March 18, 2019

IN OUR OPINION, PERSPECTIVE #79 — MARCH 18, 2019

(A Continuing Series for Leading CPA Firms)

“ANOTHER FIRM BITES THE DUST”

“ There are no secrets to success. It is the result of preparation, hard work, and learning from failure”.                                                                 — Colin Powell

While there are lots of reasons why small and mid-sized CPA firms don’t realize their full potential and, in some situations, fail or bite the dust, we have found that the downward spiral of a firm usually starts with a Managing Partner (the heart and soul of any CPA firm — the shepherd, orchestra leader or quarterback, if you prefer, of the partner group) who didn’t fully understand the key objectives and day-to-day responsibilities of the role and therefore, failed to operate on all cylinders.

By way of background, a few points are worthy of note:

• At small and mid-sized firms, many Managing Partners “grew up” in small firm environments and have had little exposure, if any, to what it takes to move the firm to the next level. Instead, these Managing Partners are usually the biggest billers, the best business development partners or the partners with the most billable hours. At  larger firms, particularly at the Top 100, on the other hand, the Managing Partner usually is a developing professional who has been exposed to what it takes to operate a complex organization, exhibits the skills to build and leverage the resources of the firm and, therefore, has the potential to move the firm to the next level. And while a successful Managing Partner, regardless of the size of the firm, usually carries a very small client load to stay grounded in client service and to remain credible with the partner group, billings and chargeable hours are truly a very small part of the job. In our view, a Managing Partner’s clients are the firm’s partners; giving them the opportunity to maximize their strengths while minimizing their weaknesses. It’s a very challenging and daunting responsibility.
• As a leader, every word a Managing Partner says, and every action taken, has a tremendous impact not only among the partner group but also throughout the firm. This can’t be overemphasized!
• Many firms select a new Managing Partner from their ranks at an age somewhere between 45 and 53. Candidates are usually excellent client relationship partners with substantial client service responsibilities. The thought of giving up a substantial portion, if not all, of the client relationships that have been developed over years of service, is very scary to many. For sure, there is a risk in being a Managing Partner. Candidates ask:
• “What happens if I’m not successful? In the spirit of trust, I lose most of my client responsibilities and begin to lose touch with my outside referral sources. I’ll have nowhere to go but to exit the firm when I’m no longer Managing Partner”.

This is a very real concern and we have found many firms do not want to recognize its severity. Instead firms say, “trust us” and while that is easy to say, history has found that this trust has been misplaced. Our advice is that firms consider “protecting” the Managing Partner with an agreement, with compensation and severance provisions, that ensures employment for two or three years after the person steps down as Managing Partner. While this is rarely done in today’s world, we suggest that the absence of such an agreement could very well be one reason firms have difficulties in attracting effective managing partners and, as a result, are unable to achieve the next level of success.

In Our Opinion, Managing Partners at many small and mid-sized CPA firms would be much more successful if they went into the job with a better understanding of their key objectives and day-to-day responsibilities. To provide guidance and to help improve the success rate for new Managing Partners and for the firms that they lead, we are pleased to summarize the Top 100 firm best practices to maximize opportunities and minimize risk. Of course, one size does not fit all and the practicality of this guidance depends on the size of the firm, number of offices, geographic coverage and individual strengths of the professionals. This guidance should prove to be particularly helpful to Managing Partners responsible for multiple offices or for those with a single office consisting of 15 or more partners.

KEY OBJECTIVES

• Create a one-firm, firm first culture and instill a team philosophy that client service transcends geographic and office boundaries. This requires partners thinking “our clients” not “my clients”.
• Communicate effectively with partners/staff and the community.
• Take an active role in client service and communication plans and assure that partners/staff are providing first class, quality client service that can be measured in a number of ways including:
• Timeliness of delivery.
• Technical expertise.
• Innovative ideas.
• Forward thinking strategies.
• Frequent communications.
• Thought leadership.
• Client appreciation.
• Establish effective corporate governance.
• Ensure a strong balance sheet.
• Drive revenue and profitability that results in market compensation for partners/managers.
• Implement best practices for communications, business growth, and cost controls.
• Protect the firm and assure that partners/staff are appropriately trained, evaluated and adhering to firm policies and evaluating client acceptance and  continuation risk.
• Participate in the local community by being an active leader in nonprofit organizations.
• Function as the firm’s spokesperson with business and financial outlets and publications.
• Mentor future leaders.
• Maintain relationships with the leaders of other small and mid-sized CPA firms and nurture potential M&A activities.

DAY-TO-DAY RESPONSIBILITIES

• Design and develop a strategic plan and direct its implementation.
• Work with Firm’s Executive Committee (strategy, firm and partner matters) and Management Committee (day-to-day execution).
• Be readily available for big opportunities or problems.
• Create an environment of trust among the partners.
• Walk the talk and lead by example (“do as I do, not as I say”).
• Ensure that partners set stretch goals and that they are held accountable for progress.
• Ensure that partners receive the appropriate compensation for their contribution to the firm’s success.
• Coach and/or outplace ineffective partners.
• Develop relationships with major clients and potential clients.
• Market and sell the firm’s products and services to clients and potential clients; an effective developer of new business is very desirable.
• Assure compliance with firm policies regarding capital expenditures and operating expenses.
• Prepare and internally communicate an annual operating budget and be held accountable for its achievement.
• Ensure an effective personnel plan for current and future client service needs.
• Seek laterals who can beef-up bench strength and diversification.
• Oversee key internal go to market and functional partner/staff meetings.
• Hold monthly partner meetings to discuss financial performance and other firm matters. Topics usually include:
• Financial performance, billed hours, collected rate per hour, personnel costs, utilization, etc.
• Firm operations including key issues and opportunities.
• Developments at major clients.
• Marketing and business development activities.
• Business development and pipeline reporting.
• Personnel updates.
• Functional (Audit, Tax and Consulting) updates.
• Risk management.
• Scheduling and staffing capacities.
• Ensure an effective utilization of administrative management and financial information systems.
• Resolve significant professional disagreements among the partners.
• Implement and maintain effective client billing and collection protocols.
• Promote diversification of services by introducing new products and services.
• Work with the HR Department on significant office personnel hiring and termination matters.
• Monitor partner/manager fee realization vs. plan and recommend actions for improvement.
• Oversee client service transition planning for retiring partners.

IN CONCLUSION

Firms need to be very careful in selecting and developing their Managing Partner. The goal should be to ensure a high probability of success. That’s not only good for the Managing Partner, it’s also good for the firm and for future managing partners.

Don’t short change the importance of the role; too many firms fail when the Managing Partner doesn’t have the capability to move the firm forward. We strongly encourage firms to make the necessary investment in an effective Managing Partner.

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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 desposito@espositoceo2ceo.com or 203.292.3277.