CHAPTER

6
ORGANIZATION AND
MANAGEMENT OF
MAS PRACTICE
LEARNING OBJECTIVES

After studying Chapter 6, you should be able to:

1. Understand the basic techniques in developing

MAS Practice.
2. Describe the organizational structure of the MAS
Practice or Division.
3. Understand the role, responsibilities and
qualifications of the personnel in consultancy
practice.
4. Explain how the target level of competence
required of management consultants is defined.
5. Describe the steps in starting the MAS Practice.
6. Identify the problem areas in rendering MAS by
independent accounting firms.
7. Understand and apply financial management
principle in a consultancy practice.
8. Understand how to prepare a business plan for
MAS Practice.
 CHAPTER 6

ORGANIZATION AND MANAGEMENT

OF MAS PRACTICE

Developing MAS Practice

If one wishes to be a consultant, he or she must first assess his or her own talents
and expertise. In addition, one needs to review his or her communication skills,
both oral and written; sales ability; ability to focus on a project and carry it to
conclusion and ability to maintain objectivity. One must also evaluate his or her
business and professional judgment.

The scope of a consulting practice is defined by the expertise and experience of

the consultant within the practice. This can be technical consulting in
a) engineering,
b) industrial management,
c) marketing,
d) business management, or
e) financial areas.

To be successful, it is extremely important to recognize the firm's background

and expertise so that the scope of the consulting practice can be well defined for
proper communication to the potential clients. The firm should not "over sell"
these abilities or accept work outside the firm's capabilities.

Prior to entering into a consulting practice, the prospective consultant should

conduct market research to identify opportunities in the marketplace.

This will specifically involve

a. study of the listings of management consultants
b. survey of local CPA firms to determine which are offering consulting
services
c. determination of possible oversaturation of consultants in one's specialty
area.
d. identification of new services that may provide a competitive edge.
 Organization and Management of MAS Practice 111

Although economic statistics and financial information concerning consulting

practices are not readily available, most of this information may be obtained
from word of mouth discussions with other consultants and knowledge of the
local marketplace.

Quite frequently, a consultant gets started when his or her clients indicate that
they would like to use his or her talents as a consultant. This limited number of
clients will provide a sufficient base for the individual to get started and maybe
even keep busy started on a full-time basis.

In any case, a practice development program needs to be initiated to target

potential clients. Market research is important both for the new (inn and
established consulting practice. Every practice needs to have a continual flow of
work and steady stream of new opportunities and new contracts. Some effort has
to be made to reach out, contact potential clients and make them aware of one's
consulting services.

Equipped with necessary information, one needs to establish an operating plan

for the practice - that is, to set goals and objectives. These goals and objectives
should include
a. a desired income level,
b. potential clients, and
c. strategies to obtain those clients.

Based on the services one proposes to provide, the types of potential clients that
could benefit from those services and the potential amount of work, the
practitioner can now identify staffing requirements and financing needs.

To develop a meaningful and worthwhile network, the practitioner must

establish quality contacts and educate the network as to the type of services he or
she offers.

If one has built a quality network, some contacts will continually refer work to
the practitioner. These productive contacts develop and grow based on a solid
personal relationship and the consultant's commitment to providing excellent
service.
Building a successful network requires keeping the practitioner's name in front
of clients and contacts. This can be done through client newsletters, articles,
112 Chapter 6

seminars, entertainment, or even periodic phone calls. In any event, there need to
be consistent, intermittent reminders to the network about the consultancy firm
and its services.

ORGANIZATION OF MAS DIVISION

Management advisory services of an accounting firm may be rendered by a man

who is primarily an accountant or by a specialist. A firm with large clients may
find it necessary to train some of its accountants as specialists in MAS or to
engage men with experience and training in engineering, marketing, economics,
EDP, psychology, etc. A consulting firm should periodically assess its needs
with respect to in-house knowledge and skills. Upon comparing the knowledge
and skills held by its current consultants against its needs, the firm can determine
the extent of its deficiencies. Should such deficiencies exist, a consulting firm
can apply these approaches.

1) It can employ additional consultant with adequate knowledge and skills

Or
2) It can undertake a variety of "staff development" activities that are
intended to endow the presently employed consultant with needed
knowledge and skills.

Staff Pyramid and Fee Structures

A simple approach in staffing a consulting practice is to break the practice into

pyramids of from five to fifteen people. Depending upon the practice specialty
and the particular firm's philosophy, the size but usually not the structure of the
pyramid may vary. A graphic depiction of the consulting pyramid is shown
below:
Level
Partners
Principal
1 Director

Senior Managers
Managers
2
Supervisors

Senior Consultant
3 Senior

4 Associate Consultant
Staff
 Organization and Management of MAS Practice 113
Each pyramid is built around a partner, principal or director. In large practice, there will be
multiple pyramids. The numbers in the pyramid refer to the typical number of personnel at each
level (per pyramid).
Partners, Principals, Directors
The top of the pyramid contains the partner, principal or director. This individual is
typically the most experienced highly paid professional and is normally responsible for the
successful completion of engagements, dealing directly with clients and for selling work.
Principal activities of partners include performing practice planning, administering and
developing practice, consulting with top-client managers, approving engagement reports,
and managing client crises.
On certain occasions, a consulting firm may determine that its practice requires additional
strength at the partner level. One such occasion could arise if the gap between services to be
offered, and the ability to offer them, is so great that recruitment at lower levels cannot be
expected to produce the desired results.

In the event that a new partner is to be recruited, the principal consideration must be the
external reputation of the candidate as a highly competent consultant. The firm should
proceed cautiously, since the recruiting process is extremely involved. In addition to the
candidate's reputation for competency, the recruiting firm should consider his or her
probable (1) remaining period of useful and productive service to the practice and (2)
compatibility with the existing practice and current partners.

Senior Managers, Managers, Supervisors

The next tier of the pyramid is made up of senior managers, managers, and supervisors. These
individuals perform week-to-week management of the engagements and are responsible for
identifying new client prospects and assisting in the sales process. Principal activities of
managers include planning engagements, evaluating consultants, supervising consultants,
writing proposals, reviewing working papers and reports, consulting with client managers.
and serves as expert in one or more applied knowledge areas.
114 Chapter 6

Many consulting firms recruit for their practices mainly at the manager
classification level. Their reasoning is that a manager is likely to be of
worth from the beginning, since his or her personal competence will usually
determine the success of individual engagements. A firm that intends to
recruit a manager will probably seek the following attributes:
1. Previous successful consulting experience
2. Previous successful middle and top management experience
3. Specialized or advanced knowledge in major areas where the
recruiting firm's practice has identified needs

Senior Consultants, Seniors

The third tier of the pyramid is made up of senior or senior consultants.

These individuals typically have 2 or 3 years of consulting experience and
are capable of supervising the daily work of the younger staff. They possess
the right combination of experience and dedication to complete different
projects with limited supervision. Seniors are normally in short supply in
most firms.

Associate Consultant, Staff

The final layer of the pyramid consists of young or new staff. Depending
upon the firm, these individuals usually have less than 2 years of consulting
experience and may have been hired directly out of graduate or
undergraduate school. Some firms require prior business experience, while
others prefer to train their own personnel and hire some undergraduate
students.

Billing Rates

The typical range of billing rates of the four pyramid levels are as follows:

Level 1 P6,000 to P12,000 per hour

2 P3,600 to P 6,000 per hour

3 P2,000 to P 3,600 per hour

4 P1,200 to P 2,000 per hour

 Organization and Management of MAS Practice 115

These billing rates are normally adjusted annually when promotions are given
and salaries are changed. Within each pyramid level there may also be multiple
billing codes relating to salary and experience levels.

Defining the Target Level of Competence of Management Consultants

Consulting competence is the ability of a consultant (e.g. management services

practitioner with an accounting background) to deliver specific agreed-upon
consulting services to a client on a profitable time-and-fee basis observing
professional standards.

The four major factors that must be considered when defining the target level of
competence are
1. Scope of Practice Area
2. Service Variety
3. Client Requirements
4. Service Delivery Capability

DISCUSSION:

1. Scope of Practice Area

A consultant who desires to grow should take the following steps:

1. Review the economic region in which the consulting firm draws, or

expects to draw, most of its clients.
2. Inventory the services required by the existing client, and in most
cases, by the clients the consultant would like to add (e.g. related to
audits, reviews and tax planning).
3. Select services from this inventory that will be provided.
4. Acquire the competence needed to provide the selected services.
5. Notify clients and potential clients that the consulting firm is able
and willing to perform the selected advisory and consulting services.

2. Service Variety

The range of services that consultants typically provide is extremely broad.

Most engagements, however, would fall into one of the following categories:
116 Chapter 6

1. Planning, control and reporting systems

2. Operational computer system analysis, design, implementation and
evaluation
3. Specialized technical services such as advice on new laws, entering
international markets or keeping abreast of new economic or
technical development. Specific services such as acquisition,
mergers, divestitures, economic and feasibility studies, management
audits, market analysis, etc. might also fall into this category.

3. Client Requirements

In reviewing client requirement, the consultant may assess the following

questions:
1. Will a fully implemented service (e.g., a system or recommendation)
be turned over to the client ready for use? If so, these services will
require more care, organization and attention to detail than other
services.
2. Will the service require changes or adaptation? If so, the client must
be told explicitly what to do in order to realize the service benefits.
3. Does the client belong to an industry with special characteristics or
problems? If so, the ser vice must be designed to produce
satisfaction in such situation.
4. Does the client have special financial or growth problems? If so, the
service should not aggravate these problems or be ineffective in their
presence.

4. Service Delivery Capability

Service delivery is the application of consulting skill and without this, even
high levels of knowledge and understanding cannot be put to effective use for
clients.

In delivery services, the consultant undergoes the following phases:

1. Setting objective, identifying problems and needed services,
predicting specific expected benefits from these services, and
gathering essential facts pertaining to the problem and means of
delivering the services.
2. Adapting and beginning the services that are to be the principal
deliverables from the Engagement.
 Organization and Management of MAS Practice 117

3. Implementing these services to the client's satisfaction.

4. Evaluating the results in operation, in order to determine the extent
to which the anticipated benefits were received from the services.

MANAGEMENT OF MAS PRACTICE

Steps in Starting the MAS Practice

CPAs have been providing management with advice and technical assistance for
as long as the accounting profession has existed. But as businesses grew in size
and complexity, the demands of clients for outside professional help also
increased significantly. A number of accounting firms realized that they now
have to offer management services on a systematic, organized basis.

A CPA who would want to start the MAS practice formally may follow these
suggested steps:
1) Determine and make a list of services that one can truly offer with a
confidence of competence to perform.
2) Review a client list classified by industry, size, etc. and prepare a
package tailored to fit the firm's competence and a particular type of
clientele. "Initial package" usually consists of services that are closest
to the conventional accounting function such as budgeting, financial
planning situation analysis (mergers, make or buy decisions, etc.) cost
systems or studies and system design and installation, office
management and equipment.
3) Prepare a line-up of MAS Personnel. In the selection of the staff, the
following sources may be considered:
a) Accounting firm's own staff (usually audit staffmen who had
lost interest in the audit work but who have the technical
qualifications, personalities to do MAS work).
b) Experienced specialists (engineers, management consultants)
from outside the firm either on a full-time and permanent basis
or part-time basis.
c) Referral by other CPAs.
4) Seek out advisory engagements.
118 Chapter 6
This, of course, should be done within the bounds of the Code of Ethics.
Leads to management advisory clients can come from an outright request
for advice by the client to a rumor that a business is in trouble. The CPA
can capitalize on his audit and tax engagement. Mention can also be
made of the CPA's availability for MAS work in his audit letter of
engagement. Use of letters and brochures to inform present clientele is
also allowed.

The basic characteristics and qualifications of a CPA firm form a sound

basis for the development of the management advisory services portion
of the CPA's practice. The CPA's review of the many aspects of an
organization's operations gives him the opportunity to know the
weaknesses and strength of the business firm. This is the reason why
members of the business community seek his advice on business matters.

Sources of MAS Engagements

The primary source of MAS engagements is the audit client of the CPA.
In the course of his examination of a client's financial statements, the
CPA reviews many aspects of an organization's activities and
procedures and thereby obtains first hand knowledge of the problems
confronting management. The CPA may therefore be engaged by the
audit client to conduct a more thorough and in-depth analysis of the
problem and to make constructive suggestions to solve the problem and
improve the operations of the company. Other possible sources of MAS
clients are:
a) Referrals from other CPAs.
b) Referrals from audit clients.
c) Referrals from businessmen.
d) Referrals from financial and government institutions.
e) Referrals from legal and other professional firms.

Problem Areas in Rendering MAS by an Independent Accounting

Firm

The potential problem areas that may arise in connection with rendering MAS by
an independent accounting firm are:
1. Questions as to the effect of the practice of MAS on the firm's
independence. Agreement should be reached as to the relationship that
 Organization and Management of MAS Practice 119

MAS work will have on the audit work. It is important to remember that
decision making is the responsibility of the client's management and the
MAS man's function is solely advisory. The principle of independence
that applies to an audit engagement also applies in the practice of MAS.
2. Development and maintenance of a high level of competence in MAS. A
policy should be established for resolving the problem in the event of
disagreement between an MAS partner and an Audit partner as to
whether appropriate competence exists in the firm. Also, provisions for
the staff's continuing education program should be made.
3. Questions of what fee to charge. A clear policy should be established
with respect to the fee structure and the reasoning behind the same
should be understood by the entire firm.
4. Question of AUDIT-MRS cooperation in obtaining engagements.
Efforts to be made to obtain MAS engagements and the cooperation to
obtain MAS engagements and the cooperation to be expected of audit
partners and staff should be clearly defined.
5. Question of regular communication between the MAS function and the
rest of the firm.

Financial Management of an MAS Practice

A consulting practice is a business and, like all businesses, must have financing.
Financing can be provided by capital invested by you or the initial group of
consultants or by funds borrowed from banks and others. The following are the
initial and basic capital requirements.

1. Working Capital
• This will be used to pay monthly operating expenses such as salaries of
consultants, rent, supplies, utilities, secretarial services, etc. This will be
needed to fund accounts receivable that represent time billings to client.
It is prudent to have working capital for at least three to four months'
expenses. Also, many consultants obtain retainers at the beginning of a
consulting assignment to help finance the burden of monthly expenses.
Care, however, should be exercised to avoid a "financial trap" where
funds are received and spent before the work is actually performed.
120 Chapter 6

2. Office facilities and equipment requirements

Since consultancy is a business activity, this means that the consultant
should establish a professional and businesslike image for the basic
business operation through stationery utilized, telephone answering
procedures employed, quality of typed material that is presented to
client. A practical option for a start-up firm is leasing an office in a
professional suite that provide many facilities including secretarial
service, copy machine, telephone answering, etc.

As the practice grows, the next step is leasing office furniture,

employing permanent secretary/receptionist, multiple employees and
other consultants. Each of these steps requires a business decision as to
the viability of the practice and the capacity to handle the additional
overhead expenses.

Of prime concern to one's consulting practice are the costs of operation

and cost of equipment and facility requirement because they have a long
term impact on the practice profitability.

Revenues and Expenses of Management Consultants

Net service fees represent the peso value of what has been sold to the client or
what will be received as revenue. If the staff is fully utilized or there is 100%
professional's time chargeable to a client engagement, it could mean a very
profitable operation. Net service fees are determined by subtracting from gross
fees (total chargeable hours worked by a professional times his or her billing rate)
the allowance, fee adjustment or write off. The allowance percentage is
normally in the 12% to 16% range and would ultimately depend on effective
use of the staff.

Billings and Collection

One of the most important considerations in a consultancy practice is how
professional fees are to be established. Some consultants bill services on an
hourly basis, while some on a daily, or per diem basis. Some consultants
add out-of-pocket expenses directly chargeable to the client to the bill while
others absorb their expenses. Staff billing rates are often a multiple of the
salary paid to the employee. Multiples of 2.5, 3 and 3.5, the actual hourly
rate of pay, are very common.
 Organization and Management of MAS Practice 121

Another billing approach is on a project basis. Here the fee is determined for
the project and the work is completed with a reasonable time. No matter what
the method of billing, time keeping is of prime importance.
There should also be an appropriate mix between practice development and
productive chargeable time.

Follow-up on unpaid invoices is important. Statements should be sent as a

reminder of outstanding invoices. Aggressive invoice collection is important
to cash flow and survival of the practice.

The following illustrative income statement of a small consulting practice will

show the normal sources of revenues and expenses.
AFC Consultancy Services
Income Statement
For the year ended 2010

Gross services Pxx

Less: Allowance xx
Net services Pxx
Direct operating expenses
Professional staff salary and bonus xx
Office staff salary and bonus xx
Other direct expenses (supplies, travel, etc.) xx
Total xx
Contribution to general overhead Pxx
Less: General overhead
Pensions xx
Group life and medical insurance xx
Rent xx
Depreciation and amortization xx
Stationery and office supplies xx
Subscription and services xx
Staff training and education expense xx
Professional membership dues xx
Interest xx
Taxes xx
Other administrative expenses xx
Total xx
Net income
122 Chapter 6

Preparing a Business Plan for MAS Practice

Why Prepare a Plan?

Most consultants prefer to be a consultant first and a business owner second.

But planning and good management skills are vital to business success. Those
who do not plan run a very high risk of failure.
A business plan is written summary of what the consultant hopes to accomplish
by being in business and how to organize the resources to meet his/her goals.

Having clear goals and a well-written plan aid in decision-making. With a

business plan, the consultant has some basis and a standard comparison to use in
evaluating alternatives presented to him/her.

A business plan establishes the amount of financing or outside investment

required and when it is needed. It makes it much easier for a lender or investor to
assess the consultant's financing proposal.

Format

The business plan format shown in Appendix A.1 is a starting point for
organizing the consultant's plan.

The business plan format normally consists of four parts: the introduction, the
business concept, the financial plan, and the appendix.

The plan starts with an introductory page highlighting the business plan. The
business concept, which begins with a description of the industry, identifies the
consultant's market potential within the industry and outlines the action plan for
the coming year. The financial plan outlines the level of present financing and
identifies the financing sought. This section should be brief. The financial plan
contains pro forma (projected) financial forecasts. These forecasts are a
projection into the future based on current information and assumptions. The
appendix section contains all the items that do not naturally fall elsewhere in the
document, or which expand further on the summaries in the document. These
might include a personal net worth statement and a statement of accounts
receivable.