Divesting clients wisely.Most CPAs agree it is in everyone's best interests to match clients with CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. firms that are best suited to the clients' specific needs. However, that fit can change over time, which can lead to divesting. Wise client "de-selection" or divesting, requires combining several key concepts and creating alliances with other service providers. This column discusses how firms seeking to narrow their client base and firms seeking to add clients can create value, as well as add value to their clients--at the same time. The 80/20 Principle The Pareto Noun 1. Pareto - Italian sociologist and economist whose theories influenced the development of fascism in Italy (1848-1923) Vilfredo Pareto Principle's impact on CPA firms is a frequent topic of discussion. Put simply, the principle states that 80% of a firm's revenues come from the top 20% of its clients; see Kotch, The 80/20 Principle: The Secret to Success by Achieving More with Less (Doubleday Dou·ble·day , Abner 1819-1893. American army officer traditionally considered the inventor of baseball, although a game similar to baseball predates him. , 1998). And further, a different 20% of clients usually produces 80% of a firm's problems. Some have even used the Pareto Principle Pareto Principle A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The principle states that, for many phenomena, 20% of invested input is responsible for 80% of the results obtained. as a basis to postulate postulate: see axiom. that the bottom tier of clients may actually reduce a firm's profits. The value of strategic alliances with other professional service providers is another frequent topic. Often, the discussion deals with firm specialization A career option pursued by some attorneys that entails the acquisition of detailed knowledge of, and proficiency in, a particular area of law. As the law in the United States becomes increasingly complex and covers a greater number of subjects, more and more attorneys are , niche development and/or and/or conj. Used to indicate that either or both of the items connected by it are involved. Usage Note: And/or is widely used in legal and business writing. combining firms with complimentary skills to serve a broader market. It rarely deals with alliances among firms situated in similar market niches offering similar services. Combining the Pareto Principle with the concept of strategic alliances, CPA firms can create value and build strong relationships with colleagues as a foundation for future cooperation and, possibly, for succession planning Management Succession Planning In organizational development, succession planning is the process of identifying and preparing suitable employees through mentoring, training and job rotation, to replace key players — such as the chief executive officer (CEO) — . Moreover, they would be able to accept clients with less concern about whether the clients will still be attractive in the future. This strategy also permits smaller firms to create a "feeder feeder abbreviation for self-feeders. Used in feeding groups of animals at intervals of several days. Feed has to be dry and comminuted so that it will run down the spouts from the hopper into the troughs. " relationship with larger firms. This can help the smaller firms grow steadily and more predictably. Divestiture The breakup of AT&T. By federal court order, AT&T divested itself on January 1, 1984 of its 23 operating companies, which became known as the Regional Bell Operating Companies (RBOCs). Instead of Firing As professionals, CPAs have a responsibility to provide their clients with quality service. When this is no longer possible, it is time to divest To deprive or take away. Divest is usually used in reference to the relinquishment of authority, power, property, or title. If, for example, an individual is disinherited, he or she is divested of the right to inherit money. . Divesting can be beneficial to clients and CPAs alike for the very reasons the Pareto Principle identifies. It usually occurs when clients no longer fit the CPA's target market. Often, the firm's growth or reduction in client services drives the decision, usually making it unfair to both the client and the CPA to allow a poor fit to continue. Divestiture's basic premise assumes it is better to find a new home for clients rather than just jettisoning them. It helps avoid making the client feel rejected, and rewards the divesting firm for having attracted and served the client. It helps the profession's overall image by reinforcing the notion that CPAs look for what is best for their clients, as fewer clients are left to fend for Verb 1. fend for - argue or speak in defense of; "She supported the motion to strike" defend, support argue, reason - present reasons and arguments themselves. It is often emphasized that the best way to "fire" clients is to deliver the message professionally in a way that does not anger them. However, no matter how great the effort, the message the client receives is negative. Divestiture differs from firing clients by more closely resembling a partial sale of a practice. This is true precisely because a divesting firm truly is selling off a small part of its business. The divesting firm transfers clients that are not a good fit for the CPA to another firm that is seeking that kind of client, and then it typically receives a portion of the new firm's first year's billings. Making arrangements in advance with another CPA to take over the divested clients is clearly the best approach. If done properly, divestiture also allows the firm terminating the relationship to be paid for its past investment in building the relationship. And because the divesting firm may have tried unsuccessfully to price the client into leaving the firm, it allows a small firm to achieve pricing it might otherwise not be able to achieve. Lastly, it eliminates the guilt many practitioners feel when deciding not to continue to serve a particular client; the practitioner is recommending what he or she considers to be an excellent solution to the client's needs. The arrangement between the CPA firms can be as formal or informal as the parties wish, but the disclosures to clients must be handled carefully. Otherwise, the transfer is unlikely to occur, client confidentiality The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. issues can surface and the message to the client remains the same as if the client were fired. The Process If divestiture is handled properly, the risks to the acquiring and divesting firms are small. The risk is small to the divesting firm because the CPA has already decided the divested clients are not clients it wants to retain; the firm was prepared to let them go. Any compensation the divesting firm receives as a result of the transfer is a "bonus" compared to simply terminating the client relationship. And since the divesting firm has already decided not to serve the client any longer, the acquiring firm can be less concerned with noncompete Noncompete A provision in a number of employment contracts that prohibits an employee from working for a competing firm for a specified number of years after the employee leaves the firm. issues. Further, the successor firm typically only pays on successfully collecting for its first year of work. Compensation typically is one-third to two-thirds of first-year adj. 1. Being in the first year of an experience especially in a U. S. high school or college; - of a person. Adj. 1. first-year - used of a person in the first year of an experience (especially in United States high school or college); "a fees, with 50% being most common. Finally, both firms can distance themselves from the other firm if necessary, because the arrangement is officially just a referral with a "finder's fee Finder's fee A fee a person or company charges for service as an intermediary in a transaction. finder's fee The charge levied by a person or firm for putting together a deal. " attached to it. Successful divestitures share several attributes. The first is that the divesting firm built a relationship in advance with a CPA firm it trusts and that trusts it. The new firm must also be a firm that wants to grow by adding new clients. Ideally, the acquiring firm is smaller and/or newer than the divesting firm. It is best if the divesting firm has worked closely enough with the successor CPA to know he or she is a good fit for the divested clients. This is a key element in making clients comfortable with the change. A message that often works well is, "[New CPA] has worked with us on a lot of projects over the past [-- years/months] and we have high regard for the work [he/she] has done while working with us. We believe [he/she] offers the quality you are used to and [he/she] will honor As a verb, to accept a bill of exchange, or to pay a note, check, or accepted bill, at maturity. To pay or to accept and pay, or, where a credit so engages, to purchase or discount a draft complying with the terms of the draft. our price structure." For divestiture to work well, several conditions should exist. Among the more important ones are: Client service issues: * First-hand first-hand Adjective obtained directly from the original source Adverb 1. directly from the original source 2. knowledge of the acquiring CPA'S work and practices. * Appropriate talent/quality at the acquiring firm. The ability to state with a clear conscience that the acquiring firm does quality work. * The acquiring firm has the capacity to absorb the clients identified for divestiture. * The acquiring firm's culture/CPA's personality is consistent with the client's experiences at the divesting firm. * A communications plan and a back-up plan in the event a client does not want to move, agreed to by both parties in advance. Communicate as much as possible in writing. * Clear criteria that can be easily communicated to both clients and the new CPA as to why a particular client was chosen for divestiture. Consistent client messages between the divesting firm and the acquiring firm. * Clients' written permission to share information with the new firm; follow confidentiality procedures carefully. * The acquiring firm must go to great lengths to make the new clients feel welcome right from the start and include them in the firm's normal practices early and often. Neglecting this is the single easiest way to destroy the opportunity; clients have a tremendous need to feel wanted. Firm-to-firm issues: * Reasonable expectations as to pricing, conversion rates and client reactions. Not all clients will react positively. * A simple two-to-three-page agreement between the CPAs outlining key terms of the agreement (to avoid miscommunications). * The divesting firm determines the divested-client list independently, and requires the acquiring firm to take all clients identified for divestiture for at least the first year. Potential individual client issues should be identified for the new CPA. * Analysis of clients and selection of the successor firm completed before need to divest arises. * An ongoing, annual process involving the same firms, not switching players annually. * The divesting firm must be willing to provide the support to the acquiring CPA necessary to assure a successful transition. Additional Observations Divestiture and firing are not mutually exclusive Adj. 1. mutually exclusive - unable to be both true at the same time contradictory incompatible - not compatible; "incompatible personalities"; "incompatible colors" . A practitioner can fire some clients and divest others; it is just harder to explain to the fired clients why they were in that group. Further, although this column has focused on developing a strategic relationship with a smaller firm, there is no reason why this concept could not be implemented with more than one firm. Multi-sourcing, while perhaps diluting the relationship with the one smaller firm, may provide greater opportunity for finding a "better fit" based on a particular client's needs. While the divestiture concept is most often used by comparatively small firms that are, perhaps, one order of magnitude A change in quantity or volume as measured by the decimal point. For example, from tens to hundreds is one order of magnitude. Tens to thousands is two orders of magnitude; tens to millions is three orders of magnitude, etc. different in size, nothing prevents larger firms from applying the practice. A small local firm can develop this sort of "feeder" approach with one of the large international CPA firms. What makes this particular arrangement work is that the small firm shares a core competency A core competency is something that a firm can do well and that meets the following three conditions specified by Hamel and Prahalad (1990):
2. is there. As the trickle down Trickle down An economic theory that the support of businesses that allows them to flourish will eventually benefit middle- and lower-income people, in the form of increased economic activity and reduced unemployment. effect of Sarbanes-Oxley and other economic mega-trends continue to be felt throughout the profession, divestiture also offers a great opportunity for small firms with unique skills to "move up the food chain" achieve recognition for the expertise they possess and charge appropriately for that expertise. As noted earlier, because most firms' first reaction in the case of less attractive clients is simply to price the client into leaving, honoring the existing fees should be attractive to the acquiring firm, especially if the clients are coming from a larger firm. And honoring the old firm's pricing (or even bettering it slightly) is usually received positively by clients moving to the new firm. Communicating a small (5%-10%) fee reduction when clients are notified often has a large positive impact on conversion rates. A good candidate for receiving divested clients is a subcontractor One who takes a portion of a contract from the principal contractor or from another subcontractor. When an individual or a company is involved in a large-scale project, a contractor is often hired to see that the work is done. or a practitioner just starting out, which the firm has previously used for peak seasonal staffing needs. Another alternative is someone with an office in the same building. This is often easier for clients; they simply return to a different address in the same building. Although this column focuses on divesting clients by working with strategic partners for the benefit of all concerned, client transfers between larger and smaller firms can go both directions. If clients grow beyond a small firm's capacity to service them properly or need assistance in areas in which a small firm does not have expertise, there can be an understanding that both firms will use their best efforts to encourage the client to transfer some work to the larger firm under the same sort of divestiture approach. Divestiture will not work in every situation. Client conversion rates differ significantly, based on a number of factors, some of which are beyond one firm's or the other's control. Examples of other issues that can affect the outcome are geographic compatibility and branding, or "touch and feel" service issues. A Final Suggestion Trade publications often refer to CPAs as clients' "most trusted advisers." As such, CPAs are in a unique position to deliver the message discussed here. An analogy analogy, in biology, the similarities in function, but differences in evolutionary origin, of body structures in different organisms. For example, the wing of a bird is analogous to the wing of an insect, since both are used for flight. that often helps in these situations deals with another highly trusted adviser, the medical doctor. When clients are uncomfortable about the divestiture process, consider saying something like," Just like a doctor, we see what is affecting our 'patients' and try to prescribe pre·scribe v. To give directions, either orally or in writing, for the preparation and administration of a remedy to be used in the treatment of a disease. the right solution. Sometimes that means needing to see another doctor; sometimes it's just going around the corner to the pharmacy pharmacy, art of compounding and dispensing drugs and medication. The term is also applied to an establishment used for such purposes. Until modern times medication was prepared and dispensed by the physician himself. In the 18th cent. ; and sometimes it's a procedure we can do here in the office. We just want our 'patients' to get the right treatment and I honestly believe you will be happier in the long run with this new 'doctor.'" It is amazing a·maze v. a·mazed, a·maz·ing, a·maz·es v.tr. 1. To affect with great wonder; astonish. See Synonyms at surprise. 2. Obsolete To bewilder; perplex. v.intr. how effective this analogy can be. Conclusion Before firing clients, firms should give serious consideration to alternatives, one of which is divestiture. Divestiture offers many advantages over firing clients. These advantages accrue To increase; to augment; to come to by way of increase; to be added as an increase, profit, or damage. Acquired; falling due; made or executed; matured; occurred; received; vested; was created; was incurred. to clients, firms seeking to grow and firms seeking to narrow the focus of client service efforts. It can be a "win" for all of the affected parties. However, while divestiture is almost always preferable for the parties involved, sometimes firing clients cannot be avoided. Now that the 2005 "busy season" is over, practitioners should evaluate both the source of future growth and what, if any, clients the firm would not accept today if they were not already clients. The Pareto Principle's 80/20 relationship is nearly universal and its applicability to CPA firms is clear. The benefits of applying it properly can accrue to clients, the CPAs involved and the profession as a whole, by ensuring clients are served by the firms most interested in, and capable of, serving them well. Editor's note Editor's Note (foaled in 1993 in Kentucky) is an American thoroughbred Stallion racehorse. He was sired by 1992 U.S. Champion 2 YO Colt Forty Niner, who in turn was a son of Champion sire Mr. Prospector and out of the mare, Beware Of The Cat. Trained by D. : Mr. Holub is a former chair of the AICPA AICPA See American Institute of Certified Public Accountants (AICPA). Tax Division's Tax Practice Management Committee. Mr. Porter is the chair of the AICPA Tax Division's Tax Practice Improvement Committee. Mr. Eckelkamp is a member of that Committee. For information about this column, contact Mr. Holub at (813) 222-8555 or stevenh@apcpa.com, or Mr. Eckelkamp at (314) 849-7555 or joe@eckelkampassociates.com. Co-Editors: Steven F. Holub, CPA Aidman aid·man n. A member of an army medical corps attached to a field unit. , Piser & Co. Tampa, FL Jeffrey A. Porter, CPA Porter & Associates, CPAs Huntington, WV Author: Joseph T. Eckelkamp Eckelkamp & Associates St. Louis, MO |
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