The Attack on Profitability
 
Tamera Loerzel

The theme of INSIDE Public Accounting’s 2016 Benchmark Report is, “Steady as she goes, but watch the horizon.” Firms are experiencing good times again with an average of 6.1% organic growth and 30.2% net income for all firms nationally, according to IPA. The caveat is that we’re in one of the tightest labor shortages we’ve experienced, even beyond what we experienced in 2007-08. And, we need to pay attention to the typical market swings that past trends tell us we need to prepare for.

All of this can lead to a squeeze on profits with some key contributors being the rising costs of office space and salaries that seem to outpace any increase in client fees. Making investments in the long-term sustainability of your firm will help manage the squeeze on your profit line.

Firms that are combatting the attack on their profitability are focusing on these five areas:

  • Embracing remote work even more – continuing the progression toward Anytime, Anywhere Work™ can ease your need for expanded office space traditionally required to support the growth goals of your firm. Many firms are experiencing continually increasing costs for office space, in addition to a shortage of space in which to expand without moving or finding new space. Firms that have figured out how to make the shift to allow their team members increased flexibility in WHERE they work through programs like work from home or working from a remote location have increased employee engagement and retention and have been able to reduce one of their highest expense items– office space. Being open to remote workers also removes the geographic constraint for attracting those tough-to-find experienced hires. For more ideas on making the shift to more remote work and thereby reducing your firm’s overhead while still expanding your firm’s market reach, read my colleague Renee Moelder’s blog Where is Your Firm With AnyWHERE Work?
  • Improving efficiency and streamlining processes – most firms have been engaging in some kind of process improvement or efficiency initiative to help identify redundant or unnecessary steps or work that may traditionally have been done to complete an engagement. However, the two areas we see firms can still make strides is ensuring full support and compliance with their new processes and not reducing the fee to clients because of the gains you’ve realized from improved efficiencies. One of the most disheartening activities you could undertake is to conduct a process improvement initiative, whether you form an internal committee to lead it or hire an outside consultant trained in LEAN process improvement, and then not follow through on their recommendations. We see this happen all the time where someone (typically one of the firm leaders) doesn’t want to change their process or habits or they have this “one client that the change doesn’t work for” so real change doesn’t happen and the reduction in steps and increased efficiency doesn’t occur. Be sure to empower those charged with making recommendations to truly realize the benefits of any process improvement – and your team is inspired to innovate and solve problems.

    And then, be sure to agree that any gains realized will not be used to reduce fees. Instead, invest in salaries and training to retain and attract the best team members to serve those clients or in technology solutions to continue to enhance the client experience (see more on technology in the next section). The higher realization from increased efficiencies should be allocated to offset your firm’s increased cost of doing business.
  • Leveraging technology – to remain competitive, technology investments must be a priority, as those investments will pay dividends. Start with the process and efficiency improvements using scan and auto-populate tools for tax, if your firm isn’t already doing so, and data extraction technologies, benchmarking and data analytics in audit. On the (very near) horizon, firms will see real results by utilizing technology to enhance and personalize the client experience with portals, video, and other digital technologies. This increased ease and insights your clients experience should result in enhanced loyalty and increased revenue per client. And making these strategic technology investments will translate into higher team engagement, so you’ll experience less turnover and fewer costs associated with replacing them.
  • Raising fees – with the increased value and enhanced client experience and rising costs of labor, raising fees is a must. In most firms, the average annual salary increases typically outpace client fee or rate increases, which is not sustainable long-term (and has serious impacts on the short term). Firms should increase their fees annually at a higher rate – especially for new client engagements. With the labor shortage and real capacity challenges in most firms, selling new engagements at your current rates makes your team members wonder how that makes business sense and who is going to do the work with already full-to-the brim workloads. Raising your fees to the point that you actually lose some proposal opportunities will allows you to target those that you (and your team) really want and that will be more profitable for the firm.

    With existing clients, raise the rates of your C and D clients to your “new client rate” (especially if you haven’t had the courage to transition them out of your practice) so that at least you’re getting your top rate for those not so ideal clients. For your B clients, make a plan to get them to your new client rates over the next year or two; typically, when you explain the investments you’re making in your people, technology, and infrastructure to deliver the value you’re able to provide, your true B clients will understand and be willing to move with you.
  • Adding (more) consulting services – this last strategy will impact both your top line and bottom line, because advisory services garner a higher rate per hour with typical realization of 100% or higher. And, clients are looking for more proactive, future-oriented and problem-solving services from their CPA and your staff demand to provide more elevated, make-a-difference services. My partner Jennifer Wilson highlighted in her blog, Consulting Services Can Grow Your Firm – If Managed Properly, how firms are seeing great success and traction with “state and local taxes, business valuation, outsourced CFO and controllership, IT security, financial planning, internal controls consulting, international tax, M&A due diligence, and human resources, among many others,” when they consider the differences between managing and growing an advisory practice compared to traditional compliance services.

As you work “on” your business this spring and summer in strategic planning retreats, identify which of these ideas will have the biggest impact on your bottom line. Then, commit to implement it and begin mitigating the squeeze on your firm’s profits. So, which one are you going to take on?

Warmly,
Tamera

 

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