CA FIRM OF THE FUTURE Price: Member - Rs. 250/- | Non Member - Rs. 300/First Edition - January 2013 Reprint - February 2021
Contents
CA FIRM OF THE FUTURE
August J. Aquila, PhD Vaibhav Manek, FCA, CPA (US)
BOMBAY CHARTERED ACCOUNTANTS’ SOCIETY
7, Jolly Bhavan No. 2, Ground Floor, New Marine Lines, Mumbai 400 020. India Tel. : 6137 7600 / Fax : 6137 7666 E-mail :
[email protected]; Website : www.bcasonline.org; Web TV: www.bcasonline.tv
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© BOMBAY CHARTERED ACCOUNTANTS’ SOCIETY
Reprint - February, 2021 First Edition - January, 2013 Price : ` 250/- For Members ` 300/- For Non-members
The opinions and views expressed in this publication are those of the Contributor. The Society does not necessarily concur with the same. No part of this publication may be reproduced or transmitted in any form or by any means without the permission in writing from the Bombay Chartered Accountants’ Society. This publication is sold with the understanding that neither the publisher, nor the author will be responsible for the result of any action taken on the basis of this work whether directly or indirectly for any error or omission, to any person whether a buyer of this publication or not. Published by Shri Suhas Paranjpe for Bombay Chartered Accountants’ Society, 7, Jolly Bhavan No. 2, New Marine Lines, Mumbai 400 020. Tel.: 6137 7600 • Fax : 6137 7666 • E-mail:
[email protected] Visit us at www.bcasonline.org • Web TV: www.bcasonline.tv
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FOREWORD
The Institute of Chartered Accountants of India was founded in 1949 i.e., more than 60 years ago. In these 6 decades, the profession of Chartered Accountancy has seen considerable change. The number of CA firms has increased with increasing number of members; the type of work that CAs do has changed considerably; the manner in which CAs carry out their assignment has undergone a sea change with the advent of sophisticated IT tools; the scale of fees that CAs charge has also seen substantial changes. We have also seen a spate of multinational professional service firms carrying on various types of activities in India – whether through tie-ups with Indian firms or directly. In India, the CA profession is mainly composed of Small and Medium practitioners. Almost 90% of the CA firms are either sole proprietary concerns or small and medium partnership firms. Such firms face considerable challenges in terms of manpower, infrastructure, spiralling overhead costs, increasing demand from clients for a one-stop-shop and also aggressive competition from larger firms. Coupled with these is also the fast pace at which our laws are changing and complications are seeping in the interpretation of statutes. In this background, if a small practitioner were to survive then either he needs to scale up his size or merge or amalgamate with other firm(s). Another option would be to increase the value addition in the services that one provides to one’s clients. In all such situations, one important requirement that is vital for survival and growth is knowledge of and implementation of Practice Management. Practice Management has several facets and is a complex and wide subject. Even large firms find it a challenge to put into practice ideal management styles. However, what is certain is that the future will belong to well managed firms. The firm of the future will be the firm that is able to balance all its resources in an effective manner and optimise the same. The firm of the future will have happy iii
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CA Firm of the Future
and satisfied clients, staff and partners. Only such a firm will be able to attract and retain talent – whether at a staff level or at a partner level. How does one achieve such an ambitious result? This publication provides you a glimpse into what a “CA Firm of the Future” will look like. The authors August Aquila and Vaibhav Manek have shared their collective experience and knowledge and have brought out an extremely useful and interesting publication with lots of examples set out in the most lucid and simple language. Bombay Chartered Accountants’ Society has always remained a catalyst in helping its members and public at large to remain updated in knowledge. We are confident that this publication will help our members in preparing themselves for the future and in imbibing the best practices that firms across the world follow. We are extremely grateful to the authors for their painstaking efforts and for sharing their experience generously with us. Mumbai Dated: 3rd January, 2013 Deepak R. Shah President
Ameet N. Patel Pranay H. Marfatia Chairman Chairman Infotech & 4i Publication & Research Committee Committee
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BCAS at your service A voluntary organisation established on 6th July 1949, BCAS has more than 8,800 members from all over the country at present and is a principle-centred and learningoriented organisation promoting quality service and excellence in the profession of Chartered Accountancy and is a catalyst for bringing out better and more effective Government policies & laws and for clean & efficient administration and governance. The diverse activities of BCAS include: BCA Journal: The Bombay Chartered Accountant Journal (BCAJ) is a publication with a track record of over 40 years and is considered as an outstanding publication by tax and accounting professionals in practice or in industry. It includes analytical articles and updates on the subjects such as Direct Tax, Indirect Tax, International Tax, Accounting and Auditing and Information Technology. BCAS Web TV (www.bcasonline.tv): BCAS Web TV is a new initiative of BCAS based on the Internet Video Streaming Service where you can see video or hear audio recordings of select events conducted by BCAS on your computer or on your internet enabled mobile device. Publications: Every year BCAS publishes Referencer along with a CD which is an indispensable tool for professionals as well as those in the industry. We also publish books on varied topics of professional interest such as Audit Check-list, TDS, Fraud, Transfer Pricing, FEMA, Laws & Business and Charitable Trust. Representations: BCAS makes representations to various authorities on different laws as well as on procedural issues, with a view to making them just and friendly to the general public. The representations include pre and post budget memoranda to the Ministry of Finance, Government of India, Ministry of Company Affairs, and Central Board of Direct Taxes among others. Educational Activities: BCAS conducts various educational activities such as seminars, workshops, residential refresher courses, study circles, lecture meetings, e-learning programme on XBRL. Free Advisory Clinics: BCAS conducts following free clinics: Accounts & Audit Clinic, Charitable Trust Clinic and RTI Clinic to help the members & non-members in respective areas. Eminent experts provide free advice at these clinics on pre-fixed days. BCAS Website: The website of BCAS viz. www.bcasonline.org, apart from giving the latest news, circulars and notifications relevant for professionals, also serves as a “Knowledge Portal”, and is an excellent source of information. Please visit us at our Cyber Addresses, and share your views with us: Linkedin Twitter Facebook Group Our blog Our website BCAS Web TV
: http://in.linkedin.com/in/bcasglobal : http://twitter.com/bcasglobal : globalcharteredaccountants : http://globalcharteredaccountants.wordpress.com : www.bcasonline.org : www.bcasonline.tv
We hope to interact with you more often, as we are truly, just a click away!!
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MANAGING COMMITTEE 2012-13
President Deepak R. Shah Vice President Naushad A. Panjwani Hon. Joint Secretaries Nitin P. Shingala Raman H. Jokhakar Treasurer Chetan M. Shah Members Aliasgar Z. Kherodawala Bharatkumar K. Oza Himanshu V. Vasa Jayesh M. Gandhi Krishna Kumar Jhunjhunwala Manish P. Sampat Mukesh G. Trivedi Nandita P. Parekh Narayan K. Varma Narayan R. Pasari Pradip K. Thanawala Saurabh P. Shah Sonalee A. Godbole Suhas S. Paranjpe Sunil B. Gabhawalla Toral N. Mehta vi
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INFOTECH & 4i COMMITTEE (INF & 4i) 2012-13
PUBLICATION & RESEARCH COMMITTEE (Pb&R) 2012-13
Chairman Ameet N. Patel
Chairman Pranay H. Marfatia
Ex-Officio Deepak R. Shah Naushad A. Panjwani
Co-Chairman Pradip K. Thanawala Ex-Officio Deepak R. Shah Naushad A. Panjwani
Convenors Kinjal M. Shah Nandita P. Parekh Pinky H. Shah
Convenors Manish P. Sampat Manish R. Reshamwala
Members Anil J. Sathe Anuj Y. Gupta Ashutosh A. Pednekar Atul C. Bheda Bishan R. Shah Chirag A. Chauhan Himanshu V. Vasa Huzeifa I. Unwala Kamlesh L. Doshi Manish P. Sampat Narayan K. Varma Naveen G. Daivajna Nikunj S. Shah Ninad B. Karpe Nitin P. Shingala Pankaj C. Ghadiali Pranay S. Kochar Samir L. Kapadia Sanjay B. Chokshi Sanjay M. Dhariwal Sanjeev R. Pandit Shardul D. Shah Shariq M. Contractor Shekhar R. Agharkar Vinod Kashyap
Members Anup P. Shah Bhavesh P. Gandhi Chirag N. Sheth Gursanjit Singh Ahuja Janak K. Vaghani Jayesh M. Gandhi K. C. Narang Mahesh G. Nayak Pradip N. Kapasi Preeti P. Jain Rajesh S. Kothari Rajesh S. Shah Raman H. Jokhakar Sanjeev R. Pandit Suhas S. Paranjpe Sujal A. Shah Vipul K. Choksi Yatin K. Desai
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1— CAChap. Firm ofIntroduction the Future
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Contents Chapters 1.
2.
3.
Professional Service Firms — Strategy in alignment..................... 1 1.1
Why strategy for a professional service firm?....................... 1
1.2
Strategy Models and What Works.......................................... 5
1.3
Knowledge delivery and efficiency........................................ 7
1.4
How strategy does differ?........................................................ 7
1.5
Implementing the strategy — From A “Producing Manager Partner” To A “Leader” in A Professional Service Firm............................................................................. 8
Partner compensation - Workable models From Entitlement to Performance..................................................... 9 2.1
Partner compensation — From Entitlement to Performance.............................................................................. 9
2.2
Final Thoughts....................................................................... 23
Team Performance Review............................................................... 25 3.1
Why performance based review – why review?.................. 25
3.2
CA firms – staffing for the future......................................... 25
3.3
Team dynamics impact team performance.......................... 26
3.4
Team performance – the characteristics – from “I” to “We”..................................................................... 27
3.5
Individuals within teams...................................................... 27
3.6
The Survivor - “I will survive”............................................. 28
3.7
The Performer – “I will Perform”.......................................... 28
3.8
The Stabilist – “I shall do my BEST” ................................. 28
3.9
Setting expectations – from “entitlement” to “intrinsic performance”.......................................................................... 28
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Succession planning – Getting Ready to Transition Your Practice..................................................................................... 29 4.1
Getting started........................................................................ 30
4.2
Separate your personal identity............................................ 30
Develop your plan................................................................. 30
4.3
What’s the firm worth? ........................................................ 31
4.4
Client Notification................................................................. 32
4.5
Develop other interests.......................................................... 32
4.6
Your succession plan............................................................. 32
4.7
Don’t wait until it’s too late!................................................. 33
4.8
Appendix 1 — Succession Planning Key Best Practices.... 33
4.9
Appendix 2 — Nine Steps to Effective Succession Planning ................................................................................ 35
Risk Management for a CA Firm.................................................... 39 5.1
Why Risk Management?........................................................ 39
5.2
Risk Management for CA Firms............................................ 41
5.3
Best Practices......................................................................... 56
The Marketing Plan.......................................................................... 57 6.1 Introduction........................................................................... 57 6.2
Make it Everyone’s Plan........................................................ 57
6.3
The Process............................................................................ 58
6.4
Gathering Information........................................................... 58
6.5
Creating and Implementing the Marketing Plan................. 59
6.6
Developing Tactical Work Plans........................................... 64
6.7
Marketing Activity................................................................. 65
6.8
Recognition and Reward....................................................... 72
6.9 Conclusion............................................................................. 72 6.10 Appendices............................................................................. 73
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CA Firm of the Future
Making Mergers Work...................................................................... 91 7.1 Phases..................................................................................... 92 7.2
8.
General areas for integration................................................. 95
Employee and Partner Performance Review................................ 100 8.1
What Is Performance Management?................................... 100
8.2
Performance Evaluations..................................................... 105
8.3
Only Performance is Reality............................................... 109
8.4
Final Thoughts..................................................................... 110
8.5 Exhibit.................................................................................. 110 9.
Partner Learning & Development – Developing Competencies.. 125
10.
Innovation in a Professional Service Firm.................................. 138
11. Annexures........................................................................................ 142 Annexure 1 : M&A Checklist.......................................................... 142 Annexure 2 : Firm Confidential Questionnaire............................. 191
Chap. 1 — Professional Service Firms — Strategy in alignment
CHAPTER
1.1.
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Professional Service Firms — Strategy in alignment
Why strategy for a professional service firm? A typical question that we as Chartered Accountants face from time to time is; •
Do we know where we are headed?
•
Do we know what will be our firm’s revenues this year and next year?
•
How much money do we make in our proprietorship and partnership firm?
•
What shall we pay to our talent, senior most management, and staff?
• Should we branch out to other cities or enter into collaborations? •
Should we be more visible on the study circuit?
•
How do we increase referrals to our firms?
•
Why should someone introduce new clients?
•
What makes us special?
If you are faced with some of these questions you are not alone. As a professional and being structured as a professional service firm has its own dynamics. Each one of the above question can be logically answered with data if one thinks through what does the firm want to do? Where can it excel at? What would be the logical starting step? These questions when answered with clarity, focus and vision become the strategy of the firm.
McKinsey in its famous 7Ss model defines the strategy matrix as under:
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The 7S Model
The 7S-Model was developed by Tom Peters, Robert Waterman, and Julien R. Phillips, while working for McKinsey & Company, a global management consulting firm, when they first published the 7S Model in their 1980 article “Structure Is Not Organization” in Business Horizons magazine. McKinsey’s 7S Model illustrates the seven key components of an organisation, which are charted in figure 2-1. The model maintains that an organisation is not just its structure, but it consists of seven distinct elements, three of which are dubbed “hard” and four of which are dubbed “soft.”
The 7S Model became extensively used by mangers and consultants and is one of the cornerstones of organisational analysis:
The three “hard” S elements—strategy, structure, and systems— are tangible and easy to identify. They can be found in a firm’s strategy statements, business plans, organisational charts, and other documentation. The four “soft” S elements—skills, staff, shared values, and style—are intangible. They are difficult to describe because capabilities, values, and elements of your firm’s culture are continuously developing and changing. The “soft” elements are highly determined by the people who work in the organisation. Therefore, planning or influencing the characteristics of the “soft” elements is much more difficult. Although the “soft” factors are intangible, they have a significant impact on the “hard” strategy, structure, and systems of the organisation.
The following table from In Search of Excellence: Lessons from America’s Best Run Companies, illustrates Peters’s, Waterman’s, and Phillips’ description of the seven Ss:
As in nature, organisations have an ecosystem in which each element has its place yet is dependent on the other elements for long-term survival. When you change one element in the ecosystem, you affect the others, whether planned or not. Effective organisations generally struggle to maintain a fine balance between and among the seven Ss.
Chap. 1 — Professional Service Firms — Strategy in alignment
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Table the Seven S’s The Hard Ss’ Strategy
Actions an organisation takes in light of changes in its external environment
Structure
Basis for specialization and coordination influenced primarily by strategy and by organisation size and diversity
Systems
Formal and informal procedures that support the strategy and structure
The Soft Ss’ Style and culture
The culture of the organisation, consisting of two components: Organisational culture: The dominant values, beliefs, and norms that develop over time and become relatively enduring features of organisational life Management style: more a matter of what managers do than what they say; how they spend their time
Staff
The people and human resource management processes used to develop managers, shape basic values of management cadre, introduce recruits to the company, manage the careers of employees
Skills
The distinctive competences—what the firm does best and what individuals do best
Shared values
Guiding concepts, fundamental ideas around which a business is built
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If one of the seven elements is changed, each of the other elements is affected. For example, a change in human resource systems, like internal career plans and management training, will have an impact on organisational culture (management style) and, thus, will affect structures; processes; and, finally, characteristic competencies of the organisation.
According to Dagmar Recklies1, when firms try to make changes, they usually focus their efforts on the “hard” Ss of strategy, structure, and systems, believing these are easier to change. “If we change our strategy,” says one managing owner, “won’t we get different results?” Traditionally, public accounting firms have taken this approach when starting a change process. Unfortunately, however, it is the wrong place to start.
Most companies and public accounting firms care less for the “soft” Ss of skills, staff, style, and shared values. In In Search of Excellence, Peters and Waterman observed that most successful companies work hard at these “soft” Ss. Few organisations, including public accounting firms, have taken their advice to heart. Because structures and strategies are difficult to build or refine when the organisation’s culture is dysfunctional, or values are not shared, “soft” factors can make or break a change process. The dissatisfying results of most corporate mergers, whether small or spectacular megamergers, are often based on a clash of completely different cultures, values, and styles, making it difficult to establish effective, common systems and structures.
You can be providing a standardised service with efficiency, application of skill and established systems, models and practices faster and better than anybody else (say a statutory audit) and be considered an efficient professional service firm. The fees that you will command will be above average to recognise skill and efficiency.
As against standardised offering one can provide experienced service as a customised solution to generic problems using judgment and technical depth of knowledge. The client proposition shall be “We have been through this before” i.e. Trust Us, We Know. In this spectrum an experienced professional service firm
1.
Dagmar Recklies is cofounder and managing director of Recklies Management Project GmbH. For more information see www.themanager.org.
Chap. 1 — Professional Service Firms — Strategy in alignment
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will command a premium (say, an Income Tax Appellate Tribunal representation or a unique valuation engagement).
Yet the third spectrum is the proposition of “We are the smartest brains around”. In this spectrum the CA firm is hired for creativity and imagination, for the uniqueness of analysis and state of art knowledge, pioneering concepts. In effect the professional service firm is promising a unique solution to complex problems (for example, Harish Salve appearing for Vodafone in the Supreme Court of India and Chief Justice S. H. Kapadia along with two other senior Judges on the bench hearing the arguments and deciding in favour of Vodafone).
The market positioning within a CA firm can therefore be summarised as standardised offering, customised offering, offering of experience and expertise and state of the art offering: 1. In standardized offering we should strive for low cost delivery systems and expect high volume and high leverage as profit drivers; 2. In the customised offering we are providing user friendly advice and “peace of mind” where the profit driver would be an above average fee and good leverage;
1.2.
3.
Offering of experience and expertise: Here a major, complex and ill-defined issue that the client has little or no experience of is resolved by real time diagnosis and judgment, resulting from experience of similar problems and in depth technical knowledge. This clearly commands high fees and low leverage;
4.
State of the art offering: Here we are providing innovative solutions “unheard of problems” with very little precedence. This it needs high level of diagnostic skills, state of art knowledge and creativity so as to command premium fees very low leverage and very high reputation of success.
Strategy Models and What Works Peter Drucker exhorted executives to ask the following five questions: 1. What is your mission? 2. Who is your customer? 3. What does your customer consider Value?