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Profitability & Competitiveness in CPA Firms: The factors that shape success

CCH Singapore22nd April 2010

Robert SawhneyManaging Director

SRC Associates Ltd, Hong Kong

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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?• (Source: The Tipping Point by Malcolm Gladwell)

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The State of Play• 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

1. Client satisfaction is a top priority at our firm2. We have no room for those that put their personal agenda ahead of the interests

of the client or the firm3. Those who contribute most to the overall success of the firm are rewarded the

most highly4. Management gets the best work out of everybody5. Around here you are required, not just encouraged, to learn and develop new skills6. We invest a significant amount of time in things that will pay off in the future7. People within our firm always treat others with respect8. The quality of supervision on client projects is always uniformly high9. 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).

Building commitmentEnsuring executionSetting directionPersonalexample

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Knowledge and LearningWhat do professionals really sell?

• “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’dLearning

• 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 FinancialReliability (budget/schedule) Cost reductionsInformation understandability RevenuesInformation practicality ProfitabilityTechnical expertiseSpecialized expertiseCreativity Functional Quality StrategicIntegrity Better decisionsResponsiveness More enlightened decisionsProfessionalism Relational VariablesPartnership InvolvementConfidence ImageReputationCredibility (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

Client value, satisfaction and firm performance

Market based strategy and strategy implementation (based around value factors)

Client orientation

Competitor orientation

Inter-functional

coordination

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Strategy in the Big 4

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Quick Case• 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

• Values• Management

Leadership

• Learning• Strategy • Client Value• Innovation

Knowledge and market orientation

• Financial• Non financial

Performance

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Thank You!• If you want copies of the any of the reports or research cited

here, please don’t hesitate to contact me:• bob@srchk.com, www.srchk.com• Blog: www.marketingasia.typepad.com• Twitter: http://twitter.com/robertsawhney • My new book: Available from Lexis Nexis in Hong Kong and

other Asian offices or www.amazon.com

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Appendix – accounting firm mergers• 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.