Improve your profits by reducing time costs to zero
03/06/2010 10:30:00
In its seminal 2003 report “The profitable and sustainable practice”, the ICAEW said that, as legislation and the business landscape become increasingly complex, there is no way that most practices can afford to develop all the in-house skills they need to meet their clients’ full range of needs. As a result the ICAEW recommended that:
“...there is an increasing need to make strategic alliances… with other organisations who can supply expertise they don’t have in-house, easily and efficiently.” (page 14)
In response to this recommendation, many practices have set up strategic alliances in the three key areas of advanced tax planning, financial services and business consulting. And as a consequence they report the following benefits:
- Substantially improved clients service
- Substantially increased revenues
- Substantially reduced partner working hours, and
- Substantially reduced time costs
In many cases the cost reductions are very substantial indeed – with the time cost element of fees usually being reduced to 10% or less of the relevant fees. And some practices say that their time costs are indeed much closer to 0% than to 10% of fees.
How to provide tax services at zero cost
Following the ICAEW’s advice, many successful practices now work with a number of carefully due diligenced tax planning specialists who can bring advanced tax planning solutions to the table for the benefit of their clients. Typically their arrangements work like this:
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The practice makes their clients and prospects aware of their strategic alliances with third party tax specialists – eg through seminars and one-to-one discussions etc |
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Where clients are interested the practice will introduce them to the tax specialist |
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The tax specialist does all the explaining – ie they describe the tax planning options that suit the client’s needs, explain all the pros and cons, including the risk-reward trade off, and answer all the client’s questions |
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The tax specialist will also do all the “selling” – although this tends to be very soft sell, since the potential tax savings are usually large enough to make it a no-brainer for many clients. |
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Where the client wants to go ahead with a piece of advanced tax planning the tax specialist agrees a value-based fee with the client – typically 25% of the tax that will be saved |
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The tax specialist enters into a separate engagement with the client, does all the technical work and bears all the engagement risk (so the time cost for the practice is generally negligible) |
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The tax specialist will already have signed a “no poach” agreement |
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As a result, client service is improved, and clients end up with very much lower tax bills than they would have done if the practice had not set up this strategic alliance |
The tax specialist never charges the practice a single penny for this type of arrangement. Instead they actually reward the practice by paying them a “payaway”:
- These payaways are fully disclosed to the client and retained under the terms of their engagement letter – so they fully comply with all relevant professional and legal requirements
- Payaways will typically be 10% to 40% of the fee paid by the client to the tax specialist. And given that the tax specialist will generally charge the client 25% of the tax saved, the accountant will typically earn payaways equal to 2.5% to 10% of the tax saved.
- As a result payaways are rarely less than £2,000 per participating client. And usually are in the range of £2,000 – £20,000 per client. So across a client base the total fee potential can be very substantial indeed. For example, I am aware of many practices earning well in excess of £100,000 in payaways a year. And I am even aware of firms that have earned over £100,000 in payaway fees from a single client. These fees are invariably very much higher than the firm would have earned under the traditional “do all the work and take all the risk” business model.
As a result clients get the very best tax planning advice and support, their tax bills are very much lower, and the practice earns substantially higher fees. In addition, the time costs involved in generating these fees are very small.
How to provide business consulting services at zero cost
The second type of strategic alliance many firms have set up is with a business adviser/coach/consultant who is able to offer advanced business advisory support to clients that is beyond the scope of the firm’s in-house expertise and/or capacity. These alliances typically work in a similar way as with tax specialists. The main differences being that:
- The consultant is often introduced to clients as a member of the practice’s extended team
- Again, the consultant never charges the practice a penny. But in many instances it is the practice that bills the client for the work, with those fees then being shared 75% to the consultant (who, after all, is doing all the work), and 25% to the practice.
The benefits from this approach include:
- Clients get advanced business advisory support that wouldn’t otherwise be available to them
- The practice adds a high quality profit centre, with no costs of any kind, and
- The practice improves its service levels and enhances its reputation
- Which in turn helps it to win even more quality clients
If you already have a strategic alliance in place with a business adviser/coach/consultant, make sure that you get to keep at least 25% of the fees they generate from your clients, since that is emerging as the market rate. Likewise, if you are starting a new strategic alliance in this area, make sure you get at least 25% from the outset.
How to provide financial services at zero cost
This is the third main area for strategic alliances, and it is probably the one practices are already most familiar with. Even so, the last few years have seen a number of new opportunities, industry benchmarks and market rates emerge. So my advice is to evaluate your current arrangements:
- Are the IFAs you work with giving your clients the very best possible advice and service? If you don’t know, find out. And change them if they are not.
- Are you earning at least 20% INITIAL COMMISSIONS, and are they based on the best possible LAUTRO rates? Renegotiate them if not.
- Are you earning at least 20% RECURRING COMMISSIONS, and are they based on the best possible LAUTRO rates? Again, renegotiate them if not.
- Do you have a watertight system for ensuring that you do actually receive all the commissions that are due to you? If not, get one fast!
Even in situations where all you are doing is referring clients to an IFA who is entirely independent of your practice, these 20% minimum initial and recurring commissions (on best LAUTRO rates) are rapidly becoming the industry standard. So make sure you get them. Because when you do, you will start to earn very substantial recurring fees with no associated time costs.
The bottom line
I have concentrated on advanced tax planning, business advisory and financial services here because they are the three areas where I mostly see firms forging successful strategic alliances. However, the principles apply equally to any area where clients have a major need, but your practice doesn’t have the in-house skill/capacity to meet that need brilliantly well. So what other profitable strategic alliances could your firm forge?
Of course I acknowledge that there are many detailed considerations to address before “going live”. And I also accept that this approach may not be right for everybody. But since it usually generates much better results and outcomes for client and accountants alike, it is clearly something that every true professional must at least seriously consider and evaluate.
And I say that because:
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It addresses the new reality – ie that the world is now so complex that no small practice can possibly do everything to the incredibly high standard that their clients deserve and their professionalism requires. |
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Forging alliances with genuine experts means that clients get a better service |
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Clients also get better outcomes - such as lower tax bills – so they are happier
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As a result, these happier clients will give you more referrals, and your client base and reputation will grow |
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You earn substantially higher fees |
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You earn those fees with very little time cost, since you don’t have to pay a single penny to the people who do all the work (ie no salary or employers NIC, no recruitment or training costs, no sickness, holiday or maternity pay etc) |
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It is always cashflow positive, with lots of cash coming in and none going out
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And because others are doing all the work, you have more time left over every week – which you can either reinvest in the practice and its clients, or you can use to reduce your personal working week and improve your work-life balance |
And for those reasons, it is also what the ICAEW recommends!
Steve Pipe - 7 May 2010
Free resources
The Tax Club has created a 10 step guide covering many of the practical details you must address before going live, and before you start to get the full benefits described above.
If you are not already a Tax Club member, I will gladly send them to you if you email me on stevepipefca@avn.co.uk
