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Building a premium-dollar niche practice.

The most successful practitioners among my clients are those who have had the insight to carve out a specialized practice niche and develop it to its fullest potential. The days of the solo general practitioner may be numbered, but opportunities have never been greater for specialists.

The Possibilities

First, there are high-tech bookkeeping shops, providing computerized bookkeeping services to small and mid-sized businesses for less money and aggravation than the businesses would expend trying to do the work themselves. Then there are practitioners who specialize in business plans, loan packages and finding financing. There are practitioners who only work with insurance agencies, practitioners who only work with small credit unions, practitioners who specialize in professional practices...or restaurants...or commercial fishing operations...or farming...or personal financial planning...or who provide very specialized services to the clients of other practitioners...or even to other practitioners themselves.

The point is, finding a niche that can be developed to the best of your ability is a key to successfully launching a durable practice. The last thing most communities need is yet another "me, too!" accounting practice. When you compete head-to-head with similar or identical practitioners, the only variables are competence, personality and price. Assuming competence, the only truly controllable variable is price. Some of the old Big Eight firms learned the hard way that all-out price competition hurts everyone, including clients and the public.

Getting Started

If you are already in practice, I suggest focusing first on attorneys and other small-firm professionals such as physicians, dentists, architects and consultants. As clients, attorneys can provide powerful multiple benefits to a growing practice. First, they are easy to approach. They expect new practitioners to introduce themselves and stay in touch on a low-key basis, which eventually leads to opportunities to do work for them and their clients. Secondly, most accounting and tax aspects of a law practice are virtually identical to the corresponding aspects of an accounting practice. If you can't provide first-rate professional services and management advice to lawyers, you shouldn't be in practice. Thirdly, they understand how to deal with other professionals, which makes for greater efficiency. Fourthly, they expect to pay for services rendered at some reasonable hourly billing rate because they expect their own clients to do likewise. Finally, they have clients who need accounting, tax and consulting services and they can and will refer them to a practitioner in whom they have confidence.

In short, you can develop professional relationships with attorneys confidently, efficiently and profitably, with a high probability of referrals. They provide what I like to refer to as "practice leverage." A few individual lawyers and small law firms make a perfect cornerstone for your premium-dollar niche practice.

Other small-firm professionals are great sources of referrals from within their own professions. They talk among themselves, they socialize and they are relatively unfamiliar with accounting, tax and other business professionals. Whenever one of them is happy with an accountant, lawyer or investment counselor, the word spreads rapidly. Do a first-rate job for one physician and you'll soon have a dozen physicians on your client roster.

Develop a Series of Specialties

Whenever you have two or more clients in a particular business or whenever you have performed extensive special work for a client in any business, consider the possibility of making a "specialty" of that particular business or that particular kind of special work, perhaps starting with an industry or practice statistical survey. Most business owners and professional practitioners in almost any field seem to like to participate in--and receive the results of--financial and statistical surveys of their field. With the powerful spreadsheet software available today, it is easy to carry out, for example, a law practice statistical survey in an area (city, county, state) to analyze and report average annual billings, average billings per employee, average hourly billing rate, average occupancy cost per attorney and a host of other useful and interesting statistics. Once the survey is completed, privately show each practitioner or firm how their practice compares to the norm. It'll get your foot in a lot of doors.

Obviously, great care must be exercised in handling the sensitive data. The survey itself should be priced so it's hard to resist, which may mean it isn't directly profitable. But by the time you've personally delivered and interpreted the results to the participants, you'll have greatly enhanced your presence in the business community, and you'll be on the inside track to the participants' accounting, tax and special work.

Learn as much as you can about the financial and management aspects of two to four professions or industries in which you have two or more clients. Identify available resources and use them--or help your clients to use them. If possible, join trade associations and industry groups or work with professional associations. Sponsor and present seminars, workshops and panel discussions for clients and others in that particular profession or industry. Do your homework and become more than "just an accountant" to people in that profession or industry. Before long, you'll be considered a very special resource with a unique relationship to the profession or industry, and the rest will take care of itself.

How Specialization Works For You

Practitioners who specialize in specific industries or specific professional services move rapidly toward the highly-efficient end of the learning curve, where quality work is performed quickly and profitably. Clients are generally impressed by the expertise of assigned staff and the caliber of work. Complaints seem to disappear and referrals take their place.

There are occasional problems, of course. Some clients would prefer not to share their accountant with a competitor, fearing that sensitive financial information or other confidential data may be compromised. However, other clients prefer to deal with someone who is "familiar with our kind of business." The latter attitude seems to prevail in most areas, and a clearly-stated commitment to confidentiality (and a clean record in that regard) seems to reassure most of the others.

Marketing a specialized practice is usually far easier than marketing a full-service practice. When you attempt to market a full-service practice, you have nothing unique or distinctive to talk about. But someone whose practice is limited to one or two industries or to specific narrow professional services gets immediate recognition and instant credibility. People remember your name more easily because specialization is still relatively unusual, and they assume that you are an expert in your field, more competent than a general practitioner would be. And in fact it is possible to become and remain an expert in a narrow practice.

Motivating Staff to Build Clientele

Marketing several specialties is even easier if, as your practice grows, you provide strong incentives for your staff members to develop business for you. Unfortunately, some practitioners are "penny wise, pound foolish" in this regard, preferring to save a few thousand dollars a year in compensation rather than induce their employees to get out and generate new client business for them.

For years I've been recommending a compensation scheme for professional staff members that includes these elements: (1) a competitive salary, (2) a productivity bonus linked to fee realization on the jobs to which the staff member is assigned, and (3) a new business bonus equal to 10-20% of the first year's fees for a new client developed by the staff member. This last element is critical in building a practice because it helps put the staff member in the practitioner's shoes with respect to new business development.

Many practitioners rebel at the notion of a 10-20% new business bonus. It goes against their nature, which is to try to squeeze maximum work for minimum dollars out of their staff members, in exchange for vague hints about partnership...someday.

New business developed by a staff member is incremental business--and incremental profit--which otherwise would never have come through the door. To refuse to consider paying a bonus for bringing in such business is the height of shortsightedness. Incremental business can be very profitable.

Most practices produce profit/salary for the practitioner in the range of 40-50% of annual fees, and I use that statistic to analyze new business. However, if additional client business can be serviced without adding staff or overhead, incremental profit from new client business will be more like 65-70% of fees. To pass up potential profit of that magnitude in order to save bonus money makes no sense.

A $10,000-a-year client represents the following cash flow and present value, assuming 45% profits and no fee increases, if retained for the number of years indicated:
Years Fees Profit Net P.V.

1 $10,000 $4,500 $4,167
2 20,000 9,000 8,025
3 30,000 13,500 11,597
4 40,000 18,000 14,905
5 50,000 22,500 17,967

(I've included present value because the bonus is paid "now" and most of the profits come "later," so it's unfair to count the full dollar amount of future profits when relating the two.)

A 10% new business bonus to a staff member amounts to only about 5.2% of the net present value of a client that lasts for five years. In other words, if offering such a bonus results in a new client that lasts five years, the bonus pays for itself nearly 20 times over--a return on investment of nearly 2,000%! And since it's a "no client, no bonus" policy, there is zero risk. It's like betting after the race is over! Even if the client leaves after a single year, the return is over 450%. If existing staff and facilities are adequate to perform the work, returns may be even higher. Start-up inefficiencies may reduce these figures, but incremental business is extremely valuable, and new business bonuses are worth paying no matter how you look at it.

In the above analysis, I deliberately ignored the financial impact of long-term client relationships (six years or more) and the financial impact of selling the practice at some point. The competitive environment is intense in most parts of the country, so any evaluation that assumed a long-term relationship would be suspect. Clients brought in by staff members should be exempted from no-compete clauses and like restrictions in the staff members' contracts. To some this is heresy, but the present value of a practice sale five or more years in the future is quite small compared to the present value of profits in the meantime. To tell a staff member that you will pay a 10% or 20% new business bonus and that they are free to take the client with them if they leave can have an enormously powerful motivating effect. Suddenly, practice development is not simply something the staff member "should" be doing but something only a fool would neglect.

Agreeing to allow staff members to take "their" clients with them if they choose to leave largely eliminates disagreements about when a staff member should become a partner. When and if the staff member has developed enough recurring business to be able to start his or her own practice, a partnership should--and probably will--emerge. Practitioners who unfairly use covenants not to compete and similar restrictions to try to trap young professionals into permanent employee status usually fail. In time they spawn their own fiercest competitors, and they lose the best prospective purchasers of their practice (at retirement) they ever had.

Analyze and "Weed" Your Practice

"In any group, a small number of items in the group will account for the bulk of the total value." This is a powerful and useful observation, often called Pareto's Law or the 20/80 Rule, long-used by industrial engineers and management analysts.

In a small accounting practice, a few clients generate most of the annual fees, a few clients consume most of the staff time, and a few clients generate most of the contribution to the firm's overhead and profit. Surprisingly, they are not always the same clients! Worse than that, the way many practitioners keep score makes it difficult to know which clients are which.

The key is to determine contribution (gross profit) margin, client by client. Total fees generated by a client less the direct cost of servicing the client (primarily the cost of staff time, including your own) equals the client's contribution to the overhead and profit of the practice. If you set billing rates the way most practitioners do, the ideal client (100% recovery of all time charges at standard billing rates) will generate fees equal to roughly three times the cost of staffing the engagement. A client who generates fees equal to one and one-half times cost (50% recovery of time charges at standard billing rates)--especially a large client--may still be worth keeping, at least temporarily, because such a client is covering costs and making some contribution to overhead. If you are continually unable to recover more than 50% of time charges at standard rates from a client, gently terminate your relationship with the client.

The goal for a sole practitioner or small partnership should be what I call a "premium-dollar practice," with fully-utilized professional staff billing premium rates and recovering 100% of all time charges. Too many sole practitioners and small-firm partners work long hours and long weeks, year after year, for far less compensation than they could be earning because they continue to service clients who don't pay their way.

If you expect to achieve your financial goals and grow, you must "fine-tune" your practice occasionally and slowly eliminate clients who produce an inadequate contribution to your overhead and profit. Obviously, you must be certain that the problem is the client's inefficiency or unwillingness to pay reasonable fees, not your own inefficiency or staff incompetence.

Many of the practitioners I know were once timid about "getting tough" with their clients on billing and collection matters. But the successful ones soon discovered an interesting fact--that clients respect you for it. Most of the successful professionals I know make a point of explaining in the very beginning that their fees are based upon time charges at established hourly rates, that they bill monthly and that they expect timely payment. When two monthly bills are outstanding, service stops. Many practitioners bill from the very first meeting with a new client, in order to get things off on the right foot. Obviously, it is easier to take this stance after your practice has been safely established than it is in the very beginning. On the other hand, timely payment is never more important than in the beginning. Set a policy you can live with, then enforce it.

Looking Ahead

Specialization is the future of the accounting profession. Independent practitioners will continue to thrive but only if they deliberately seek out and develop profitable niches from among the rich array of possibilities. The accounting and tax worlds have become so complex that a general practice involves unacceptably high risk of client loss, audit or compliance failure or other serious error.

Even the traditional small-town practice is not immune. Computer and communications technologies make location largely irrelevant. Even today, you can live where you wish and make routine contact with clients by phone, computer/modem and fax. My own small practice consulting work is carried out largely in that fashion.

Practitioners who sense and respond to these changes will continue to prosper and grow. Those who cling to the old ways of public practice will gradually pass from the scene. Each of us is free to choose.

Robert B. Scott, Jr., CPA, is a small practice consultant and publisher of practice management materials in Wickford, Rhode Island, and a faculty member at Roger Williams University in Bristol, Rhode Island. He is a member of the American Institute of CPAs, the Institute of Management Consultants, and the Rhode Island Society of CPAs.
COPYRIGHT 1993 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Scott, Robert B., Jr.
Publication:The National Public Accountant
Date:Sep 1, 1993
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