Measuring what matters: [want to know how successful your firm is? Take the customer's point of view]

CPA firms are enamored with their internal performance measures. The most popular include [tours billed: hourly rate hilled: percentage write offs: non-billable hours: and gross revenue per partner, per team member and per office. All of these traditional management of accounting practice measures focus on the firm, rather than the customer, We are convinced that CPA firms are too focused on internal measurements for their ego and reward systems to the detriment of the firm's customers and team members, and the firm's financial and emotional outcomes.

Such measures, while informative for the firm's leadership, violate the canons of performance measurement, enhancements that drive improved profitability, customer loyalty and employee happiness. Performance measurement systems must he aligned with the customer's expectations and experience in mind, otherwise the behaviors customers receive will conflict with the behaviors they desire.

Such conflicts lead to lower revenues, lower customer loyalty and higher employee turnover.

Following our motto of "Study Success for Success Leaves Cities." we searched for the best forum to learn how our profession can create performance measurements that:

* are leading rather than lagging indicators:

* are focused externally, where results matter and where revenues and profits are generated;

* can move our profession forward by focusing on the important measures, even if they aren't easily quantifiable: and

* are valued by our customers, because that is where performance matters.

After researching successful service companies, including The Ritz Carlton, Nordstrom and Four Seasons, we determined that FedEx provided one of the best models for emulation.

DELIVERING RESULTS

FedEx is the leading innovator and service provider in the overnight package delivery business. Its brand is so strong that people don't refer to "overnighting" a package, they simply say "FedEx it." FedEx's reputation for premium pricing, delivering packages when you need them and an unconditional guarantee that your delivery will be on time or its free, has catapulted it to market leader while recording superior profits.

The best way to study FedEx is from Memphis, Tenn., its worldwide hub. In Memphis we saw about 175 aircraft from around the world fly in and--with the aid of 9,000 part--time employees--be unloaded and reloaded with about 1.5 million new packages. Planes were airborne again in less then an average of five hours.

We compared FedEx's ability to monitor, control, sort, handle and deliver approximately three million packages a day to the average CPA firm that we consult with that might have l00 projects going at any one time. We recognized how inadequate the traditional firm's project status system is compared to that of FedEx.

If needed, what percentage of open projects could a managing partner locate and communicate its percentage of completion and expected delivery date--in, say, five minutes?

We predict the answer is nil to none. Yet, FedEx can do it in seconds, and on millions of open deliverables.

FedEx rewards and motivates team members to deliver packages on time because that is what FedEx customers care about. The connection between what the company measures and rewards and their industry dominance is solidly linked.

Our profession's focus on efforts instead of results has promulgated many of the ills that MAP survey's decree, including large write-ells of customer billings, low employee morale, slow paying receivables, slow growth and customer defections.

CHALLENGING THE STATUS QUO

The Memphis hub is an amazing sight, and FedEx has come a long way since its first day of operations March 12, 1973 when it had just six packages to deliver--two of which were from customers. The remaining four were from sales people testing the system. Not bad for founder Fred Smith, who got a "C" on his term paper that contained the idea for FedEx.

For years FedEx operated under the 95 percent rule, which said that to improve on time delivery beyond 95 percent would be cost prohibitive and require a price not acceptable to the majority of its customers. But to drop below 95 percent would also be unacceptable to the customer. As Michael Basch explains in his book Customer Culture: How FedEx and Other Great Companies Put the Customer First Every Day:

"Fred Smith has a way of standing back from the business and challenging the basic tenets of the business. One day he challenged time '95 percent rule'--a sacred cow since the very early days.

'If we handle a million packages a day and we mess up 5 percent, that means we mess up 50,000 packages a day,' he reasoned. 'And since one person ships to another, that means we've disappointed 100,000 people each day. It doesn't take a rocket scientist to figure out that before long you've disappointed everyone in America who ships or receives packages.'

"Then he created what he called a Hierarchy of Horrors. Of the 5 percent disappointments, what is time worst tiling you can do to the customer? What is the next worst thing, and so on, He and his senior management team identified eight major horrors."

MEASURE WHAT MATTERS

The FedEx story goes to the heart of what a professional service firm should measure. Who would suggest customers of professional service firms define success by how many hours are logged on a timesheet? What exactly, does this measure? And why do firms devote so much time to completing, tracking and printing such reports based upon billable hours?

Timesheets do not measure tire success of a professional in time same way a customer does. It would be as if airlines measured success by the amount of time their planes were in the air rather than whether they arrived on time.

There is a big gap between what firm leaders want their team members to do--charge hours--and what the customer wants. But before we can measure success, we must understand how customers define the success, and failure, of their professionals. Let's examine why we lose, and acquire, customers.

According to August J. Aquila and Allan D. Koltin, the top seven reasons people leave their accountant are:

1. "My accountant just doesn't treat me right." (Two-thirds of the responses

2. CPAs ignore clients.

3. CPAs fail to cooperate.

4. CPAs let partner contact lapse.

5. CPAs do not keep clients informed.

6. CPAs assume clients are technicians.

7. CPAs use clients as a training ground (for new team members).

Why do people select accountants? According to William J. Winston in Marketing/or CPAs, Accountants, and Tax Professionals:

* Interpersonal skills.

* Aggressiveness.

* Interest in the customer.

* Ability to explain procedures in terms the customer can understand.

* Willingness to give advice.

* Perceived honesty.

Note what is missing. There is no reference to technical quality or price. No reference to efforts or time spent. All reasons relate to services as perceived by the customer.

If our profession wanted to develop leading measurements that matter, shouldn't it create measurements that encourage time above skills?

REPLACING TIME-BASED AND FIRM-FOCUSED METRICS

Think about mitigating the No. 1 reason for customer defections: "My accountant just doesn't treat me right." What could you measure to stop two thirds of your defections? We believe it's job turnaround.

Communicate to customers the anticipated delivery date for each project, phone call, meeting, IRS letter response and then deliver on or before that date.

By focusing on job turnaround the firm will be measuring what matters to its customers: the timely completion of each project. Firm's that allow projects to sit and gather dust allow a customer cancer to develop and provide customers with reasons to believe their CPA simply doesn't care about them.

We work with a New Zealand firm that guarantees its compliance customers a four-week turnaround on financial statement and tax preparation service. The firm tracks and notifies its leadership if an internal date is missed, thereby alerting engagement personnel to respond before they miss the external due date.

The second performance measure we recommend relates to communication skills. Both expressive and listening skills must be measured and constantly improved. Baseline measures can include surveys of both internal and external customers and team members, and communication consultants who review written communications and provide coaching sessions. Seminars and creative writing programs can also be used.

The third performance measurement leverages the customer communication measurement. Recognizing that the Pareto principal is alive and well in CPA firms--meaning that 80 percent of a firm's revenue is generated by 20 percent of the firm's customers--a simple metric is one of unilateral customer contacts.

CPA firms should divide their customer lists into groups of 20, and moving down the revenue or similar curve, ,assign respective groups to partners, managers and team members. Everyone then contacts one of the 20 customers on their respective lists each day to see how they are doing. By contacting your best customers you are demonstrating that you care about them and their goals, and you are keeping them informed. All of these are key items for customers.

Focusing on issues that your customers care about is the first step toward success. You can have a high billing rate, but without a customer willing to pay it, it's useless. Customers care about results that help them achieve a better future. Focusing on the right measures will place you--and your firm at the top levels of profitability and customer loyalty.

Go ahead, flip your binoculars around and pay attention to those things that really matter. You'll be happy you did.

Fedex's Hierarchy of horrors

The so-called Hierarchy of Horrors was tire genesis for the FedEx Service Quality Index (SQI), which is a system of weighted Key Performance Indicators (KPIs) that measure the functions of critical importance to the customer. The SQI measures the following functions, each weighted according to the degree of customer aggravation caused by a failure to perform. The number of "average daily failure points" is multiplied by that component's assigned weight to calculate the SQI:

Item                               Weight

Right-day late-service failures      1
Wrong-day late-service failures      5
Traces                               1
Complaints reopened by customers     5
Missing Points of Delivery           1
Invoice adjustments requested        1
Missed pickups                       10
Damaged packages                     10
Lost packages                        10
Overgoods                            5
Abandoned calls                      1
International SQI indicator          1

Since being placed in service in 1987, the SQI has enabled FedEx to increase its on-time delivery performance from 95 percent to 99.7 percent without adding significant costs. The lower the weight, the more FedEx knows it is meeting customer needs.

Sample CPA Firm Hierarchy
of horrors

Item                                         Weight

1. Missed external deadline                   10
2. Missed internal deadline                    5
3. Customer placed into voice mail             1
4. Customer message returned > 2 hours         1
5. Customer message returned > 8 hours         5
6. Customer message not returned before
   customer calls back                        10
7. Customer receives surprise invoice          5
8. Customer receives IRS notice                3
9. Customer receives IRS notice
   generated by firm error                    10
10. Customer receives 2nd IRS notice
   because firm didn't handle                 20
11. Firm receives customer defection notice   30

The above represents how a firm could track items daily that focus on
items valued by a firm's customer. The lower the weight, the more
the firm knows it is doing the right things for success.

Daniel D. Morris, CPA, and Ronald J. Baker, CPA, are co-founders of VeraSage Institute, a think tank dedicated to teaching professionals value pricing, This article is adapted from The Firm of the Future: A Guide for Accountants, Lawyers, and Other Professional Services, authored by Run Baker and Paul Dunn, and published by John Wiley & Sons Inc. You can reach Morris at [email protected] and Baker at [email protected].

COPYRIGHT 2003 California Society of Certified Public Accountants
COPYRIGHT 2003 Gale Group