In 1993 when Cheng & Co was established, our firm had three employees and was just one among thousands of accounting firms in Malaysia. But even then, with our tiny bank balance and short list of clients, we dared to set our minds on becoming the leading firm in the country and expanding regionally in Asia-Pacific.
It’s been close to three decades now, and this year, we are in the process of being listed on the Malaysian stock market, marking another significant milestone in our business growth. People have asked me how we did it. In this article, I share our strategies for sustainable long-term growth, including the use of the balanced scorecard and pursuing mergers and affiliations, that I hope will be useful ideas for small business owners.
The balanced scorecard as an effective management tool
In our early days, to stand out from the rest, we knew we had to offer something different. As our clientele expanded, demand for a one-stop service firm rather than visiting multiple firms for various services, began to grow. Clients were looking for convenience. That was the trigger that gave us the idea to become more than just an accounting firm.
Our expansion approach was centred on diversifying our business model after carefully studying the pain points of our existing clients before introducing a wider range of services to address their needs. Becoming a one-stop centre for professional business services also helped us pitch our firm in a more appealing way to potential clients. After making the transition, we began looking at various methodologies to measure performance and achieve synergies throughout the firm to enable the translation and realisation of our vision.
We found that the balanced scorecard (BSC) is the perfect strategic management tool for our firm to realise our ambitions. The BSC is a methodology that uses data analysis to help an organisation achieve outcomes such as enhanced performance of employees, increased cost efficiencies, and improved client satisfaction to accomplish its desired goals and individual key performance indicators (KPIs).
The implementation of the BSC helps create synergies throughout an organisation and enables the translation of its vision, mission, and strategies into tangible and measurable action plans.
It is also bridges the gap between top management and staff of all levels, as it is a transparent methodology that effectively communicates the expectations and outcome from multiple stakeholders to drive our firm towards our targets and objectives.
The implementation of the BSC was crucial in our growth ambitions. Approximately 95% of our clients are SMEs, and working closely with them for several years gave us a good understanding of their needs and helped us design solutions to address critical issues such as restructuring, disputes, and succession planning.
The BSC identifies four perspectives as the pillars of an organisation’s success — financial, customer, internal process, and learning and growth. Incorporating these pillars illustrated our commitment to our shareholders and board members, employees, customers, and suppliers and vendors.
The BSC also plays an important role in our firm when it comes to incentivising employees based on KPI achievements. High-achieving employees are given attractive incentives to spur them on to greater goals. Learning is also crucial and a constant feature in our industry. A part of employees’ reward system requires employees to complete 40 to 60 training hours a year. We also allocate 3% of total staff payroll for our annual staff training cost.
It is important to note that the BSC is not merely an internal strategic performance measurement tool for us. We have strongly advocated the use of the BSC for our clients, and the industry at large sees the benefits of the methodology.
Recently, we conducted a BSC awareness programme for a client — a shoe manufacturer — that has traditionally prioritised the school shoes segment with smaller productions for other purposes. In recent times, with government policy changes such as going from white to black shoes and school closures due to the COVID-19 pandemic, the company’s sales took a hit, and the management approached us to give them guidance.
Our BSC training identified the need for the company to diversify into other shoe segments to soften the blow of a dip in one segment and reduce packaging expenses by moving from its costly flashy approach to more cost-effective, eco-friendly options.
For the BSC to be successful for an SME, everyone starting from the top needs to buy in to the concept and be fully aligned with the long-term goals and objectives of the company. To put it simply, all employees need to speak the same language to be able to close the expectation and performance measurement gap between the top and bottom, with everyone knowing what others are supposed to do. The transparent nature of the BSC helps the whole company understand the overall action plan and each other’s responsibilities.
Mergers and affiliations for expansion
Right from the outset we knew that mergers and acquisitions (M&A) would play a key role in our ambitions to become a leading accounting firm in Malaysia. At the same time, we were also fully aware that as a small firm, we did not have the financial might to expand rapidly like the more established or larger firms.
Although we started out with a few successful mergers in the early years, it is not an easy process to navigate, and mergers take considerable time. We had to work out a strategy for faster expansion that works best for a small firm like Cheng & Co. After much deliberation, which included revenue considerations, we decided that mergers and affiliations is the ideal strategy for rapid growth. This is a slightly different approach to the more common M&A.
Generally, M&As are a sensitive issue for many companies. They don’t quite like the impression that they’re being taken over, although this really is the case more often than not when an M&A exercise takes place.
Also, some firms prefer to work in a collaboration arrangement rather than a complete takeover. Therefore, we have taken the mergers and affiliations route by getting the other party to join us as a member firm first to work together and build a relationship. At this stage, the company will be able to experience the full range of our services, which enhance its own capabilities.
If all worked out well between both parties, we moved forward by exercising the option of mutually agreeing to a full buyout of the member firm. The patient nature of this process has actually helped us identify the right partners to become a part of Cheng & Co.
We developed a structured mergers and affiliations mechanism for our proposals with a minimum outlay of upfront deposits followed by 36 monthly instalments to take over the recurring fee on a goodwill ratio of 1:1. The recurring fee is not a one-off fee but a yearly retainer fee that we charge the client. It does not require raising initial capital to exercise such a merger or takeover.
This structure is still in use in our firm today, and the rationale for the instalment process is to limit any losses if the merger and affiliation does not turn out as expected. It gives us room to re-negotiate and re-adjust figures with the other party.
While this may not seem as attractive as M&A, our belief is that this structure will help us identify genuine merger opportunities with smaller firms that prioritise the wellbeing of their clients alongside financial gains, and that they see us as the right partner to ensure their clientele are served well.
The strategy has gradually helped us improve our efficiency as a service provider and gave us the required competitive edge in an increasingly tough market. After completing mergers in various states, we have presence and leadership in these locations to serve local businesses and communities in double quick time through affiliations.
The geographical advantage gained from this exercise increases the speed of our services and solutions as opposed to having just a single operation in Kuala Lumpur and travelling to every nook and cranny around the country, which is extremely time-consuming in an age when time is of the essence.
The cost of our services and solutions eventually became more competitive due to our availability in various locations, which helps retain clients and attract new clients. Upon switching to mergers and affiliations, we have merged with more than 20 firms and practitioners while continuing to explore new collaborations of this nature.
A successful merger can help create stronger synergy structure in a firm while giving access to a larger pool of human capital and technical resources. Such resources usually require a lot of funding to set up from scratch. However, one of the biggest challenges has been integrating the newly acquired workforce into our team. Many mergers become problematic precisely for this reason.
To solve this issue, we created a guide we call “Growing Vision Tree” for existing and new employees. The vision tree is used to train our people to give them the Edge and Energy to Energise and Execute (4Es) all professional services with great passion. It also encourages all our employees to embrace diversity in areas such as culture, education, and belief.
Implementing this culture required many hours of training and team interaction activities and, within a year, all newcomers were fully immersed into Cheng & Co culture. Together with the balanced scorecard methodology, we were able to integrate new personnel in subsequent mergers relatively quickly.
Beyond accounting and audit
As part of our strategy to widen our market segment and presence, we decided to embrace new business models to diversify our services and penetrate new customer bases to increase revenue streams. However, it’s crucial to remember that this needs to be done in keeping with the company’s core strengths and expertise. In our case, that is accounting and audit.
Over the last ten years, we have expanded into global business services, initial public offering consultancy, Australian property management and consultancy, company secretarial services, and enterprise resource planning consultancy.
Another key aspect of our strategy is the Professional Entrepreneur Programme (PEP) designed to develop entrepreneurial skills in our leading professionals. In 2017, the Malaysian government outlined its goal to produce 60,000 accountants by 2020. This gave us an incentive to contribute towards nation building and the accounting profession by training innovative accounting practitioners and entrepreneurs.
After discussions with key stakeholders and industry experts to devise a development plan, the PEP was introduced as a platform for young accounting students and graduates to hone their entrepreneurial skills and gain invaluable real-world accounting experience. This programme helped us identify eight project directors, with each driving their own project in line with our business growth strategy.
A never-ending journey
Starting a business, especially an accounting practice, is not easy. But it will seem easy compared to what lies ahead once the die is cast. The key here is to always ensure that you have tangible and actionable plans for growth, development, and good and bad times, complemented by a lot of patience and perseverance. These are the lessons that we have learned in almost three decades since we began and can easily be applied to any business.
Tough times don’t last, but tough people do. Every entrepreneur should dare to dream and dare to fail. When I started Cheng & Co, my dream was to have ten partners with MYR 10 million ($2.46 million) in revenue in ten years. We reached this goal in 14 years as opposed to the planned ten years. While not all dreams will materialise the way you want them to, they will drive determination and optimism to continue pushing, embracing change, bearing the pain, and enjoying the gains in the future.
— Chua Hock Hoo, FCMA, CGMA, Ph.D., is the co-founder and executive chairman of Cheng & Co Group, a professional services firm headquartered in Malaysia with 300 employees and four international offices. He is also an adjunct professor at UNITAR International University and Universiti Kebangsaan Malaysia (UKM). To comment on this article or to suggest an idea for another article, contact Alexis See Tho, an FM magazine associate editor, at Alexis.SeeTho@aicpa-cima.com.