In a few weeks, we will be celebrating our first anniversary as a boutique advisory firm consulting to small and mid-sized CPA firms. It has been a terrific year for us—business has exceeded our expectations and we are very grateful for the opportunity to advise and consult with more than 12 clients.
In our opinion, there are some real challenges out there for small and midsize CPA firms and, at the same time, there are many opportunities. As we reflect on the upcoming year, we encourage you, leaders in mid-market CPA firms building sustainable brands for the long haul, to address five practice challenges as you approach 2017:
1. Stay away from “growth at almost any cost.” We get it. Organic growth is very hard to come by in this anemic economy. We also understand that some of your best business developers and relationship builders are getting older and your bench strength isn’t where it needs to be. And while it is tempting to pursue a “top line strategy” and snatch “growth at almost any cost,” we encourage you to resist the temptation of acquiring very small practices that help create bulk, but nothing else.
We have found that very small practice acquisitions are riddled with sand traps (problems). At the end of the day, they generally don’t work for mid-market CPA firms. The quality of these small practices is not on par with yours. The quality of the professionals in these small practices is lacking when compared to your firm. Overall, if a small practice acquisition doesn’t have quality clients with quality people (and it usually doesn’t have both and in some cases, doesn’t have either), it isn’t going to be accretive to your firm. In fact, oftentimes these small deals quickly move in and out of mid-market brands and prove to be dilutive. Further, a top-line mentality also usually leads to poor morale and defections of some of your best people because they get disillusioned by working on small clients with little, if any, margin. Generally, a lose/lose proposition that we would encourage you to avoid.
2. Get serious about a strategic plan that holds partners accountable through a performance management and compensation system. Many mid-market firms don’t have a strategic plan or, if they have one, they don’t use it as a tool that holds partners accountable to each other through a performance management and compensation system. Instead these firms went through a strategic planning “exercise” that sits on a shelf (perhaps in gift wrap and a bow) gathering dust in partner offices. That’s a missed opportunity!
A well thought out strategic plan, if used properly, is a great management tool. It provides direction and gets partners on the same page. It is the vehicle for individual partner setting, periodic monitoring, counseling and an annual evaluation which is usually used as the basis for annual compensation adjustments. Coupled with an effective performance management and compensation system that enables timely monitoring of progress compared to plan, a strategic plan is very powerful. We encourage you to undertake the effort (it’s an exhaustive process and an expensive one if you use an outside consultant), but the pain is greatly outweighed by the gain. A strategic plan can become a living, breathing part of your firm as you navigate the future.
3. Deliver on the promise of being a trusted business advisor to your clients. Most mid-market firms say their professionals are trusted business advisors (forward thinking by providing clients with solutions to business challenges), but in fact that is not the case. The trusted business advisor concept in many firms is nothing more than a marketing and sales slogan. It’s not reality as a large chunk of the work done by accounting and tax professionals requires solid technicians who can effectively deal with compliance issues. Every day, day in and day out, they look in the rearview mirror. While that certainly helps clients, it doesn’t deliver on the promise of being a trusted advisor.
Again, we see this as a missed opportunity. Imagine how powerful your firm could be if your people were, in fact, forward thinkers as well as technicians. Natural by-products of annual compliance services include observations and suggestions that help clients increase the value of their businesses by improving EBITDA and working capital. Such value-added services would make your firm distinctive and provide you with a competitive edge in the market. While undertaking the education and on the job training is a big investment, we believe it pays big dividends. And, by the way, your professionals would thank you for providing them the opportunity of becoming trusted business advisors.
4. Move away from a traditional accounting firm model that chases shrinking margins to a professional services firm model that pursues increasingly handsome margins. Compliance services, particularly in an anemic economy, produce very thin margins for every size of CPA firm, from the largest to the smallest. Several forward-thinking firms have begun to build out consulting and advisory services such as cybersecurity assistance, transaction support services and international tax planning. It’s where healthy margins can be found. We encourage you to start looking at a broader menu of services that are usually found at what is referred to as professional services firms. When you peel back the onion at the Top 10 firms, their organic growth and a large percentage of their profit improvement are coming from advisory and consulting services. Our best guess is that these and other professional services are going to be part of the future for many firms, particularly as new competitors, disrupters such as Google and Microsoft, enter the space that has been traditional owned by CPA firms.
5. Deal with your aging partner group to ensure smooth leadership and client transitions. Many firms acknowledge they have aging partner groups. We have found that few firms, however, are effectively addressing the problem by going after young talent, developing that talent and grooming that talent for future leadership and client transitions. This problem isn’t going away (it is going to get only worse if you put your head in the sand). There is plenty of talent in your firm, but it needs to be developed. Some firms have launched partner candidate development academies (very effective retention and development tools), and we encourage you to consider the same for your firm. There also are many high-quality professionals in the Giant Four firms that aren’t happy because of long hours and tedious tasks. They are available and interested in moving to small and midsize firms, but they need to be identified. High-quality retained search firms are very effective in helping you recruit this talent.
Taking corrective measures that address these and other challenges on a timely basis will help maximize growth and profitability in 2017 and thereafter. It will avoid the inevitable unraveling of your firm. Tough medicine but very rewarding for the long run.
Enjoy the holiday season with your family. Happy and healthy 2017!