Talkin' Taxes

The name H&R Block usually doesn't conjure good images. The first thing that comes to mind is April 15, the day of reckoning, when Americans must file their tax returns. H&R Block has become synonymous with income-tax preparation. Serving more than 17.4 million taxpayers, the Kansas City, Missouri, company is the world's largest provider of tax services. In 1996, revenues exceeded $894 million.

H&R Block has been selling low-cost tax-preparation services for more than 40 years. The conservative H&R Block logo and bureaucratic-looking offices with metal desks and chairs exemplify no-frills tax advice delivered by professionals who pride themselves on speed and accuracy.

The "H" in the company name stands for Henry, 74, and the "R" for Richard, 71-the two brothers who started the company. As chairman of the board, Henry remains the company's guiding force. Richard left the company in 1982 when he was diagnosed with terminal lung cancer. When he was miraculously cured, Richard dedicated his life to working for cancer-related organizations. Lest anyone get the wrong impression, Henry makes a point of saying that even though his brother abdicated control of the company, H&R Block's legendary success is due to their combined teamwork.

They are the products of a close-knit, middle-class family. Their father was a successful attorney. Their mother encouraged the brothers to go into business together; they respectfully heeded her advice and never regretted doing so.

But Henry Bloch says he and his brother never intended to open a tax-preparation service. "I took one semester of accounting and dropped it because I hated it," he confesses. "We kind of stumbled into this business. It certainly wasn't something we had planned." Henry graduated from the University of Michigan with a degree in mathematics, and Richard earned a bachelor's degree in finance from the University of Pennsylvania's Wharton School of Business, in Philadelphia.

When the Bloch brothers finished their army stint at the end of World War II, they launched United Business Co. in 1946, using their savings for the negligible start-up costs. They offered bookkeeping, collection and management services to businesspeople. "It was a pretty straightforward business," explains Bloch. "I visited clients to pick up their records while Richard ran the office."

As a goodwill add-on, the brothers prepared income tax returns as a free service to their bookkeeping clients. The Blochs had no idea they were so good at it until their clients began recommending them to friends. The brothers had a knack for turning out fast and accurate returns. When they were overwhelmed with requests for tax-preparation advice, they decided to put a price tag of $5 on the service. Suddenly, the Blochs' lives turned complicated.

"By 1954, between preparing income-tax returns and offering our regular services, we were practically working around the clock during tax season, which runs from January until April 15," says Bloch. The brothers were so busy, they decided to eliminate the side business altogether. They reasoned their business was doing well, so why kill themselves?

"We told our nonbookkeeping clients we were quitting the income-tax business and they'd have to go elsewhere for the service," says Bloch. "We couldn't handle all the work."

Just as they were about to put a premature lid on their income-tax business, a good client who worked for The Kansas City Star suggested they start a whole new business devoted solely to preparing income taxes. He advised them to kick it off by taking out two ads in the newspaper at a cost of $100 each.

"My first reaction was that we'd have to do 40 returns-at $5 per return-just to get our ad money back," chuckles Bloch. "I was very skeptical, but Richard said we ought to take a chance. He said that the worst that could happen was that we'd lose $200. That's how the business was born."

As soon as the ads ran, the Blochs were bombarded with calls. In 1955, they dissolved United Business Co. and, planning to hire help as needed, instead launched H&R Block, trading the "h" in their last name for a "k" for easier recognition. And they kept their fee at $5 for more than a decade. What's more, if there were any mistakes in the return, the Blochs paid the penalties and interest (and they still do). They intended to stick with the $5 fee because they thought it fair. "Local businesspeople thought we were nuts," says Bloch. "Competitors told us we were making a big mistake in charging so little. They said we were too moral and ethical. The truth is, the $5 fee was no 'seductive lure.' We meant it."

Jerome Grossman, H&R Block's former vice chairman and a 29-year veteran of the company, says the Blochs knew exactly what they were doing. "They took a backdoor approach to pricing," he explains. "Instead of adding up all their costs and putting a profit on top of their service, they determined what the product should sell for and then figured out how they could make money selling it. It was an unconventional way of pricing products or services."

But it worked. "We grew so fast, we didn't need to increase our fees in the early years," adds Bloch. "To a large degree, this accounted for much of our growth. We were growing by 100 percent a year. It would have been stupid to raise our fees. Our biggest source of new business was referrals, not advertising. I guess the moral is, if you do good work, people appreciate it, and you'll be rewarded."

Despite inflation and an escalating cost of living, H&R Block is still offering bargain-counter service. "Today, our average fee is a little less than $66 for a personal return," says Bloch. "We only raised our fees because the income tax returns became more complicated. Clients had more sources of income and more deductions."

In contrast to competing services, the Blochs charged not by the hour, but by the complexity of the tax return. "The more schedules and forms to be processed and entries to be made, the higher the price," Bloch explains. "This is the fairest way, because the fee is not based on the speed of the preparer."

The Blochs finished their first year with sales of $100,000. In 1956, they opened seven New York City offices. In 1957, they opened offices in Columbia, Missouri, and Topeka, Kansas, and began franchising in 1958. In 1961, sales crossed the $1 million mark. The following year, the Blochs took their company public. By 1969, H&R Block had more than 3,000 offices throughout the United States, Canada and Puerto Rico. Sales exceeded $56 million. And the best was yet to come.

Through a combination of franchised and company-owned locations, Bloch estimates the company opened approximately 1,000 offices a year until the early 1970s, when the market became very competitive. Today, H&R Block boasts 9,937 offices around the world, almost half of which are franchises.

While H&R Block's growth was explosive, its co-founder says success didn't come easily. A major problem in the early years was changing the image of the tax-preparation industry. "We were considered a fly-by-night business," he says. "When we started, there was no industry of which to speak. Tax preparation was done haphazardly. Anyone could get into the business because there were no standards, rules or regulations."

Bloch figured his company could change things by simply standing behind its work. Once again, they took a bold stance and, to the chagrin of competitors, pushed for government regulation. But it was the Blochs' steadfast integrity that ultimately worked in their favor. After a decade in the business, H&R Block was not just an inexpensive tax-preparation service-it also won high marks from the IRS and tax professionals. Bloch drives home the point that his tax preparers are carefully picked and trained. "We just don't hire anyone who walks in off the street," he says. "We train thousands of students through a 66-hour program. About 60 percent of the tax preparers are women, many of whom are teachers or mothers who enjoy the seasonal nature of the work. They're paid a salary plus commission on their volume of business."

Grossman and other high-ranking company executives say that, aside from providing a good service backed by ethical business standards, incredible teamwork and intuitive business decisions played a major part in H&R Block's dramatic growth.

Consultants say there is no middle ground when it comes to a family business: It either works or it doesn't. The Blochs were lucky. From the moment they opened for business, there was a smooth synergy between the two brothers. They operated like a well-tuned automobile engine.

"During our first few years in business, our offices were next to each other's, and we reviewed everything together," says Bloch. "It worked pretty good, but we wasted a terrible amount of time doing everything together. When the business started growing aggressively, we had to carve up the work. I remember saying to Richard that we would certainly make mistakes, but we no longer had the time to talk everything over. He agreed."

Henry ran the Kansas City operation, which accounted for the bulk of the company's revenues. Richard handled the balance of work around the country. "It worked out well," says Bloch. "Richard was instrumental in opening offices across the country and I concentrated on providing good service."

Bloch was obsessed with "quality control" long before those words became fashionable. "I really tried to make the clients happy," he says, recalling the early days when he was creating efficient work routines. "I remember opening my doors and being bothered seeing 30 people waiting for me. I got upset when I realized that people had to wait for several hours. Until we started working by appointment, clients took a number and waited their turn."

The Blochs let nothing slip by them. Once the details of the client/tax preparer relationship were worked out, they concentrated on the larger issue of expanding their business. When the tax operation reached its saturation point in the mid-1970s, the Blochs deemed it a good time to branch out. "We'd reached a critical impasse," says Bloch. "We could either translate high profits into big dividends for shareholders or fuel further growth by reinvesting profits in high-performance acquisitions."

He chose the latter path, which proved a brilliant strategy. "Because of the high-volume, cyclical nature of the tax business, the company was a cash cow," he says. "It made sense to look for the right acquisitions."

Bloch emphasized the word "right." Once again, the Blochs put their heads together and painstakingly evaluated dozens of acquisition candidates. "We decided our acquisitions had to be service businesses," Bloch explains. "The business had to be repetitive. We didn't want to get into a new business each year. We wanted customers who would come back every year. And we wanted quality businesses. We wanted to acquire companies that would improve our image. We didn't want to be in the trash-hauling business, for example."

Keeping those parameters in mind, the Blochs acquired Ft. Lauderdale, Florida's Personnel Pool of America (PPA), a temporary-services firm. In 1980, the Blochs bought CompuServe, an online computer service based in Columbus, Ohio. Both acquisitions paid off, but it was CompuServe that turned out to be a runaway success-and a problem for Bloch.

When the Blochs acquired CompuServe in the pre-Internet late-1970s, they never dreamed it would become one of the country's premier online providers. In 1996, its revenues exceeded $793 million. Even an astute businessperson like Bloch is awed when he considers the acquisition only cost $25 million. But the problem is that their acquisition of CompuServe has confused the H&R Block image. "For a number of years, the financial community has complained that it is difficult to follow our company," says Bloch. "We're in two very diverse businesses. Compu-Serve is in the high-tech business, whereas tax preparation is the exact opposite. Because of the success of CompuServe, we've become known as a high-tech company."

H&R Block's image within the financial community is critical. Because the alliance with CompuServe diluted their image, Bloch and his senior executives bowed to pressure from financial analysts and decided to gradually sell off CompuServe. In 1996, less than 20 percent of Compu-Serve was sold for $522 million. In September of 1996, the H&R Block board of directors decided not to proceed with spinning off Compu-Serve just yet; the company still plans to separate CompuServe but hasn't identified which options it will pursue until CompuServe's performance improves and stabilizes. "When the separation is completed, there won't be any confusion about what we do," says Bloch. It will be back to business as usual. Bloch and his army of tax preparers can concentrate on improving their performance at what they do best-tax preparation.

And although Bloch is not intimately involved in the day-to-day running of the business, he still puts in a full day's work, overseeing the entire tax-preparation operation. It's a routine he doesn't intend to give up. Even though he could have retired a decade ago, he doesn't want to turn his back on what he has worked so hard for. At this strategic juncture, this street-wise entrepreneur enjoys contemplating what made him and his brother so successful. "There was no magic formula," he asserts. He admits that things have gone smoothly, yet it was he and his brother who made this happen. "Early on, we learned there was no fast road or easy answers. A lot of people want to get ahead quickly and look for shortcuts. But there are none. To be successful, you have to be ready to stand behind your work and give customers more than they expect."

As simple as that may sound, asserts Bloch, "You also have to work real hard."

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Bob Weinstein profiled Charles Schwab in the November issue of Business Start-Ups.