IN OUR OPINION,
(A Continuing Series for Leading CPA Firms)
PERSPECTIVE #93 — SEPTEMBER 30, 2019
WHAT DOES IT TAKE TO CREATE A SUSTAINABLE BRAND THAT CAN
RUN WITH THE BIG DOGS?
“The older I get, the more I see a strategic path to where
I want to go. If you’re going to hunt elephants, don’t get
off the trail for a rabbit.” —T. Boone Pickens
In the context of a CPA firm, a sustainable brand is a firm that has both scale and “market permission” to service complex, sizable, multiple domestic and international location companies that have an appetite for growth and private/public capital that translates into services that it needs from a CPA firm beyond basic accounting, auditing and tax compliance. To have scale, a CPA firm needs to have about $250 million in revenues with healthy equity partner compensation. Receiving “market permission” from investment bankers, attorneys, private equity groups and industry peer groups to service their mid-market clients or portfolio companies gives CPA firms the ability to grow their brands and prosper over the long term. Without scale and “market permission”, a CPA firm is destined to be a merely good firm.
In the U.S. public accounting profession, there are three tiers of CPA firms. The Top Ten CPA firms are the sustainable brands:
- In Tier One, we have the Giant Four (Deloitte, PwC, EY and KPMG), with a principal focus on serving the Fortune 500, which have institutional, more sterile relationships with their CPA firms (as opposed to personal relationships with the partners; services provided are generally either compliance or consulting). The secondary strategy is the mid-market, but the Giant Four are in this market principally to absorb overheads and utilize partner/staff capacity. During the Sarbanes-Oxley professional services boom, circa 2002 to 2006, mid-market clients were discarded like yesterday’s newspapers, since during that period, the Giant Four didn’t need mid-market
- In Tier Two, there are the Next Six (RSM, Grant Thornton, BDO, Crowe, CLA and CBIZ and Mayer Hoffman), with a principal focus on the mid-market and a secondary focus on the Fortune 500 (with the main focus is on consultancy rather than auditing or tax compliance). Serving mid-market owner/operated businesses requires partners to develop personal relationships with their clients (as opposed to the institutional, much more sterile relationships of the Giant Four with their Fortune 500 clients). Each one of these Next Six firms aspires to achieve over $2 billion in annual revenues in the near term.
All ten firms in Tiers One and Two are great sustainable brands because, pound for pound, they have the best partner/staff talent, a stable of identifiable marquee clients, worldwide branding, industry credentials, quality leadership and an infrastructure that will continue to propel them over time. Most important, in addition to all the good things that come with scale, they all have “market permission” to service complex, sizable, multiple-location clients that raise private and public capital as they grow. Their CEOs, managing partners and other senior partners are very smart and energetic business leaders. Their colleagues are partners with deep subject matter expertise who serve as trusted business advisors and consultants to many successful companies.
- Then there are the Tier Three CPA firms. These firms principally service small businesses. Some aspire to be mid-market sustainable brands (and some of them will eventually achieve that status – perhaps even become the “category killer”). Others have taken a different path by being small, specialty boutiques. But the majority of them are merely good firms serving businesses that are small today and most of which are likely to be small tomorrow. This generally translates to small margins today and small margins tomorrow.
Many Tier Three CPA firms, while quality organizations, will either merge-up into mid-market sustainable brands or fail. If they don’t merge-up or fail, they will continue to bump along – with the destiny of being forever merely good firms with mediocre average partner earnings.
This perspective is not focused on building a Tier One (as there is no real opportunity except for the consulting space) or a Tier Three firm. Instead, this perspective is focused on building a Tier Two firm that ranks between #5 through #10, i.e., the Next Six, because that is where the
opportunity is for aspiring CPA firms that want to “run with the big dogs”. In Our Opinion, the opportunity is there for the taking.
Of utmost importance is that you need to commit to a strategic path toward becoming a mid-market sustainable brand and not deviate from it by chasing low-hanging fruit or other distractions. Unfortunately, many firms don’t think strategically. They don’t know where they want to go or how to get there. Many don’t even think beyond a two- or three-year period. They look simply to make a good living for their partners – without taking a longer-term strategic view of how to elevate their firm toward sustainability. But eventually the short-term tactical mode of operation catches up with such firms – limiting their growth – and, as a result, they either merge up or perhaps die. Poof!
Leading a CPA firm in this decade is more challenging than ever. Slow organic growth and talent shortfalls make it very difficult. CEOs, managing partners and other senior partners must always be up for the game, and be able to quickly adapt to a shifting landscape for services. They have to creatively identify value differentiators, lead others through change and become champions of change themselves. This is particularly important if they want to be more than just a merely good firm.
So, what is the magic sauce, you may ask – how do you start moving your firm from a merely good firm to a mid-market sustainable brand and start running with the big dogs? The magic sauce requires 8 steps or building blocks:
- A shared vision about the future and the strategies with accountability that will get your firm there.
- A sound, basic governance and economic model that rewards performance and includes a two-tiered partnership.
- First-class partners who know how to build, maintain and grow people relationships.
- An effective performance management and compensation system that aligns with your strategy.
- Marquee clients through industry, consulting and technical specialization.
- A firm that is distinctive and brings value beyond compliance needs.
- National and global geographic reach achieved organically and by merger combinations.
- Persistent and consistent leadership.
It is not easy trying to transform a small CPA firm into a mid-market sustainable brand. Some partners will resist the transformation and, in some cases, try to undermine the effort. Other partners won’t understand how the transformation could realistically be achieved. This “noise” is to be expected but it can’t be tolerated as it acts as a drag on the firm. If the path to becoming a mid-market sustainable brand requires some partners to “get off the bus”, so be it. Leadership has to put firm first and continue building a firm that can take advantage of the opportunities in front of it.
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 shares 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.