"It is not enough to manage results - The real potential for improvement lies in better understanding and managing the process."

Geary Rummler & Alan Brache

Much has been written about total quality management (TQM), often describing how TQM can be applied in the manufacturing sector. However, one aspect of TQM, continuous process improvement (CPD, can also be applied in a small CPA firm. CPI is a structured approach that allows an organization to continuously enhance client satisfaction by improving practice and administrative processes.

Process Quality

Dr. W. Edwards Deming, who played a major role in the development of TQM, defines quality as "a predictable degree of uniformity and dependability at low cost, suited to the market." While Deming was referring to a manufactured product, the definition can be applied to services produced by a CPA firm. Another view of TQM is that it comprises a group of ideas and techniques for enhancing competitive performance by improving the quality of products and processes. This explicitly acknowledges the importance of process improvement on competitive performance. A process may be defined as the sequential integration of people, materials, methods, and machines to produce a product or service. Customers for products and services exist both inside and outside a company. In a CPA firm, an inside customer for an audit staff person is an audit manager, an outside customer is the client. Both customers must receive quality services.

All products and services are produced and delivered as a result of processes. Examples of processes in a CPA firm include professional staff time reporting and client billing. Staff often follow a particular process in time reporting such as entering their time in a personal notebook, then transcribing the notebook entries onto a timesheet. Finally, individual timesheet information may be transcribed and accumulated on a client timesheet. A CPI initiative directed at improving the staff time reporting process could result in a reduction of steps in the time reporting process. To improve any process, it is necessary to first identify the value-added activities and the nonvalue- added activities in the process.

A value-added activity is an activity that converts resources into products or services consistent with client requirements. In an audit setting, a value-added activity is inventory valuation; consumers of the audit report receive value when inventories are fairly stated.

A nonvalue-added activity can be eliminated with no deterioration in product or service functionality, performance, or quality. For example, during an audit, writing a review note is a nonvalue-added activity because the time spent writing the note does not increase the value of the audit to the client.

Process improvement results in cost savings and a better product or service being produced by the process. Processes can be categorized as either practice processes or administrative processes. An example of a practice process would be the preparation of a tax return. The time required to complete this process is referred to as "cycle time." The cycle begins with the start of the preparation of a tax return and ends when the tax return is completed. A firm would improve the process with the hope that cycle time would be decreased and the quality of the tax return would improve. An example of an administrative process is the staff time-reporting process previously mentioned.

Practice and administrative staff form CPI project teams and use problem solving tools to enhance client satisfaction and identify and eliminate waste in practice and administrative areas.

High Potential Project Areas

Five practice and administrative areas appear to have high potential for improvement from a CPI effort - internal accounting and administrative functions, client service and communications, practice development, specific procedures to reduce audit cycle time, and specific projects for the tax department. An outline of these practice and administrative project areas is presented in Exhibit 1. Following are some illustrative CPI projects.

Internal Accounting and Administrative Functions. One project focused on professional staff time reporting procedures. The objective: to standardize and simplify time reporting, in order to reduce the potential for lost revenue due to errors and late reporting. When the CPI team documented the time reporting process, they found multiple areas of concern. Staff occasionally posted time to inactive clients or jobs, which meant that chargeable time ended up being nonchargeable. Math errors were common, as were late time sheets. Also, staff seemed to be taking excessive time completing and submitting the timesheets.

As a result of the CPI team effort, the firm purchased a user-friendly software program which allows time information to be entered from an individual's office computer. This new process eliminated a significant amount of paperwork and reduced the errors.

Client Service and Communications. A fundamental TQM principle is that the client is first and the firm exists to provide value to the client. An important aspect of this is identifying client needs.

One firm developed a survey of client satisfaction for their management consulting clients. The firm wants to learn which services are adding value for the client and which are nonvalue adding. Once this is determined, then processes can be redesigned. The survey is being sent to clients following completion of consulting assignments.

The same firm also improved the audit-delivery process. Now, staff spend more time working in the client's office rather the firm's offices. There was a perceived value to the client when the audit staff was visibly present. The TABULAR DATA FOR EXHIBIT 2 OMITTED client was able to see the staff performing useful tasks, and the client better understood the reason for the audit fee.

Practice Development. Proposal preparation procedures have been identified by one firm as processes which can be improved for both audit and consulting. This includes the planning phase of the proposal, as well as the delivery phase of either audit or consulting services. Further, this firm wants to shorten the lead time required before a proposal can be delivered.

Reduce Audit-Cycle Time. There are several CPI approaches to reducing audit cycle time.

* Avoid handling data multiple times. Excessive data handling provides no value to a client. One firm networked their computers and is now able to download client data files and reduce workpaper preparation, which also addresses the goal of reducing nonvalue-added activities.

* Schedule staff more effectively. Staff frequently were sent to clients who did not have the necessary workpapers prepared. This resulted in significant nonproductive staff time. Now, more careful scheduling is done so that the appropriate workpapers are available when the staff arrives.

* Reduce cycle time by increasing audit-partner participation in planning. Increased involvement with the audit on a day-to-day basis should decrease the likelihood that, at the conclusion of the audit, the partner will find that critical work was not done. Closer partner involvement reflects a desire to build quality into the audit while the work is in progress, rather than at the conclusion of the audit.

Tax Department Projects. Workload compression is an acute problem for small tax practices with many Subchapter S clients. Subchapter S clients almost always have calendar year-ends, creating a particularly sharp increase in the amount of work performed during February to April 15th.

One answer is to automate where possible and cut down on the paper flow. One firm analyzed the tax return preparation process, which involved preparation of multiple input sheets and multiple reviews of the tax return. If even a single error was detected, the entire return was redone. Now, the tax practitioner usually sits face-to-face with the client and enters tax data into a networked PC. There are savings for the firm in terms of both generating less paper and not having to store it. Further, the tax practitioners are able to do "what-if" tax planning for clients sitting across the desk from them.

Project Cycles

Having identified a potential area for the application of CPI, the CPI Team is ready to begin a project cycle, typically lasting from six to 18 months. There is a specific series of steps to be followed. Each step is significant, and TQM literature, as well as some practitioners, strongly warn against trying shortcuts.

Assuming a CPI effort - reducing the total time required to process telephone calls received by a switchboard - the 10 steps in a CPI team project cycle are stated and illustrated as follows:

Step One. Partner group identifies high potential projects and prioritizes them. In most firms, there are probably several processes which are good candidates for a CPI initiative. The telephone call project was one of many that could have been chosen. While ideas for CPI projects may originate at any level of the firm, CPI is almost always a bottom-up effort. Ideas for improving a process generally originate at the organization level where the process actually occurs. Small CPA firms have a distinct advantage over larger firms: There are fewer levels in the hierarchy, therefore, there probably will be better communication of process improvement ideas. However, unless the decision makers - the partner group in the small CPA firm - buy into the project, the chance for success is reduced. Cost/benefit analysis is not quantified during this step.

Step Two. Partner group selects the project. The first CPI project is the "demonstration project." The success or failure of the demonstration project is critical to the acceptance of a CPI program. The partner group and others in the firm will either be encouraged or discouraged by the results of the first CPI effort. In selecting the demonstration project, the partner group should choose a process which has a good chance for demonstrable success. The firm should be able to recognize that benefits clearly exceed costs. The telephone call project was an easy first choice.

Step Three. Organize a small CPI team. Utilize five to as many as 10 people; most teams have about six members. Teams usually have at least one member from each level of the firm, from staff to partner. The team should be sufficiently cross-functional to represent all departments involved in the process. After team members are identified, the team selects its leader. Frequently, the team leader is a lower-level person in the hierarchy but with enough experience and respect of the group to be able to accomplish results. Some firms restrict partners from being team leaders.

A new CPI team should be selected for each project. It is probably impossible to have a single team capable of addressing all CPI projects, even in a small CPA firm. One team would simply not know enough about processes in the various areas of the firm - tax, audit, and consulting.

Step Four. Educate team members about basic concepts and techniques of TQM, CPI team building, and problem solving Team members must be able to use the seven basic TQM problem solving tools - pareto charts, fishbone diagrams, histograms, flowcharting, scatter diagrams, control charts, and run charts. These tools are very useful in analyzing the process to be improved. There are many good books and articles about TQM and CPI. One basic text, Essentials of Total Quality Management, by Richard L. Williams (American Management Association, 1994), clearly presents TQM basics, including the seven basic tools. A second, Reengineering the Corporation, by Michael Hammer and James Champy (Harper Business, 1993) focuses on the experiences of large companies; it is, however, still relevant to smaller firms. At one firm, CPI team members learned the fundamentals of the seven basic tools during three half-day sessions provided by the firm. One or more of these tools will be used by the team in step six.

Step Five. Document processes related to the project; identify performance measures and improvement targets. Team members must clearly understand a process if they are to improve that process. In the telephone project, this means carefully observing the process by which calls are answered and routed throughout the firm. At the same time the team documents the processes, it also identifies performance measures and improvement targets. Performance measures refer to performance before the CPI effort, in this case, an average number of 1,380 calls per day. The improvement target is 700 telephone calls per day.

At this point, the partner group again becomes involved in the CPI effort by reviewing the work of the CPI team. The CPI team presents a cost/benefit analysis of the project to the partner group for approval. If it appears the benefits from CPI will only slightly exceed the costs, the proposed project goes no further. However, in many firms it is relatively easy to identify projects in which benefits will almost certainly exceed costs by a wide margin, The telephone project was in this category. If the partner group approves the work of the CPI team, they reaffirm their commitment to the CPI effort.

Step Six. Apply one or more of the seven basic tools to identify problems and their root causes. A pareto chart could be used to rank process problems. The chart organizes and portrays data in a way that helps people to understand the present performance of activities and processes. Application of the problem solving tools is usually a time consuming process. It is, however, necessary to show where the process can be improved. In the telephone project, a root cause for the increasing need for telephone operators was an insufficient number of direct incoming telephone lines.

Step Seven. Identify alternative corrective actions. This step resulted in the installation of more direct telephone lines and voice mail.

Step Eight. Test temporary corrective actions. For the telephone project, a temporary corrective action might be installing a few direct telephone lines and monitoring the results of this action. If this temporary action results in a decrease in the number of calls handled by the switchboard, the team would evaluate whether this action is cost justified. Do the benefits received from additional incoming telephone lines exceed the cost of the lines?

Step Nine. Implement corrective actions if test results from step eight indicate actions are useful and cost effective.

Step Ten. Monitor and review implementation of the CPI project and prepare a brief project completion report, which includes

* comparison of the planned completion date with the actual completion date,

* comparison of budgeted hours with actual hours,

* planned and actual performance measures for the process (for the telephone project, the target was 700 calls per day and the actual was 852 per day),

* a cost/benefit report, which shows the actual costs of the CPI effort and the benefits realized, and

* suggestions for other CPI projects that came to light during the CPI effort.

Finally, the cycle begins again, starting with step two.

CPI Results Are Quantifiable

The results of a CPI effort are quantifiable. As indicated above, one firm completed a successful CPI project which focused on standardizing and simplifying professional staff time reporting procedures. At the conclusion of that effort, they summarized the areas where improvements had been made. They also estimated annual savings for the first year, the one-time labor and out-of-pocket costs, and the CPI team satisfaction. Using hypothetical amounts, Exhibit 2 illustrates how the firm quantified the results of the CPI effort. It shows that the amount of staff time posted to inactive clients or jobs was decreased by 50%. That is, the number of incorrect postings were decreased to one-half of the number of incorrect postings occurring before the CPI effort. Note that the annual savings are an annuity - they will occur indefinitely, while the costs are typically one-time only.

What's in it For a Team Member?

Almost without exception, staff react positively to CPI efforts. A major reason is that staff persons normally have significant input into a CPI effort and want to be heard. CPI is a bottom-up effort.

Everyone in the firm should want to work for the betterment of the firm and the firm's clients. However, top management must explicitly state that CPI productivity improvements will not result in staff layoffs. An individual is never asked to participate in eliminating his or her own job, or that of another staff member. In the telephone project, those people who had been working the switchboard were redeployed elsewhere in the firm where they now perform value-added activities.

Team members are recognized, but not rewarded financially. In one firm, recognition meant that the firm took all team members to lunch one day. At the luncheon, they all received a token of appreciation, in this case a small desk clock which bore an inscription indicating membership on the CPI team.

How Does a Firm Benefit From CPI?

In today's competitive market, clients demand more; they frequently expect their CPAs to be business advisors in addition to being tax preparers or auditors. They are increasingly asking for more value.

Client service and communication is an area where CPI can be most successful. CPAs can determine the needs of clients, and through process improvement, they can respond more quickly to those needs.

Smaller clients are also sensitive to rising fees. Frequently, they want their CPAs to provide a constant or increasing level of service. One reason smaller CPA firms survive and prosper is that they consistently deliver a high quality product. Anecdotal evidence suggests that many small CPA firms have a culture of quality. However, Michael Hammer, a co-author of the book, Reengineering the Corporation, warns that, "The big guys are learning how to act small; so the small guys have to learn to be even better." Small CPA firms can use TQM and CPI principles to become even better.

EXHIBIT 1

HIGH POTENTIAL PROJECT AREAS FOR PROCESS IMPROVEMENT

1.0 Internal accounting and administrative functions

1.1 Time reporting procedures 1.2 Billing procedures 1.3 Acquisition of supplies and services 1.4 File management, storage and retrieval 1.5 Health-care cost control and reimbursement 1.6 Internal communications.

2.0 Client service and communications

2.1 Client-satisfaction survey and client-needs identification 2.2 Improving client-service delivery process 2.3 Communications to clients 2.4 Communications to client-service team

3.0 Practice development

3.1 Proposal preparation procedures 3.2 Improving current practice development programs 3.3 Communications to existing and potential clients 3.4 New service development

4.0 Specific projects to reduce audit cycle time

5.0 Specific projects for the tax department

Jack M. Ruhl is an assistant professor of accountancy and Roger Y. W. Tang is the Upjohn Chair of Business Administration, both at Haworth College of Business, Western Michigan University. The authors wish to thank Mr. Craig Fitzgerald of Plante & Moran and Ms. Jacqui Winship of Ernst & Young for their assistance.