A Measure of Success

BY LAWRENCE W. SCHWARTZ

While we wish our colleagues at Bailey & Co., Snyder & Co., Harrex Group and Kennedy and Coe LLC every success, the article “The Firm of the Future” (Nov. 08, page 68) made it difficult to determine the firms’ outcomes which, ultimately, will determine their success or failure—profitability.

The only measurements presented were those the article itself described as inappropriate—revenue—by pointing out that Bailey produced $2.8 million in revenue with 14 FTEs, that Snyder produced $1.3 million in revenue with 13.5 FTEs, and that Harrex produced $2.2 million in revenue with 21 FTEs. No similar metric was presented for Kennedy and Coe. Quick and dirty calculations give us at least some relative results to consider. One would expect Bailey, with $200,000 in revenue per FTE, to be far more profitable than Harrex at $104,762 per FTE or Snyder at $96,296 per FTE. But beyond that, the reader is left wanting for stronger financial analysis.

For several years our firm (preceding our combination with another firm) carefully set “fixed” prices based on several factors, among them client hand-holding expectations, transaction volume and complexity, and intellectual capital requirements. Clients continually expected more for less, making scope creep (despite “change orders”) a consistent obstacle to the development of client-firm value congruence. This led to the continuation of unprofitable, sometimes unnecessarily risky, client relationships, and often for the wrong reasons. We were, thankfully, profitable but not nearly at levels we could have achieved using more traditional (and, admittedly, more carefully tracked) value and productivity measurements.

Change is good, and looking at things differently is a useful exercise. Strong, ethical cultures building intellectual capital and collaboration will indeed shape the successful firm of the future. Healthy, proactive relationships with clients will clearly build the platform from which high-quality services are provided. Unfortunately, the article failed to make the case for profitability.

Lawrence W. Schwartz, CPA, MBA, CVA
Fairfax, Va.

Author’s reply: The article does mention that the profitability of Bailey & Co. has increased by 500% in three years, and Snyder & Co.’s profits have increased as well (though this fact was edited out of the final article). Harrex Group is barely over one year old, making comparisons impossible, while Kennedy and Coe has yet to get rid of timesheets but would be the first to point out that profitability on fixed-price agreements, overall, has increased.

Obviously, none of these firms would sustain this change if it were not more profitable. But that is not to say profitability would rise automatically for a firm in transition, as they are usually undergoing other changes as well––such as firing low-value clients, adding capacity for higher-level services, investing in education, etc.

Your firm’s negative experience with fixed pricing is not without precedent. It is usually caused by a lack of pricing skills, project management and accountability. Not everyone in a firm is equally good at pricing. For this reason and others, the firms in the article have established pricing councils, letting their most competent people do the pricing, much like a majority of Fortune 500 companies. Pricing has become a separate and distinct function in firms of the future, requiring lifelong education and commitment to this unique skill.

I know firms that value price that are among the most profitable in the world. But that is not the only measure of a good firm. They also have no problem attracting talent, with some having a waiting list of eager recruits (how many firms can say that today?) along with a better quality of life.

Change, indeed, is good, and the profession is in the midst of a tectonic shift, thanks to the courage, entrepreneurialism and risk taking of the trailblazers profiled in the article––and many other firms around the world––that have adopted this new model.

Based on nearly 20 years of experience working with value pricing, I conjecture that given the choice between two equally profitable firms, one that uses timesheets and one that does not, the average CPA will choose to work for the firm that does not use timesheets. Especially younger generation accountants.

Ronald J. Baker
Petaluma, Calif.

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