October 12, 2024

businessinsider

Costing Accounting Everyday

A major inflection point in the firm life cycle

NxtStep Consulting founder Sean Boyce identifies the key point at which growing firms need to change how they operate, or risk stagnating, and shares what the key issues they need to deal with.

Boyce podcast screen.jpg

Transcription:

Dan Hood: (00:03)
Welcome to On the Air with Accounting Today. I’m editor-in-chief Dan Hood. You know, there comes a time in a small firm’s life cycle where it’s no longer quite a small firm, but it’s not necessarily a big one, and where the firm’s leaders need to make some serious decisions about what they want to be when they grow up and how they’re going to achieve that. Here to talk about all that is Sean Boyce, the founder of NxStep Consulting, which works with firms to help them scale up and grow through that sort of awkward phase. Sean, thanks for joining us.

Sean Boyce: (00:26)
Absolutely happy to be here. Thank you for having me, Dan.

Dan Hood: (00:29)
Great. Like I said, this is an awkward transition for many accounting firms, cause they’re not sure, uh, um, how to make it, how to, how to handle that because they take some from being sort of small firms where everything kind of, uh, you know, the partner or the owner takes care of stuff. You get to a certain size where you need all kinds of, more sort of professional, um, uh, back office functions to help you with it, with marketing, with technology, with, uh, all kinds of things. Uh, and I wanna talk more about it. Let’s start with sort of, what size do you think firms, uh, at what size do firms start needing to think differently about their growth and about themselves?

Sean Boyce: (01:05)
Yeah, that’s a great question. Uh, I’ve seen it quite a bit for me in terms of what I usually see it’s right around that like 10 million to up to upwards of 20 million annual revenue range is where things seem to change pretty dramatically for accounting firms, right? When they need to start making some bigger changes, if they haven’t, that’s where they can find themselves in trouble.

Dan Hood: (01:25)
Gotcha. It is. And it’s, it’s that range you see in anywhere from 10 to 20 I, some firms that are, that are growing particularly fast may see it even a little, a little earlier. Um, but there is no hard, fast thing, but it’s right around there. Cause that’s when you start having a, uh, a staff count where you start needing to manage larger numbers of people manage larger numbers of engagements. Um, uh, what are some of, uh, when you look at that, when you look at a firm, uh, you know, like you said, it’s not a hard and fast number it’s around that and you start thinking about it. Uh, but what are some of the red flags you’ve seen that, you know, that, that, that indicate a firm has reached that point.

Sean Boyce: (01:55)
Yeah. And like you said, as well too, Dan, there’s a couple other identifying factors as well, too, if, and when they kind of get to that range, but team size might be in the 30 to 50 plus or something like that. Um, but in terms of red flags and what they might see, and what’s some indication that things are probably about to change in a big way is in particular, there’s a general lack. Uh, it seems, and this is usually a common complaint from their team, as it pertains to process, uh, structure tools, resources technology is a big complaint as well also, which puts a lot of stress and strain on the team. And a lot of times these firms are expecting kind of what worked for them before to work for them during this phase and through the next phase of growth, which is a big misconception and a huge problem that I see with a lot of the firms that I work with.

Sean Boyce: (02:41)
Um, as well as start to see some other symptomatic change because of these underlying fundamental root causes where they experience higher turnover, retention becomes an issue. Team feels significantly more burned out, uh, pain from these problems just seems to kind of spill into other areas. But otherwise I would say one of the bigger components of this that we often see as well, too reflected financially in terms of performance for the firm is where their profitability really starts to take a hit as in the firm is growing, but the profitability isn’t growing alongside it, uh, or worst case scenario it’s flat or even shrinking that is a particular sign that times definitely need to change like what we’re before isn’t expected to work now and especially not in the future.

Dan Hood: (03:22)
Gotcha. Uh, yeah, I think, but I think it’s certainly true that for, uh, across the accounting profession, both for firms, and I also find that for people’s careers, it’s sort of what got you to where do a certain level. Isn’t what you need to take you to next. Lovely. See it with staff, you know, they, they get promoted cuz they’re really good at doing something particular, but they get order to managing people. Managing people is a very different thing than say, uh, you know, conducting an audit. Uh, it’s interesting the firms, uh, and this is a true think of a lot of different, uh, uh, industries. It’s not just accounting, but that, that thing where you, you get to grow, we got to this point, this is great. And now we just need to do everything different. um, you know, maybe we could talk about, uh, some of those things that they might need to do differently. Some of the things they might need to think about differently when they reach that point, you know, what are, uh, some of the areas they’re gonna have to, uh, to think differently in? Sean Boyce: (04:09)Yeah. Great question. And, and the biggest thing that I see in terms of you trying to leverage previous strategies that worked for them to kind of get them to where they are now that isn’t expected to carry them forward through the next phase of progress. Is this what I refer to as just like more accountants, uh, which is a common strategy that a lot of these firms use cuz it worked for them before, as in, when they get new demand, some of the business development that they’ve invested in starts to pay off marketing activities as well. Also, we’re just gonna meet that demand with what we’ve done before, which is additional capacity through our workforces. And we’re just gonna continue to expand. We’re gonna hire are as many accounts as we need in order to meet that demand. Now that is a inefficient solution to that problem, which is why their profitability ends up taking a significant hit. Sean Boyce: (04:50)So what they start to, what they need, how they need to think differently is they need to go beyond just hiring accountants. That’s not enough like the previous phase, your firm, you know, may have felt more just like a group of accountants doing work together, moving forward. You need to be thinking about building that into a proper business so that you have all the resources team, uh, the members, the skills that you need in order to kind of grow through the next phase, which again is gonna look like going beyond just hiring accountants. You need to be looking towards more, you know, expanding in the skillset of your team, which maybe hiring more folks that are operations minded folks that have a technology focus, especially today, more importantly than ever, uh, in order to be able to meet that increasing demand with more efficient solutions than just simply meeting that with additional capacity, cuz that can preserve, you know, I know the benchmark that we often use, uh, performance wise from the accounting industry is revenue. Sean Boyce: (05:40)But in reality, what I’m want you to focus on more importantly is your profitability, right? Cause that’s gonna free you up, give you the ability to invest in new areas, you know, give your firm, uh, the kind of the performance that you’re looking for. That’s gonna come in the way of new process, new technology, new resources, and are along that critical path, which, uh, for me in a strong area focused in terms of where I’m usually, uh, focused on at that point in time is the areas between client acceptance, all the way chew and through service delivery. Um, there’s plenty of opportunity there. Make significant improvements upon how you did things previously, because more than likely, somewhere along that path, you have a considerable number of bottlenecks, which are slowing your team down and causing a lot of these problems. We need to find them and we need to eliminate them. Dan Hood: (06:23)Right? Yeah. It’s interesting. Cause a lot of the things you’re talking about, it sounds like what they’re, uh, what’s gonna have to happen at some, for some of in a lot of these areas is just gonna have to be some investment, right? You talk about, you can keep hiring accountants to do all the work that you, that you need to do. But at some point you have, when you have a group of accounts, you need someone to manage them, right? You need, you may need to hire someone who will not lit who may not do any, anything they will, but who in theory might do no work? No, uh, you know, no actual client work, but they’re just there to optimize the operations of the team. And I think for is that, is that something you see, uh, reluctance to make those kinds of investments and I, and you could, uh, repeat that example in a million different areas in terms of technology or marketing or anything like that, where it’s like, you have to spend money to manage this larger organization or to, to, to let it happen. And that’s gonna feel, I think for a lot of firms like, wow, suddenly I’ve gotta spend all this money or make these investments what’s this about Sean Boyce: (07:12)Exactly. Yeah. These investments are critical, especially as you grow. Right. Just assuming that the structure that we have add before is gonna work for us. Moving forward is another mistake that I see. So you need to have those layers added, uh, occasionally as well also to make sure that things aren’t growingly and the management of them doesn’t become kind of a bottleneck or an Achilles heel for the progress you wanna make. So that’s gonna require folks with more people management skills, you know, in addition to those other areas that I mentioned in operations and technology, making sure your team has the right kind of strategic help that they need in order to complete their work as efficiently as they can to preserve the performance of the organization, but also, you know, the mentality workload, things like that, that will end up stressing at your team. If you’re simply just trying to use inefficient solutions that you’ve used before to try to get you to and through this next level of progress. Dan Hood: (07:57)Gotcha. All right. There’s, there’s a lot more, I wanna explore at this cuz it’s a big topic and I think it’s an important one for, for firms, but we’re gonna, uh, take a quick break. All right. And we’re back, uh, with Sean boy, we’re talking about, uh, I don’t, I have, uh, scrupulously avoided making any kind of adolescent metaphor, adolescents metaphors, and I’m gonna stay away from that. But there is this transition where firms go or hopefully, uh, go from being a small firm to being a, a, a larger firm or more, uh, more complicated firm. Maybe that’s a good way to put it, uh, as they get more complex. And there is this phase where they need to figure out all these things. And I wanna, we’ve, we’ve mentioned sort of scattered through here. A lot of the, the sort of things that they may have to do, they may have to bring in layers of management to, to manage a larger team, uh, to optimize that you mentioned, uh, they may need to bring in, uh, other people, you know, people with other skill sets that aren’t necessarily accounting related. They might be a, you know, specialty, uh, skill set, uh, you know, uh, maybe someone who’s good at financial planning, someone who’s good with it or someone who’s good in, in, in, in an industry that you wanna cover. Who’s not necessarily an accountant. Um, maybe we can sort of do a little more systematic go through sort of identify a lot of the, more of those issues, those kinds of things that firms should be examining and say, okay, does this need to change as we move to a new stage of our, of our life cycle? Sean Boyce: (09:13)Yeah, well said and great questions, uh, for sure. Again, the most common mistake that I see is that thinking that just hiring more accountants is all we really need to do in order to meet demand. And you think of better solutions with greater leverage. That’s one of the most important strategic decisions firms can make as they look for. You know, some of the work that I do when I, I come into working with a firm might be, they are planning to grow by two X or three X. And instead are thinking through, you know, hiring and expanding their team by two or three X, right? So the, the leverage isn’t there, but instead, you know, we can, there are strategies that we can put in place in order to enable your team to be able to complete that much work. But to do that with one X, to do that with the team that you already have, meaning that you increase those. Sean Boyce: (09:56)So with better leverage, that’s gonna empower your team, enable them to do a lot more with a lot less, which is going to show up financially performance wise for your firm. But it’s also gonna take a lot of stress and pressure off your team as well also, cause it will reduce significantly the amount of busy work that your team is required to have to complete, you know, doing the most time consuming error, prone, and expensive work. That’s chewing up all those valuable resources. And I was talking to a firm, uh, earlier today I’m thinking about working with and similar situation that they’re kind of going through, and this is gonna be, you know, a future conversation that we’ll have, but need to look for those opportunities where we can, uh, alleviate their team from the most time consuming work, which is where their firm, all the expense is just accruing. Sean Boyce: (10:35)And it’s eating into their margins and said, look for solutions that have better leverage to free up their, uh, their valuable resources in order to redirect them into these areas of greater profitability for their firm. And that’s where you start to benefit from those investments and those solutions of greater leverage, because as your revenue grows, we want your profitability grow with it. We don’t want your profitability to just meet it in lockstep or plateau or case scenario start to shrink, right. Cause that’s where, you know, you go to experience a lot of these other problems. That’s just an kind of an early warning side. Dan Hood: (11:04)Gotcha. You know, it’s interesting. This is, um, you talk about leverage one of the, uh, parts of our top hundred firms that that always amazes me is the difference between billion dollar firms, literally the firms that make over billion dollar revenue in terms of number of staff per partner, uh, in it’s about double at the, at the billion dollar firms, the ones that are really, uh, just, you know, leading, leading the way in terms of revenue. I don’t know what their profitability is, but let’s assume they’re, I’m assuming they’re pretty profitable. Cause uh, uh, the amount the partners make there is pretty high. Um, and they’re, they’re leveraging, right? You’ve got one partner for every, um, uh, it’s roughly 15 staff overall for the whole firm. And then is you get to smaller firms, it’s one partner for every seven staff. So that, that it it’s the having more people is not necessarily the answer, but having the right people and having them, uh, leveraging them is, uh, is, is, is a huge thing. And it’s something the firms need to think about. Cause it’s not just about the size of your staff and it’s about how you’re, how you’re managing, ’em how you’re using them. Sean Boyce: (11:57)Agreed. Absolutely. That makes a huge difference. Right. Is, uh, and that comes into that strategic element as well too, is like taking a step back and evaluating, you know, what strategies are working for us and what aren’t, let’s evaluate the ones that have paid off. Let’s like you said, look for areas where we can make some new investments and let’s experiment a little bit with, you know, tools that we can use to create greater leverage and then evaluate those results. If you’ve got kind of the opportunity to do that, your firm’s gonna be better prepared for what’s coming because the different phases of growth make a huge difference in terms of, you know, what you’re going to need to do as part of that next phase to get you chewing through, out of the firms that I’ve worked with that are in this 10 to 20 million range, they’re afraid of getting stuck there. Sean Boyce: (12:37)Cause there’s a lot of firms that haven’t gotten, haven’t been able to get beyond that level on their way to 50 million plus. Uh, and if you get stuck there, that can be a difficult position to find yourself in where these problems, if they’re left unaddressed and you’re not proactive in your approach. Now there’s a case study for firm in my area that are, I studied where they were, they had reached probably approximately a size of about 50 accounts or team size of about 50. And in one year they had hired 50 more people with no net increase in overall head count. They had experienced a hundred percent turnover. So it was basically just a revolving door there. Yeah. And it’s because they were trying to use those previous track. Didn’t come up with better solutions. Their team felt the pressure and stress there because the plan like a effective strategic plan, wasn’t there, they didn’t have the right tools and resources. They didn’t have the right ops help. It was just, you know, a larger group of accountants trying to do work together. Inefficiently. They went looking for greener pastures. Dan Hood: (13:31)Yeah. That’s wow. That’s a hundred percent turnover. That’s crazy. Crazy, right. At some point, right? You gotta, if, if you’re at that point at some point, at some point below a hundred percent, you would’ve thought they might have said, huh, 50% percent, 50%. That’s, that’s pretty high. Maybe we should be doing 70, 75%. No, no. Maybe we should. No, no. Let’s see if it gets to a hundred, then we’ll change. Um, I’m assuming they changed when they hit a hundred percent. That may be optimistic of me. But, um, I, I, I, and this is only because I’m, uh, uh, more, but are there other big mistakes, uh, that you see accounting firms making in this, at this, at this point in their, uh, I think other than the, the, the, just throwing bodies at it, Sean Boyce: (14:07)That’s definitely a big one. The other is not being proactive about your strategy when it comes to technology, there’s a lot more that firms can do than they are currently in order to create these solutions with greater leverage. And if they are intelligent about kind of how they invest, where they are now to prepare for what’s coming, they’ll be ready for it when it does arrive. So I see a lot of firms that invest resources predominantly, and I understand why they do into business development and marketing. They’re trying to create more activity. They’re trying to grow really strong pipe line. And more often than not, that does pay off, which is, you know, one side of the success that you need. But I see a lot lesser amount of activity and it’s very underwhelming in terms of what they invest on the operation side. As they’re not necessarily ready to meet all that demand that’s coming. Sean Boyce: (14:52)And that puts just additional greater stress and pressure on their team and then start experiencing a lot of these problems like turnover, et cetera. Um, so I would encourage more firms to take a more proactive approach in making investments in that, you know, expanding your capacity on the operations in particular creating solutions for greater leverage through and resources and technology and investments in these areas, but not to wait until those investments have paid off in business development and marketing, right? Chances are, if you’re investing there, you’re going to see the results. You need to be more proactive about it so that you can immediate when it arrives, not start to try to make those changes. Once you see that wave hit. Cause at that point it’s probably gonna be too late. Now you’re gonna have to start from so that those investments won’t be ready to pay off because you haven’t made. Dan Hood: (15:34)Right. That’s great. I, I, it’s interesting job you’ve if they’re, they’re, they’re being proactive about their marketing. That’s one of the things that will change, obviously, as you go into this thing, right? You stop, it’s not just about, uh, sort casually waiting for referrals or hoping the phone rings. And it’s, it’s really, you gotta build one of the things you have to do as you go to that size and hope to grow bigger rate is build, uh, a very intentional business development pipeline, uh, that you’re tracking on a, a productive basis. But yeah, if you’re not ready for the business, when it comes in the door and that maybe leads to the sort of broader, and you’ve talked about this, you know, being strategic about it is you have to think of the firm as a whole, right? You have every, everything you do, everything you touch over here has an implication over here, your technology, uh, uh, outlays will have an impact on how you train your staff and how many staff you have will have an impact on, uh, your ability to, to, you know, handle the technology that you brought in all those things tie in together into the marketing, as you said. Dan Hood: (16:24)So if you’ve got a lot of people coming in the door, you’ve gotta be able to, you know, a lot of clients coming in, you’ve gotta be able to handle that work, which may have staffing and technology implications. And so et cetera, et cetera, and everything sort of tied together. So I think that’s, yeah, that’s uh, as you said, thinking strategically about the, the firm as a whole is probably, uh, uh, pretty crucial, Sean Boyce: (16:41)Definitely. Yeah. Focus as much as you can on building that business to be as effective, delivering so much value for your clients and making sure you have the team and resources that can support all the people that are doing the hard work at your firm as you’re growing and through these layers and through these different levels and just be re just be ready for what those different levels are going to mean. Like we talked about introducing those layers when you need them, uh, making sure that your folks aren’t feeling overwhelmed, that, you know, keeping your eye on all of these metrics in order to make sure that they aren’t slipping as you’re growing, right. Because I’ve seen firms where the revenue’s growing profitability is actually shrinking, uh, which is an indication of a larger problem somewhere else. So find out what that problem is in fixable 42 8. Dan Hood: (17:19)Excellent. Well, you’ve talked, uh, throughout this, you mentioned some of the, some of the advice you’re given to people, some of the ways you’re working with, or maybe we can dive a little bit more into that. Like how do you go about advising, uh, a firm that’s at this, this, this turning point? Sean Boyce: (17:30)Yeah. Great question. Thanks for asking that one. Uh, really, it starts with understanding what the goals of the firm are and then aligning that with the appropriate strategy and the objectives that need to be accomplished, which typically looks like an example that I mentioned earlier today, uh, the firm where I was talking with that had shrinking margins, while those still growing their team is feeling overwhelmed. So you start to seeing some of these symptoms, which prevents them from, you know, it overwhelms their team with the busy work that they have to do, which means they’re not free to be able to invest more time into the higher margin activities, right. Which for that firm is gonna impact its financial performance. So because of that, usually we’re looking for, you know, I’m looking for those types of symptoms so that I can focus in the area, which is burning through these precious resources and cycles for your team and chewing up a lot of time. Sean Boyce: (18:17)And then once I’ve identified and it usually amounts through one or more series of kind of like what I refer to as bottlenecks in your process, typically between that client acceptance all the way to, and through service delivery, find those bottleneck. And then we do what we need to in order to figure out what’s the best way to eliminate them, right? That might be process improvement. That might be automation, different technology, different technological resources, whatever it is, come up with the most efficient solution. That’s gonna provide them with the greatest leverage in terms of making investments in this area and seeing a positive ROI. And then with that time that they get back, they’re able to rein back into these more higher margin activities. And that’s what grows your profit margin as your revenue and firm does as well too. So, you know, it’s an element of really trying our best to shift gears from taking a reactive approach to these things is an only dealing with a problems when they show up right to a proactive approach. Sean Boyce: (19:07)You know, every, if I can encourage every firm, it would be to take a proactive approach to be continuously looking for these bottlenecks because they exist everywhere throughout your firm, but be looking for them, understanding the impact that they have, figure out what you need to do to put the best high leverage solution in place to eliminate that. And that’s gonna enable your firm to maximize the efficiency of your growth and be able to keep pace and lockstep with all those investments you’re making in BD and marketing. And as those are paying off and your firm is growing, it’s gonna enable you to kind of enable to maximize the efficiency of that growth. Like I mentioned, which preserves your margin and ideally even strengthens it as your firm growth. Dan Hood: (19:43)Gotcha. Yeah. I mean, it seems like, uh, a, a lot of it boils down to put it this way, but, uh, you just gotta start thinking, you just gotta start thinking of a, out to your firm as opposed to, you know, and I think this is, this happens for a smaller firms, right? You get work, work comes in, you just do it, you just do the work you don’t think about how am I doing this work what’s, you know, is this process make sense? It’s just, I gotta get this work out. Particularly firms are so busy nowadays. A lot of it comes down to let’s just get it out the door. Um, but a lot of what you’re, uh, a lot of what you’re recommending really is I think it sounds like you just gotta and say, okay, wait, is this the right way to do this work? Uh, as you said, the bottlenecks are everywhere when you’re just a couple of people you’re yeah. We’re just getting it out the door. That’s all it matters. But when you’re larger, you can’t afford those bottlenecks get magnified and cause bigger problems Sean Boyce: (20:24)Well said. Yeah. That thinking on the business versus thinking in it is a big differentiator, I would say between, you know, just being a group of accountants versus some, like having a proper organization and firm that needs to operate the way that it needs to in order to make sure that those efficiency plays are in place. Um, so yeah, that’s a huge element of it, making sure that you’re making the strategic investments and decisions when you need to, in order to be ready for that demand when it arrives. Dan Hood: (20:47)Awesome. All right. Uh, this is great. This is a, a lot of great advice for firms that as they reach this sort of inflection point in their, in their life cycles, uh, any, uh, any final piece of advice you would give them, uh, some one, maybe some, one thing to think about as they, uh, as they face this time, Sean Boyce: (21:02)I would look for the most time consuming error prone element of anything within your critical path at the moment, and then focus your effort there because that’s where you’re gonna get your maximum ROI. And the work that I do, it’s always about ROI, you know, just like a good accountant would appreciate. Uh, we’re gonna focus very intensely on where we can make basically the smallest change to make the biggest impact. So if you follow those symptoms, that’s gonna enable you to kind of find that sweet spot. Dan Hood: (21:26)Excellent. All right, Sean Boyce of next step consulting. Thanks very much for joining us. Sean Boyce: (21:30)Thank you very much for having me dad Dan Hood: (21:32)And thank you all for listening. This episode of on the air was produced by Accounting Today with audio production by Wen-Wyst Jeanmary. Rate or review us on your favorite podcast platform and see the rest of our content on accountingtoday.com. Thanks again to our guest, Sean Boyce. Thank you for listening. Speaker 3: (21:48).