Efficiency is not a Strategy

I spent the first decade of my career inside internal operations at accounting firms where it was accepted that every non-chargeable hour should be treated as a problem. One of my proudest accomplishments was creating a scheduling system that got the firm to above 45 hours of chargeable time per week. Another was an initiative that resulted in eliminating 10% of the firm’s “least-productive” partners. By the end of my tenure at that firm, billable utilization looked excellent and our senior management congratulated everyone on a job well done. Almost a decade after my departure, the firm continues to navigate through the long term results of our work.

When I moved to a midsized firm, I brought with me my large firm playbook, assuming that’s what they hired me to do. Thankfully I was mistaken. They hired me because they thought I still had the potential to learn and they proceeded to teach me the principles of long-term durable growth. There is a lot here, but for the sake of argument I am going to characterize this different approach as “trusting the partners.” I will acknowledge that results are not perfect and there are plenty of anecdotes and anecdata that undermine this trust narrative. Nevertheless, we grew our business unit from $44 Million to $151 Million in five years. It was messy and, by traditional metrics, we often looked like we were failing. What worked for us was that we deliberately invested in building capacity for supervision, coaching, and talent development. This would not have been possible without this mandate from leadership: Partners are accountable for the success of the overall firm as a business.

The risk comes when key performance indicators are built around the idea that most non-billable hours are due to inefficiency. That can combine three very different categories, waste, capacity, and future capability, into one red flagged “overhead” number. Management research has identified the same problem across most service businesses: when efficiency is measured too narrowly, costs are often shifted elsewhere in the system rather than eliminated (Davidow, 2018).

The operator’s job is to distinguish activity that creates no value from capacity that protects throughput, quality, and the firm’s ability to produce its next generation of leaders.

Margin killers

Real waste has a defining feature: it consumes time and effort without adding value. Examples of this are: Anything that takes partners away from direct client service, hierarchical org structures with too many touchpoints, excess meetings, inconsistent governance, and low-value high effort clients. Removing that waste improves both margin and employee experience. It gives professionals more time for client work and gives leaders better visibility into where the firm needs additional investments.

Creating value with capacity

Accounting demand is seasonal, deadline driven, and at the same time, unpredictable. Having a well built staffing model that includes excess capacity is the firm’s shock absorber. If the firm is staffed lean enough to only have enough people to keep busy outside of the deadlines, there won’t be enough capacity to complete the work during busy season. If you aim to have just enough staff to handle the busy season, there isn’t any capacity to absorb unexpected turnover, medical emergencies, and of course, when a client creates an unexpected problem. If your workforce is already stretched thin when a client calls you for help, that client may end up finding safe harbor with a firm that’s willing and able to flex during busy times. These are all short-term examples of value destruction through efficiency. Long term, the biggest negatives with having a lean workforce add up: overtime rises, quality suffers, coaching disappears, and a culture that once attracted the best talent struggles to keep the talent it already has.

Manager and reviewer capacity is especially easy to misjudge. A manager with time to coach staff, clear review comments, and coordinate work will show up as a problem when productivity reports get sent out. Remove that capacity, however, and staff wait longer for answers, errors get missed, and partners are left to pick up the work that managers should be doing. Increasing margin percentage metrics through cost reduction weakens leverage and takes the firm’s most expensive people away from the firm’s clients. Creating capacity is an insurance policy to maintain quality of work (Davidow, 2018).

Recruiting a well-trained senior staff or manager is a very low probability endeavor. We call this “hunting for unicorns.” If you would like to have one very good manager today, the best way to do that is to go back five years and hire four to six interns. Since we don’t have time machines yet, the second best way is to start hiring interns today. Producing trained professionals is the most valuable thing accounting firms do for their clients and for themselves. Interns become staff, staff become reviewers, managers, and eventually partners through coaching, feedback, and judgement developed over time. You won’t find evidence of this in any KPI report, but this is how a firm creates its talent. A firm that tries to monetize every available hour becomes a snake eating its own tail: it consumes its talent pipeline and destroys its succession plan.

The real operational goal

Every nonbillable role and every meaningful block of nonbillable time needs to have a measurable purpose. Is it absorbing seasonal peaks, increasing depth of knowledge and specialization, training future leaders, or lowering partner admin time? Firms often invest time and money into software that never gets used, offshore teams that are underutilized, and admin roles that add complexity.

Measuring success goes beyond margin and productivity tracking. Client surveys, realization, WIP/AR aging, overtime, turnover, staff promotion readiness, and partner promotions are good markers for measuring if capacity is creating value. The goal should be framed around what the firm’s talent, succession plan, operational model, and profitability looks like in the next five to ten years.

Firm growth

Improved operating discipline is the right response to an industry that needs it. Many firms carry avoidable complexity, weak management habits, and excess cost. However, an accounting firm is simultaneously a service-delivery business and a talent-development system. Margin depends on leverage, and leverage is created through investing in the recruitment and training of interns and staff.

Firms that distinguish operational waste from valuable capacity will be in the strongest position to capture rising demand for professional services.

References

Davidow, M. (2018). Value creation and efficiency: Incompatible or inseparable? Journal of Creating Value, 4(1), 1–9. https://doi.org/10.1177/2394964318768904