Can small business consulting be profitable?

The answer is a resounding yes.

Many CPA firms approach small company consulting projects using the traditional method of service delivery. The result is they frequently perform too much of the work and the client winds up with a steep bill. There are three choices at this point: The client pays and is upset, the client doesn't pay and the CPA firm is upset or a compromise is reached in which both parties are mutually dissatisfied. After a few of these episodes, firms conclude consulting services can't be delivered profitably to small businesses. The reality is that one delivery methodology just won't be able to satisfy all clients.

How have CPAs historically delivered traditional services? A client who hires a CPA to prepare a tax return or financial statement or perform an audit believes he or she is paying for an end product. This perception has become so prevalent it's uncommon for CPAs to bill for services not associated with a paper report. As a result, most firms emulate a job-shop manufacturing environment. They take the raw materials - the client's records - and customize a product by sending them through the "manufacturing" process, during which the information is sorted, summarized, categorized, analyzed, extrapolated and so on. To arrive at a finished good and maintain client satisfaction, the CPA firm must correlate its available resources with the magnitude and complexity of the project and meet committed deadlines.

What's the priority? In the small business arena, clients often can't afford to pay for the entire manufacturing process. But they can and will pay for some stages of the process or just for management skills and expertise. This could make small business consulting an attractive practice area for many firms, but the problem is that CPAs often use only one service delivery methodology. When a custom-produced finished good is ordered, many CPAs retreat to their own manufacturing plants where they can drive those products through the process most expeditiously.

While there is nothing wrong with this approach, a problem arises when speed is less important to the client than, say, money. Therefore, CPAs must vary their delivery methodologies to reflect a client's specific situation. This may mean performing just one or some combination of the manufacturing stages instead of all of them, managing the process using client personnel instead of their own or providing only advice and assistance to the client management team.

The point is that CPAs must separate the advisory service from the implementation service (both of which are defined in the American Institute of CPAs statement on standards for consulting services). Even within the implementation service, the CPA should be ready and willing to segregate the various tasks in a manner that recognizes a variety of skill levels. This allows the client to specify engagement areas that are the client's responsibility and those that are the CPA's. This way, the client has the option of using his or her own less expensive labor force for some tasks as well as the ability to control the degree of his or her involvement. To deliver consulting services successfully, the CPA firm has to be able to match the delivery methodology to client resources.

The MTS technique. To facilitate this, my firm developed a technique called MTS, which categorizes client resources into three broad areas - money, time and skill - and sets priorities based on greatest scarcity. The process works by discretely determining the answers to questions such as:

* Does the client have the discretionary funds to hire outside assistance for this project?

* What is the client's time frame for project completion?

* Does the client have the in-house expertise or skills to perform this project?

* Is the completion time more or less urgent than the need to minimize project expense?

* Does the client have people available to work on the project? Do they possess the necessary skills? If not, can the work be broken down in such a manner that these resources can still be used?

The answers enable us to determine which resource - money, time or skill - is searcest for the client. We use the responses to design a service delivery method.

For example, most CPA firms have a few clients that generate more than their fair share of revenue - that 10% of the client base that makes up 30% or more of total fees billed. When these clients hire CPAs, their scarcest resource typically is time or skill, with money lagging way behind. In these situations - when urgent projects can't be completed quickly using internal expertise - CPAs are hired to use their manufacturing process and their people to expeditiously complete the custom-ordered finished goods. These engagements are very profitable, less complex to manage and easy to administer. Why? CPAs often can leverage chargeable-to-nonchargeable time by assigning personnel to time-sensitive projects full time until they are completed.

Identifying objectives. Unfortunately, for most CPAs these larger, price-insensitive projects are rare. More commonly, for small business clients, money is scarcest, skill falls in the middle and time is the most abundant. This describes 80% or more of all of the consulting opportunities available, is typical of most small business engagements and requires a totally different delivery methodology. In these cases, when clients can't afford to pay for the entire manufacturing process, the CPA has to shift from the role of performing the work to that of simply planning the work (which would involve developing findings, conclusions and recommendations for client consideration and decision making).

The technique we created to facilitate this process is called "to-do list planning," which programs CPAs to spend their time with the client in a series of small planning sessions focused on identifying client objectives. Each objective is broken down into tasks, with due dates established, and assigned to client staff who have the skill to complete a particular task. This minimizes the CPA's time and capitalizes on the practitioner's skill and knowledge while keeping costs low by using client personnel to perform the work. This methodology typically takes much longer, but the finished good is much more affordable. In addition, client personnel participate in on-the-job training while working on the project. The client is not the only winner - the CPA firm reaps rewards, too: This approach is profitable because the planning sessions are billable at full or premium rates.

Phasing. Another technique that can be used with clients of all sizes is called "phasing." It takes larger projects and breaks them into smaller phases, which are distinguished by a clear set of expectations or benefits. This way, the client can begin a project and commit to each step a finite, manageable sum of money. At the end of each phase, it is up to the client to decide if, when and how the next phase will be carried out. In almost every project, the first phase is planning, when the current processes, problems and various alternatives are identified. In some cases, this phase shows the need for further definition, research or analysis, which may be phase two, three and so on. The approach allows the client more control, a better grasp of scarce resources and greater understanding of the benefits of continuing into future phases.

Many benefits. The businesses that most often need CPAs' help are small ones trying to survive and grow. Firms that have turned away from such organizations in the past should rethink their approach. By varying the delivery methodology, firms can increase the demand for services, generate revenues at premium rates, enhance client loyalty and enjoy the satisfaction of being able to help the organizations that need them most.

EXECUTIVE SUMMARY

* MANY CPA FIRMS conclude consulting services can't be delivered profitably to small businesses. The reality is that one delivery methodology just won't satisfy all clients.

* IN SMALL BUSINESS engagements, clients often can't afford to pay CPAs to perform the entire process, but they can and will pay for some stages of the process or just for management skills and expertise.

* THE MTS TECHNIQUE categorizes client resources into three broad areas - money, time and skill - and sets priorities based on greatest scarcity among them.

* USING TECHNIQUES SUCH AS to-do list planning and phasing minimizes the CPAs time and capitalizes on their skill and knowledge while keeping costs low by using client personnel to perform the work. This methodology typically takes much longer but is more affordable for the client and provides client personnel with on-the-job training. For the CPA firm, the associated planning sessions are billable at full or premium rates.

A TYPICAL MTS-METHOD ENGAGEMENT

Consider the example of a retailer with annual sales of about $1 million that needs help to improve and automate its information systems. In an hour-long discussion with the owner, the CPA learns her priorities, including computerizing information on inventory, purchase orders, etc. The client has semiskilled personnel available to assist with the project and is very concerned about controlling engagement costs.

The hierarchy of scarce resources is money, skill and time. Merging the techniques of to-do list planning and phasing, the CPA might arrive at the following plan:

Phase 1: Review and gain a basic understanding of the client's operations (the time involved depends on the CPA's understanding of retail operations and this particular business).

Phase 2: Determine an automation solution.

Phase 3: Implement it.

Phase 4: Fine-tune the systems.

The two components that need a cost estimate initially are phase 1 and a three- to four-hour meeting that begins phase 2. During the meeting, a to-do list is created that identifies tasks, assignments and scheduled delivery dates. The CPA gives cost estimates for any tasks he or she will perform.

Here is an example of a to-do list that might evolve from the planning meeting:

1. Investigate the various retail software vendors. Focus the investigation on management priorities.

2. Call the client's retail association to find recommended automation alternatives.

3. Call friendly competitors to determine their automation choices, as well as their satisfaction with them.

4. Prepare a simple diagram depicting how current systems operate, from purchasing through receiving, sales through collections, returns through credits, etc.

5. Identify reports and inquiries management needs to manage operations effectively.

6. Conduct a planning session to review the operations diagrams and discuss the findings on automation alternatives.

7. Select the appropriate retail system.

Some of these tasks will be assigned to either the client or the CPA firm, depending on client employees' abilities. This enables the client to take maximum advantage of in-house personnel while controlling the timing and costs of the work. It provides the added benefit of on-the-job training for client personnel.

Note: If a software solution is not identifiable - as step 7 presumes - it's time to create another to-do list covering additional necessary information and tasks.

WILLIAM L. REEB, CPA, is a shareholder in Winters, Winters and Reeb, Austin and Fort Worth, Texas. He has founded seven small businesses, is coauthor of the book Small Business Consulting, published by the American Institute of CPAs, and is a member of the AICPA information technology executive committee.