Geographic Expansion? Make Sure You Do It Right

“The essence of strategy is choosing what not to do.”

— Michael Porter

Are you the CEO of a one office CPA firm that is doing very well and is beginning to think about opening a second office in a different city through a merger or acquisition? If yes, this Perspective is must reading because history has shown that many one office firms who open up a second office in a different city are disappointed with its integration and financial performance. Establishing a second office is high risk unless:

Main Office or “Headquarters”:

Creates a one-firm, firm-first culture (thinking outside of local geography by providing clients with the best possible client service team regardless of geography) and

1. Instills a sense of management consistency and standardization at the second office while allowing for individuality and flexibility based on geography, office size and strengths/weaknesses of office leadership.

2. The partnership understands that the acquisition of a second office is essentially a long-term investment in the firm’s future that more than likely will initially be dilutive, and if the right decision, accretive over the long term.

There is an effective local office partner in charge who understands his/her key job responsibilities and what it takes to manage a local office, maximize opportunities and minimize risks.

We have found that one office firms often fail when they attempt to open a second office because cultures at the two locations don’t blend and because the two offices develop an “us” versus “them” mentality. Essentially, the two offices don’t wear the same team shirts so to speak. In fact, it is not unusual for these offices to compete or cannibalize each other for new clients and new assignments at existing clients. To help minimize the possibility of falling into the “us” versus “them” mentality, we have found that it helps if the main office or “headquarters” cross fertilizes partners, staff and clients. Partner and staff relocations, if possible, are highly effective but, if not possible for whatever reason, cross fertilization of partners/staff on client assignments is highly desirable.

Many partners at one office CPA firms do not take the long view of the future and are focused principally on “show me the money.” Many are not wanting to make investments that won’t pay off until sometime in the future because they won’t be benefiting from the investment in the near term, if at all, particularly if they retire before the investment turns accretive. This is a tough mentality to overcome but it can be effectively dealt with if the firm’s leadership exhibits persistency and consistency in what’s in the best interests of the firm over the long haul.

While the first two points are very important in “setting the table” and managing expectations, the most important ingredient in opening a second office through a merger or acquisition is an effective local office partner in charge. In Our Opinion, key job responsibilities of the office partner in charge include the following:

GENERAL:

Driving firm protocols, policies and procedures including those required for risk management, communications, business growth and profitability, cost controls and client service.

Designing and developing a two/three year office strategic plan that mirrors, to the extent appropriate, the firm’s strategic plan and overseeing its implementation.

Driving “go-to-market” strategies through firm’s industry groups and fostering the development of skills.

Becoming the “face” of the firm in the local community by being the lead spokesperson with major organizations and social media.

Maintaining relationships with the management of other major CPA firms in the local geography.

Resolving major client disputes consistent with the best interests of the firm and collaborating with firm’s internal legal counsel and functional heads when appropriate.

Making it clear that partner compensation is determined first and foremost on how successful the firm financially performs and secondarily on how well the office does and, within the office, how well individual partners perform.

CLIENT MANAGEMENT AND PROFITABILITY:

Overseeing client ranking and addressing “D” clients.

Approving new clients including fee arrangements and profitability.

Approving all major fee adjustments.

PARTNER PERFORMANCE AND ACCOUNTABILITY:

Collaborating with partners on their annual goals.

Coaching and mentoring partners as part of a quarterly review of how partners are doing against goals.

Taking appropriate action to hold partners accountable for their actual collections versus budgeted collections.

Overseeing succession and client transition plans for retiring partners and for partners who are reducing responsibilities.

Recommending compensation and annual adjustments.

Fostering partner involvement in office social functions and in supporting personnel recognized for outstanding community service.

PROFITABILITY:

Developing and taking ownership of the local office financial budget with the buy-in by office partners.

Monitoring monthly/annual financial results and, to the extent, that results aren’t meeting expectations, collaborating with office’s management about corrective action.

Ensuring that all appropriate tools and information are provided to industry “go-to-market” leaders and other office partners.

Managing daily operations including human resources and receivables and work in progress management.

Assuring office compliance with firm policies over capital expenditures and operating expenses.

PERSONNEL:

Ensuring that the office has a personnel plan that acts on the talent gap between the office strategic plan and

current personnel capabilities.

Monitoring and enforcing firm culture reflecting an appropriate balance between financial and operational excellence.

Coaching and mentoring staff.

Recommending staff promotions, raises, and bonus awards.

Approving all major hires and staff terminations.

Holding monthly partner and staff meetings to share firm and office developments.

Ensuring timely employee performance evaluations.

OTHER:

Completing an annual survey of office morale and take appropriate action based on results.

Promote programs and activities that reinforce the team and support firm culture.

In Conclusion

Opening a second office in a different geography can be very risky business if the firm’s leadership doesn’t “set the table” and manage expectations of the firm’s partners. Having said that, a successful second office is not that uncommon if the day-to-day leadership is vested in an effective office partner in charge who understands the responsibilities and how to carry them out. Oftentimes, the successful opening of a second office leads to the opening of a third and potentially more offices – all of which can be very fruitful financially.

Geographic Expansion? Make Sure You Do It Right

“The essence of strategy is choosing what not to do.”

In Conclusion

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