1 | P a g e

Change Management and Restructuring

in a

CA Firm

Project for Foundations in Management

Q1-EPGP03 (2015-17)

IIM Kozhikode, Kochi Campus

Project by

Seshadri Nathan Krishnan

2nd October 2015

2 | P a g e

Contents Executive Summary ............................................................................................................................. 3

Background ......................................................................................................................................... 3

The Firm .............................................................................................................................................. 3

Challenges ........................................................................................................................................... 6

Changes ............................................................................................................................................... 7

New Governance Structure ............................................................................................................. 7

Operations ...................................................................................................................................... 8

Changes in HR and Staffing ............................................................................................................. 9

Telecom Group .............................................................................................................................. 10

Financials and other organisational measures. ................................................................................ 11

What did not work so far .................................................................................................................. 12

3 | P a g e

Executive Summary The discussion here is about a Chartered Accountant firm that grew into unrelated areas and the

process changes to streamline and restructure its businesses. The Firm had a very profitable

audit/tax practice. A lot of outsourcing and consulting services were added on to it over the course

of under a couple of decades making it look less and less like a CA firm and losing focus in the

process.

The restructuring involved hiving off some of the businesses into a new entity, making changes in

the operations and focusing on some of the largest problem areas. Restructuring offered up a few

hidden synergies like that between financial advisory business and banking outsourcing. The process

also involved rethinking the processes of an entire division and restructuring staffing and

management.

Background The Firm1 was founded in late 1990s by two Kerala based CAs who were the partners, one in South

Kerala and another in Central Kerala. By 2012, Firm had grown into an unwieldy behemoth with lot

of audit and non-audit projects. Partners expressed their interest in re-organising and streamlining

the operations of the firm; they were looking for someone who understood their work culture

better.

The Firm As most growing firms are wont to do, Firm had taken on whatever clients came its way. In the

meanwhile, it had added partners and offices – with offices now in Tamil Nadu, Karnataka and

another city in Kerala besides the original offices in South Kerala and Central Kerala. After about a

month of going through the financials and other study, I got a sense of how the firms’ activities are

structured. Figure 1 illustrates a simplified version of the activities.

Figure 1

1 Names are being masked to protect privacy. Firm in capital letters will refer to the specific CA firm and in

small letters to any partnership firm.

Firm

Audit & Tax Division

Consulting Division

Business Process Division

Associate

4 | P a g e

The Audit Division was the bread and butter of the Firm. The audit services included high profile

clients in various industries, banks and insurance companies. The division was structured like most

CA firms – with a partner leading an engagement and seeking out the expertise of other partners as

needed. The engagement partner may not necessarily be the partner who brought in the client to

the firm. For speciality audits like concurrent audit of Banks there was bare minimal oversight by a

partner with only review of the high risk areas and the rest handled by retired bankers. Most of the

partner time was spent on managing client expectations, representing with tax authorities and

review of high risk areas and audits. The firm also had a tax practice which dealt with individual

income taxes and direct and indirect taxes for businesses of all structures like sole proprietorships,

firms, companies etc. The employees involved were primarily CA articled clerks, semi-qualified CAs

and qualified CAs who were junior partners of the firm

The Business Process Division consisted of process outsourcing, corporate and non-corporate filing

and accounting services. Process outsourcing employed a large number of people with varying

qualifications and skills. Accounting services group provided accounting support to clients who were

non-auditees – some of which was provided onsite. Corporate and non-corporate filing was

essentially outsourced filing services for businesses and included filing for incorporation of

companies, corporate filing, filing of periodic returns for tax deducted at source and other tax

related filing on behalf of clients.

Telecom group, which handled processes such as form collection and archiving, address verification

of post-paid customers for various high profile names (‘TelCo’s) in the Telecom industry, employed

most of it. The address verification process involved the following key steps. Allocation to field staff

would involve a phone call to the person from the office reading out client information – it would

happen around 1-2 pm afternoon since the files from TelCo were received around 10-11 am for Day

0. Day 1 would involve allocation through phone of the customer to a field staff and completion of

some of the verification by the field staff. The customer interview process by itself was very short –

lasting about 5-10 minutes. The constraint was travel time and availability of the customer.

Submission of visit details was over the phone as well. The calls would start coming in by around 6

pm and go on till 8-8.30 pm. A normal coverage by a field staff was considered 10-12 customers in a

day and in some areas like Ernakulam city, it was 30 in a day. Day 2 was for completion of Day 0

customers and getting new allocations. The work load per field staff was managed through a rule of

thumb approach of the Manager. The TelCos had a 48 hour TAT – which was interpreted to mean

that revert had to go to the TelCo by late Day 2.

5 | P a g e

Though the Telecom Group was larger, the older outsourcing projects such as those for

Banks/Financial Institutions (FIs) also operated under this division. It started as a field verification

request by a private sector auto lender and evolved into verification exercise for lot of automobile

lending specialists and some banks. The Manager of the Telecom Group (referring to him as

‘Manager P’) was a young ex-banker who handled this business. Since he was already managing

field staff in Central and Northern Kerala, it was thought appropriate to have him handle the

Telecom Group business in the area when it started in the Firm. Some of the time, the Telecom

Group’s staff was used to conduct field verification of this category of customers causing a lot of

heart-aches. Another manager, Manager S handled the business in Southern Kerala.

The Consulting Division handled ad-hoc consulting projects of varied nature over the years. It

included mergers and acquisition related services, investment advice, feasibility studies, financing

and capital raising, ERP implementation, study of accounting processes etc. The engagements were

handled by a partner or a qualified staff as appropriate.

6 | P a g e

The Associate was a partnership firm set-up by the relatives of some of the partners and was

handling some outsourcing businesses and accounting services where the firm was likely to have

conflict of interest or independence issues. There was no involvement on the part of the partners,

though some of the admin support was common. The Associate was part of the discussion to

restructure the operations because the current owners had expressed interest to sell the business

and cash-out. The attractiveness of the Associate was enhanced by the ease in porting certain

labour related registrations if the Associate was acquired instead of going for a new registration,

inspection and such. In the world of red-tapes, this was a big attraction. The CA Firm enjoyed

exemption from such registrations.

Challenges The first challenge was making sense of the business of the Firm. The Firm had grown without a

clear strategy in place – it seemed like the partners were guided by the philosophy that bigger was

better and top line growth was what mattered. As a result, the Firm had taken on a lot of unlikely

business services at razor-thin margins. The immediacy for restructuring was felt when the income

tax authorities questioned the lower net margins reported in the tax returns and the books were

thoroughly inspected with a lot of partner time spent on giving explanations.

A CA firm is governed by the code of conduct issued by the ICAI, the membership and self-regulatory

body. Its strategy, within the limitations of the code of conduct, is to grow purely professionally,

thereby enhancing the reputation of the firm and hence, the hourly rate commanded by the partner.

Not unlike a law firm, the important number for a CA firm is leverage – ratio of partners to non-

partner fee-earners. In playing that game, Firm’s strategy had gotten out of hand and it ended up

mistaking a pyramid with a large base as the salvation disregarding the billing margins.

It was further exacerbated by the rules of the game being different in the large Telecom group –

there were immediate penalties for non-compliance, unlike a CA is used to and there was operating

leverage to be managed in this business – volumes were not assured month to month and it did

fluctuate highly. The Telecom group’s costs were primarily fixed with revenue that was highly

variable. There were incentive payments for higher volumes paid to employees, but no minimum

volume was in effect for an employee. Some of the staff was freelance. There was no control

measure in place to check whether an employee did in fact visit the address of a new phone

subscriber when he reported a visit.

The partners expressed interest to go into consulting, but were unable to pay for skills through profit

share or equity stake. The code of conduct said that a CA firm could not advertise its services or

create a distinct logo and identity. The Big 4 firms and other large foreign firms get around this

through the network clause. CA firms are allowed to be part of a network of firms with the brand

and identity belonging to the network. The code of conduct also gave permission to start what were

called Management Consultancy Services Company (‘MCS Company’) for CAs to provide non-audit

services subject to the same code of conduct.

A CA in practice is governed by the same conduct and it prohibits him/her from running any

business. A CA can be a shareholder and non-executive director in a company, but not its whole

time (executive) director or managing director.

7 | P a g e

Changes

New Governance Structure

Stage I of the change was to re-imagine an appropriate form for the business considering the

challenges faced. After long deliberations and running through various options, the decision was

made to incorporate a new company with senior partners as shareholders. Research showed the

precedents of other firms structuring similarly and found a few instances across India. The company,

NewCo would be majority owned by senior partners of the firm (seniority determined by tenure) in

return for them bringing the existing businesses into the NewCo. The partners would have majority

representation in the board of the NewCo as non-executive directors. The business would be run by

a third party who would act as the Managing Director/CEO of NewCo. CEO would run the day to day

operations of NewCo with advice from the senior partners who are the directors. I became the

founding MD and CEO to handhold the spin-off process. A Chairman, who had experience in

consulting and teaching at IIMC was brought in from the outside to guide the overall course of

NewCo. With this governance structure in place, it became easier to execute and reward

performance of non-CA professionals in the business. Figure 2 describes the new structure after the

spin-off. A period of two to three years was determined necessary to complete the spin-off to avoid

the need for renegotiating some client contracts. In order to ensure the successful execution of the

spin-off, the Managing Director would also be the employee leading the Consulting and Financial

Services division of the Firm for the period of the change.

Additionally, the NewCo would also buy out the existing businesses of the Associate and roll it under

the Business Process division. In order to avoid any potential conflicts of interest, it was also agreed

that any non-attest services (attest services are defined as services requiring the signature of a CA)

would be executed from NewCo and where services are a combination of attest and non-attest

services, Firm would price it as an independent component and quote jointly for the engagement.

Figure 2

NewCo

Consulting Division Business Process

Division Accounting and tax

advisory

Associate Firm

Audit and other attest services

Tax representation services

8 | P a g e

In a short while, the NewCo was incorporated and the business of the Associate was bought out by

NewCo as planned along with employees. NewCo had its registered office in Bengaluru with

branches in Kochi and Chennai. Kochi was the effective head office of NewCo due to the staff

strength and director presence. During restructuring, I found that the employees had a lot of

banking experience. A new Division was added to ensure focus of the business in the area of

Financial Advisory – comprising of corporate finance and individual investment advisory services.

Each division would be guided by one or more of the non-executive directors – three focused on

Business Process – one taking Telecom and Banking/FI group, the other the Accounting, Payroll and

the third ERP and Processes and I chose Financial Advisory, Corporate Secretarial and Consulting and

the last director on International Tax Planning.

Figure 3

Operations

Operations were strong in some areas, mediocre in a few and total absent in a couple. Due to legacy

reasons, Human Resources was one of weakest area in operations. There was no or minimal HR

compliance requirement for a CA firm. Payroll was part of accounting and recruitment was handled

as part of administration team. This had to change under the new structure.

NewCo

Cross Border

Offshoring

International Tax Planning

Business Advisory

New Business

Existing Business

Consulting

Restructuring and workouts

Business Process

Telecom Group

Banking/FI Group

Accounting

Payroll

Corporate Secretarial

ERP and Processes

Financial advisory

Corporate Finance

Retail Investment

Transaction Advisory

9 | P a g e

Changes in HR and Staffing

A new Head of HR and Legal - handling Legal matters, HR, Payroll and Recruitment was identified.

She brought with her a legal background and experience managing the HR of an IT firm in Infopark

and brought a new energy into the whole process. Some of the preliminary work related to

compliance was already underway with various labour related registrations in place – broad policies

were put in place for ensuring compliance such as minimum wages, non-pay benefits, contract

labour etc taking the advice of a consultant. Based on filling this important vacancy, NewCo also put

a renewed focus on Payroll services as a revenue centre. By the end of the FY2013, three contracts

were in the bag turning Payroll into a profit centre by FY 2014.

Some anecdotal evidences also pointed to staff being more confident due to timeliness of payment

of salaries (timing of incentive payment was tied to customer collections already), about new

benefits that were extended to them like minimum wage ESI, PF, gratuity etc. As part of the

transition, gratuity and continuity of service was agreed for the tenured staff. They also now had an

ear for their issues.

Compensation structure was looked at in detail for the staff – especially in the Banking/FI and

Telecom Groups. Field Staff had a lot of attrition and it was expected to continue due to the nature

of the job and the profile hired. The usual type of hire was a college goer who wanted to work part

time and earn some pocket money or people out of plus two or the just graduated. The part time

continued to be hired as contract workers who were paid on a case basis. They would handle only

the Telecom business and would not touch the Bank/FI business. The other full-time field staff were

now paid minimum wage and in turn measured on a minimum case per day monthly. The

performance measure was closely monitored with termination as the consequence, if they did not

meet the measure consistently over the probation period. They would earn an incentive only on

meeting the minimum threshold. The incentive was structured as a revenue sharing arrangement of

the billing per customer. This aligned the interests of NewCo and the employee. The high

performers in this segment with potential were identified and given a track to move to the higher

earning/high risk Banking/FI group. College kids were hired to handle call volume from early

evenings when the revert from the field staff would start coming in. It was an easy fix which

released much of the supervising time to focus on next day’s allocations afresh in the mornings.

Manager P and Manager S were handling the largest revenue earning groups of customers.

However, they did not get along well. The solution was found to slowly move out Manager P to

Banking/FI group where his core competence lay as an ex-banker. As a part of this process, three

fresh supervisors were hired and appointed to look after the different stages/customer groups at the

testing phase. The hires worked out well eventually.

Though the nature of field visit looked similar, Banking/FI Group required a more polished approach

to clients from our field staff. The client interview went beyond asking basic questions and required

some amount of judgement as to the condition of the household etc. Additionally, the client tended

to be people who could afford to buy a luxury brand car, for instance or a high value loan instead of

just a person spending under Rs.500/month on a mobile phone connection. Some of the chosen

field staff were formally designated as eligible for a Banking/FI allocation among the whole

population of field staff and only they would handle these clients.

10 | P a g e

Telecom Group

Manager P was a frequent cause of heart ache for the directors – I described him as ‘loose cannon’

in one of his initial assessments which was found apt by other directors at later points of time. He

followed a driving approach to the staff – instilling fear rather than respect. The redeeming factor

was that he was loyal and hard working. P could be found rolling up his sleeves to work when

needed. However, his approach drove the stress levels up among the staff, resulting in frequent

interventions from the directors and new HR lead. The eventual solution worked out well for all

involved – however, Manager P fought the solution all the way tooth and nail at every step of the

way. Manager P currently leads the Banking/FI group and shares quality responsibility for the

deliverables for the banking sector in the Firm. He also applies his expertise in the Corporate

Finance services bringing in revenue.

In the whole Telecom process outlined earlier, there was lack of controls in various places. For

instance, a field staff could not visit a customer and just call them up and ask for information. There

was no quick and easy way of ensuring the visit actually happened. Earlier in the past, this practice

was condoned due to work pressure. TelCos also were uneasy with this practice since the Telecom

regulator was starting to get tougher on them due to recent national security incidents. As a result,

TelCos started imposing large penalty on vendors who did this pseudo verification. It called for a

rethink on processes on our part.

The result of a lot of brain storming and discussions was a two-pronged solution. A software vendor

was engaged to identify mobile solutions with GPS linkage to ensure visits. This was a long term

solution since development time was involved. The shorter term fix was to start seeding calls – the

calling team would start their shift around 3 pm and start randomly calling customers to check if

they were visited by the field staff. The call script was structured nicely in collaboration with the

TelCos themselves. Initially seeding calls were made purely randomly. The information obtained

from the calls put certain of the field staff on the radar and the cases handled by these staff that

came on the radar were more closely monitored for an extended period of time. Over the course of

time a proprietary method was developed for this process. The software solution was deployed

eventually on mobile by FY 2014 and is working well with the seeding calls acting as supplement.

11 | P a g e

Financials and other organisational measures. The first six months was the time period during which a lot of low hanging fruits were harvested.

The financials looked a mixed bag with some divisions teasing with a glimpse of what was possible

and the others showing how things had gone wrong. A summary is as follows:

Gross Margin

% of Revenue

Business Services

- Advisory 60% 12%

- Non-advisory 50% 2%

Business Process Services

- Associate (1.1%) 11%

- Accounting 21% 6%

- Telecom & Bank/FI (6%) 59%

Financial Advisory Service 75% 10%

The overall indirect cost was around 14% of the revenues and hence, the NewCo was barely break-

even by six months. The year 2014 ended very similar to these half yearly results.

The staff-mix including their tenure from the Firm was as follows:-

Year of joining Count

At formation 1

2001 1

2003 1

2004 4

2005 5

2006 5

2007 3

2008 10

2009 7

2010 15

2011 21

2012 13

Total 86

By the end of the year, staff count was up to 120 and has grown over FY 2014 as well.

12 | P a g e

What did not work so far Profitability of the Telecom Group continues to be elusive until FY 2014. It still contributes majority

of the revenue share of the NewCo and as a result, the overall profitability suffers. Part of the

reason is that Telecom companies were going through a phase of low profitability and were

squeezing their vendors as well leaving no room for price negotiations. The Board is looking at this

phase in the Telecom Group as investment phase and it is partly working out. NewCo is the first stop

for a new Telecom company looking to expand in Kerala. The strategy has slowly evolved to use this

opportunity to streamline operations and have the unquestionable presence established in the

market. This strategy is yet to play out completely.

Lot of time has been spent on restructuring operations that focus on higher profitability areas such

as Consulting and Financial Advisory is still lacking. Additionally, since the majority of the board are

CAs, they have a hangover of ‘Marketing is bad’ carried over from the CA practice. There have been

baby steps in the form of registering a service mark, launching a website and social media presence.

Strangely for a company with CAs on majority board, accounting has been an area that has not

worked well. Over the course of the 3 year of existence, NewCo has had three different

accountants. In addition to the attrition, there is lack of focus on management accounting function

– accounting is primarily a statutory reporting and book-keeping function presently. As a result,

there is a likelihood of old mistakes being repeated such as new businesses being taken on without

adequate thought on profitability and cash flow.

Lastly, the Balance Sheet of the NewCo is over capitalised due to inefficiencies in working capital.

Collection is inherently tough in businesses in Kerala. In addition, thin margins can eat into returns

when TelCos delay payment for various reasons.