services? International Journal of Service Industry Management, Vol. 8, No 5 pp.377-397)
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The Importance of Industry Knowledge
• Much research in the professional services sector
points to the importance of industry knowledge
for clients and accounting firm
• For example, Moroney and Simnett (Behavioral
Research in Accounting, 2009) found that
auditors working in a complex industry (pension
funds) have a greater comparative ability to
identify business risks, information sources, and
evidence-gathering processes in their industry
than auditors working in a generic industry
(manufacturing)
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Marketing!!!
Did you know: Marketing has the most significant impact
on firm performance???...but not the way you think!
• Marketing is a business philosophy that puts creating
and delivering customer value at the heart of all that
an organization does
• It is an organization culture that acquires and
disseminates information-cross functionally and across
hierarchies, and acts upon that information
• This sharing and information coordination tolerates no
functional silos
• Strategy, marketing, leadership, and KM - interlinked
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Bed rock of firm performance-a
market orientation
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Quick Case
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Harrex Group, NZ (source: J of Accountancy, 2008)
Founded in 2007 by Brendan Harrex, first chief value officer at his former firm
He says focus on time and cost only creates illusion of managing a PSF
What really matters is value creation
No more hourly billing, a change of culture
Key Performance Indicators for Harrex:
* Ability to think strategically on behalf of clients
* Client Communication
* Delegation
* Turnaround Time
* Client Feedback
* Effective Listening and Communication Skills
* Knowledge Elicitation/Coaching
* Risk Taking, Innovation and Creativity
* Continuous Learning
* Passion, Attitude and Commitment
* Team Player
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The Final Framework
Leadership
• Values
• Management
Knowledge
and market
orientation
• Learning
• Strategy
• Client Value
• Innovation
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Performance
• Financial
• Non financial
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Appendix – accounting firm mergers
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Joel Sinkin and Terrence Putney published an article in the March 2009 issue of the Journal of Accountancy that addressed the
problems faced by accountancy firm mergers. They highlight the ten biggest reasons mergers fail:
1. Ego. Normally this is manifested in unwillingness on the part of the partners in both firms to adapt to the new way of doing things
required to make a merger work. Even in the case of a much smaller firm merging into a larger one, there should be some give on both
sides to allow for the formation of a cohesive and motivated team.
2. Firm name. The surviving name should be worked out before the merger is completed and a strategy developed for how the name
change will be communicated to the market, which is a critical part of the process. There are many hybrid methods such as creating a
bridge entity, using the predecessor firm’s name as a byline in the letterhead, forming a new name combined from both names, and
adopting a generic name.
3. Culture. While the larger firm’s culture usually primarily survives, adopting features of both firms’ cultures will normally lead to a
better environment after the merger.
4. Change. Instituting change slowly wherever possible will lead to less impact on clients and staff and can help maximize the retention
of both types of constituents. Mergers without high levels of staff and client retention often are not successful.
5. Inadequate capacity. In mergers where some partners may soon be leaving due to retirement or succession, or where there is planned
staff attrition, professionals need to be replaced soon after the merger is effective. If the successor firm lacks the existing excess capacity
to handle the new requirements, and fails to execute on its plan to acquire new resources, in most cases the deal will eventually fail.
6. Staff transition. Staff are accustomed to their roles, the expectations the firm has for them, compensation level and methods, and
perks and benefits. Maintaining the status quo for staff wherever possible will reduce the stress that change places on them and lead to
higher acceptance and retention.
7. Technology. Normally, for a merged firm to start operating efficiently, technology platforms have to be brought into conformity.
However, a failure to invest adequate resources in upgrades, conversions and training can lead to poor execution of the technology
transition, causing frustration and, in the end, higher costs.
8. Poor transition planning. All aspects of the operational transition must be thought out in advance. Otherwise, inadequate resources
will be devoted to the execution, and the staging can be off, causing additional stress on the staff and clients.
9. Impatience. Some changes need to be introduced immediately; some things can wait. For example, the time and billing system is
normally a core management tool and must be adopted immediately whereas certain client service systems (such as write-up software
or even tax prep software) can be phased in, especially after seasonally busy times of the year. Not forcing change for its own sake can
lead to better acceptance and execution.
10. Communication. Management teams that fail to fully communicate to the combined team the rationale for the transition plan, what
is expected, and how to obtain help when it is needed may find people not executing the plan and resentment building.
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