Platt’s Perspective: Classifying Clients – It’s Good For The Top And Bottom Line (And Everything In Between)

By: Michael Platt

Have you ever noticed that after you a buy a new car – let’s say it’s a 2017 silver Mercedes-Benz – you start seeing the same make, model and color every time you look around?

In similar fashion, firm professionals can begin to home in on their ideal clients and recognize them instantly. To help accomplish this, they need to go through two exercises that the majority of firms neglect: Define the firm’s best to worst clients, ranking them A through C or D, then outline a plan to improve their grades so they become better clients.

IPA’s most recent survey data, from more than 540 firms, show that only 30% are formally classifying their clients in this way. The other 70% are missing an opportunity to sharpen their focus, make more money and limit unnecessary headaches.

Mike Platt

Mike Platt

Many firm partners have their own ideas on who their A, B, C and D clients are, but it’s rarely agreed upon firmwide, and lower-level professionals may hold vastly different views on the attributes of a “perfect” client. The more clearly this is defined up front, the easier it is to target that group.

Every firm over the years has collected all kinds of clients – some are ideal fits for the services the firm provides; some were ideal at one time and are now legacy clients; and some are no longer appropriate.

So, how would a firm decide which clients are As and which are Cs or Ds? That’s up to every firm to define, but typically A clients are ones with growth potential, who are cooperative, pay premium fees for premium services, come to you before making major decisions, rely on your advice and refer other clients to the firm.

B clients, for example, may not access a full range of services or actively refer your firm, but they are owners of up-and-coming companies who could likely become A clients someday. C clients may be your 1040 tax return customers, and D clients could be those who are late providing information, argumentative with staff, late paying bills and constantly complaining about fees. Some D clients are unavoidable (think your brother-in-law, or the grandson of your best A client), but all should be reviewed and culled on a regular basis.

I believe so strongly in classifying clients that I suggest identifying them by letter grade in a firmwide database that is accessible to all professionals and reviewed every few years. Obviously, keep this information confidential – no client wants to hear that they’re a C client.

Once clients are classified, the firm should define a plan to move clients up. Can your firm guide tax return clients on ways to streamline operations of their businesses, grow and become more profitable? If so, those B clients may become more reliant on the firm’s expertise and opt to take advantage of more firm services, becoming A clients in short order.

Classifying clients moves the right metrics. When a firm focuses its energy on providing great service to A and B clients, realization goes up, fees go up and profitability goes up. At the same time, clients are fulfilling their dreams for their businesses, and they’re more successful and happier as well.

Classifying clients helps with business development. When you’re out looking for new clients, you don’t want to just grab whatever’s out there. Zero in on the kind of client the firm wants to pursue. That’s because not all revenue dollars are the same. Generating a dollar’s worth of revenue from an A client often costs far less than generating a dollar’s worth of revenue from a C or D client.

Don’t limit your thinking to believe that classifying clients is just a marketing activity. It is, but it’s much more than that. This exercise can focus the firm in a clear, targeted way on key metrics related to profitability, realization, revenue per charge hour and contribute to business development opportunities, growing the top line as well.

One other benefit to consider – once A clients are defined, future A clients are much easier to find, just like those 2017 silver Mercedes-Benzes you’re seeing everywhere.

Platt’s Perspective: The Q&A That Just Might Save Your Firm $1 Million This Year

Any partner who brings in a new, million-dollar client would be considered a superhero – and rightly so – but MPs could save just as much money by paying closer attention to an investment they’ve already made.

Mike Platt

Mike Platt

Consider the phrase, “We have great people.” It’s a statement I’ve heard hundreds of times from MPs describing why their firms are successful. And it’s true. People are any firm’s most valuable asset. Research shows if firm leaders nurture that investment just as intentionally as any client relationship, the payoff can be huge.

And here’s the good news: fostering a more engaged and empowered work force through improved communication costs absolutely nothing. But preventing these valuable assets from walking out the door can save thousands, if not millions, of dollars.

RTR imageUp-and-coming staff want to know the higher purpose of the firm, how the business of accounting works and their role in the firm’s success. INSIDE Public Accounting, in conjunction with ConvergenceCoaching, surveyed more than 700 CPA firm professionals aged 21-40, and repeatedly, they asked to be more involved and informed. Learn more in our research report, “Road to Retention: Motivators and Drivers for Young CPA Professionals.”

The report revealed seven fundamental questions young professionals are asking. Providing the answers can help shift the culture at your firm, and reduce unwanted turnover caused by a lack of communication.

What does the firm expect from me? – New hires are typically thrown into the deep end of the pool and told to swim, but they would benefit from a list of priorities from the firm. How should they focus their time every day? Client work? Business development? Give them guidance, they’re starving for it.

What is the path to partnership? – Define the building blocks to partnership, put it in writing and talk about it. Not everyone wants to become a partner, but those who do are not getting a lot of information on what it takes to get there.

How did the current partners ‘make it’? – Put your partners in front of your people, perhaps in a lunch and learn session, and have them talk about how they reached the level of success they’re enjoying now. Capture success stories and tout them. Hearing directly from the partners makes a big impression and can do a lot to inspire young staff with ownership ambitions.

How do I make more money? – Very few firms clearly define what it takes to get a promotion. Don’t make it a mystery. Outline what is required in terms of client work, staff mentoring, business development, etc. Make it clear, understandable and achievable.

Where is the firm going and why is the firm choosing this path? – Do your staff members know why the firm exists? And by this I don’t mean creating a vision statement that no one can remember; it should be something you feel in your gut. Answer this question: Why do we come to work every day? Powerfully communicating that message is the biggest thing you can do to help your firm in the next five years. Share with staff who the firm clients are, what they mean to the firm, and the clients’ visions, dreams and aspirations.

Are we growing? – Staff want to know that they’re on a winning team. Firm leaders are notoriously close-mouthed about financials, but even high-level numbers, on revenue, growth and new business development, would help educate and keep your team focused on the next milestone.

Are we on track for success? – Professionals want to know if the firm is meeting its goals and whether their department is on track. Only about half of firms in IPA’s annual Survey and Analysis of Firms share financial data with everyone in the firm. I believe more transparency, with context, empowers team members to work together to help the firm achieve its goals.

Every MP knows that it costs far more to replace a staff member than to keep the rising stars who are already on board. Help staff feel part of a team that is driving toward the same goal. Young professionals have told us that they’re craving answers to these seven questions. Give it to them, and you just might see turnover drop, morale increase and profits rise.

The 2017 IPA Accounting Firm National Benchmarking Surveys Are Open For Participation

The 2017 INSIDE Public Accounting (IPA) Annual Survey and Analysis of Firms is now open to all accounting firms in North America. The results of the annual survey is the IPA National Benchmarking Report, the IPA 100, 200 and 300 firms ranking, and the coveted IPA Best of the Best firms. If you would like to participate, please contact our office.

DEADLINES FOR SURVEY SUBMISSIONS – FIRMS WITH FISCAL YEAR-ENDS OF…

…June 2016 through December 2016: May 5, 2017
…January 2017 through February 2017: May 19, 2017
…March 2017 through April 2017: June 5, 2017

THE 2017 IPA SURVEY AND THE INTERNAL OPERATIONAL SURVEYS ARE AVAILABLE FOR COMPLETION.

Your firm must complete the IPA Survey and Analysis form in order to participate in any of the internal operational surveys. If you would like to participate, contact our office.

Gain a competitive advantage and grow your firm with industry insight from the independent benchmarking leader in the nation.

BENEFITS OF PARTICIPATION

  • The opportunity to be included in the largest annual management of an accounting practice (MAP) survey in the country. To be benchmarked with more than 540+ firms nationwide and potentially be ranked among this year’s top firms in the: IPA 100, IPA 200, IPA 300 and the coveted IPA Best of the Best Firms in the nation.
  • If you participate in the surveys, you will receive a complimentary copy of the August 2017 issue of the award-winning INSIDE Pubic Accounting newsletter. This issue highlights the annual IPA 100 firm rankings, along with a detailed financial and operational analysis of the rankings.
  • An electronic complimentary copy of the 2017 Executive Summary, of the IPA National Benchmarking Report. If you participate in any or all of the IO surveys, you will also receive a complimentary executive summary when published in late summer.
  • You will receive preferred pricing on the 2017 IPA National Benchmarking Report, the IO Reports, and other benchmarking items. You may pre-order your reports now.
  • You will get preference for selection in articles written by IPA throughout the year, (an excellent opportunity to market your firm).
  • If you would like to participate, please contact our office.

CONFIDENTIAL DATA – WHAT YOU CAN EXPECT FROM INSIDE PUBLIC ACCOUNTING 

All confidential firm data, including salaries, compensation, income, etc., will be held in strict confidence. Salaries, compensation and sensitive data, such as income, revenues by niche, etc., will NOT be shared or publicized. We take extreme pride in our ability to collect this data to assist the profession and are now celebrating 27 years surveying accounting firms across the globe.

Please contact IPA at survey@plattgroupllc.com with any concerns or questions. IPA conducts a thorough review of each survey submission for commonly missed areas and for any and all errors. IPA will contact the person / contact named on the submitted survey form for any and all clarifications / updates. Some data, such as firm name, MP(s) name, firm net revenue, and organic growth may appear in the IPA Newsletter (if accolades are given).

IPA ASSOCIATION PARTNERSHIPS: INSIDE Public Accounting is pleased to partner with the following associations to provide survey and benchmarking services for their member firms: The Alliott Group, CPAmerica International, DFK International, INPACT Americas, LEA Global, Moore Stephens North America and PrimeGlobal. Please contact The Platt Group / IPA with any questions at (317) 733-1920.

Platt’s Perspective: Ready Or Not: The Future Is Here!

Mike Platt

Mike Platt

The future is here whether we are ready or not. I was in Las Vegas last month presenting at and attending an international association conference, which happened to be at the same hotel where IBM was hosting its World of Watson convention with more than 15,000 attendees.

Like many, my introduction to Watson was in 2011 when Jeopardy! champion Ken Jennings famously played the computer and lost. And, like most outside the tech world, I hadn’t heard much about Watson since then. I walked down to the convention center to see what I could see, and came away from that experience with a jaw-dropping “WOW!”

Cognitive learning, augmented intelligence – whatever you want to call it – is signaling an epic shift in how humans interact. One World of Watson exhibit featured a new app for the insurance profession that aims to streamline the auto claims process by 80%. Tapping into Watson’s capabilities, a photo of the damage and a scan of an accident report starts the process of scheduling repairs and estimating damage. The programming for this app began the end of August, and within eight weeks it was ready for display.

Watson has already infiltrated the professional services world. Earlier this year, two developments will affect the way professionals conduct business in the future. In the legal world, BakerHostetler hired a “robotic legal researcher” named ROSS – built on the IBM Watson platform – to work with the firm’s bankruptcy team, scouring through thousands of precedents and articles to prepare for cases.

ROSS started out as a research project at the University of Toronto in 2014. The project goal was to build a legal research assistant to help scale the capabilities of lawyers through the use of artificial intelligence. From the start, it took ROSS 10 months to learn the entire body of bankruptcy law.

In the accounting world, KPMG announced plans to apply Watson’s cognitive computing technology to its professional services offerings. The March 8 press release touts: “Many of KPMG’s audit, tax, advisory and other professional services rely heavily on judgment-driven processes. Adding cognitive technology’s massive data analysis and innovative learning capabilities to these activities has the potential to advance traditional views on how talent, time, capital and other resources are deployed by professional services organizations.”

Technological transformations are coming at a rapid and accelerating pace. Some firms are now using drones for inventory observation. North Carolina State University is experimenting with virtual reality in its accounting classes. Blockchain technology, which underpins crypto-currencies like Bitcoin, provides an instantaneous verification of transactions, assuring that the accuracy of the transaction can be trusted and verified. Hmmm, does that sound like an auditor’s job?

In talking about the many disruptive technologies that are coming online daily, Barry Melancon, president of the AICPA, told Council members gathered in Orlando in October, “Who are we to think that these rapid changes in technology are going to somehow sidestep our profession?” What was my takeaway from the designs, experiments and applications on display at The World of Watson? Simply this: “Ready or not, here it comes.”

Platt’s Perspective: Moving From Accountant To Advisor Doesn’t Need To Be The Equivalent Of Jumping Across The Grand Canyon

Mike Platt - Cropped for IPA INSIDER

Mike Platt

For years, firms around the country have embraced the need to shift from trusted accountant to trusted advisor. Some individuals in some firms have made the transition very successfully, having the skills, experience and business acumen to get the job done. But for many, the leap from historian to advisor may as well be a jump across a chasm the size of the Grand Canyon.

The perception of a successful accountant is a learned professional with deep, specialized knowledge about financial and operational activities of business. The idea of moving from “the person with all the answers” to “the person with all the questions” – as many consultants see themselves – not only is a difficult mindset to embrace, but also fundamentally challenges the perception of what many accountants think is the key to their success. It requires professionals to embrace a completely different belief system to define success in a career. Frankly, it’s too much for many to wrap their heads around, so they end up staying within their comfort zone.

I recently had a chance to have lunch with John Schweisberger, a consultant-turned-accounting-firm-CEO-turned-practice-group-leader with Armanino in California, who explained in the clearest terms I’ve heard to date what consultants do. “There are three reasons companies hire consultants,” explains Schweisberger.

  • 1) They know that things are not right, but cannot identify the root problem.
  • 2) They have identified the problem, but have difficulty coming up with a workable solution.
  • 3) They know the solution, but need help implementing it.

To help identify a problem, you need to be a good diagnostician. To help identify a solution, you need to be a creative problem solver. To help implement the solution, you either need to be an expert in your specialized field, or be a good executive coach to help the company leaders get it done.

To accountants of any age wrestling with how to tackle the daunting idea of moving from accountant to trusted advisor, take heart. All three roles are needed, and all three roles require different skill sets. You do not need to be all things to everyone, and you can specialize in any of the roles.

Peeking behind the curtain of “secrets of successful consultants” in this way makes it clear that successful accountants can comfortably take on any one of these roles to become successful consultants. The trick is to think of these roles as stepping stones across a river, allowing you to grow in the role of trusted advisor without feeling like you have to jump across the entire canyon at once.

TBT Platt’s Perspective: An Open Letter to CPA Firms From Small Businesses Everywhere

Mike Platt - Cropped for IPA INSIDERI was looking through our files the other day and stumbled across a Platt’s Perspective I wrote almost 15 years ago. The sentiments expressed in that Open Letter To CPA Firms still ring true today. As you engage in a busy and successful tax season this year, and go on to strengthen your prospecting muscle in the coming months, take note of this reminder on behalf of small businesses everywhere, and enjoy this #TBT Platt’s Perspective!

In my role, I am in the fortunate position of working with CPA firms and small business owners on a daily basis. As you can imagine, both sides would describe their relationship differently. On behalf of all those business owners who are looking for help, but seem frustrated with how accounting professionals are courting them, I write this letter. Listen up accounting professionals.

Dear Accounting Professional:

Why won’t you make it easy for me to do business with you?

I own a small business and I’d like it to grow bigger. I work 12 hours a day. I need someone who can step in and help me get control of my life again and steer my business in the right direction.

Please understand that I really WANT to do business with you. I’m looking for reasons to say “YES” to you, not “no.” I don’t want to spend my time selecting a CPA. But you’re not making it easy.

  • You sell accounting services every day. I buy accounting services once in a blue moon. Help guide me through the process. Is my business too small for your firm? Do you have the staff to assist me with the day-to-day accounting functions? Tell me what I should be looking for. Tell me how you have helped others like me.
  • I know which questions I want to ask. You know which questions I should be asking. Share them with me.
  • I don’t know what my budget is for your services. That’s because I don’t know what it will take to get me where I want to be. Based on what you know about me, tell me the low, median and high range of what it could cost, and show me what benefits I would derive at each level.
  • My customers buy my product for a fixed price, not my time based on how efficient I am. I can budget and forget my worries with a fixed price from you. Can you accommodate that?
  • I expect you to be technically competent – that’s not really a selling point. I expect you to be ethical and work with integrity. That’s a given.
  • The issue is how you can customize your knowledge to fit my needs, not how can I change my needs to fit what you have to sell.
  • Your firm has been around for 40 years? Congratulations, good for you. What’s important to me is ‘What can you do for my business?’
  • I know my business and my problems are not unique. You’ve seen dozens of companies like mine and know that many of the problems are similar. Share with me how you’ve helped other small business owners get control of their businesses.
  • As a prospect, I know that you really want my business because you are spending hours trying to close the sale. Why is it that when I become a client the billable clock starts ticking immediately?
  • I really do understand that in your business, you may not be the one doing the work. That’s OK. Then let me talk to the person who WILL be doing the work so I can feel good about them.
  • I desperately want to end my search for a CPA and firm in order to get on with improving my business. Make me feel like you heard and understood what my concerns are so I can feel good about making a decision to hire you.
  • My business is my life, it’s all consuming. Show me that you care about me and my business too. If you really do care, then my search is almost over. If you really don’t care, respect my time enough to diplomatically point me elsewhere.
  • And by the way, I know it’s tax season. I know you’re busy. I know you have just a couple of weeks left of working 60+ hours a week. But I don’t want to hear about it. I do that 50 weeks a year.

Keep in mind, I’m looking for reasons to say “YES,” not “NO,” but you don’t make it easy. Honor your promises, do what you say you’re going to do, show me that you understand, and above all else show me that you care. It’s not that hard. Amazingly most of your competitors aren’t doing it, so a little effort on your part will go a long way and will really make you stand out in my mind.

Make it easy for me to do business with you, and this can be the start of a beautiful relationship.

Sincerely,

Most Small Business Owners Across America

Platt’s Perspective: Merger Musings As We Move Into 2016

I admit to feeling a bit nostalgic this time of year, and it’s not just because of the holidays. It’s because my email inbox is stuffed with news about mergers as firms rush to finalize their deals before Dec. 31.

Mike Platt

Mike Platt

There is a strong sense of loss that IPA feels, as part of the accounting community, when good, independent, local firms that have been around for many decades announce that they are merging up – regardless of whether the reason is a good strategic one, or simply because partners want to retire and no one is ready to take the reins when they do.

Now there are excellent reasons for many of these unions: succession for firm owners, a bigger, more talented staff, new marketplaces, new niches, the ability to expand existing services and more promotion opportunities for staff.

But the downsides are real too. The first year, at the very least, has the potential to be extremely disruptive for everyone involved. New systems, technologies and processes have to be integrated and learned; offices may need to be moved; partners and staff can both take an “us versus them” approach to the merged entity; redundant staff may be laid off and concerns about future layoffs may remain; accounting associations lose members; clients may not want to work with a much larger firm; and small local business serving the acquired firms may lose that firm’s business. Increased communication – which is needed to set and manage expectations on all sides – may not get the attention it needs.

While mergers are here to stay, and are becoming more common within professional services firms (and, not surprisingly, within client organizations too), it makes me wonder: Should firms be built to sell, or built to last? Should both options constantly be on the table? And how many firms have truly chosen their path?

Firms continue to be courted with offers. Many tell us that their partners have determined to remain independent and have therefore not seriously entertained acquisition offers. Others choose the fast-track toward merging. Still others revisit their options constantly to read, and re-read the tea leaves of the current environment to see which way to go.

Now don’t get me wrong, it’s perfectly OK to keep an open mind about the future of the firm, but I believe that a concrete decision – either a strong Declaration of Independence or a decision to ultimately sell – will take the firm down two separate roads. Those that have made their decision – regardless of what it is – will find it easier to have all partners pulling in the same direction and reaching their goals faster and with less friction. Those that haven’t may find that time and energy is wasted while aiming for a fuzzy target that not everyone understands, agrees to or even favors.

My take on all of this? Bigger isn’t always better. The grass isn’t always greener. Reality doesn’t always live up to the promise. IPA would not be sad at all to see the volume of merger announcements slow down to a trickle.

As we roll into 2016 with more mergers on the way, my plea to both the acquirer and the acquired is to do everything you can to ensure that one plus one is significantly greater than two (or three, or four or five). Only then will the continued merger mania deliver the value-added hype that has gripped the profession. You owe that much to your partners, staff, clients and the profession.

Benchmarking Numbers to Watch Related to Succession

By: Michael Platt, publisher, INSIDE Public Accounting

Mike Platt

Mike Platt

The 100 largest firms in the nation, the IPA 100, are telling us that succession is not their top concern. In fact, only 15% of the IPA 100 said it was one of the three biggest challenges facing the firms. While on the surface this may appear as a victory, other issues – staffing, growth and profitability – have nudged out succession as the top three sources of concern.

All those issues affect succession, of course. IPA has been able to analyze data from hundreds of CPA firms over the past 25 years through the IPA annual Survey & Analysis of Firms and the IPA National Benchmarking Report, one of the longest-running and largest MAP surveys in the accounting profession.

Numbers to Watch Among the IPA 100

Data tells us there are several metrics related to succession that accounting firm leaders need to watch closely:

  • Equity Partner Retirements: Of the 75 IPA 100 firms that provided information on retiring partners, 77% experienced equity partner retirements either last year or this year. That represents a total of 136 partners retiring in 2014 and more than 110 expected to retire in 2015. These firms include 2,840 partners, with retiring partners representing 8.7% of the total.
  • Newly Admitted Partners: Those same firms admitted 230 equity partners in 2014 – 70% more than retired. Expansion in the partner ranks is coming from both internal staff and lateral hires, which accounted for 42% of admitted partners.
  • Retirement Obligations: Retirement payouts, which reflect the annual financial commitment by the firm to retired partners, averages 1.5% of a firm’s total net revenue. Based on IPA data, retirement obligations as a percentage of net revenue are actually down over the last few years due to renewed growth in top-line revenues.
  • Average Partner Age: The average age of the partner group, at 52.2, is increasing, despite the naming of new (presumably younger) equity partners, and mandatory retirement clauses in effect for 75% of the IPA 100.

How IPA Can Help

Compare your firm to firms of similar size, to those within your region or to the Best of the Best firms, using the 2015 IPA National Benchmarking Report. It offers detailed information on more than 500 firms with over 80 pages of tables, graphs and analysis, along with in-depth analysis of the IPA 100, IPA 200 and Best of the Best firms. Order the full report today or read the executive summary. Survey participants can also order the one-page customized Financial & Operational Report Card, an extremely valuable tool to help firm leaders get laser-focused on what’s working, what’s not working and where the firm needs to improve. Consider inviting IPA to your next partner retreat for a customized presentation based on your firm’s survey results in the context of a global view of what’s happening around the profession.

How Does Your CPA Firm Measure Profitability?

By: Michael Platt, publisher, INSIDE Public Accounting

FrontPageImageAs we wind down the 25th annual INSIDE Public Accounting National Benchmarking season, we wanted to dig a little deeper into the questions on everyone’s mind: How profitable is my firm? How do I compare against my peers? Seems like a pretty basic question, and given the fact that we are part of a community of CPAs, you would think that it would be a pretty simple answer.

But you would be wrong. After reviewing over 500 surveys, talking with managing partners around the country, and fielding questions on this for months, it is quite clear that “profit margin” means different things to different people.

If profit margin (net income as a percentage of net revenue) is the gold standard of measuring profitability, the fact remains that there are many variables that firms consider when coming up with their “number.”

View the 2015 Best of the Best

View the 2015 Best of the Best

The biggest variable comes in defining what net income consists of. Traditional measurements of net income assume that net income is measured before any compensation, draw, bonus or salary is paid to equity partners. INSIDE Public Accounting has used this measurement in its National Benchmarking Report for years. Why? Because there is little consistency among firms. Consider these various compensation strategies:

  • Pay a small livable wage as a draw and motivate partners by splitting up a larger piece of the profits at the end.
  • Assume that the firm will be doing well and pay partners a higher wage during the year.
  • Take profits and fund a deferred compensation program.
  • Reinvest in the firm by taking some profits off the table.
  • Distribute all profits to equity partners each year.

The flaw in the traditional measurement of net income is that it assumes the cost of partner labor is zero.

Leverage, therefore, plays a big role in defining profitability based on this approach. In firms with lower leverage, where partners are responsible for a larger share of the billable time, profitability will be significantly higher than in firms with greater leverage. Does that mean a low-leveraged firm is “doing better?” Maybe not.

By promoting a manager (where cost of labor is counted as an expense) to an equity partner (where cost of labor is not counted as an expense), profit margin will increase, and net income per equity partner will decrease (everything else being equal). Is the firm doing better or worse as a result? We need to find a way to level the playing field so that leverage does not skew comparisons inside firms and between firms.

Sign up for the IPA newsletter.

Sign up for the IPA newsletter.

Many Ways To Calculate The Cost of Partner Labor

If partner labor is included as part of “cost of goods sold” in an accounting firm, it should give a clearer picture of true profitability. IPA’s National Benchmarking Report has used the traditional measurement of net income in determining profitability for years, but recently we began looking at this critical number in different ways.

Consider these three ways to measure a truer cost of partner labor:

Method 1 – Assign a flat rate per equity partner for a cost of their labor. If a senior manager costs the firm $150,000 a year, assign a flat rate for partner time of $200,000 per year as a cost of their labor. This is a simple, straightforward approach that approximates the cost of labor quickly and easily.

Method 2 – Calculate a cost to the firm of partner charge hours: For every charge hour billed by a partner, divide the billing rate by the selected billing multiple of the firm to determine the cost of labor for those billable hours, and only count the cost of billable time. For a partner charging $400 per hour, this would likely be around $100. The average equity partner may charge 1,000 hours, so the cost of that labor would be $100,000 per equity partner.

Method 3 – Calculate the cost to the firm of all partner hours: Presumably, non-charge hours are being spent productively and are of value to the firm, whether it is in relationship building, client acquisition, referral relationships, staff development and mentoring, etc. Take that same $100 and multiply it by total work hours of equity partners. For a firm with average partner work hours of 2,400, that would represent a cost of labor of $240,000 per equity partner. (Note: Often, partners wear their total work hours as a badge of honor, with some working 2,800 to 3,000 hours per year. The cost to the firm should reflect that total time commitment for a truer picture of partner labor, so $300,000 for those partners is not unreasonable.)

In my opinion, Method 1 is the simplest, and Method 3 is the most accurate. Method 2 discounts the value of non-charge hours and is not reflective of the value of labor provided by partners.

Adding this extra calculation to compare profitability from one year to the next internally, and in comparison to other peer firms, gives you a much clearer view of how well you are doing. It is well worth the extra time to get a much more accurate view of how profitable your firm is.

How IPA Can Help

The 2015 IPA National Benchmarking Report offers detailed information on CPA firm profitability, including a look at traditional profit margins as well as a measurement that includes a flat $200,000 labor cost to the firm per equity partner. The data comes from more than 500 firms across the nation and is presented by revenue band and by geographic region. Order the full report today or read the executive summary.

 

 

 

Platt’s Perspective: Shifting The Power Of Billing To Clients In Real Time

“Disruptive innovations.” It’s a phrase we continue to hear more and more often, as new approaches to old ways of doing things continue to be developed. One interesting innovation recently entered the legal profession, and is sure to have an impact in the near future on accounting firms as well.

For as long as the profession has been around, the billing process has been managed and controlled by the service providers themselves. Law firms (and accounting firms) enter hours worked in the time and billing system, review reports, write off time as they feel appropriate, issue discounts (or premiums) as they feel appropriate, and send the invoice out the door. Occasionally, especially in the legal world, clients are surprised by the size of the bill, object to the cost, and the firm adjusts the bill based on the client’s pushback. Sound familiar?

Mike Platt

Mike Platt

Enter a new generation of apps designed to shift the control to the client, removing some of the secrecy inherent in the traditional billing process. In the last 18 months, new disruptive products such as ViewABill, LeGuard and Apperio have  appeared, allowing law firm clients not only transparent access to the billing process, but also the power to “throttle back” the amount of work being delivered by the firm based on real-time access to hours in the online system. This collaborative approach between client and attorney is intended to help clients budget better and eliminate surprises when the bill arrives.

According to ViewABill, the first of these companies in the market, the initial response by law firms was fear that the software would drive a wedge between them and their clients. In an article earlier this year in Bloomberg Business, ViewABill reports that half the top law firms in the country are now using their software, helping the firms to promote a culture of collaboration with their clients. A marketing video for LeGuard  touts the “revolutionary way to control legal billing by holding lawyers accountable for the number of hours they bill to a client.” Apperio provides customizable dashboards to track time, provide real-time alerts based on spending thresholds the clients set, and compares performance to other law firms, encouraging the firm’s clients to “keep your eye on the ball.”

Based on the annual IPA National Benchmarking Report, more than 95% of the revenue generated in firms still comes from the traditional “dollars times hours” formula. It’s just a matter of time before this same technology innovation permeates the accounting profession.

  • Could this promote a culture of greater collaboration between firms and their clients?
  • Could it drive the profession to issue invoices in a timelier manner?
  • Could it eliminate those awkward after-the-fact billing questions from clients?
  • Could your clients demand that YOUR firm provide this type of access?

Whether this specific disruptive innovation is met with defensiveness or eagerness, the fact remains that it is here now, and is part of the growing trend empowering clients. Firms that embrace collaborative billing, prepare for it, create processes to maximize its potential, and appropriately communicate to clients, in my opinion, will win.