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The Firm of the Future

New model shuns time sheets, favors value creation.

November 2008
by Ronald Baker/Journal of Accountancy

To a large extent, your company is being managed right now by a small coterie of long-departed theorists and practitioners who invented the rules and conventions of "modern" management back in the early years of the 20th century. Management is out of date. Like the combustion engine, it's a technology that has largely stopped evolving, and that's not good.
—Gary Hamel, The Future of Management, 2007

The reigning paradigm of how to manage a CPA firm hasn't changed for more than a half-century:

Revenue = People Power x Efficiency x Hourly Rate

Unfortunately, this model has several limitations. First, it overemphasizes every marginal dollar of revenue — and hence any client — as beneficial. But low-value clients consume a disproportionate share of a firmís precious capacity, while keeping it from reserving capacity for its most valuable clients.

Second, most firms attempt to leverage people hours, which is how the traditional pyramid structure was formed. Yet with technological advances and a talent shortage, it becomes increasingly restrictive for firms to think their capacity resides in head counts.

Third, firms attempt to measure efficiency using indicators such as billable hours, utilization and realization rates. These metrics compel firm leaders to believe efficiency is the archetype of running a profitable firm, but what if you are efficient at doing the wrong things? A relentless focus on efficiency comes at the expense of creativity, innovation and effectiveness.

Last, the hourly rate — along with a "you sell time" mentality — has been taught to at least two generations of CPAs, or "Firms of the Past." In reality, clients donít actually buy time, so it is difficult for firms to sell something that clients donít think they are buying. The hourly rate places an artificial ceiling on income potential.

It seems that since the profession invented this model, it should be able to reinvent it as well.

This article has been excerpted from the Journal of Accountancy. Read the full article here.