IN OUR OPINION, PERSPECTIVE #41 — SEPTEMBER 5, 2017
(A Continuing Series for Leading CPA Firms)
UNLOCKING ACCELERATED GROWTH
“Growth is never by mere chance; it is the result of forces
— James Cash Penney
When it comes to growth, two of our core beliefs are:
- size matters, and
- service line diversification (the professional services model) is better than the traditional accounting firm model.
In Our Opinion, the proof is in the pudding. Consider the following two data points (kudos to Mike and Kelly Platt for publishing the IPA Top 100, 200 and 300 firms each and every year; the statistics we are referencing come from their 2017 analysis):
- In 1997, three non – Giant Six firms in the IPA 100 (with annual revenue between $1.9 billion and $37.2 million) had annual revenue of at least $100 million. By 2007, 19 non – Giant Four firms were generating at least $100 million in revenue annually and in 2017, annual revenue at 38 non – Giant Four firms are generating at least $100 million in revenue annually.
- At the IPA 100, audit, as a percentage of total revenue, continues a multi-year decline to 37% while non-traditional service lines have on average climbed to 27%.
You may be wondering what impact do these data points have on growth in revenue and profits? Well, we believe they have significant impact. We encourage you to compare these statistics to what is happening at your firm when considering the following:
- Average organic revenue growth at the 38 largest non – Giant Four firms in the IPA 100 is 2%; with mergers, growth goes to 11.1%. Other IPA 100 firms are experiencing average organic revenue growth of 6.2%; with mergers, growth goes to 8.5%. In contrast:
- Average organic revenue growth at the IPA 200 (with annual revenue between $36.5 million and $16.8 million) of 7%; with mergers, growth goes to 8.2%.
- Average organic revenue growth at the IPA 300 (with annual revenue between $16.7 million and $10 million) of 8%; with mergers, growth goes to 6.6%.
- Average organic net income growth at the 38 largest non-Giant Four firms is 9%; rising to 9.6% when factoring in mergers. Other IPA 100 firms are experiencing average organic net income growth of 3.5%; with mergers, growth goes to 3.8%.
With this backdrop, we present to you 21 questions; your answers, and what you do about your answers, will unlock accelerated growth at your firm:
- What is your understanding of the future direction of the profession and how can your firm succeed in this new environment?
- If there isn’t clarity about your firm’s vision, what do you believe it should be?
- Are there opportunities for more effective leadership and governance at your firm?
- What are the major obstacles to your firm achieving 8% organic growth yearly?
- What strengths does your firm have that you believe are not being leveraged enough in the market?
- If the firm could only work on three strategies to drive growth of revenue and profits, what would they be?
- The most successful firms are changing from a traditional accounting firm model to a professional services firm model that broadens the menu of services. Is this a direction that your firm should aggressively pursue? If yes, please identify advisory and consulting opportunities you believe might be particularly attractive to your firm.
- Should your firm hire a professional sales team? Why or why not?
- Is your firm going to market with distinctive service capabilities that add value to business owners as they tackle their challenges?
- Is there a clear and convincing “Value Proposition” that distinguishes your firm from competitors and removes price as the main buying trigger for potential clients?
- Is geographic diversification an attractive strategy for your firm?
- Are mergers and acquisitions attractive strategies for your firm?
- Does your firm properly prepare for new client opportunities and assign the most effective sales team to the opportunity?
- Does leadership make it clear to all partners what is expected from them in terms of business development?
- Growth is negatively impacted by client losses – what does your firm do to maximize its “stickiness” with all major clients?
- Does your firm effectively align strategy with partner goal setting, accountability and partner compensation adjustments?
- How do you believe that partner accountability should be established, managed and communicated?
- Does your firm actively attempt to improve talent?
- Is your firm producing a sufficient number of potential partners who are capable of perpetuating the firm?
- Is there a comprehensive training process/program in place that prepares potential partners and newer partners on skills relating to effective networking and business development?
PARTNER COMPENSATION PLAN:
- Is your firm ready to move away from a “book of business” partner compensation plan to a methodology that aligns strategy, partner goals and partner performance?
The trend lines are compelling. In contrast to 1997, when only three firms were achieving annual revenues of $100 million or more, today there are 38 firms and those firms are experiencing organic revenue growth of 8.2% (11.1% when mergers are considered) and organic income growth of 7.9% (9.6% when mergers are considered). Not only are the largest firms getting bigger, they are also getting stronger with service line diversification. Today Audit is 37%, Tax 27% and Advisory 36% of annual revenues. Unless market conditions change, it is pretty clear to us that Audit will continue to shrink (because margins continue to shrink) and Advisory will continue to expand (because that is where client demand is and demand translates to healthy margins). For the IPA 100 firms, taken as a whole, average organic growth in net income of 4.8% has slowed to a pace not seen since 2011 when firms were climbing out of recession. There is no sign that indicates this downward spiral will not continue if your firm continues following the traditional accounting firm model as opposed to a professional services firm model with service line diversification.
If your firm is not demonstrating healthy trend lines, it is time to kick into high gear. Accelerating growth isn’t brain surgery. It requires commitment, dedication, strong leadership and partner accountability. Answering the questions above should jump start the growth journey for you. Best of luck!
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.