The future for the small and medium sized firm (2)

By Phil Shohet And Andrew Jenner, Directors, KATO CONSULTANCY

CA MAGAZINE - July 2004

In our last article on the future of small and medium sized firms in the independent sector (CA Magazine march 2004) we took a broad view of the marketplace they are currently working in and the changes, both cultural and structural, that need to be made if they are to continue servicing that market both effectively and profitably in the future. Being, for the most part, naturally conservative change is not a concept that appeals to many accountants, and the fairly radical changes they are now required to make can be extremely daunting.

Accepting the need for change is one thing; initiating that change and ensuring its success is quite another. A new regime requires careful and continuous monitoring if it is to be effective in the long term, and it is this attention to detail that will make the difference between success and failure. What are the very practical steps that firms can take to ensure that the change process is not only as painless as possible, but also their gateway to a brighter future?

Benchmarking is not a new concept for the accountancy profession and many firms take part in one or more of the inter-firm comparisons offered by a variety of organisation in order to compare their progress against that of their peers. However, what few firms undertake in any consistent manner are the internal benchmarking exercises that are so vital to maximising profitability. This is particularly so in firms that have become departmentalised with the addition of more specialist services.

With a diversity of profit centres within the practice there is a need for more sophisticated performance indicators; both to establish whether the profits generated by these centres are sufficient to justify their existence, and to identify the strengths and weaknesses within each one. Identifying the fee income is not enough: the ratio of profits to turnover in specialist departments tends to be much higher than with compliance work. This means that a much more detailed breakdown of costs and overheads is required in order to obtain an accurate picture of the contribution each department is making either at gross margin or at net contribution level. Practice management IT systems will record all the necessary data and can generate the appropriate reports to help the partners monitor performance.

These days it is not uncommon to find firms where 80% or 90% of profit is generated by specialist services, but with no benchmarking systems in place the partners will be blissfully unaware of the risks they are running. It is essential that firms ensure the profitability of the audit and compliance work which is their core business and which generates recurring fees. The following example shows just how revealing a breakdown of the fee income generated by individual services lines can be:

Managing partners must identify the key performance indicators within the practice to assist the benchmarking process. These KPIs will vary from one department to another: and, indeed, from one individual to another as partners and senior staff should also be included in this exercise. For example, departmental KPIs could be meeting internal and external deadlines, overall recoveries, WIP and debtors. However, the personal KPIs for the partner in charge of the department might be very different. KPIs must be specific, measurable, easy to assess and fair. Partners and staff must be aware of what they are, and the plan needed to make them work, including a monitoring and mentoring programme

The individual KPIs can, of course, be included in the firm’s staff appraisal system (although they can still be used if there is no forma appraisal system). This also applies to the partners, and for those practices that do not have a partner appraisal system, now is the time to bite the bullet and introduce one . Either through a reluctance to confront the issues surrounding under-performing partners, or a fear of causing serious disagreements, partner appraisals get pushed to the bottom of the priority list. However, properly managed partner appraisals add value to the individual and the firm, and help everyone to play to their individual strengths.

Few firms measure the total contribution from individual partners. The approach is generally to expect some 1,000 hours of chargeable time plus some indeterminate amount of non-chargeable time. Assessing partner activities is therefore a process where there is no benchmark for measuring whether or not a partner is doing what the firm requires beyond the chargeable hours worked, fees billed or new work generated.

A good appraisal system, using KPIs in conjunction with each partner’s own career plan and the firm’s business plan can have a dramatic effect on the practice in terms of both efficiency and profitability as well as improving communications and fostering better working relationships.

Cultural and structural changes are never easy, but the key to success lies in the detail. The future will bring great opportunities for independent practices: to take full advantage of them firms will not only need the right mix of skills, but, just as importantly, the ability to monitor their performance right across the board.