Managing The Bottom Line

Reprinted with permission from OSCPA Catalyst, November/December 2008

What comes to mind when you hear "manage the bottom line?" Do you think about controlling expenses? How about asking employees for more chargeable hours? While it's fiscally responsible to manage and control your costs, and in theory, more chargeable hours lead to greater revenue, there is another way - improving your processes.

The manufacturing industry has been using the Lean Six Sigma methodology for years. The concepts have now begun making their way into office and service processes, including those of CPAs. The desire to improve efficiency has lead CPAs to this breakthrough process improvement toolset.

Lean Six Sigma uses a team-based problem-solving approach, led by skilled facilitators (certified Black Belts) who bring a set of potential tools that are uniquely applied to each process and situation. Starting with a thorough measurement and analysis of the "current state" of the process, the team identifies where efficiencies are being lost and uses Lean techniques to improve those processes.

CPA processes are ripe with inefficiencies. Historically, attempts to increase efficiency start with new technology and end with telling people to work harder. With this mindset, it's amazing that staff turnover isn't worse. We should be telling people to work smarter, not harder.

The Missing Link Between Technology and Efficiency

Technology is great, right? After all, it provides significant value and efficiencies. But, is it being used in a way that optimizes a process' performance? The two must go hand-in-hand.

Firms often buy new software because the salesperson told them how much it would improve efficiency. But in some cases, the software best practices actually conflict with optimal process efficiency. If the number of non-value added steps, or those steps that don't provide added value to your clients, is increased with new software, how is your process improved?

And while firms continue to invest in new technology, staff members complain about inefficiencies or chaos in their offices. It's because they are not looking at work from a process mindset. Lean Six Sigma is the missing link between technology and an optimally efficient process.

Recently, while conducting an assessment of an East Coast public accounting firm, I met with the partner in charge of one of their satellite offices. From his comments, it sounded as if they had the most efficient office and processes on the planet. There were no problems. No bottlenecks. Staff were working hard, but being efficient. This firm has invested in all of the newest and greatest technology known to public accounting. I started wondering why we were there.

Then, I spoke with the office administrator. When I asked if she knew of any areas where the process was breaking down, I was flabbergasted by her response - "Where do I start?" She proceeded to tell me about all the problems she saw in that office. After that, everyone I spoke with from staff accountants to senior managers confirmed what the office administrator said. This office was definitely not efficient, and they were going to be running staff out the door if they didn't quickly focus on improving their processes.

What would an outsider say about your firm's processes? What do your other partners say? Most importantly, what does your staff think? Are they working hard, not smart? Or are they working smart and efficiently? Hopefully the latter.

Is Your Firm Ready?

If your firm is not working smart, why aren't you managing the bottom line by improving your processes? Process improvement will lead to gains in capacity - gains that will enable your firm to do more with the same resources. And doing more with the same resources will give partners more time to develop new leads to grow the business. Ultimately, this will lead to greater partner returns.

An investment in process improvement is just that, an investment. You will be investing money in the form of staff time, facilitation expenses and other incidentals. And if you have any partners that want to control partner income by managing every last penny spent in the firm, you will have to sell them on the idea. Their idea of managing the bottom line is not spending money, which is a short-term tactic. Lean Six Sigma process improvement is a long-term strategy.

Likewise, those partners who believe more chargeable hours are the solution will also need to buy-in to the new concepts. Unless you have tons and tons of new work coming through the door, increasing charge hours essentially incentivizes your people to be inefficient. When staff are penalized for not hitting chargeable hour goals, especially when they don't have complete control over what work comes in the door, you'll find that jobs are prolonged and drug out so staff can hit the goal you gave them. Rather, tell your people to reduce chargeable hours in comparison to similar work in prior years.

Training is Key

If you're thinking that you may want to use Lean and Six Sigma principles to improve your processes, start with training. It is imperative that key leadership understand and then commit to the process. Through training, management will be introduced to the concepts of Lean and Six Sigma. Be sure to ask for a "hands on" simulation showing Lean techniques at work, too. Seeing is believing.

At the end, you should be able to identify the eight categories of waste - errors, overproduction, waiting, not utilizing people's talents, transporting, WIP, motion and excess processing. In the Lean world they call this "Learning to See," or learning to see all of the waste and inefficiencies in processes. Identification of waste will no doubt lead to discussions on bottlenecks and the absolute destruction bottlenecks cause on our processes and to our people. And you should have a better understanding about the new metrics you'll use to measure results.

Assessing Where to Start

Just because you may be excited about applying the concepts you've learned, don't jump right into a project. It is important to take some time to assess what is currently happening and to prioritize the areas you want to focus on. A good assessment will include both individual and roundtable discussions in a variety of service areas and with a variety of staff levels. The reason behind using a cross-functional group is because the people doing the work know the most about how the process works and often have the best answers to problems. Don't discount the knowledge and ideas of your administrative personnel either.

After the assessment, you have a better understanding of your inefficiencies, and you'll want to tackle them in an organized and deliberate manner. First, project teams will need to be assembled and trained. You'll also want to provide basic Lean training for others in the firm so you can begin to create firm-wide awareness. That's how you get results to snowball and momentum to build.

As one project is completed and processes improved, you'll need to move onto the next area. The idea of continuous improvement will begin to take hold - meaning everyone in the organization will live by the Lean Six Sigma mantra, "Today's optimal solution will be tomorrow's marginal solution and the next day's obsolete solution."

Measuring Results and Benefits

As accountants, numbers matter. And the first question you have is probably, "What are the results?" To answer that question, you'll have to be open to looking at some new metrics.

First, Lean is all about understanding the voice of the client ("VOC"), both internal and external, and making sure the processes ("VOP") are capable of meeting the demands. When you identify internal and external client needs, you realize your processes have value added and non-value added steps. Non-value added steps are processes that do not contribute to the satisfaction, needs or qualities desired by the client. These should be eliminated or reduced. So an analysis of value add vs. non-value add time in processes is a must.

Cycle time is another new metric to track. This is looking at the time a project is "in process," from picking up the client's work to the final product being delivered to the client. Don't confuse this with lead time, which has the clock ticking when the client work comes in the door. Reducing cycle and lead times indicate process efficiency.

Tracking both the level and number of review notes is another metric. This data typically only exists in the mind of a partner and isn't tracked. However, it is extremely valuable information to have to improve your processes and gauge those improvements.

Lastly, looking at chargeable hour reductions will indicate process improvement. Unless you are bringing significant amounts of new business into the office, efficiency success will be measured in taking less time to do more work.

When you start using these metrics to track efficiency, you can fairly easily "dollarize" the impact in terms of increased capacity and output. For example, one firm was able to complete 50 more tax returns this past tax season with fewer staff. Not only is the revenue collected sooner, since the returns weren't put on extensions, but they did more with fewer resources. They can now accept 50 more returns without interruptions. If their average return is $500, a one-year gain of $25,000 was achieved.

Lastly, don't underestimate the soft benefits. Your partners will realize the training in these breakthrough problem-solving concepts will enable your staff to identify and correct their own problems before going up the ladder for assistance - ultimately saving time. Keeping staff happy by working smarter, not harder is another benefit. Since there are fewer qualified staff available in the marketplace, employee retention is a key strategy for many firms.

The Best Way to Manage Your Bottom Line

The next time someone in your firm talks about managing the bottom line, introduce them to LeanCPA. Doing things the way you've always done them is not going to cut it in today's world of CPA shortages and stiffer competition. Investing in new technology will not solve all of your firm's problems. Telling staff to increase their chargeable hours will create more inefficiencies. Refusing to spend money on your staff, training, and improving your processes because you want to manage the bottom line this year will leave you behind the pack. Progressive firms realize that an investment now in process efficiency will pay off huge dividends down the road. These will be the firms that continue to grow and dominate their local markets. These are the firms that will attract top accounting and finance talent. Can you afford not to invest in your processes and people?

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