IN OUR OPINION, PERSPECTIVE #52 — FEBRUARY 19, 2018
(A Continuing Series for Leading CPA Firms)
BASIC PRINCIPLES TO IMPROVED PROFITABILITY — DO YOU HAVE THE DISCIPLINE?
“In reading the lives of great men, I found that
the first victory they won was over themselves…
self-discipline with all of them came first.”
—Harry S. Truman
We all know that improving profitability on a sustained basis generally is a long-term play that requires significant planning, discipline, accountability, implementation, and patience. Unfortunately, the senior partners at many small and mid-sized CPA firms do not possess all of these attributes and therefore are unable to make significant strides in their bottom line distributions to their partners. While it’s an uncomfortable scenario, it’s reality and almost understandable as many small and mid-sized CPA firms are thinly managed and do not have the leadership that is necessary to change the inevitable path of merging up.
While improving long term profitability is a complex challenge, In Our Opinion there are several basic principles that have the potential for significant operational improvements. Once applied, many small and mid-sized firms incrementally move the needle on the bottom line. Nevertheless, we have found that even these basic principles, tried and true, aren’t consistently used at many small and mid-sized CPA firms because of a lack of organizational discipline.
This Perspective summarizes the basic principles and emphasizes the importance of organizational discipline to improve profitability.
Here are the basic principles to improve operations:
- Strive for a shared vision about your firm’s future and strategies (with partner accountability) that will help achieve success.
- Promote a “firm first” culture that rewards collaboration.
- Reach for a high degree of institutional partner loyalty and team effort by placing great emphasis on firmwide coordination of decision making, group identity, cooperative teamwork and institutional commitment.
- Create a foundation of fairness and a lack of cronyism. When your firm says that certain things matter and they actually do matter, it goes a long way in establishing trust in your firm’s leadership.
- Insist on a sound economic model that rewards consistent performance.
- Insist on sound corporate governance that “walks the talk” when the rubber meets the road.
- Require consistent and persistent leadership by senior partners with a no tolerance view on individual partners who think that they themselves are “stars” and much more important than the firm itself.
- Take a hard look at your partner compensation model and ensure that it contains enough transparency and that it supports your firm’s core values and strategic decisions.
- Attract and retain first class partners that understand how to build lasting business relationships with clients and contacts.
- Develop partner goals, holding partners accountable for delivering results, and rewarding compensation when goals are achieved both individually and collectively.
- Drive industry specialization (the key to a value proposition that differentiates) into your firm’s DNA.
- Emphasize growth on the top and bottom lines at satisfactory rates (say 6% to 8% per annum) through cross sells and new originations.
- Create a business development culture that includes everyone within their capacity and skill set.
- Demonstrate that your firm is different by bringing value to clients that is measurably better than competitors. This is readily achieved when your firm institutionalizes its approach to client service (client expectations) by consistently providing by-products of compliance services such as observations to EBITDA and working capital improvements.
- Approach client service with multi-disciplinary client service teams of audit, tax and advisory professionals.
- Make it well known that the firm wants marquee clients that build brand awareness and credentials and not simply volume for volume sake.
- Emphasize that long hours and hard work demonstrate high involvement and commitment to the firm.
- Place an emphasis on continuous education on firm policies, procedures and protocols.
- Look for smart mergers and lateral hires that add to a firm’s strength, improves its weaknesses and expand its footprint.
Implementing these principles does not require brain surgery or dealing with complex longer-term strategies. Nevertheless, we have found that many small and mid-sized CPA firms cannot implement many, if not most, of them on a sustained basis. And again, we believe that it comes down to a lack of organizational discipline. We have found that many firms pick and choose a number of these principles and treat them as the flavors of the month. Emphasis is pushed through their firms for one or two months and profitability improves. That’s the good news. Now the bad news. After one or two months of C Suite muscle, management’s attention wanes and the foot is taken off the gas pedal. Slowly people get the impression that leadership no longer is interested in the initiative. If leadership isn’t looking, many professionals will go back to their bad or ineffective habits. It’s human nature.
These basic operating principles are tried and true tools to improved profitability. We believe they can be viewed as low hanging fruit. They work. If your firm does nothing else coming out of the tax season, we encourage you to take our list of basic principles, prioritize it for your firm and start driving the most impactful through your operation with persistency and consistency. The key to improved profitability is organizational discipline and determined leadership.
Dom Esposito, CPA, is the CEO of ESPOSITO CEO2CEO, LLC — a boutique advisory firm consulting to leading CPA and other professional services firms on strategy, succession planning and mergers, acquisitions and integration. Dom, voted as one of the most influential people in the profession for two consecutive years by Accounting Today, authored a book, published by www.CPATrendlines.com., entitled “8 Steps to Great” which is a primer for CEOs, managing partners and other senior partners. In Our Opinion, is a continuing series of perspectives for leading CPA firms where Dom and his colleagues share insights, experiences and wisdom with firm leaders who want to “run with the big dogs” and develop their firms into sustainable brands. Dom welcomes questions and can be contacted at either firstname.lastname@example.org or 203.292.3277.