This document discusses factors that shape success and competitiveness in CPA firms. It summarizes research showing that a firm's cultural orientation, especially around knowledge management, marketing, learning, and integrating strategy, knowledge management, and marketing, explains up to 70% of performance differences between firms. Leadership and values management are also important factors. The document provides examples from large accounting firms of how they approach issues like knowledge and learning, marketing with a focus on client value, and integrating strategy across business units.

1. Profitability & Competitiveness in CPA Firms: The factors that shape successCCH Singapore22nd April 2010Robert SawhneyManaging DirectorSRC Associates Ltd, Hong Kong1www.srchk.com

2. The Power of ContextExperiment at Princeton University in the USGood Samaritans (seminarians of The Princeton Theological Seminary) were asked to deliver a short talk on the bible at a nearby venueThe Samaritans split into two groups: one told they were late, the other told they were a few minutes earlyVariable: ‘victim’ outside building68% of the early group stopped to help, only 10% of the late group?(Source: The Tipping Point by Malcolm Gladwell)2www.srchk.com

3. The State of PlayGFCGlobalizationRegulation both locally and internationallyDemanding clientsKnowledge sharing and applicationTechnology Social media and Web 2.0ConsolidationCompetitionBPOTalent retention and managementFirm culture and ethics3www.srchk.com

4. CDASStrategic ThrustsThis 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%.www.srchk.com4

5. What is the problem then?Hourly billing that does not recognize value and creates conflict of interest between client and firmFocus on billable time and utilization ratesAssociates trained in technical skills but not in managementProfessionals with high IQ and little EQFirm structure that inhibits cross functional sharing of informationProfessionals with little formal business trainingSenior partners with high resistance to alternative ways of workingFixation on practice areas as opposed to client problemsFocus on cross selling without understanding client needswww.srchk.com5

6. What the CDAS sayswww.srchk.com6

7. 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/Multimedia/RonBaker.htmSynthesize knowledge, knowledge for profit, effectiveness, thought leadership…value!www.srchk.com7

8. PSFs are DifferentProduct resides in the structural, social, and human capital of firm – knowledge and learning keyKey marketer is the professional who interacts with clientDifferentiation 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)?www.srchk.com8

9. So what factors do shape success?An exampleBig push for consolidation, internationalisation, and alliancesResearch 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.www.srchk.com9

10. Cont’dPatricia 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. www.srchk.com10

11. So what factors do shape success?Answer: it’s the cultural orientation of the firm – but not how you thinkThese are (and they explain up to 70% of the variance between firm performance)KMMarketing (culture)Learning Strategy, KM, and marketing as oneLeadership and values management …coming up, these explained and the ‘internal strategy’ of one of the Big 4!www.srchk.com11

12. Leadership and ValuesFrom David Maister (Practice What You Preach)Nine key statements that explained over 50% of variations in firm performanceClient satisfaction is a top priority at our firmWe have no room for those that put their personal agenda ahead of the interests of the client or the firmThose who contribute most to the overall success of the firm are rewarded the most highlyManagement gets the best work out of everybodyAround here you are required, not just encouraged, to learn and develop new skillsWe invest a significant amount of time in things that will pay off in the futurePeople within our firm always treat others with respectThe quality of supervision on client projects is always uniformly highThe quality of the professionals in our office is as high as can be expectedwww.srchk.com12

13. His Modelwww.srchk.com13

14. Quick note on values and ethicsIn 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. www.srchk.com14

15. Leadership‘motivation, inspiration, commitment’Leadership is crucial because it sets the agenda and tone for action within the firmSupportive, participative, consultative, transformational (the 4 I’s).www.srchk.com15Personalexample

16. Knowledge and LearningWhat do professionals really sell?“Know-What” for sales and business growthProvision of Knowledge about clients, targets, their industries, and their (and your) competitors throughExternal news services and business periodicalsBusiness, economic, and industry analysesService Offering databases providing market analysis, proposals, client presentations, qualifications & value statements and Thought Leadership around the specific services you provideCompetitive Intelligence knowledge bases “Know-How” for quality service deliveryProvision of professional guidance; reusable approaches, solutions and deliverables; as well as connections to team members and subject-matter specialistsTechnical and regulatory information and guidanceMethodologies and toolsService Offering databases providing “Best Practices” and deliverables “Know-Who” for people managementProvision of tools for managing your business processes: sales, service, people and knowledgeTeam and community-of-interest discussion forumsEngagement Management SystemsOffice and personnel directoriesService Offering databases providing communications and people skills informationwww.srchk.com16

17. Cont’dLearningDo 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?www.srchk.com17

18. 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)www.srchk.com18

19. The Importance of Industry KnowledgeMuch research in the professional services sector points to the importance of industry knowledge for clients and accounting firmFor 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)www.srchk.com19

20. 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 doesIt is an organization culture that acquires and disseminates information-cross functionally and across hierarchies, and acts upon that informationThis sharing and information coordination tolerates no functional silos Strategy, marketing, leadership, and KM - interlinkedwww.srchk.com20

21. Bed rock of firm performance-a market orientationwww.srchk.com21

22. Strategy in the Big 4www.srchk.com22

23. Quick CaseHarrex Group, NZ (source: J of Accountancy, 2008)Founded in 2007 by Brendan Harrex, first chief value officer at his former firmHe says focus on time and cost only creates illusion of managing a PSFWhat really matters is value creationNo more hourly billing, a change of cultureKey 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 Playerwww.srchk.com23

24. The Final Frameworkwww.srchk.com24

25. 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.comBlog: www.marketingasia.typepad.comTwitter: http://twitter.com/robertsawhneyMy new book: Available from Lexis Nexis in Hong Kong and other Asian offices or www.amazon.comwww.srchk.com25

26. Appendix – accounting firm mergersJoel 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.www.srchk.com26