A prescription for change.

Many people have predicted that small CPA firms will not be able to survive into the next century because of competitive and cost pressures. David Schlotzhauer, a partner of the six-person, Kansas-based Mills & Schlotzhauer firm, has spoken to numerous small practitioners across the country in the last several years, and he strongly disagrees with such predictions. He believes, however, that firms must face up to one major challenge: the need for monumental change in the way they will practice.

A NEW APPROACH

Schlotzhauer, the chairman of the American Institute of CPAs small firm advocacy committee, has developed a deep understanding of the issues facing local practitioners from his experience in his own firm and from the small firm roundtables the committee sponsors around the country. Here are some of the ways he believes the practice environment will differ in the future:

1. The type of work firms do will have to change. "There will be more movement away from compliance work and into consulting," Schlotzhauer predicts. His own firm performs all the traditional services for its closely held small business clients, but it has expanded its business consulting to the point where it now makes up 25% of revenues. Involvement in projects such as mergers and acquisitions "is much more fun," he says. "Although compliance is important, the clients does not easily perceive the value." Offering consulting services enhances the firm -- client relationship. Schlotzhauer believes. "You become very personally involved with clients; they come to rely on you totally: You become their strategic business adviser. Small firms have done this for years, but it's really mushrooming now."

One reason for this new trend is because of threats to long-standing CPA services, such as recurring discussions of flat or consumption taxes. "Tax work is a huge part of the practice of small firms. One practitioner I spoke with recently said 90% of his practice was tax compliance. If that goes away, what do you do? CPAs are asking themselves that question."

2. Firms will have to change their hiring approaches. Practitioners must have more than number-crunching skills. This fact has long been accepted in the profession, but Schlotzhauer says clients' attitudes have changed and they now expect all firm members to offer analytical skills. "The computer hardware and software are there to crunch the numbers. You have more numbers than you know what to do with. Now clients want to know how to interpret them and what you can do to help them run their businesses better."

In his own firm, Schlotzhauer has committed to alter his hiring methods to find staff who will meet clients' expanded expectations. He has done this by changing what he's looking for in recruits. "We seek not only technology skill but also thinking skills and maybe even an entrepreneurial outlook." It's not always possible to find the right match in a very subjective process, he admits. One of his regrets is hiring someone who wasn't right and trying to make the arrangement work despite obvious problems. "Small firms become like families. If you get the wrong person, it can really create problems." In terms of hiring, he has found no scientific method to finding the right person, but he no longer attempts to keep on an employee who is not working out.

3. New "practice alliances" will form. Many firms fail to enter specialized niches because of the risks of narrowing their client bases. "It's hard to make the transition," he says. "How do you give up a $10,000 audit or one that is 20% of your practice?" Schlotzhauer foresees a time when even the smallest of forms will associate in local, national or even international referral networks that allow them the flexibility to specialize in one area while referring work to and receiving referrals from other practitioners in the group. Each associated firm would have its own specialty, including everything from traditional services to business valuation or M&A work. "It would be similar to a loose partnership, but with the freedom to remain independent," he says.

THE HUMAN TOUCH

Another constant factor for small firms is new developments in information systems. When Schlotzhauer and his partner, Charles Mills, started their firm in 1988, they decided that keeping pace with technology was crucial. "We make a significant, continuing investment, not only in hardware and software but also in training," he says, adding that the firm devotes between 2% and 5% of fees to technology costs annually. While that is below the 6% to 8% many recommend, "it's a huge figure for small firms," he observes. And while technology can make a practice more productive and efficient, it also means doing more work in a shorter period.

But he has found that small business clients are willing to spend money on technology, and their advisers must follow suit. And he believes that advances in technology benefit small firms in two ways. "The information explosion is affecting small businesses as well as small firms," he observes. "They want help in coping with all of that data and CPAs have unique abilities to handle complex sets of information."

At the same time, small firms' major advantage is the personal touch -- and technology will only reinforce that asset. "Our engagements are based on relationships with individuals. As technology explodes and we become disconnected, personal contact will be key. That's where small firms will shine."

MAKING CONTACT

Although he sees a bright future for local practitioners, Schlotzhauer doesn't believe any practitioner will prosper if he or she works entirely alone. He has found that learning about other firms' challenges and solutions has been an important advantage. "It's key for small firms to be tied into other small firms, through professional events or more informally." At his committee's roundtables, "the participants say, `I though I was the only one having these problems. I'm not out here by myself.'" He urges fellow practitioners to stay in touch with their peers. "There are people out there willing to listen, to answer a question, to help."

Firm Profile

Name: Mills & Schlotzhauer. Year opened: 1988. Locations: Leawood, Kansas. Total personnel: Six. Number of partners: Two. Number of CPAs: Two. Areas of concentration: Tax; auditing and accounting; consulting. Gross fees: Over $575,000. Percentage of fees in Accounting: 10%. Auditing: 10%. Consulting: 25%. Types of clients: Closely held small businesses. Advertising and marketing programs: Referrals. Best thing we did in the last five years: Made a commitment to keep up with technology. Worst thing we did in the last five years: Hired the wrong person and tried to make it work. How the practice will change in the near future: Greater emphasis on consulting; move into practice alliances.

EXECUTIVE SUMMARY

* ONE OBSERVER of the small firm practice environment believes that local firms have a bright future -- if they are willing to change. David Schlotzhauer, a partner of a six-person Kansas firm, says firms must place greater emphasis on consulting services and change their hiring approaches to find staff who can help clients interpret data and run their business better.

* PRACTICE ALLIANCES, loose referral networks that allow firms greater flexibility to specialize, could be another key advantage for small firms.

* TECHNOLOGY CAN BENEFIT small firms because small businesses will need help understanding the mountains of data available to them and, as technology creates greater distances between people, the personal attention small firms offer will become an even greater competitive advantage.

* SMALL PRACTITIONERS SHOULD STAY IN touch with their peers in similar firms, either through professional events or informally, to understand their common challenges.