So You Want to Compete: Lessons From the Leading Accounting Firms

From Los Angeles and New York to London and points in between, it seems every law office management conference of late has someone on the agenda addressing how to compete with the accounting megafirms. Strategies range from initiating strategic alliances and partnering to expanding the firm's services. It takes place against the backdrop of a legal marketplace that has never been hotter as firms enjoy record-breaking revenue increases.

To those with a view to what might lie beyond today's good fortune, it's clear the status quo is simply not viable. There is growing concern for the advances accountants have made in other parts of the world. Obviously, the profession has tough choices ahead.

Despite any rules forbidding multidisciplinary partnerships, top accounting firms have managed to put together international legal networks and become the biggest legal service providers in all the major European centers. It is a good bet that within the next five years, Arthur Andersen will reach its articulated objective of being one of the leading international players delivering legal services.

Let's look at this new breed of competition. Accounting firms long have used approaches that make their culture different in delivering value to clients. Perhaps by examining these approaches, we can understand accounting firms' notion that they can deliver legal services better than most law firms. This difference in culture between the two professions, seen as a whole, translates into an interdependent blend of management philosophy and client focus.

Client Satisfaction

If you ask any senior or retired attorney about their relationships with clients in "the good old days," they likely will tell you the lawyer was looked upon by most business people as the primary source of general business advice. Howard Rudge, senior vice-president and general counsel of E.I. du Pont de Nemours and Company, recently commented on his criteria for choosing firms: "I expect them to grow DuPont's business. ... Lawyers are always able to tell you what the law is. But I'm more interested in whether they are telling the business people how they can build the business."

Now, imagine what substantive answers you might evoke from your partners if you asked: "What do you now do to make your kinds of transactions or matters more valuable to clients, and to improve your level of client satisfaction?"

From my experience, you likely will find a few partners who are doing significant things but no one else in their practice group knows about them or learns how these partners are doing them. You'll find other partners who frankly "haven't really given it much thought." (After all, the client does seem to keep coming back!)

Contrast that with a recent survey of client satisfaction among 500 of America's corporate executives. Ernst & Young took top honors for offering practical advice, responding quickly to requests, giving real value for fees and acting proactively. According to this survey, conducted by Novak Marketing of New York, client satisfaction ratings were very close among all the Big Five firms. Arthur Andersen came in a close second.

These executives were asked to rate their current firm and their perceptions of the other firms according to nine quality service attributes. Novak then weighted the results based on how important the clients regarded each characteristic. For example, among the largest companies, executives most admired Arthur Andersen's reputation for possessing a wide range of skills, understanding the client's business, displaying industry expertise, offering practical advice, deploying a capable staff and taking initiative.

In 1993, Coopers & Lybrand (now PriceWaterhouseCoopers) began measuring and rewarding its partners on a qualitative as well as quantitative basis. Through the use of "regular" client surveys, management gauges partners' effectiveness in serving clients. By interviewing and surveying staff, Coopers & Lybrand graded partners on their ability to mentor, train and manage personnel on client matters.

Then there are those law firms that have attempted to measure client satisfaction "once, about two years ago and we seemed to be doing okay."

Understand the Client's Business

Let's try a little exercise. Have each partner in your practice group take a blank sheet of paper and list the partner's largest and most important clients. Include clients who represent emerging companies that currently have or soon may have some form of international business transactions. This list represents the most likely targets of future accounting firm interest. How susceptible are these clients of yours to the courtship of accounting megafirms?

We're not finished. Now, have each partner note next to each company "the top three issues that are keeping executives in that company awake at nights."

Be assured your accounting competitors will score well with this exercise. How vulnerable do you feel now?

The lesson: To thrive, specialize. To really know a client's business, you have to understand the client's industry.

The fastest-growing accounting firms report the strongest niche practices. The 1998 edition of Accounting Today's "Top 100 Tax and Accounting Firms" cited the most popular industries (from manufacturing to auto dealerships) and niche services (from nonprofit organizations to practice management for doctors) on which these firms focus. Many law firms haven't considered these specialty areas. But even local accounting firms now are doing business coast to coast, built on strong, industry-focused specialties.

In fact, accounting firms increasingly look to develop expertise beyond conventional industry groupings. Example: companies owned and operated by women. Women have started more than half the 3 million businesses formed in the United States in each of the past five years. Industry sectors that most attract women include health, education, child care, information networks and beauty. One in every 10 biotech companies currently has a woman founder and CEO.

What law firm in your jurisdiction is recognized as the preeminent authority serving women-owned companies?

Law firms need to all but scrap their historical departmental structures and move toward small industry teams. It is much easier not just to manage smaller groups effectively but to organize small groups according to client needs and industry focus areas.

Where to start? First, get your current client base organized by S.I.C. codes. Next, look at where your firm already may have industry expertise.

Harness Knowledge

We are in an age of knowledge. The clear winners will be the smartest firms.

The implications are profound. Intangible assets like expertise, intelligence, speed, agility imagination, maneuverability networks, passion, responsiveness and innovation all facets of "knowledge" become critically important.

Most law firms are not confronting the realities of a knowledge economy. They're not focusing on (or investing in) assembling the pieces to fully capitalize on the potential of their smart partners and smart technologies. Instead, they often woodenly follow a rigid "plan" and even more rigid annual budget both of which become obsolete in the face of new eruptions of knowledge (like unexpected innovations from unexpected accounting firm competitors).

These accounting firms (and their consulting arms) trade in what they know. They are investing millions in major strategy initiatives to manage knowledge as a competitive advantage.

Imagine the day (very soon) when you have to compete with an Arthur Andersen law firm. Are you aware this firm can send each partner to a client's office armed with a 35,000-page three-ring binder called an intranet? That is what Andersen had in mind when it decided to move the entire body of firm knowledge to an intranet called KnowledgeSpace.

During the last year, Andersen has taken substantive content from each of its major practices and ported the material to the new system. Such initiatives aren't trivial. Andersen spent about $1 million and eight months designing and building its system, including three months porting more than 35,000 pages of content to the intranet. Result: The intranet has become integral to the firm's strategy.

Using KnowledgeSpace, a lawyer can bring the firm's collective knowledge to bear on any client problem. One professional, for instance, visited a client company that needed help controlling its growth. Accessing KnowledgeSpace, the professional quickly found answers posted by Andersen's Global Best Practices Group. The client, impressed, immediately could see the firm's value beyond the value of the individual partner.

Ernst & Young has focused on knowledge management as a major business process since 1993. To help partners share and reuse knowledge, E&Y has created what Dick Loehr, a director of E&Y's Center for Business Knowledge, calls "communities of interest." There are 70 firmwide networks of people with common interests and expertise. Each is supported by its own database of wide-ranging information.

For example, in serving the automotive industry, a law partner at Ernst can access knowledge about the industry and issues that concern its top players. The partner can find out about product development issues or what's being done about specific problems. The network's database reveals who has deep background in the industry, what's in their risumis and where they've been speaking. The partner also could find out whether E&Y has specific relationships with academic researchers who cover the industry.

Before its merger with Price Waterhouse, Coopers & Lybrand created its own version of knowledge management, the Knowledge Management Group, to oversee strategy, technology and learning. It launched the Knowledge-Curve, an intranet that puts all kinds of company and competitor information in one easy-to-reach place. The firm estimated it could save more than $1 million a year if the intranet shaved just one hour a week from the time professionals spend looking for information.

By way of a special link, the firm's clients could access daily tax legislation updates, ask questions of professionals and get answers to questions most frequently asked of firm experts.

Investing in Long-Term Development

How do you compete with firms that are prepared to live with lower profits per partner so some of those profits can be invested for long-term market dominance?

In most law firms, the philosophy seems to be: "Why should partners invest any of this year's profit in the possibility of a payoff far into the future?"

Meanwhile, accounting firms have transcended the limits of conventional partnership thinking. They can create a business organization capable of making long-term decisions and investments on a global scale.

Some of those investments have been dedicated to "revitalizing" what clients previously considered a commodity service, making it more valuable. Not long ago, Arthur Andersen announced a new Business Audit system. This major advance in auditing financial statements is designed to give clients better, more timely insights to improve financial reporting processes and to manage business risks better.

Three years (reportedly more than 2 million collective hours) in development and training, the Business Audit is said to represent the latest, most significant enhancement ever of Arthur Andersen's assurance methodology. Andersen says more than 125 teams in 10 countries field-tested the system.

And how do you compete with firms that invest a significant part of their annual revenues in training and developing their people? The world's biggest accounting firms long have understood something most lawyers still need to recognize: Investing in training and retention pays dividends.

In 1998 (before its merger with Coopers) Price Waterhouse announced an investment of more than $100 million in training an average of $9,500 per professional, representing approximately 6 percent of 1998 revenues. Its objective: to open the most technologically sophisticated global training facility in the professional services industry. Costing $52 million, it will accommodate 750 professionals at one time.

By contrast, in a survey of 1,200 laterally hired partners at 253 law offices, attorney search consulting firm Major, Hagen & Africa codified factors that make laterals satisfied with their new firms. Alarmingly, even the highest-ranked firms scored only average or a little above in working to integrate laterals into the firm culture.

Meanwhile, at Ernst & Young which recruits upward of 5,000 people a year an internal study showed that new hires who experience a thorough orientation and integration process are twice as likely to remain with the firm longer than two years. Last year, the firm created an Office of Retention and hired its first national director of orientation. Along with its counterparts, Ernst is scrambling to show new laterals many of whom are lawyers it can be a very rewarding environment in which to practice.

What drives all this and one key to understanding the accounting megafirms is the focus on management. Management is the preserve of a distinct class of professionals whose only job is to manage. At Arthur Andersen, these professionals comprise Andersen's business caste and are crucial to the firm's success but their importance often is overlooked by outside commentators. The management of Andersen is in the hands of full-time business people who are not trying to be practitioners. They are motivated to develop business and to think about nothing else.

If business development requires a substantial long-term investment, they will arrange it. The investment may hit current profits or penalize partners, but it will not hit the managers. They are paid specifically to make this sort of decision. Only by doing their jobs will they earn their salaries and profit shares.

The Lessons

Law firms will have to take some interesting approaches, to remain competitive. Change is always a difficult prospect, especially in the midst of the current legal boom. But firms must start looking at all the options and thinking the unthinkable. They must invest time and capital in client satisfaction, industry focus, knowledge capturing, training, and management commitment.

The good news is that most firms can afford to start serious initiatives now, while robust economic conditions allow.