15
Building the Future Firm Continuously

“Be uncomfortable being comfortable, discontent being content.”

~ COACH JOHN WOODEN

Nothing stands still. In his book, The World is Flat: A Brief History of the Twenty-first Century, Thomas Friedman describes many of the rapid changes taking place today. The business world, competition, technology, communications methods, and our communities are constantly changing. You can build the perfect accounting firm for today, and soon, it will be behind.

One of the major assignments of leaders and managers is to implement processes that will carry the firm into the future, rather than simply positioning you for today.

Gary Shamis, founder and CEO of the top-100 multioffice firm SS&G Financial Services, Inc., in Cleveland, OH, talks about his firm’s and partners’ attitude toward continuous change and improvement

You could go around this country and ask people, “Who are the best CPA firms?” We’ll probably get our fair share of people saying that SS&G is one of the best firms in the country. On the other hand, if you spent time with our partner group, you would never find a more dissatisfied group with what we have now on a daily basis. It’s never good enough, and there is not a piece of this organization that has not been reengineered 10 times over to try and improve what’s there—every single thing—and so, it’s just a continuing process.

After I read Thomas Friedman’s book The World Is Flat, I was actually convinced that we needed to be doing more offshore work. So, we ended up spending three years working with our tax software provider to reengineer our 1040 process. We basically moved all of the clerical functions of the 1040 preparation to India. You’ve got to be good in tax to be successful in practice development, and we needed to move the clerical roles out of our offices, so our partners could focus on giving great tax advice.

In this chapter, I’ll review the ongoing process that the best managers adopt in order to keep the systems, processes, and procedures not only up-to-date but ahead of date. Great managers ensure that their systems and processes are subservient to strategy and people, and for that reason, those systems can never be static. Leaders are influencing their team members on a journey. Anytime there is movement toward a goal, friction will occur. Therefore, managers must always be adapting the systems to reduce the potential problems caused by friction. We will discuss a variety of methods being used to improve processes, such as business process improvement, Lean Six Sigma, and Six Sigma.

This chapter, like many others in the book, just touches the surface of the concepts surrounding continuous improvement of business processes. In appendix D, “Eight Continuous Process Improvement Phases,” I’ve reviewed some of the events that are important as you proceed through any change process. In appendix F, “Business Process Improvement Resources,” I’ve listed a number of resources, books, and websites to which you can refer to become more knowledgeable in this subject. In addition, you may want to consult a firm called Lean CPA, LLC, a division of Rea & Associates, Inc., in Ohio, that specializes in Lean Six Sigma for accounting firms.

Commit to Continuous Improvement

A huge part of managing any business is a commitment to regularly improving the internal management of operations. Because an accounting firm is such a high-margin business, it makes sense that the most successful leaders of firms focus their attention on business growth. After all, an incremental dollar of revenue can create an incremental 80 percent or more of margin in the short run and as much as 40 percent in the long run. However, high-margin businesses cannot ignore their operations, either; they can always improve the level of work handled by partners and client cycle time on projects (the turnaround time on client matters). Some firms look to “lean” improvement or Six Sigma processes to regularly evaluate and upgrade their work, as we’ll discuss later in this chapter.

Chris Allegretti, CEO of the regional firm Hill, Barth & King, LLC (HBK), in Boardman, OH, is building his firm of the future by consolidating offices. After the economic recession that began in late 2007, HBK went from 17 offices down to 10.

You can do a lot of things in small offices, but it’s very hard to have someone with deep skill sets who’s a great auditor, someone who’s a great tax practitioner, or someone with specific industry knowledge. In a merged environment, we get a little more efficient. It allows us to get our people concentrated in certain areas, so they can develop their skill sets to service our clients better.

Two key reasons that firms focus on improving their management of operations are as follows:

1. Reducing wasted efforts inside all processes, so that the firm is more productive

2. Compacting steps in each process, so that client work can be performed more effectively and turned around more efficiently

In Gary Shamis’s firm, outsourcing low-level tax operations to someone else allows his tax partners to focus on being business advisors. Rick Dreher, CEO of the megaregional firm Wipfli LLP in Green Bay, WS, is leading the same kind of change for all his experienced service providers. The same concepts will apply to changes taking place from an outside regulatory body, as well as from an internal process improvement program. Rick Anderson, CEO of the megaregional firm Moss Adams LLP in Seattle, WA, and Bob Bunting, former CEO of the megaregional firm Moss Adams LLP, are leading the preparation for International Financial Reporting Standards. Mark Twain said, “Continuous improvement is better than delayed perfection.” I have heard leading CPA firm consultant Gary Boomer say many times, “We are looking for progress, not perfection.”

Firms have undergone massive changes in the last 10 years, and the expectation is that the next 10 years will not be any slower. Massive changes in the regulatory environment (for example, the Sarbanes-Oxley Act of 2002); shifts from all paper to less paper and, in some cases, paperless; new practice management systems, availability of talent; and the dramatic changes in worldwide competition are all driving continued change. The rapid changes taking place in the accounting, tax, and financial services industries and professions over the next 5 years are numerous and cannot be covered here. It is the role of your strategic planning to understand the environment and forces of coming changes to which you must adapt your future firm processes. The AICPA’s Horizons 2025 Project is one resource to look to when researching the many possibilities to consider.

A leader must set realistic goals, but once they are achieved, you must not become satisfied. Achievement will continue at the same or a greater level only if you do not permit the infection of success to take hold of you. Success breeds satisfaction, and satisfaction breeds failure. The symptom of that infection is called complacency. Contentment with past accomplishments or acceptance of the status quo can derail a firm quietly and surely.

Critical Success Factors for Change and Growth

In an environment where continuous change is necessary, these five factors are essential to the success of building your future firm:

▴ Strong leader and manager alignment. Both leaders and managers must communicate a shared purpose and sense of urgency for any changes that are being made for the future. Leaders who wait for systems and processes to break down will be the laggards in our industry. Whereas the leaders who can engage their managers to build the next generation firm before it breaks are those leaders who will take their firms far. Top leadership and manager support must be highly visible early in the process and reinforced throughout. When the leaders and managers are aligned, the friction caused by changes will be reduced.

▴ Measurable goals. Goals for any change initiative must be in line with the firm’s strategy, and they must be measurable. Both leaders and managers must agree upon and clearly define the criteria for measuring progress toward the goals and overall vision.

▴ Actionable business case. Strategic benefits and returns on investment must be clearly communicated throughout the implementation team and all others who may support the progress. Firmwide and individual performance measures must be aligned to the objectives of the strategic plan.

▴ Clearly defined roles. Key leaders, managers, team members, and stakeholders must be identified early in the plan. Roles, responsibilities, and a time line need to be clearly defined. In many firms, the leaders and team members of any planned change will need training and experience. After all, you are building a business that you’ve never led before. One great way to gain this training and experience is to interact with leaders in larger firms who’ve gone through similar changes and can advise you of the opportunities and pitfalls. Approximately 30 alliances of CPA firms will help you do this. In addition, most state CPA societies and the AICPA provide various in-person and online forums for interacting with other like-minded firms.

▴ A well-designed execution plan. Managing change must be an integral part of the program. The execution strategy must be well defined and clear to all stakeholders. Program milestones must be designed to deliver program goals and objectives. Affected individuals need to be trained and ready for their new assignments.

New ideas from those under your leadership are essential for achieving and maintaining a competitive edge. Welcome those people strong enough to speak up and offer alternatives, but beware of those who do it in a manner that crosses the line. Look for people who can engage in a robust exchange of ideas without causing disruption. Bob Bunting shares

I changed from a guy who liked people to agree with me to a guy who realized that if people won’t disagree with me, nothing was going to happen because they weren’t engaged. If there is no real conflict, nobody is helping improve the decision, nobody is really buying into the decision, nobody is committed to the decision because there is nothing going on.

For effective and efficient process improvement to be developed, every manager will need input from the people doing the work. They will always know where the bottlenecks are. All the leaders I spoke with discussed their commitment to continuous process improvement, and several felt that there would be an increasing emphasis on reduction in cost and cycle times as the world continues to become more competitive.

There is no progress without change, but not all change is progress. Although we want to continuously improve our processes, change must be well thought out. Don’t carelessly discard processes that have stood the test of time. When you change a process in a large organization, you must start with communication and training and then hold people accountable. If you do not follow these steps when making changes, you will be very frustrated in how sloppily the changes are implemented.

Building a System to Manage Change and Improve Processes

Successful accounting firms don’t just accept change; they understand it and plan for it. They design and manage processes that will improve their outcomes and client service. To do this, some accounting firms are now using concepts from the manufacturing business, such as Six Sigma, Lean processes, and Kaizen. These concepts are defined as follows:

▴ Six Sigma works to improve quality. High-quality, efficient processes allow you to deliver services in a proactive manner, rather than a reactive one.

▴ Lean processes focus on efficient operations, cutting out unnecessary steps.

▴ Kaizen is a principle that focuses on continuous, small improvements.

Six Sigma

Six Sigma is a management technique that aims to develop and deliver near perfect products and services. It has been claimed that Six Sigma is only useful for problems that are hard to find but easy to fix versus a more radical reengineering approach whose advocates focus on problems that are easy to find but hard to fix. As mentioned previously, Lean CPA, LLC, a division of Rea & Associates, Inc., a CPA firm in Ohio, specializes in helping CPA managers with gaining knowledge and certification in these concepts.

The term Six Sigma refers to statistical constructs that measure how far a given process deviates from perfection and then systematically determine how to improve them. Its focus on process quality evolved out of the quality movement that began in the 1980s. It is now used for a much wider range of process improvement activities, and organizations like Accenture, IBM, GE, Bank of America, and DuPont have proven that Six Sigma can be used in service industries as easily as it can be used in manufacturing.

The principles of quality applied in implementing Six Sigma are almost always defined in terms of the firm’s vision and strategy. Processes are designed from the perspective of the client and enabled by a commitment to thinking in terms of processes across the organization. Metrics such as utilization, leverage, reliability, price, on-time delivery, client loyalty scores, and accuracy provide the targets. The client focus creates market knowledge that can illuminate the need for process change in areas where the company can add value or implement improvements that clients themselves value most.

Six Sigma uses a concept called DMAIC, an acronym for define, measure, analyze, improve, and control, as described in the following:

▴ Define the project: your not-for-profit audit process, 1040 tax process, or strategic planning process. Determine the team members and their roles, especially the team leader.

▴ Measure how the process currently flows to identify potential areas of waste.

▴ Analyze each step regarding its potential for value adding or its lack of value.

▴ Improve the process and identify the potential for gains.

▴ Control the outcomes. All these steps can be perfectly executed, but you will gain nothing unless you take this step. You control the outcome by documenting the new procedures, training everyone in the new process, and then requiring that everyone operate in a consistent manner.

Tom Luken, president of the local firm Kolb+Co in Milwaukee, WS, has used these techniques before and is planning a complete review this year to continue improvement. He says, “When we went to document management, we flowcharted our entire tax flow, tax return process, flowcharted the D&A process, to help us understand that process and then improve it and integrate it with our new document management process.”

Lean Processes

The origins of Lean date back well before the 20th century, long before it was called Lean. The word Lean came from an MIT student while researching the differences between some Japanese and North American car makers. The key thought processes within Lean are identifying waste or nonvalue-added activities from the clients’ perspective and then determining how to eliminate them the right way.

Determining value is at the heart of Lean. Value is defined as an item or feature for which a client is willing to pay. The Lean framework is used as a tool to focus resources and energy on producing the value-added features while identifying and eliminating nonvalue-added activities. For example, clients of accounting firms often tell us that they’d be willing to pay more for things like clearer invoices and simply meeting deadlines.

One of the most effective ways to improve processes is to flowchart them. Using a visual display can help you identify the value-adding and nonvalue-adding steps in any process and will provide you a common language when improving those steps.

Lisa Cines, former managing partner of the top-100 firm Aronson LLC in Rockville, MD, says

We evaluate how we keep people in their seats. Every time they get up from their seats, inefficiency is created. A simple example is when we went to online billing, but we still distributed paper. So, we made an announcement that six months from now, no paper. It was a huge transformation for the billing process, which has also increased our collection rate significantly.

We’ve made terrific strides in collecting work-in-process [WIP] and accounts receivable [AR]. We were not in a good place, and we were late collecting and losing money being the client’s banker. Each partner had standards, but we needed firm standards. We have now broken down WIP and AR into their own separate DSO buckets, and we have set standards for each of those buckets. We have probably brought it down maybe 30 days in total. Our target is 45 days total in WIP and AR.

In appendixes A–D, you’ll find a variety of simple tools, such as affinity diagrams and flowcharts to help you internally design and carry out some aspects of formal Six Sigma and Lean improvements.

Many items of waste and inefficiency in processes are small when viewed alone and can be easily overlooked. Almost every step of any process will have some element of waste. We must identify every element of waste and then look at their total impact. Eliminating minor elements of waste can add up to huge improvements in efficiency. Lean concepts utilize a variety of metrics to measure results: value-adding and nonvalue-adding steps, cycle time, lead time, and voice of the clients. Cycle time and lead time measure the total time that a project is in process. Cycle time is the more important because it is the total time from the start of a project to the delivery of the report, whether written or oral. Lead time is that time it takes you to get started on a project. Then finally, we must ensure that the client’s voice is heard, and our delivery meets their expectations.

Kaizen

Kaizen, a Japanese concept, is often translated in the West as ongoing, continuous improvement. Some authors explain Japan’s competitive success in the world marketplace as the result of the implementation of the Kaizen concept in Japanese corporations. In contrast to the usual emphasis on revolutionary, innovative change on an occasional basis, Kaizen looks for uninterrupted, ongoing incremental change. In other words, there is always room for improvement and continuously trying to become better.

In practice, Kaizen can be implemented in corporations by improving every aspect of a business process in a step-by-step approach while gradually developing employee skills through training and increased involvement. Principles of Kaizen implementation are as follows:

▴ People really are the most important company asset.

▴ Processes must evolve by gradual improvement, rather than radical changes.

▴ Those improvements must be based on a quantitative evaluation.

The following principles will help you to successfully implement continuous improvements:

1. Performance Driven. All process changes must be based on client needs and measurement. Measurement techniques such as balanced (performance) scorecards or blueprints indicate whether you are acting consistently with your strategic goals, which should be based on client needs and traceable to key performance indicators.

This principle in no way says what the right measurement indicators should be. Every accounting firm is different and has its own strategy for identifying which goals are achievable. Nonetheless, it is vital that each firm chooses wisely; the old adage “You get what you measure,” is universal to all businesses.

Bill Hubly, founder and managing principal of the local firm Corbett, Duncan & Hubly, PC, in Itasca, IL, says

We used to get our billing out by the 25th day of the following month, and we’ve moved that process down to the 10th of the following month. And we’re working to get that reduced. That was really driven 2 or 3 years ago on the scorecard. Whoever was doing billing, they had a goal. You need to get your billing done by the 10th of the month, and if you’re not getting that done, then you’re not going to be awarded those points, and it’s going to affect your compensation.

2. Client focused. Will the improvement initiative solve or improve an identified client issue? Why would your client care about the change? To analyze the gap between your current processes and the client’s needs in the future, consider two key factors. First, you should have a strong grasp of your client’s needs. Second, you should understand the state of your current relationship and have a vision of what you want these relationships to be in the future. Gaps between these two states will drive your change efforts. The future state view will also provide a set of evaluation criteria for change from the current reality, which then will be translated into balanced scorecard key performance indicators (KPIs) (see chapter 8, “Accountability: Trust but Verify,” for a thorough discussion of the scorecard and KPIs).

To use the improved billing practices previously mentioned as an example, clients experience three distinct pricing emotions: price resistance, price anxiety, and payment resistance. Dramatic studies with our clients have demonstrated that when you speed up the billing process, clients are more willing to pay your higher rates. When you discuss the estimated bill up front and agree on a retainer and progress billing arrangement, you are dealing with both price resistance and anxiety. When you obtain progress bills, so that your final bill is a small portion of the total, you are effectively dealing with their payment resistance. And when you employ a change-order system, you overcome those convenient memories and have clients who happily pay your fees. All these changes are adding value to your work without doing more work, just changing your processes.

Debbie Lambert, managing partner of the top-100 multioffice firm Johnson Lambert & Co. LLP in Raleigh, NC, says

We serve over 350 insurance companies, and our audit template is a mission critical system for us. We have audit templates for insurance, employee benefit plans, and nonprofits. The way we build those templates and implement them is critical to our practice. We are continuously improving our systems. We have an e-mail box where we can send comments throughout the year. So, if a particular form is too difficult for the benefit it provides, we can recommend a more effective method. So, if people don’t like the way something works, they just send in recommendations right there. It’s amazing how much we get.

We have lots of input in process improvement. We have two tiers: one is the technical, and the other is the efficiency. We put them into different groups to look at it because we obviously want a top-quality audit. And we need to be cost effective as we do these things. So, if you have a form that feels like it’s taking too long for the benefit, let’s look at that form, let’s see what we could do differently to streamline it, and so comply with the standards to give the quality and the efficiency.

3. Traceable to client expectation. If you cannot trace an improvement to a specific client expectation or need, then the initiative needs to be questioned. In some cases, firms have undertaken business process changes just to suit the personal preferences of one or more partners without regard to their impact on client expectations. The challenge is to build an initiative that is traceable to client expectations and balance that with the firm’s operational objectives. Conflicting business and political drivers can devastate a sound decision-making process. Change initiatives wasting thousands of hours and dollars can be found in almost all accounting firms of any size and complexity. Typically, the root cause is poor decision making or poor interpretation of the firm’s needs and client expectations.

4. Aligned across departments and business lines. This principle deals with the importance of cross-functional collaboration and integration. Management structures that are overly rigid are too slow to respond and will eventually become obsolete and nonresponsive to client demands. The most friction in firms occurs from one department to another over things like getting the tax department to review the provision in the field or getting the partners to get the bills out on time.

5. Integrated with firmwide strategic-plan goals. Some initiatives are often used simply as ways of creating a document or developing the communication strategy for implementing a technology system. We must recognize that during initiatives such as implementing an enterprise resource, a client relationship management system, or paperless workflow, we are not just affecting technology, data, or processes. We are also striving to identify champions and transform people into enthusiastic supporters and participants who will enable change initiatives.

During transition, the staff must feel that an appropriate level of trustworthy communication is happening. The main take-away is that staff affected by change should feel a sense of contribution as a result of their participation and should be positioned as the beneficiaries of the new process.

6. Conducted with a well-managed time-line approach. On the surface, the project management discipline might appear to be simply managing time, deadlines, due dates, and resources. If the discipline is not aligned with the firm’s culture, it will be a struggle to meet all objectives and agreed-upon stakeholder expectations.

Flowcharts for Seeing and Improving Processes

Whether you use one of the manufacturing-based methods or work outside of those parameters, a flowchart is a useful tool for process improvement (see appendix C, “Flowchart,” for full details on flowcharting). When I worked at PricewaterhouseCoopers LLP, we charted the work flow of large departments of accounting personnel to help assess internal control and eliminate bottlenecks. A flowchart is a picture of a process; it illustrates the details of a process, including the following:

▴ The individual steps

▴ The sequence of steps

▴ The relationship between steps

In a standard flowchart, the steps are arranged one after another until the end. This is the most common approach, and it works well with very simple processes. In a functional flowchart, the steps are arranged by sequence and step owner. This flowchart is useful when many groups are involved in a process. It provides a good overview of what is happening, who is doing it, and the complexity of the process.

Make the chart only as detailed as it needs to be. Inexperienced flowcharters often get into too much detail. The chart quickly becomes huge, confusing, and unmanageable. Each decision point makes the chart much more complex. Before putting a decision point into the flow, ask yourself whether a decision is normally made at this point. Often, you are dealing with a rare exception that can be dealt with later after you’ve created the whole chart.

When you first begin building your chart, try to get all the way through to the end before going back and dealing with exceptions and decisions. In other words, if you put a decision step into your flow, follow the “Yes” path until you get to the end.

Create separate flowcharts if the process is too large and complex. Flowcharts often represent a series of steps that are also processes. For example, you could say that the process for preparing a client tax return is as follows:

1. Meet with the client.

2. Send client engagement letter and organizer instructions.

3. Receive client input.

4. Log information into the system.

5. Assign to the preparer.

6. Review the return.

7. Sign the return.

8. Deliver the return to the collating department.

9. Send the invoice.

10. Mail the tax return.

11. Review the return with the client.

12. Obtain client loyalty feedback.

13. Collect fees.

Any of these steps could easily be broken down into another group of steps. If you have a need to break a step into that kind of detail, create a separate flowchart. In continuous improvement language, there is the concept of a value-added step. To meet the definition, the step must meet all three of the following criteria:

1. Physically changes the work passing through the process to make it more valuable to the client

2. Is a step for which the client is willing to pay

3. Assumes things get done right the first time

Examples include entering financial data into a tax program, a review of the output, a review of significant transactions for proper classification, and a review for ideas to improve the tax position of the filer during the next tax cycle. Maximizing value-added steps increases the client’s value perception of the service, thus improving process effectiveness.

If a step does not meet all the value-added criteria, then it is nonvalue added. Generally

▴ the client is unwilling to pay for it.

▴ the step does not change the output in a way that makes it more valuable.

Examples include waiting, storing, moving files, checking, recording, approvals, testing, reviewing, copying, filing, reworking, tracking work, and so on. Minimizing or eliminating nonvalue-added steps cuts the waste in the process, thus improving process efficiency.

While you are considering improving processes to build the future firm, here are some questions that you’ll want to consider with your partners or change team:

1. Are there any low value-added outcomes?

2. Are there other outcomes that we should produce?

3. Are there too many hand-offs? Are hand-offs appropriate?

4. Do any bottlenecks or inefficiencies exist?

5. Do all steps add value?

6. Which steps add the most value?

7. Which steps have the highest error rate?

8. Where is work done, and why is it done there?

9. When is it done, and why is it done then?

10. How is it done, and why is it done that way?

11. Who does it, and why is it that person doing it?

12. How many departments are involved in the process?

13. What measurement systems are currently in place?

To improve your process, eliminate bottlenecks and nonvalue-added steps, and transfer value-added steps earlier or later in the process to even the workload.

What sets Lean or Six Sigma apart from its individual components is the recognition that you cannot do just quality or just speed; you need a balanced process that can help an organization focus on improving service quality, as defined by the client, within a set time limit.

The Benefits of Continuous Improvement

Accounting has the stereotype of being a staid, unchanging profession. Leaders in our profession have learned to embrace change, specifically working to improve their firms on a continuous basis. Nonetheless, some accountants are not comfortable with change.

Rick Dreher is striving for forward movement toward the future firm, “The biggest thing that I’ve tried to change is still probably the biggest challenge that I see going forward, and that is the level of communication that we had inside our firm previously,” he says. Rick focuses on keeping his fellow partners at Wipfli LLP in the know, sharing insights with both partners and the entire staff through regular blog posts.

When things get tough, Rick is always willing to step up, and he says leadership from the top is critical to share the vision, especially during tough times. “The going is tough many times, and you’ve got a choice at that point,” he says. “You can look for someone else to solve the problem, or you can solve it yourself. I like to listen to a lot of my partners who are close to the issue, ask for their opinions on solutions, and then work collaboratively to solve the tough issue at hand. If we get stuck on an issue, and there is no clear answer, I will make the final call.”

We must recognize that in any given time, our stakeholders will have a set of requirements that are in flux and can be influenced by environmental, competitive, and market demands. If we accept the fact that change is constant, we should also recognize that using iterative processes in the overall change process is critical to the success of our initiatives.

Steve Mayer, founder, chairman, and CEO of the regional firm Burr, Pilger & Mayer LLP in San Francisco, CA, says

I believe that the business has to reinvent itself every so often with new products and services. But I firmly believe that you have to have sales and marketing getting your clients, you have to produce the product, and you have to know how to count the beans. If you’re constantly throwing innovation into the mix, and you can keep coming up with new ideas and new concepts, it works. So, that’s how I think we have done it with our firm. We have reinvented it a number of times, and we’re constantly adding new things, so we can lead into that future firm.

Conclusion

From reading this chapter, I hope you are motivated to build your firm of the future continuously and that you’ll strive for progress every day. You should have an overview of several tools (for example, flowcharts) and concepts (Kaizen, Lean Six Sigma, Six Sigma, and so on) that will help you with the continuous improvement process. In conclusion, a leader can only coast in one direction. If you are not improving, you are moving backward as the world is moving forward at an accelerated rate of change.