The Firm of the Future: New Model Shuns Time Sheets, Favors Value Creation
EXECUTIVE SUMMARY * The traditional business model of focusing on top-line revenue has several limitations when it comes to running a CPA firm because it overemphasizes the benefit of every marginal dollar of revenue and every client and places an artificial ceiling on income potential * Measuring efficiency based on indicators such as billable hours, utilization and realization rates comes at the expense of creativity, innovation and effectiveness. * The new paradigm for firm management is based on intellectual capital (IC), or knowledge that can be converted into profits. A firm's IC is comprised of human, structural and social capital. * By focusing on effectiveness over efficiency, firms are forced to consider each client's profitability and how that client fits within the firm's overall purpose and strategy. * Firms that understand the difference between knowledge workers and service/manual workers will have an enormous window of opportunity to attract, develop, inspire and profit from their human capital investors. ********** [ILLUSTRATION OMITTED] To a large extent, your company is being managed right now by a small coterie of long-departed theorists and practitioners who invented the rules and conventions of "modern" management back in the early years of the 20th century. Management is out of date. Like the combustion engine, it's a technology that has largely stopped evolving, and that's not good. --Gary Hamel, The Future of Management, 2007 The reigning paradigm of how to manage a CPA firm hasn't changed for more than a half-century: Revenue = People Power x Efficiency x Hourly Rate Unfortunately, this model has several limitations. First, it overemphasizes every marginal dollar of revenue--and hence any client--as beneficial. But low-value clients consume a disproportionate share of a firm's precious capacity, while keeping it from reserving capacity for its most valuable clients. Second, most fire, s attempt to leverage people hours, which is how the traditional pyramid structure was formed. Yet with technological advances and a talent shortage, it becomes increasingly restrictive for firms to think their capacity resides in head counts. Third, firms attempt to measure efficiency using indicators such as billable hours, utilization and realization rates. These metrics compel firm leaders to believe efficiency is the archetype of running a profitable firm, but what if you are efficient at doing the wrong things? A relentless focus on efficiency comes at the expense of creativity, innovation and effectiveness. Last, the hourly rate--along with a "you sell time" mentality--has been taught to at least two generations of CPAs, or "Firms of the Past." In reality, clients don't actually buy time, so it is difficult for firms to sell something that clients don't think they are buying. The hourly rate places an artificial ceiling on income potential. It seems that since the profession invented this model, it should be able to reinvent it as well. AN IMPROVED MODEL A new paradigm is gradually supplanting the old way of thinking because it offers viable alternatives for leveraging the chief source of wealth in today's knowledge economy--Intellectual Capital (IC): Profitability = Intellectual Capital x Effectiveness x Price The new model, or the "Firm of the Future," has several advantages over the old. Rather than focusing on top-line revenue, the firm is forced to think about the profitability of each client, and whether that client fits within the firm's overall purpose and strategy. Despite common belief, CPAs do not sell hours. A firm's capacity to create wealth for its clients resides in its IC--that is, knowledge that can be converted into profits, rather than simply focusing on leveraging people and hours. A firm's IC has three components: 1. …