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CCH-JOURNAL, CPA Practice Management Forum October 2006, Adding Niches: Getting Started in a New Direction

Adding Niches: Getting Started in a New Direction

It wasn't too many years ago that most accounting firms did little, if anything, in the way of niches.

"We hung out our shingles and that was it," notes Gale Crosley, principal at Crosley + Company/Atlanta. "We certainly didn't focus in on being known for something."

Plainly, that has changed. Buyers are more sophisticated, and they want more for their money. In addition, the profession is more competitive, so providers must differentiate.

"We are in a mature profession," Crosley says. "When you are relatively new, everybody tends to be a generalist; there's plenty of work for everybody. When a market becomes mature, it becomes very sophisticated."

In addition, she notes the impact Sarbanes-Oxley has had on the profession, creating a multiple-provider scenario. SOX encourages an environment in which clients shop for the best providers, and work filters down from the Big Four and national firms to regional and large local ones.

"Large opportunities are coming down market," Crosley notes. "We have more opportunities to position ourselves as a firm that specializes in something."

Defining the opportunities

As with many things, knowing where to start can be the hardest part.

Jeff Rattiner, president and CEO of JR Financial Group/Denver, helps accounting firms set up financial planning and investment management niches.

A firm looking to begin a niche first must determine whether a market truly exists or whether it is considering offering a service just to please one or two clients. Rattiner suggests polling clients, sending out a quick five-to-10-question survey to determine their interest levels. He has found that if a firm sends out a survey and offers clients a free 30-minute consultation to see if they would find the potential service beneficial, as many as 80 percent of clients may come in for the consultation. A figure like that should be enough to indicate that a significant opportunity exists.

Sam Allred, chairman of the Upstream Academy/Helena, Mont., conducts management presentations on beginning niches. He says in general, firms need to set up a process for identifying, launching and building niches. The front part of that process is research. A firm's leaders should ask themselves:

Determining whether a promising opportunity exists is a matter of conducting enough research about the industry and the ecosystem and finding an unfulfilled need, Crosley says. At the heart of that research is old-fashioned conversation with people in the field: Instead of a nose-to-the-grindstone attitude, CPA firm leaders need to keep their noses to the wind.

"When you talk about issues all the time to people in your ecosystem, you're going to find gaps between what's needed and what's there," Crosley says. "They're all over the place...Your antennae are always up."

Crosley suggests talking to the thought leaders in an industry, to other providers of goods and services to that industry and to likely buyers of your services. In addition, talk to competitors: Seek out a gold-standard CPA firm that is aggressive in what it provides to the industry. Perhaps you can partner with that firm or just use it as an example to structure your practice.

But don't take on big fish, Crosley advises: Go where they are not. "If your market is flooded with large firms that provide cost segregation services, maybe you shouldn't be doing it."

Know what makes a niche

Once you decide to begin a niche, commit to it. Allred says firms need to define for themselves what it means to have a niche.

"Firms use the term 'niche' all the time when they really just have a few clients in a particular industry," he says. "If you're going to call something a niche, get serious about it. It has tremendous potential. Generally speaking, you could take about any niche and make it successful if you really focused on it."

Firms, Allred continues, "need to really define what it means to have a niche. It may not be about having a certain number of clients in a particular industry; it may be about being recognized as the expert in an industry."

He believes having a niche means, among other things, that the firm:

The infrastructure

Before you launch a niche, you must identify whether you have the ability to make it successful, Allred says: Visit with key clients to determine their level of interest. Put together a business plan. Find out who within your firm is interested in being on the team and whether you have a leader in place for it.

"One of the main reasons niches fail in our profession is that the owners are not committed to it --they are supportive of it --and those two things are miles apart," Allred explains. "At the end of the day, being supportive does nothing for a firm."

Putting the right leader in place is a critical part of the infrastructure. Should you designate an existing partner or manager, or bring in someone from the outside?

If you hire an outsider, make sure he or she has not only subject-matter expertise but also the business acumen to get a new niche off the ground, Crosley advises. As you make initial research calls to people within and serving the industry, you likely will find people who fit this bill.

Using existing staff can work well also, but Allred warns that the option brings its own complications.

"If they're good enough to launch a new niche, they're already swamped," he says. Firms make mistakes when they don't relieve the new niche leader of his or her existing responsibilities and clients. "If you bring somebody from within, the biggest decision a firm has to make is, how do you free that person up?" It might mean moving $800,000 of business --rarely an easy task but necessary if the new niche is to succeed.

Next, make sure your entire team has or gets the expertise it will need. Of course, classes and other traditional training methods are always an option, but some niches --R & D tax credits, SAS 70 work and cost-segregation work, for example --require a great deal of investment in learning to grab a significant share of the market, Crosley notes. She suggests a firm might consider partnering with another firm that already has the expertise and a methodology in place.

Some firms go through CPA associations to find expertise in a particular niche. "You can create a relationship there that will get your practice up and running," Crosley says.

A lead-off homerun

The key to launching a new niche is to achieve success early and build on it, Allred says.

"The goal with your first client is not to make money," he notes. "The goal is to create a raving fan ... to make them a referral source. That ought to be the goal for the first three clients."

He suggests in many cases, the best thing a firm can do is bring in an expert to help with the first client. Give that first client what Allred calls "Level-10 service" or "at least Level-8 service."

"Who knows how to do a Level-8 job the first time?" Allred asks. "You need an expert to help you do that."

Crosley also is a firm believer in the importance of early success.

"A lot of firms think what you should do is create a four-color and send it out to a bunch of people" without doing research, she says. "That's how products are brought to market but that's not how services should be brought to market. Services should be brought to market in a small way with a few early adopters. Get a few successes and then announce it to the world."

Early adopters willing to test your niche service can help you perfect it. If, for example, your firm conducts business valuations but would like to begin a different type of valuation, such as the valuation of goodwill, an early adopter program could be ideal, Crosley says. Let the client know this is a new service area for you and that you would like some help getting it right. That relieves you of the burden of trying to look like an expert with years of experience when you are not, and the client gets advantage pricing.

"If you get emotional buy-in from the client, they have an interest in the success," she explains. "When you can get them feeling like they're doing it with you, it's the best of all worlds because they feel like they're helping you succeed and they can help find your next client."

Crosley recommends a firm engage up to three early adopters. By the time you are done with their work, you will have figured out the message that will resonate with future buyers. You will have figured out what issues are facing your market and how to solve them. And you and the early adopter can sit down and determine where you should go next: Hopefully, the early adopters will help you get there by introducing you to industry leaders and to other service providers.

Planning ahead

You need a plan to succeed beyond the first few clients. First, standardize your new niche service, Allred advises. "Give the appearance that you know what you are doing and can replicate the success."

Standardize everything about the process, from the kind of clients you want to look for and how you screen them to how you determine which clients to take on. Standardize your proposal process, your engagement-letter process, how you plan every engagement, your progress reports, your implementation tools, and your plan for following up.

"The more you standardize it, the easier it is to market," Allred says.

In addition, you need a plan to grow the niche. Identify what milestones you must reach to achieve success.

"A lot of firms put a lot of emphasis on building a niche, but they don't have a plan to grow it," Allred explains. When that happens, the niche stagnates.

And, make sure your firm has the ability and willingness to commit to the plan financially.

"If they're going to get serious about niches, they need to create a cash reserve or an investment pool that they can draw on to launch new niches," Allred says. "If you don't have an investment pool, then partners make a decision based on how the new niche is going to affect their compensation that year."

He recommends setting up a niche "treasure chest" that won't affect partner compensation; it leaves partners free to consider what is best for the firm in the long run. How much money is needed in the treasure chest? Allred says that depends on how aggressive a firm wants to be in building niches.

Selling it

When it comes time to sell your new service, boast on your early successes. Crosley suggests writing an article about the early adopter experience. Post it on your website and send it everywhere: to new prospects, to friends of the firm, to trade publications, to your early adopters so they can use it in their marketing efforts.

"You're displaying your thought leadership, which will be critical to having people buy in," Crosley says. "Your articles are going to show them that you understand their issues at a very deep level."

When looking for new prospects to sell your service to, try your existing client list first.

"The average CPA firm has 167 clients," Rattiner says. "That alone should get you started for a couple of years, just working this database and cross-selling them."

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