Building a consulting practice; CPAs can improve their clients' businesses and their own firms by offering business advice.

For many small to midsized firms, it is no longer enough to provide only traditional services. In today's competitive marketplace, more is required.

Individual practitioners and small to midsize firms that have not already done so must develop new areas of business consulting while retaining their passion for numbers and financial statements. The integration of additional areas of concentration will help CPA practices succeed by increasing client retention rates and improving results for client companies. The key is to keep sights on a strong commitment to quality and stability of services as well as staffing and type and class of client.

The small business is one of the most valuable client types to cultivate. Most are entrepreneurial and their growth potential can be unlimited. It is important to develop relationships early in the growth cycle by taking time to know clients, listen to them and learn about their businesses. Firms maintain close personal contact by offering counsel and advice and acting as sounding boards when clients need one most-when they are experiencing growth pains. This will establish client confidence and put CPAs on the inside track when service needs expand.

CONSULTING AND THE CPA FIRM

One area in which small clients' service needs expand is consulting, a natural outgrowth of accounting services. CPAs offer advice usually based on the kind of information gathered during traditional engagements. Sometimes CPAs suggest new services and sometimes requests come from the clients themselves, who may seek advice on areas such as corporate finance, benefits (including health, pensions, compensation and incentive planning), human resources, information management and others. CPAs who ignore clients' expressions of need for help with these challenges are at risk of losing business. Clients who demand more than just audit and tax expertise will not only seek out certain services from other providers but also may take the lion's share of their accounting business with them.

In addition, following a decade of deregulation, CPA firms now face unprecedented levels of competition and the high costs of doing business brought on by rising professional liability insurance costs and increased levels of litigation. As firms lose market share to competitors, they seek new ways to develop and attract business. In many respects, consulting services provide the answer.

Ancillary services can help expand firms' client bases, distinguish one firm from another and upgrade overall quality. In addition, clients that begin as consulting clients have a fairly good chance of being turned into audit clients. Conversely, business problems that may be uncovered in an audit, such as cash management complications, human resource issues or systems shortcomings, can be tackled immediately by the firm's consulting staff.

GETTING STARTED-A LOOK AT INTERNAL RESOURCES ...

Firms that have never before provided nontraditional services would be wise to take a look at their internal resources for answers about how to begin developing new areas of expertise. The first step is for management to survey internal talents. Questions to be asked include

* What are our internal recruiting or executive search efforts? Who handles these activities?

* What are our internal benefits administration procedures? Who is our benefits specialist?

* How do we select and implement new technology related to systems? Who is our information management specialist?

* How do we train new employees and provide ongoing training to veteran staff in areas such as sales skills, management and overall quality? Who on staff is qualified to train others?

* Which staff members have special skills in areas other than accounting and tax?

* What is their experience?

After firms have assessed their resources, they must decide which of their internal functions have potential for development as consulting services. At our firm, a benefits specialist who was part of the tax division began offering counsel to clients several years ago. The response from the marketplace was overwhelming. He added staff and launched a formal benefits consulting department.

Partly as a result of this effort, the firm began reviewing other internal strengths and subsequently developed a comprehensive human resources consulting department that provides organization planning, training and professional development and business planning along with many other services related to human resources. We created the department by assessing talent in the human resources area and determining that the recruitment director, training director and the professional development counselor could provide their services to our clients. We then recruited an experienced human resources consultant to h ad this area. He brought additional skills in organizational and business planning and incentive compensation programs. The department became profitable almost immediately by using staff experts to provide client service. As demand for services grew, we added staff to this group by recruiting from outside the firm to add specific skill sets to augment staff expertise.

Once firms have identified their own staff expertise, they should be sure everyone in the firm is aware of the new services. At our firm, we conduct internal awareness seminars to educate firm members about what's available and then ask partners to identify existing clients who might benefit from the service. When staff have not worked with clients in a new service area, we do the first few engagements at a lower billing rate so they can gain experience. . . .AND EXTERNAL RESOURCES Some firms, especially small ones, may question whether their staff can handle the variety of demands associated with consulting services. These firms would be mistaken if they decided to forgo the opportunity to offer business advice, as there are a number of options open to them.

Contract for services. Under certain circumstances, contractual agreements with individual consultants are a good option for CPA firms. Consultants can be called in as needed to provide support or to handle client engagements that require special expertise. This arrangement can be less costly than hiring new staff to perform services that have not been tested or proven profitable for the firm.

Form a strategic alliance. It isn't possible to be an expert in everything, so one solution is to form an alliance with a firm that shares the same client service values and can furnish the firm's clients with new or expanded services. When evaluating and selecting a strategic alliance participant, remember to choose one with similar target markets and to check its references.

Strategic alliances with consulting or special services firms create win-win situations. Client bases can be enhanced, there are increased opportunities for networking and cross-selling and there is little or no out-of-pocket cost to alliance members.

An alliance can be as simple as signing an exclusive contract agreeing to refer and promote specific services offered by another alliance participant. Participants also might take part in a joint effort to develop sales and marketing products, services and systems marketed and sold to clients and prospects. Each participant contributes to product development; service revenue goes to the service provider.

Consider a merger. Very small firms can automatically extend the depth of their resources and scope of services by merging with firms that already have some consulting services in place. Both firms benefit from this arrangement. For the merging firm, market position is improved, more services can be offered to existing clients and the level of risk is reduced. The acquiring firm adds new clients, receives new business opportunities and is strengthened by enhanced staff capabilities.

HOT AREAS FOR CONSULTING For firms considering a move into consulting, here are some of the business categories we've identified as growth areas:

* Human resources. The need for human resources consulting is increasing. Business owners and managers are beginning to realize the most valuable assets they have are their employees. They are investing in training, incentive compensation and employee involvement programs. Firms might offer organization analysis, management assessment, development of compensation and incentive compensation programs, training and curriculum planning, program evaluation and administration. Billing rates can range from $65 to $200 per hour and realization at our firm runs around 80%.

* Activity-based costing. A new area of cost management, activity-based costing, focuses on identifying costs associated with activities and eliminates redundant efforts to save time and money. Firms might cost an entire activity and determine value added steps and non-value-added steps for cost management or offer cost management reviews and design and implementation of activity-based cost systems. Hourly rates run from $75 to $200 and we find realization hovers around 76%.

* Information management. More than ever, businesses need help wading through the quagmire of choices of computer systems and software. They also need support and training. CPAs can offer systems review and planning, computer software and hardware evaluation and selection, as well as design and development of custom software. They can do software package implementation, custom system development and package modification, planning and implementation of local and wide-area networks. Billing rates are between $75 and $225 per hour and realization is 76%.

* Financial services consulting. Recent financial institution failures provide an opportunity for services in this area. CPA firm services might include asset-backed security analysis, loan portfolio and servicing valuation and analysis. Rates vary between $80 and $225 and realization is 90%.

Other "hot" areas include benefits consulting due to constantly changing laws and the need to satisfy and retain employees while keeping costs under control, specific industry consulting, chosen based on the firm's client base, and litigation support services. Practice leaders for new areas can be chosen based on their expertise or can be trained to fill a spot.

HONING-AND MARKETING-INDUSTRY EXPERTISE

In trying to build credibility for new services or identify growth areas, we have found surveys to be an effective tool. Businesses in industries in which the firm has special expertise are surveyed to assess opinion on a wide range of issues and to gather information about companies' specific needs. The surveys serve partially as an educational tool for the firm's consultants, who learn a lot about an industry through the data collected.

After the survey is done, results are gathered and reports are issued and sent to clients, or articles are written for placement in publications including internal and client newsletters. The articles provide timely information about the state of specific industries. This is an excellent public relations tool because it gives the firm exposure and demonstrates its industry expertise.

Surveys also provide a direct way to target prospective clients and better serve existing clients in specific categories. We conduct surveys in new markets to assess the feasibility of branching out into untapped consulting areas. Last year, we conducted surveys in our area in distribution, manufacturing, advertising and retail.

In addition, we have found that clients and employees have important information, ideas and opinions about a firm's performance as consultants and tax and accounting professionals. To improve the quality of their surveys, firms should conduct client and employee satisfaction surveys. Make sure to listen to what is being said about the firm-it's one of the best tools to improve quality and maintain a healthy client base and a productive work force.

A RANGE OF BENEFITS

Firms that explore consulting options for small firm clients will find ways to expand their practices at a limited expense. CPA firms implement quality assurance for all services, so they should face no additional liability exposure from providing these services and, if internal resources are used wisely, little extra cost. Clients receive much-needed help and firms achieve greater profits and satisfaction as well as added prestige. n