IN OUR OPINION, PERSPECTIVE #65 — August 20, 2018
(A Continuing Series for Leading CPA Firms)
ARE YOU TOO SMALL TO ENDURE?
“Go big or go home. Otherwise, you’re wasting your youth”
There are approximately 14,000 multi-partner CPA firms in the U.S. and yet, according to Accounting Today’s 2018 Top 100 Firms survey, only 100 firms had annual revenues of at least $40 million; the median revenue was approximately $86 million. The statistics are staggering we have many small CPA firms in this country serving the mid-market and, regardless of size, in this emerging economy many firms are finding it difficult to organically grow their audit/tax practices at an acceptable rate (say 6% to 8% per annum). Without healthy profitable growth on the top and bottom lines, any firm will struggle and ultimately die.
So here is the question we ask you to ask yourself and your partners – is your firm too small to endure? In Our Opinion, if your answer to this question is either maybe or yes, you have to decide which strategic path your firm needs to follow. There are basically two alternatives for most firms:
- Go Big or
- Go Deep
Either path will result in what we refer to as building a sustainable brand. Deciding which path is right for your firm starts by answering these tough questions:
- Do you have the wrong mix of client service partners and staff?
- Is there enough emphasis on firm growth and profitability?
- Is your firm autocratic and/or is there sufficient leadership?
- Is there too much or too little partner autonomy?
- Do you have enough superstars?
- Do you have too many unproductive partners?
- Are the partners on the same page strategically?
- Is your firm too eager to accept and any all clients?
- Does your firm have enough capital to invest in the future?
The answers to these questions will help you decide which strategic path is realistic for your firm. The next step is to look outward and answer these questions:
- Going Big – we often hear the phrase “bigger is not necessarily better” but we maintain that the marketplace places a lot of importance on size and brand awareness and therefore “bigger is better” because the bigger your firm is, it is likely that you are building an impressive client list and many impressive partners and staff. Impressive client lists and impressive partners and staff help you attract high quality people and new clients and effectively serve existing clients. So, what does the competitive landscape in your geography look like? Is there an opportunity for your firm to become a clear alternative to the Giant Four firms or to the Next Six? Is there an opportunity for you to gain market share with larger, more complex clients with presumably better margins?
- Getting Deeper – in your marketplace, is there an industry niche (perhaps commercial real estate, retail, technology) that cries out with opportunity and a need for a specialized CPA firm with market distinction? Small firms that are deep with industry expertise usually generate excellent livings for their partners. Industry specialization sells with clients, prospects and your partners/staff. So, what does the competitive landscape in your geography look like? Is there an opportunity for your film to be the “go to” firm for a particular industry?
Once you preliminarily decide which strategic path might be appropriate for your firm, there are eight steps that you need to tackle. These are briefly summarized below:
- You start with strategic planning, implementation and accountability that requires you to:
- Go off-site with a professional facilitator and have a partner retreat – the best way to kick-off a strategic plan.
- Create a Vision Statement and do a SWOT Analysis.
- Burn the plan and tactics into each and every partner’s annual goals – this is the best way for you to achieve effective implementation.
- Develop a Sound, Basic Governance and Economic Model that enables you to:
- Establish an Executive Board for effective governance and a Senior Leadership Management Team for the day-to-day operational oversight.
- Limit equity partnerships to those who consistently help to perpetuate the firm and build enterprise value.
- Avoid the temptation of the upside-down partner/staff pyramid.
- Use insightful management tool that will enable successful execution.
- Attract, Develop and Retain First-Class Partners and remember:
- An effective HR function is critical to your future partner pipeline.
- Senior managers and laterals have to see a quality firm, one that has a strategic plan to transition to a sustainable brand.
- Your highest-performing partners must become true owners and not merely employees. Easier said than done as you grow.
- Develop a Performance Management and Compensation Plan that:
- Drives desired behavior. The focus needs to be firm first, line of business or office second and individual performance third.
- Evaluates performance in a consistent approach – it’s integral to communications and execution.
- Is viewed as a way of running your firm, rather than merely a means of rewarding partners.
- Attract, Develop and Retain Marquee Clients Through Industry, Consulting and Technical Specialization because:
- Industry specialists, consulting specialists and technical specialists are integral to your growth.
- Marquee clients are credential builders that provide CPA firms with the “market permission” to grow with “scale”.
- Specialists and marquee clients are prescriptions for providing distinctive service that brings value beyond compliance needs. This is the way your firm will stand out from your competitors.
- Develop Value-Added Deliverables That Are By-Products of Your Annual Compliance Services that:
- Demonstrate that your CPA firm provides not only superior service but also “value-add”. Three value-add examples that are by=products of your annual audit/tax compliance services are summarized below:
- Ask clients what they want from their relationship with you – then exceed their expectations. A Client Service Plan sets standards established by your clients that will serve as precise indicators of your value-add.
- Owners want to increase their business valuation and their working capital. You can demonstrate that your firm can help by delivering a Memorandum Identifying EBITDA/Working Capital Improvements. Communicate your observations not only to senior management but also to investors. They’ll be blown away by your firm’s distinctiveness.
- Family-owned businesses can truly benefit from a process that allows the owners to define their strategy, direction and priorities. A Client Situation Review will help your firm to focus on client challenges and how your firm can provide solutions.
- Consider National and International Reach:
- Arguably there are 11 U.S. financial centers that are absolutely necessary to handle growing companies. Without them (if not all—then at least one or, perhaps, two), you are not a player.
- Global reach, an important vehicle that strengthens your firm’s capabilities, is first obtained through membership in an association. Ultimately, if you are looking to Go Big, you need one global brand.
- International business Centers in the U.S. are the vehicles to establish a firm/office focus on international business and a means to developing skills and credentials.
- Make It Real Through Persistent and Consistent Leadership:
- Every word the CEO says, every action taken, has tremendous impact not only among the partner ranks but also throughout the firm.
- Being a leader is very much like being a parent. You need to be persistent and consistent in your words, actions and principles.
Just recently, Moss Adams acquired Hein, Plant Moran acquired EKS&H and BKD acquired Loeb & Troper. These are significant transactions and their common theme is to get bigger and deeper. Small and mid-sized CPA firms need to get on the bus and bulk-up. If they don’t, they will become yesterday’s news!
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 email@example.com or 203.292.3277.