Securing the future : succession planning basics

University of Mississippi University of Mississippi

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Guides, Handbooks and Manuals American Institute of Certified Public Accountants (AICPA) Historical Collection

2010

Securing the future : succession planning basics Securing the future : succession planning basics

William L. Reeb

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Recommended Citation Recommended Citation Reeb, William L., "Securing the future : succession planning basics" (2010). Guides, Handbooks and Manuals. 739. https://egrove.olemiss.edu/aicpa_guides/739

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Wil liam L. Reeb, CPASponsored by the Private Companies Practice Section (PCPS)

SECURING THE FUTURE

SUCCESSION PLANNING BASICS

SECURING THE FUTURE – SUCCESSION PLANNING BASICSA

ICPA

®

AICPA Member and Public Information: aicpa.org

AICPA Online Store: cpa2biz.com

Bill Reeb, CPA/CITP, has been consulting for three decades for businesses of all sizes and became a CPA in 1986. Prior to his life as a consultant, he worked in sales for IBM. As an entrepreneur, he has founded eight small businesses in various industries. Bill is an award-winning public speaker; he lectures throughout the U.S. and Canada and has been featured on numerous television programs. Also an award-winning author, he is internationally published, with numerous books and hundreds of articles and columns to his credit.

His honors include being named a CPA Ambassador and presented with the Pathfinder Award and serving as the Texas Vision Delegate. He also has been recognized as one of the Top 100 Most Influential CPAs, named one of the Top 100 Most Influential Practitioners, and listed as one of the Most Recommended CPA Firm Consultants.

About the AICPA’s Private Companies Practice Section PCPS is a community of CPA firms committed to making practicing CPAs and their firms successful through education and advocacy. PCPS provides local and regional firms with practice management tools and resources and acts as a voice for these firms in the standard-setting arena.

The PCPS Firm Practice Center provides access to a wide variety of valuable information and resources to make firms successful. The Center showcases content from the AICPA and associated state CPA societies renowned experts and authorities in numerous fields and well-known consultants to the profession and firms themselves. To learn more, visit pcps.aicpa.org.

ISBN 978-0-87051-854-6

780870 5185469090520

10224-356_SecuringtheFuture (Cover).indd 1 1/11/10 4:03:25 PM

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Wil liam L. Reeb, CPASponsored by the Private Companies Practice Section (PCPS)

SECURING THE FUTURE

SUCCESSION PLANNING BASICS

10224-356

Notice to Readers

Securing the Future: Succession Planning Basics does not represent an official position of the American Institute of Certified Public Accountants, and it is distributed with the under-standing that the author and publisher are not rendering, legal, accounting, or other profes-sional services in the publication. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

Copyright © 2010 byAmerican Institute of Certified Public Accountants, Inc.New York, NY 10036-8775

All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please email [email protected] with your request. Oth-erwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC 27707-8110.

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Publisher: Linda Prentice CohenSenior Managing Editor: Amy M. StainkenDevelopmental Editor: Andrew GrowProject Manager: Amy SykesCover Design Direction: Clay PorterInterior Designer: David McCradden

00-Securing1-FM.indd 2 1/8/10 11:35:25 AM

iii

Foreword

The AICPA’s Private Companies Practice Section (PCPS) is proud to be a part of the Se-curing the Future publication series. When succession planning was identified as a significant profession issue back in 2004, PCPS was there and hired one of the true thought leaders in the profession, Bill Reeb, CPA to gain further insight and to create a publication to address the needs of the profession in this area.

Fast forward four years to 2008, when PCPS again called on Bill to conduct research into this issue and—based on past experience and current issues raised—help PCPS create the PCPS Succession Resource Center. Bill and his partners, Dominic Cingoranelli and Michaelle Cameron, founders of the new organization the Succession Institute, collectively developed the materials and worked in getting the PCPS Succession Resource Center live and content rich on the PCPS Web site (www.pcps.org). The Succession Resource Center is web based learning, and houses both text and video content on succession issues. In ad-dition to it’s online offerings, PCPS also wanted to provide a print version for the broader audience. We went back to the Succession Institute team to create a second publication in this Securing the Future series.

As part of the succession research, PCPS conducted a survey in 2004 and 2008. The results of the 2008 survey showed slight improvement with 35% of responding multi owner firms and 9% of sole proprietors reporting having a succession plan in place. In 2004, only 25% of multi owner firms and 8% of sole proprietors had a plan. While it appears that some progress has been made, a great deal of work remains to be done in our profession to prepare for succession within firms.

While many firms aren’t focused directly on Succession Planning, PCPS has realized that succession issues are more about how you manage your practice than a standard pro-fession rule of thumb on what the multiple may be to calculate value. In this first volume, Securing the Future: Succession Planning Basics, does a great job in setting up the reader to start down the proper path of succession by focusing on internal operations. The subsequent volume, Securing the Future: Taking Succession to the Next Level, then builds on what is learned in this book and helps apply that learning to the succession strategy you determine for your firm. We believe that the two volumes in this set are “must reads” for anyone in public ac-counting who is contemplating succession planning or retirement.

However, even if succession or preparing for imminent retirement are not high priori-ties now, these two volumes are chock full of tools, techniques, ideas, and best practices that can help any professional firm operate more effectively, successfully, and profitability. We would like to thank Bill, Dom and Michaelle for their hard work and tireless contribution to the profession. The Securing the Future series is a true gem for the profession. We’d also like


iv

Securing the Future: Succession Planning Basics

to thank the PCPS Executive Committee who, since 2003, have kept a key focus on help-ing the profession with this very important issue. The leadership started with Rich Caturano and continued with David Morgan and we hope to continue to build on the pathway both have set for this committee in recent years.

William Pirolli, CPAChair, Private Companies Practice Section Executive Committee

James C. Metzler, CPA_CITPVice President, Small Firm Interests, AICPA

Mark Koziel, CPADirector, Specialized Communities & Firm Practice Management, AICPA


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Foreword to the First Edition

The AICPA Private Companies Practice Section (PCPS) is pleased to bring the profession our ongoing series of resources, tools, and guidance for succession in your firm. The mission of the PCPS is to make practicing CPAs and their firms successful. As part of this mission, we have assembled the best resources in the country to help you and your firm chart the proper course to successfully transition to the next generation of leaders. Bill Reeb is truly one of the most renowned and respected experts on firm practice success and is at the top of his tame in his authorship of this practical and insightful book.

We are part of a “graying” America. One Baby Boomer turns 50 every seven seconds. In 1993, almost 47 percent of the AICPA membership was over 40. By the end of 2004, that figure had jumped to more than 68 percent. Members of the accounting profession will retire faster than new CPAs can replace them; today, a substantial number of firms do not survive the founding partner. Firm succession discussions at Managing a Practice (MAP) conferences a few years ago were only about maximizing value. Now, the most pressing issue is to enable firms to continue successfully after key partners retire or move on.

This series of AICPA/PCPS succession resources are all under one tent: To build a firm that can be transitioned successfully in the future, the firm must be built to be strong and successful today.

Current and future success go hand in hand. Even if succession is not a focus of your attention at the moment, there are many powerful lesions in this book from Bill Reeb that will enable your firm to indeed be stronger and more profitable right now.

Many thanks to the members of the PCPS Executive Committee Succession Task Force, who devoted countless volunteer hours to the development of this book. Special thanks to the Chair, Wayne Berson, CPA.

Richard Caturano, CPAChair, Private Companies Practice Section Executive Committee

James C. Metzler, CPAVice President, Small Firm Interests, AICPA

Sheryl Martin, CPADirector, Firm Practice Management, AICPA



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Acknowledgments

First, I would like to thank my wife and associate, Michaelle Cameron, Ph.D., for her help writing this book. As a marketing professor for Saint Edwards University in Austin Texas, her experience and insight added significant value to the Business Development Chapter (chapter 4). Michaelle also supplied an essential perspective and clarity as to how to best develop the materials in each chapter.

Next, I want to thank the PCPS Executive Committee for engaging me to do this project and the PCPS Succession Task Force, Sheryl Martin, Mark Koziel and Jim Metzler for working with me throughout this process. Sheryl provided the necessary management and oversight for this work and supported me during its development, Jim’s and Mark’s vision never wavered as to how he wanted this product to support our public practitioner members.

I want to thank everyone who has worked with me, offered feedback, and provided support materials for this venture. One of my close friends, Michael Harnish, an associate with Plante & Moran, spent a great deal of time discussing CPA firm management issues with me. I have had the benefit of the support of all of my friends and clients, as well as the many firms that participated in the PCPS Succession Survey. I would like to give a special accolade to those firms that additionally contributed time by granting me personal inter-views regarding various topics in the book.

I want to express my gratitude to the firms that contributed the many exhibits now found on the Web site accompanying this book and Securing the Future: Taking Succession to the Next Level. Some firms wanted to remain anonymous while others allowed me to give their attributions: •Mathis,West,Huffines&Co.,P.C.,WichitaFalls,Texas — Sample New Client and New Work Acceptance Policy — Sample Client Acceptance Form for Projects of $7,500 or More •Horovitz,Rudoy&Roteman,Pittsburgh,Pennsylvania — Sample Billing and Collection Policy — Sample Owner Retirement Policy •Brady,Ware&Schoenfeld,Inc.,Dayton,Ohio — Compensation Plan (adapted for publication) •MillerGrossbard&Associates,P.C.,Houston,Texas — Compensation Plan (adapted for publication) •Walter&Shuffain,P.C.,Norwood,Massachusetts — Sample Point System Tracker


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Finally, I would like to thank Laura Inge, Editor; and Marie Bareille, Manager of Spe-cialized Publications, and Rich Grant, Product Development Manger, all of the AICPA. Marie and Laura have been improving my writing since they worked with me on my first book in 1988, and with numerous publications since then. Laura has a special ability to orga-nize, simplify, and improve my work, a rare talent. And without Marie mentoring, guiding, and supporting me throughout the years, I believe I would never have written this book. Rich made numerous project management contributions throughout the development of this work and orchestrated the creation of content for the accompanying Web site.

The following are members of the PCPS Executive Committee Succession Planning Task Force who provided direction for and reviews of this book.

Wayne Berson, CPA, Task Force ChairBDO Seidman, LLPBethesda, Maryland

David K. Morgan, CPA/PFSLattimore, Black, Morgan & Cain, P.C.Brentwood, Tennessee

Norman L. Myers, II, CPARotz & StonefiferChambersburg, Pennsylvania

William Pirolli, CPAPirolli, Deller & Conaty, PCWarwick, Rhode Island

Roy J. Russell, CPARoy & O’Connor, CPAs, Inc.Paso Robles, California

Gorden E. Scherer, CPAHorovitz, Rudoy & RotemanPittsburgh, Pennsylvania

John Welch, CPADoshier, Pickens & Francis, PCAmarillo, Texas


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About the Author

Bill Reeb, CPA, CITPBill is CEO and co-founder of the consulting firm Succession Institute, LLC. He has been consulting for three decades to all sizes of businesses, from Mom and Pop operations to Fortune 100 companies, primarily in the areas of organization, automation, and revenue generation. He decided to add the credentials of CPA behind his advisory work and became a CPA in 1986. Prior to his life as a consultant, he worked for IBM in sales back in the late 70’s. As an entrepreneur, Bill has founded eight small businesses in

the retail, software development, and services sectors.As an award-winning public speaker, Bill lectures throughout the U.S. and Canada to

thousands of executives and CPAs each year. In addition, he has been featured on numerous video-taped and live television programs. As an award-winning author, Bill is internation-ally published with hundreds of articles and columns to his credit. He currently authors a bi-monthly column called “In the Bill-iverse” which at the time of this printing is distrib-uted by 15 State CPA Societies as part of their Practice Management e-newsletter. Besides being published by various magazines, journals and newspapers, Bill has written a number of books, including the fourth edition of his consulting book. Bill also authored the second volume of Securing the Future: Taking Succession to the Next Level. And as you can see, this book is a sequel to his first book on succession with this material covering Succession Plan-ning as well as a number of best practice CPA Firm Management topics. Finally, Bill co-authored the Succession Resource Center Web site materials for PCPS in 2008.

Bill is an active volunteer within his profession, having served in many leadership roles in the AICPA such as being a current commissioner of the National Accreditation Com-mission (NAC). He has also served in numerous other roles including being a member of AICPA Council several times, a member of Strategic Planning and Chair of the Consulting Services Committees. On a local level, Bill has been a member of the Executive Board, Strategic Planning, and Chaired several Technology Committees for the Texas Society of CPAs. Additionally, he has been honored by being named as a CPA Ambassador, was presented the Pathfinder Award and served as the Texas Vision Delegate. Accounting Today has recognized his efforts by listing him as one of the Top 100 Most Influential CPAs, CPA Magazine has named him as one of the Top 100 Most Influential Practitioners, and Inside Public Accounting listed him several times as one of the most recommended CPA firm consultants.



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Table of Contents

Introduction

Superstar Model Versus Operator Model ......................................................................... 3Planning Is the First Step ................................................................................................. 5 When to Create the Plan .......................................................................................... 6 Time Frame for the Plan ........................................................................................... 6 Monitor the Plan ...................................................................................................... 7 Purpose of the Plan ................................................................................................... 7How To Use This Book .................................................................................................. 8Note to Sole Proprietors .................................................................................................. 8Conclusion ...................................................................................................................... 10

Chapter 1: The Environment and Strategy: Managing Resources, Maximizing Reward

Legislative Forces ............................................................................................................. 11Demographic Forces ........................................................................................................ 12 Age Trends ............................................................................................................... 13 Gender Trends .......................................................................................................... 13 Retirement Trends ................................................................................................... 14 Consolidation Trends ................................................................................................ 14Marketplace Forces .......................................................................................................... 15 Trend 1. An Uncertain Market ................................................................................. 15 Trend 2. Reshaping Services ..................................................................................... 16 Trend 3. Milking the Cash Cow ............................................................................... 16CPA Firm Practice Forces................................................................................................ 16 Issue 1. Foundation and Consistency ......................................................................... 16 Issue 2. Management, Staffing, and Operations.......................................................... 17 Issue 3. Growth ........................................................................................................ 17 Issue 4. Succession Strategies ..................................................................................... 17Survey Results ................................................................................................................. 18 Growth and Changes in Revenue ............................................................................. 18 Operations ................................................................................................................ 19 Succession ................................................................................................................. 21Conclusion ...................................................................................................................... 25


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Chapter 2: Structure and Leadership: Establishing a Foundation and Consistency

Enabler 1. Decision-Making Authority ............................................................................ 28 The Problem ............................................................................................................ 29 The Solution ............................................................................................................ 29Enabler 2. Standard Operating Procedures Foundation..................................................... 29Enablers And Synergy ...................................................................................................... 30Enablers And Firm Size.................................................................................................... 32 Enablers and Up to $2-Million Firms ........................................................................ 32 Enablers and $2-Million to $8-Million Firms ............................................................ 33 Enablers and Firms of $8-Million and More .............................................................. 34Enablers And Their Properties in CPA Firms ................................................................... 35 Decision-Making Authority—Voting Control Properties .......................................... 35 Decision-Making Authority—Organization Infrastructure Properties ........................ 35 SOP Foundation Properties ...................................................................................... 36Codifying Policies............................................................................................................ 40 Benefits of Separating Policies and Owner Agreements ............................................. 42 What Policies Should Be in the SOP Manual ............................................................ 43Implementing Organizational Structures .......................................................................... 43 Step 1. Choose a strategy for your firm. .................................................................... 44 Step 2. Choose who you want to manage the firm and give them the authority to do it.. ................................................................................................................ 45 Step 3. Choose the style of governance. .................................................................... 47 A Final Word on Implementing Organizational Structures ........................................ 50Leadership ....................................................................................................................... 51 Dysfunction and the Peter Principle .......................................................................... 51 Dysfunction and Organizational Infrastructure ........................................................... 52 Dysfunctional Behavior Traits ................................................................................... 54 A Final Word about Leadership ................................................................................ 58Conclusion ...................................................................................................................... 59

Chapter 3: Management and Operations: Extending the Life and Culture of the Firm

Today’s Workforce and Firm Culture .............................................................................. 62 The Generation Gap ................................................................................................. 62 Motivating Staff ........................................................................................................ 64The Upside-Down Pyramid ............................................................................................ 67 The Problems ........................................................................................................... 68 The Solution or Reversing the Pyramid .................................................................... 69


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Accountability ................................................................................................................. 72 Element 1. Align wages and benefits. ........................................................................ 72 Element 2. Offer a challenging job. ........................................................................... 75 Element 3. Communicate clear expectations. ............................................................ 76 Element 4. Give objective performance measurements. ............................................. 76 Element 5. Support learning on the job. .................................................................... 80 Element 6. Provide adequate training. ....................................................................... 82 Element 7. Reward overachievement. ....................................................................... 83 A Final Word on Accountability. .............................................................................. 83Roles And Responsibilities Of Managers ......................................................................... 84 Types of Managers .................................................................................................... 84 Part-Time Versus Full-Time Managers ..................................................................... 85Staff Reporting Models .................................................................................................... 87 Types of Staff Reporting Models............................................................................... 87 Reporting Responsibility .......................................................................................... 88 Project Responsibility ............................................................................................... 89SOP Programs That Support Employee Performance ....................................................... 92 Performance Review System .................................................................................... 93 Pay-for-Performance Compensation System ............................................................. 93 Business Development Program ................................................................................ 93 Leadership Development Program ............................................................................ 93 Motivation and Rewards Program ............................................................................ 93 Partner-in-Training Program .................................................................................... 94 Career Professional (or Career Manager) Program ..................................................... 95 Owner Evaluation and/or 360 Feedback Program ..................................................... 95 Intern Program ......................................................................................................... 95 Employee Orientation Program ................................................................................ 95 Mentoring and Coaching Program ............................................................................ 95Compensation Systems .................................................................................................... 96 The Problems ........................................................................................................... 96 Current Criteria ........................................................................................................ 98 The Solution ............................................................................................................ 99Build A Pay-for-Performance System...............................................................................100 Step 1. Identify personal billing production. ..............................................................100 Step 2. Adjust to reflect the reality of the firm. ..........................................................104 Step 3(a). Establish performance targets for staff. ........................................................106 Step 3(b). Establish performance targets for managers. ...............................................111 Step 3(c). Establish performance targets for owners. ...................................................111 Step 4. Conduct performance evaluations. .................................................................119 A Final Word About Pay-for-Performance Systems ...................................................119Conclusion ......................................................................................................................120


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Chapter 4: Growth and Transition: Increasing the Value of the Firm

Why Marketing Is Important to an SOP Foundation .......................................................122 Reason 1. Marketing is an ongoing SOP process. ......................................................122 Reason 2. Marketing is the least understood SOP strategy. ........................................122 Reason 3. Marketing can generate owner conflict. ....................................................123Size of Firm Commentary ...............................................................................................123Growth ...........................................................................................................................124 Idea 1. Client relationships take time. ........................................................................124 Idea 2. Mergers and acquisitions are costly.................................................................125 Idea 3. Superstar models are limiting. ........................................................................126 Idea 4. Firmwide marketing SOP foundations succeed. .............................................127Business Development .....................................................................................................127 Referral Marketing ...................................................................................................127 Niche Marketing ......................................................................................................128 New Services Selection .............................................................................................129 Fortress Approach Versus Empire Approach Growth Strategies .................................132 Passive Marketing Versus Active Marketing ..............................................................139Business Development Plan .............................................................................................142 Step 1. Create an up-to-date database. .......................................................................142 Step 2. Classify clients. ..............................................................................................143 Step 3. Develop an active marketing strategy. ............................................................146 Step 4. Develop a passive marketing strategy. ............................................................147Transition ........................................................................................................................148 Servicing Transition ..................................................................................................148 Firm Value Transition ...............................................................................................149Conclusion ......................................................................................................................150

Chapter 5: Succession Strategies: Passing the Torch

CPA Firm Succession Stories ...........................................................................................153 Story 1. Two Senior Partners ....................................................................................154 Story 2. A Sole Practitioner .......................................................................................155 Story 3. A Father-and-Son Firm................................................................................157 Story 4. Four Owners—Two Seniors and Two New ................................................159 Story 5. Seven Owners .............................................................................................160Merger And Acquisition Plans .........................................................................................163 Typical Acquisitions of CPA Firms ...........................................................................164 Typical Mergers of CPA Firms..................................................................................166 What Sellers Look for ...............................................................................................169 How Sellers Identify Purchasers ................................................................................171


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Retirement Plans .............................................................................................................173 Retirement Plan Goals ..............................................................................................174 Retirement Plan Updating ........................................................................................175 Retirement Plan Potential Disconnects .....................................................................175 Retirement Plan Maximum Age Requirement..........................................................176 Retirement Plan Test on Value .................................................................................179Succession Plans...............................................................................................................181 Succession Plan Steps ................................................................................................182 Succession Plan as a Catalyst......................................................................................182 Succession Plan Transitions .......................................................................................183 Succession Plan Agreement Issues .............................................................................187 Additional Succession Plan Issues ..............................................................................190 Succession Plan Potential Pitfalls ...............................................................................191Conclusion ......................................................................................................................196 Identifying the Firm Strategy ....................................................................................196 Implementation ........................................................................................................107 A Final Word ...........................................................................................................197



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IntroductionThe objectives of this introduction are to: •Introduceandimpartanunderstandingoftheconceptsbehindthesuperstarand

operatormodels. •Recognizehowplanningcanhelpyouavoidthecommonspinningmotionmany

CPAfirmsencounterwhensettingsailtowardsadestination. •Outlinehowtousethisbook.

Formanywhofirstpickupthistext,theywillexpectthefirstchaptertogetrightintothemeatofthisbook.Suggestionsprovidedinclude: •Termsforcreatingaretirementorpracticecontinuationagreement •Whatshouldbeputinplacesothattheretiringownershaveconfidencethatthey

willreceivetheirfullpayout •Whataclienttransitionplanandtimetableshouldlooklikeforretiringowners •Howtogetseniorownerstotimelytransitiontheirclients •Whatbehaviorsfirmsshouldexpectfromretiringownersatthetimeofretirement

and after •Whatkindsofarrangementsmakesenseforretiredownerswhostillwanttocon-

tributetothefirm

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•Howtheoutgoingownerscangainconfidenceintheincomingleadership •Whatafirmshouldlookforinamergerorbuyercandidate •Somecommonpricingmodelsforsellingormergingyourfirm,andsoon

Iwillgettoallofthisandmuchmore,but,inorderforthisbooktobehelpful,suc-cessionmustbeputintoamuchbroadercontext.Byanalogy,thinkofsuccessionastheroofofahouse.Toserveitspurposeandprovidevalue,ithastobesupportedbyastrongfoundationandload-bearingwalls.Similarly,itisdifficulttoputsuccessionintoperspectivewithout considering the strengths andweaknessesof afirm’s foundation and supportinginfrastructure.

BasedonmyexperiencewithCPAfirms,Icantellyouthat,althoughaddressingthequestionsaboveisessential,thefirststepistounderstandtherootcausesoftheproblemsandcriticalsuccessfactors.Forexample,havingconfidenceintheincomingleadershipislessaboutfindingtherightpeopleandmoreaboutthestructurethesenewleaderswillin-habit.Anotherexampleisthedangerofoveremphasizingthetermsoftheretirementagree-mentandtheagreed-topayoutratherthanbuildingastrongfoundationthatcanendurethestressoftransition.Althoughthetermsandconditionsarecritical,ifthefirmsplitsupandeveryownergoeshisorherseparatewayasaresultofdisagreementsaboutstrategicdirectionorcorevalues,theretiredownersarelikelygoingtohavetoworkhardtogettheirfullpayout.

BasedonwhatIhaveseen,asuccessfulfirmsuccessionislessaboutthelegalagreementsandmoreabouttheentirebusinessstrategy.Thinkofitthisway…themoredependentafirmisonindividualsratherthaninfrastructure,themorelikelythetransitionwillfail.Forexample,ifyouaresittingontheboardofapubliccompany,youwouldtakehiringanewchiefexecutiveofficer(CEO)veryseriously.Atthesametime,youwouldnotassumethatthecompanywastotallydependentonthisperson’spersonalperformance.ACEO’spoorperformancemightresultinlessthanthedesiredsuccess,buttheboardwouldassumethattherealassetsofthebusiness,suchas itscustomerbase,employees,productsorservices,marketingprograms,andqualitycontrolprocesses,woulddrivethecompany’sfuture.

So,ifyouareseriousaboutsuccessionplanning,pleasereadthisbookfromcovertocovertogetthemostoutofit.GivemeachancetomakemycaseifItakeapositionthatiscontroversialorantagonistictoyourview.Iamjusttryingtosharemyexperiencesandthoseofmanyfirmsaroundthecountry.IamnotguaranteeingthattheapproachesIcoverwillworkforyou,justasIamnottellingyouthatyourapproach—ifitisdifferent—willnotwork.Iamsuggestingthatifyoureadtheentirebook,Iamconfidentthatthediscussionswillsparkideasthatwillhelpyouandyourfirmoperatemoresuccessfullyandprofitably.

Iwantyoutotakeonemorepointunderconsideration.AsIintroducestoriesofhowotherfirmsworkthroughthesesituations,aswellassurveydata,keepanopenmind.Whenworkingwithfirms,Ifrequentlyhearcommentslike,“Ourfirmisdifferentbecauseweop-erateinasmallcommunity,”or“Thenormsdon’tapplytousbecauseofourfirmsize,”or“Ourproblemsareuniquebecauseofthepartofthecountrywe’rein.”Generallyspeaking,mostCPAfirms,regardlessofwheretheyarelocated,arefacingthesameproblems.Yes,afirminasmalltownmightbeabletopayaCPAwithfiveyearsofexperience$40,000a


Introduction

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year,whileanaccountantwiththesameskillsmightcost$65,000inametropolitanarea,buttheissuesarestillthesame.Yes,theaverageowner’sbillingrateinaMidwesternfirmmightbe$150perhour,whileanownerwithsimilarskillsmightbillat$225perhourontheWestCoast.However,inthefinalanalysis,allfirmssharebigpictureissues,suchas: •Gettingafairreturnonpayrollinvestment •Maximizingpersonalincomewithintheparametersoffirmmembers’desiredwork/

lifebalance •Increasingthevalueofthelargestassetmostownershave-theirinterestinthefirm •Attractingthebestandbrightestpeopleinordertodevelopthefirm’sfutureleaders •Feelingthattheyaremakingadifferencetotheclientstheyserve •Enjoyingthepeopletheyworkwithwhilebuildingafirmthattheyareproudtobe

apartof •Beingabletodecidehowtheywanttospendtheirlimitedtime

So, as you consider the experiences of other firms and read my recommendations,pleasestartyouranalysisfromtheassumptionthatCPAfirms,regardlessoftheirlocations,andinallshapesandsizes,arefarmoresimilarthantheyaredifferent.

Twoconceptsarefundamentaltothisbook.First,therearetwobasicmodelsusedtobuildafirm,namely,thesuperstarmodelandtheoperatormodel.Second,thereisthecon-ceptofplanningforfirmsuccession.Theseconceptsarediscussedbelowandarefollowedbyaguideonhowtousethisbook.

Superstar Model Versus Operator ModelCPAfirms,generallyspeaking,looktooneoftwostrategiestobuildandoperatetheirfirm.ThefirstoftheseiswhatIcallthesuperstarmodel,andthesecondistheoperatormodel.CPAfirmsusuallystartoutusingthesuperstarmodel,whichcanbedefinedasamodelthatplacesapremiumonthe“extraordinarycapability,commitment,aggressiveness,entrepre-neurship,andstaminaofafewpeopleforitssuccess.”Whenyouarejuststartingout,orifyouareasmalloperation,thismodelnotonlymakessense,butitisveryefficient,effective,andprofitable.

Thesecondmodel,theoperatormodel,istheopposite.Itcanbedefinedasamodelthatplacesapremiumon“theextraordinarysystems,processes,procedures,andmethodol-ogy(theinfrastructure)ofafirmtomaximizethepotentialofthepeoplethatworkwithinit.”HereareacoupledifferencesIseebetweenthetwo: •Superstarslookforextraordinaryemployeestoleveragethefirm’sprocesses.Opera-

torslooktoextraordinaryprocessestoleverageitsemployees. •Superstarsbelievethattheperpetuationofthefirmanditsfuturesuccessisheav-

ilydependentonhavinganaturalleaderatthehelm.Operatorsbelievethefirm’sfuturesuccessislessabouttheleaderandmuchmoreaboutastronginfrastructurewithclearlydefinedrolesandresponsibilities.

•Superstarsplaceapremiumonaddingstrongpersonalities(likebusinessdevelop-ersandentrepreneurs)tosustainthegrowthofabusiness.Operatorslookformore


4


processes,support,andmethodology(likeenhancingthefirmwidemarketingorcompensationsystems)toplaceemphasisandcapabilitythroughouttheorganizationtogrowthebusiness.

•Superstarsbelievethatthosethatareworthymustgothroughan“eat-what-you-kill”riteofpassage.Itisamentalitythatassumesthatcream will rise to the top on its own or only the strong will survive.Operatorsbelievethatalmostanyonecandevelopintoatechnicallycompetentprojectmanagerwithclientrelationshipresponsibility;therefore,careermanagementthatprovidesclearcareerpathsbecomescriticaltothefirm’ssuccess.

•Superstarsthriveoncreating,changing,inventing,experimenting,andtakingrisks.Operatorsthriveonconsistency,controls,settingstandards,compliancewithstan-dards,continuousimprovement,andlowrisk.

Bothprofilesareimportanttobuildinganddevelopingasuccessfulserviceoperation,buttheoptimumprofilediffersdependingonthematurityof thefirm.Consideracon-tinuum,withtheleft-mostpointbeingasuperstarandtheright-mostpointbeinganopera-tor.Start-upCPAfirmsareusuallyfoundedonthesuperstarphilosophy,whichreliesonanindividualortwotofindtheclients,servicethem,billandcollect,and,intheirsparetime,runthebusiness.Withouttheseentrepreneurs, therewouldbenobusiness totransition.Butbecausethesuperstarstrategyissodependentontheseindividuals,successfultransitionistricky.Asafirmmaturesandthedemandforservicesshiftsfromexponentialgrowthtoamoremethodicalandpredictablelevel,firmsusuallyshifttoanoperatorstrategyofman-agement, inordertobuildafirmthatcancontinuethroughgenerationsof leaders.Thisoperatormentalityshiftsthefirm’sphilosophiesawayfromcateringtoirreplaceablepeopletodevelopinganinfrastructurethatcreatesirreplaceablepositions(thatavarietyofpeoplecansuccessfullyfill).Afewbasicprinciplesofanoperatormodelare: •Developingleadershipthatcansuccessfullyfunctionwithintheexistingstructureso

thatthefirm’ssuccesswillcontinue. •Creatingaviableandenduringchainofcommandwithclearlyunderstoodand

adhered-torolesandresponsibilities.Thisallowsastructurethatsupportsnewpeoplefillingimportantpositionsfunctioningwithinarangeofknownflexibilitiesandlimitations.

•Operatinglikeafirmratherthanlikeagroupofindividualowners.Thefirmcontrolswhoservestheclients,whatservicesareoffered,andwhatprocessesandproceduresarefollowed—nottheindividualCPAsmanagingtherelationships.

•Transitioningofclientsoccursanytimethefirmdecidesaclientcouldbebetterservedbyotherresources(e.g.,theskillsetofanindividualmorecloselymatchestheservicesutilizedbythatclient)orinordertobalancethedistributionofdemandamongresources(ownerswithhugedifferencesinbooksmanaged).

•Developingsystemstorewarddesiredbehavioranddiscourageundesiredbehavior.Thesesystemsarebuilttoreflectthecurrentfirmstrategy,areusuallybasedonob-jectivecriteria,rewardoverachievement,putaspotlightonunderachievement,andareputinplacetoraisethefirm’sminimumstandardofperformance.


Introduction

5

•Developingastaffingmodelthatleveragesrealizationandutilization,whilebalanc-ingtheneedforbusinessdevelopment,technicalcompetence,projectmanagement,clientservice,andthemanagementofclientrelationships.

Firstofall,Iwanttoclarifyonepoint…bothmodelswork,andtherearesuccessfulexamplesofeachalloverthecountry.But,asyoucantellfromtheabovenarrative,farmoremoneyisinvestedinthefirm’sinfrastructureintheoperatormodelthaninthesuperstarmodel.However,thattendstobeashort-termdifferencebecauseIfindthat,overthelongterm,theoperator-drivenfirmsdeliverhigherincomestoownersthanthesuperstar-drivenfirms.Also,myexperienceshowsthattheeasiestpathforsuccessfulsuccessionisintheop-eratormodel.Althoughsuccessmayflourishinthesuperstarmodel,itssuccessionstrategyisdependentonfindingincomingsuperstarstotakeover.Thismodelcanbeverylimiting.It ishardforafirmtogrowbeyondabout$5millionto$8millioninrevenuesbecausefirmsinthissizerangegrowtothepointthattherearetoomanysuperstars.Inevitably,eachsuperstar: •Hasaverydefiniteopinionabouthowthefirmshouldoperate. •Isunwillingtogiveupcertainprivilegesofownership. •Believesthatthesuccessofthefirmislessimportantthanthepersonalrelationships

heorshemaintainswithclients. •Believesheorsheisentitledtohaveasayineveryaspectofthewaythebusinessis

run. •Isconvincedthatanycompromisetohisorherpersonalstrategyofrunningthefirm

isdoomedtofailure. •Inwardly(andsometimesvocally)threatenstotakehisorherclientsandleavethe

nexttimeacompromiseisrequired.Thisconstantposturingoftenholdsthefirmhostage.

It shouldn’t surpriseanyonebynowthat thisbook isabouthowtobridge thegapsbetweenthesuperstarandoperatormodels.

Planning Is the First StepOneofthegoalsofthisbookistomotivateyoutostartthinkingaboutwhereyouwanttogo.TheodoreRooseveltsaid,“Whenyouaimatnothing,you’llhititeverytime.”Agreatmanyfirmsrightnowareaiming and firing everyday without agreement as to the target.ThebestimagethatdescribesthetypicalCPAfirmisasailboathundredsofmilesfromanyshore,with several equally desired destinations under consideration. Although this firm wouldbehappytolandonanyofamultitudeofshores,theyremainoffshorebecausethereisnoconsensusaboutthefirm’sstrategy.Typically,partoftheownergroupvocalizesadesireddestinationandthefirmstartsheadingtowardit,onlytofindanownerortwoonthebackoftheboatthrowinganchorsoverboardtoimpedeprogress.Then,thegroupgetstogetherandsomeonebullies theothers intochangingcourse.Thisresults in thesailboat turningtowardadifferentshore,onlytofindanotherownerhoistingthesails,whileothersareatwork,again,withtheanchors.Inreality,theownerswouldbehappieratany of the various


6


destinationsthanwheretheyare—strandedinthewater.Butsinceeachownerisentitledtochooseadestination,thefirmrarelymakessignificantprogressinanydirection.Justasthesailboatpicksupspeedinonedirection,itisforcedtochangecourseagain,causingtheboattospinratherthanconsistentlymovingahead.

Thissectionconsidersthefollowingissueswhenplanning,namely,whentoplan,thetimeframeforaplan,monitoringaplan,andthepurposeofaplan.

When to Create the PlanAnumberoffirmstakethepositionthattheydonotwanttospendtimeplanninguntiltheycanidentifynear-termaddressableobstacles.Well,simplyput,agreatdealofthetime,those“addressableobstacles”areactuallybehaviors (or lack thereof)ofmembersof theownergroup.Themostexpedientwaytoovercometheseobstaclesistofacetheissuesdirectly.Althoughmostownergroups areverygoodat addressinggeneralbusinessmatters, theystrugglewhenitcomestoconflictamongthemselves.Therefore,ifyoucanframeaprob-lemareaorbehaviorinalargercontext,asabroadowner-agreed-tostrategicobjective,thealternativesaremuchlesspersonalandthereforefareasiertoresolve.

Forexample,letmegiveyouacommon“near-termaddressableobstacle.”Considera seniorownerwhois readytoretire.Theretiringowneroftenwantsnothingtoreallychangeduringhisorherlastfewyears...and,often,thesesamepeoplewanttoputrestric-tionsonthefirmregardingthechangesallowedthroughtheirpayoff.Sincetheseownersoftencontrolasignificantblockofvotingrights,theyareabletostrong-armyoungerown-ers.Forinstance,olderownerscanargue,“Ifyoudon’tagree,Iwillsellthefirm,”or,“Ifyoudon’tacceptmyoffer,Iwon’tretire.”Itshouldcomeasnosurprisethattheyoungerownersoftenfeelthattheyhavebeenbackedintoacornerwithnoalternativebuttoagreebecausebothoptions,i.e.,sellingthefirmortheretiringownerdecidingnottoretire,areevenmoreunacceptable.Iftheseconversationsturnfromtheissuesathand,andbecomemattersofprincipletotheowners,thesituationcanunravelveryquickly,leadingtothefragmentingofthefirm.Thepointisthattheextremepositionstakeninthesesituationsmaybeinthebestinterestsofanindividual,butarerarelyinthebestinterestsofthefirm.Inreality,althoughamajorityownermightbeabletosellormergethefirmwithouttheotherowners’consent,heorshewillprobablynotbebetterofffordoingthis.Thebuy-ingormergingfirmwillloseinterestquicklyiftheyseeafragmentingoftheownergroup.Typically,existingownersarealmostalwayswillingtopaythehighestmarketpriceforafirmwhenitistimeforanownertoretire.Overandover,Iseesituationsinwhichevery-onehassomethingtogainbysittingdownandairingcriticalandsensitiveissues.Throughplanning,thefocusisshiftedawayfrompersonalitiesandplacedinsteadoncreatingapathforthefuture.

Time Frame for the PlanMostpeople think that you conductfirmplanning sessionswheneverything is runningsmoothlyandyouwanttofigureoutafive-yearplan.However,mostplanningstartswhenthefirmisinchaosandevolvesfromthere.Thefirstplan,whenchaosisthedriver,willlikelycoverasix-monthperiod.Thesecondplanmightcoveran18-monthperiod.Bythe


Introduction

7

thirdplanningsession,thefirmmightactuallygetaroundtoconsideringthehorizonfortheorganizationratherthanjustreactingtotacticalissues.Planningisdynamic.Today’splansaffecttomorrow’sreality;tomorrow’srealityinfluencestomorrow’splans;tomorrow’splansaffectthefuture’sreality,andsoon.

Monitor the PlanInaperfectworld,planningandrealitypictoriallycouldbeillustratedastwostraightlinesoverlappingeachother.Butinourworld,whichismostlyoutofcontrol,bothplansandrealityaremovingtargets.So,ourexpectationsneedtobeputintoperspective.First,don’texpectrealitytoemulatetheplan.Thebestwecanhopeforisthatthetwobegintoparalleleachotheratsomepointinthefuture.

Intheabsenceofplanningandplanmonitor-ing,yourfirmislikelytozigandzagtoooften…andfortoolong…wastingresourcesandlosingcompetitiveadvantagebymissingmarketoppor-tunities.Thepurposeofplanningisnottoelim-inate missteps (as they will always occur in anybusiness),buttominimizethedurationandextentofthosedeviations.Considerthesailboatanalogyearlier.Sailboatsdonottravelinastraightlineto-wardstheirdesignatedtarget.Thekeyistokeep

adjustingtheboats’pathsothatthevariationsfromthestraightlinearekepttoaminimum.Alltoooften,scarceresourcessuchasmoneyandownertimearewastedoneffortsthatdonotcontributetotheorganization’slong-termsurvivalandprofitability.

So,thequestionofsuccessoftenboilsdowntowhethermanagementcanremainfo-cusedonitsgoals.Everytimeyourfirmveersoffcourse,itcantakemonthsandevenyearstoreversethemomentum.Longrecoverycycles(likeservicesthatnevershouldhavebeenlaunchedormergersthatnevershouldhavebeenapproved), inmanycircumstances,aretoomuchforanoperationtosupport.Therefore,byplanning,andplanningoften,althoughyoumaynotavoidmakingbaddecisions,youcanseethemisdirectionsearlierandmakecoursecorrectionsmoreoften.Thisminimizesthemistakeandrecoverycycle,thezigzageffect,therebymakingasignificantcontributiontoyourbottomline.

Purpose of the PlanInorderforanoperationtocontinuouslyimproveperformance,workersneedtohaveaclearsenseofdirectionormission.Thetheoryissimple:

By formalizing the planning process, youcanmoreeasilycreatesynergyamongtheownergroup.Theplan in turndrives thedevelopmentoftargetsandtheactionsrequiredtoreachthem.Withthisdefinitioninplace,rolesandresponsibil-itiescanbebetterdevelopedtosupporttheattain-mentof theoverall strategy.This understanding

Plans continually need to be monitored and adjusted so that they are consistent with the resources available. Operations need to be continually monitored and adjusted so that outcomes ap-proximate the plan.

Key Point

The more people working towards a common goal, the greater the likelihood of its achievement.

Key Point


8


canbeusedtodevelopandcommunicateindividual expectations that synchronize with the firm’s objectives,culminatingintheaccomplishmentofthefirm’sgoals.Planningisthefoundationonwhichfirmsdefineandbuildtheirfuturesuccess.And,givenourprofession’slandscape,therehasneverbeenmoreatstake(eithertowinortolose).

How To Use This BookThepreceding introduces twoconceptsonwhich the following chapterswill bebased:Chapter1,“TheEnvironmentandStrategy:ManagingResources,MaximizingReward,”outlinesthepresentbusinessenvironmentandincludesinsightsgatheredfromtworecentsurveys.Chapter2,“StructureandLeadership:EstablishingaFoundationandConsistency;”Chapter3,“ManagementandOperations:ExtendingtheLifeandCultureoftheFirm;”andChapter4,“GrowthandTransition:IncreasingtheValueoftheFirm,”revealunder-lying support systems, foundationprinciples, andprocesses thatfirms should consider todevelopandenhancetheperformanceoftheiremployeesatalllevelsoftheorganization.Then,oncethisframeworkhasbeenconstructed,Chapter5,“SuccessionStrategies:PassingtheTorch,”addressessuccession.Chapter5willalsoofferanecdotalevidenceabouthowfirmshaveapproached succession,both successfullyandunsuccessfully,connecting thoseexperiencestothefundamentalscoveredintheearlierchapters.

ButifyoujustskiptoChapter5now,bewarnedthattheprinciplescoveredintheearlierchapterswillconstantlybeusedtotieconceptstogetherbydescribingeitheroptionstoconsiderorpitfallstoavoid.

Avarietyoffirmshavegenerouslysharedmaterialsthatwereusedinthepreparationofthisbook.Thesesampleshavenotbeenreviewedforlegalacceptabilityorviability.Shouldyourfirmdecidetouseanyofthismaterial,youdosoatyourownrisk;itisuptoyoutogetproperlegalassistanceandadvicetoensurethatalldocumentsareadequateandsuitedtoyourneeds.Giventheequallywiderangeoffirmsforwhomthisbookisintended,readersareurgednottofocusonthespecificdetailsofthesamplesdescribedherein.Thebestfocusisontheintentandgeneralguidanceprovided.Eachfirmiswelladvisedtohammeroutitsownbestapproaches.

Butbeforeyougettogetherforyournextplanningretreat,haveeveryownerandman-agerinyourfirmreadthisbook.Ifyoudo,Icanassureyouthatyourdialoguewillchangeforeverbecausethisbookcanimpart: •Abroaderunderstandingoftheinterconnectivityofmanyofthecoreissuesfacing

yourfirm,and •Anawarenessofthevariousstrategiesthatcanhelpyourfirmbridgethegapsbe-

tweentheseinterconnectedissues.

Note to Sole ProprietorsAsyoucantell,thisbookwilldedicateagreatdealofitssubjectmattertohowtocreateaninfrastructurethatallowsafirmtoorganizeitsprocessesandpoliciesinordertoincreaseitsvalueandabilitytosmoothlytransitiontonewowners.Afirmwithoneemployeehas


Introduction

9

afarsimplerroadtotravelthanonewith50employees.Obviously,thehigherthenumberofpeopleaffectedbytheprocess,thehigherthenumberofexceptionsthatwillhavetobeaddressedandthemoredifficulttheimplementationwillbe.Take,forexample,acompen-sationplan.Ifyourfirmhastwoemployeesinadditiontoyou,afair,objectiveincentiveplanmighttakeyouanhourtodevise,andamonitoringsystemmighttakeanextracoupleofhourstoputinplace.Fora50-personfirm,asimilarsystemislikelytotaketwoweekstodeviseandmonthstoimplement.WhenwediscussthisinChapter3,Igointodetailabouttheissuesthatshouldbeconsideredsothat,regardlessofthesizeofthefirm,enoughinformationhasbeenprovidedtoconstructafoundationformovingforward.However,ifyoulookatthefundamentalsaddressed(billingrates,fairmultiplesforperformance,reward-ing exceptional service,monitoringperformanceobjectively, and reporting), it becomesclearthatthosesameprinciplesapplytoeveryone.Thus,Iamsuggestingthatifyouwadethroughthemorecomplexmultiemployeediscussions,thedialoguewilllikelysparkideasthatshouldbevaluableasyoudesignyourlesscomplicatedversions.

Second,beingasoleownerorrunningasmallfirmdoesnotstopyoufromapplyingthekindof infrastructure (albeit farmore simplified) typically found in largerfirms.Forexample,inChapter2,Irefertothevalueofdelineatingtheoversightrolesofmanagementandaboardofdirectors.Althoughtheseareone-and-the-sameforasmallfirm,settingupanadvisoryboardtogenerateabroaderdiscussionregardingstrategymightbeaviablesub-stitute.Onceagain,Iamaskingthatyoulookattheunderlyingphilosophytodeterminewaystoimprovethevalueandoperatingeffectivenessofyourfirm.

Ifyourstrategyistosellormergeyourpractice,thisbookshouldgiveyouinsightintotheattitudesandobstaclesoffirmsalittlelargerthanyours,whicharepotentialsuitors.Byunderstandingtheirpriorities, it is fareasier foryoutotakesteps inthecomingyearstopositionyourfirmtointegratemoreseamlesslywiththeirs.Thismightincludelookingforwaystomakeyourselflessindispensable(sothatsomeonecanmoreeasilystepin)aswellasestablishingclientrelationshipsthatwouldbedeemedvaluabletothem.Forexample,ifyouchargeratesthataresolowthatapurchasingfirmcouldnotserviceyourclientsprofitablywithoutraisingfeestothepointoflosingthoseclients,thenyouarenotpositioningyourfirmtohavevalue.Ifyouaretheonlypersoninyourfirmwhohasarelationshipwithyourclients,thenitwillbemoredifficulttotransitionthem.

So,asyougothroughthebook,manyofthesectionsmaydescribe solutions thatexceedyourneeds.Nevertheless,Iamconfidentthatthetimespentwiththismaterialwillpaylargedividendsifyouroutlookis,“HowcanIapplytheconceptstomysituation?”IcanassureyouthatIhavecon-sultedwithpracticesassmallas$200,000tolarger

than$50millionandhavesuccessfullyappliedversionsoftheconceptsinthisbooktoallofthem.Icanalsotellyou,asanownerofmyownsmallfirm,theefforttocodifytheseideashashelpedmemakedifferentdecisionsabouthowIplantooperatemyfirminthefuture.So,asonesmallfirmownertoanother,ifyoufeelmiredinthedetail,keepinmind that thereis“aponyintheresomewhere.”

Knowing more about your likely buyer helps you identify steps to drive up the value of your firm.

Key Point


10


ConclusionAsI stated in thebeginning, succession isaboutbusiness strategy.Whatyouwillfind isthatalmosteveryaspectofsuccessionisinfluencedbymultipleareaswithinthebusiness.Forexample,firmsoftencannotaddresssimplechangesinaretirementagreementwithouthavingtorevisitthecompensationformula,whichcannotbeadjustedwithoutconsideringownershippercentages,whichthenhavetoconsidertheimpactonmanagementandvotingprivileges.Thiskindofintegrationcontinuesuntilitcomesfullcircle,backtotheissuethatstartedtheconversation.Inordertosuccessfullyaddresssuccession,youhavetoholisticallylookatthefirmanditsprocessestofindaviablesolution.Forexample,ratherthanthefirmneeding tofindanentrepreneurialbusinessdeveloper to takeover asmanagingpartner,maybea strongfirmwidebudgetedmarketingplanandfoundationwillcreateapath foravarietyofotherpersonalitiestobesuccessfulinthatkeyposition.Or,ratherthantryingtopromoteeveryonetoanownerpositioninordertokeepkeypeoplehappy,maybeacompensationsystemandacareerpathfornonownerswilltaketheheatoutofthistransi-tion.Becauseoftheholistic,integratednatureofmanyoftheproblemssuccessionreveals,yourfirmisonlyasstrongasitsweakestlink.Hopefully,thistextwillnotonlyhelpyouidentifywhatthoseareasmightbewithinyourfirm,butalsodescribeintegratedsolutionstoaddressthem.


11

The Environment and Strategy: Managing Resources, Maximizing Reward

Chapter 1

The objectives of this chapter are to: •Introducethelegislativeanddemographicforcesthataffectourprofession. •ConsidermarketplaceandCPAfirmpracticeforcesthatfirmseitherhaveencoun-

teredorwillencounter. •Reviewdatafromnationalsurveysthatsupporttheconclusionsofthischapter.

Manyissuesareaffectingourprofessionandthestrategiesweengageforsurvival.Prob-ably,thebestplacetostartistostatetheobvious:“Changeistheonlyconstantthatdescribesourcurrentprofessionallandscape.”Thischaptercoversthemanyforcesinfluencingtheac-countinglandscape,includinglegislative,demographic,marketplace,andCPAfirmpracticeissues.Thischapteralsooutlinestheresultsoftworecentsurveys.

Legislative ForcesInthepast25years,theenvironmentfortheCPAprofessionhascontinuallyevolved.Themanydevelopments includeallowingfirmstoadvertise, theimpactofconsolidators,andanalmostexponentialgrowthintherangeofservicesofferedbyCPAs.Inaddition,more

01-Securing1-Chap01.indd 11 1/8/10 1:36:15 PM

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CPAsnowworkinindustrythanforpublicfirms,andmoststatesallownon-CPAowner-shipoffirms.Ever-changingtechnologyandtheglobaleconomyhavechangedhowandwherewework.TheSarbanes-OxleyActof2002hadasignificantimpactonthedemandforCPAservices,whiletherecessionthatbeganin2008diminishedsomeofthatdemandasclientsstruggledtocopewithanuncertaineconomy.

Workinginthisprofessionislikeridingaseriesofwavesintheocean,withtheonebehindyouevenbiggerthantheoneyouaretryingtostayon.Eachwaveseemstopresentatleasttwoverydifferentchoices.Wecantrytoridethewaveandexperienceitspowerandforwardmomentum,orwecantrytostopit(orignoreit).

Althoughwecanbuysometimebyrestrict-ingmarketplaceactivity,intheend,itislikethe“blob” in the old 1950s movie; it will just findan alternative path to go where it wants to go.Forexample,iftherulesandrestrictionsplacedonauditingbecomesostringentthatthestreetprice

becomestoohighfornonpubliccompanies,otherlesscostlyserviceswillbeofferedtotakeitsplace.Wehaveseenthebeginningsofthisasbanksoffermonitoringservicestotheircustomersasanalternativetoanexternalaudit.

Alternatively,considerthefinancialstatement.Asitdriftsfurtherandfurtherawayfrombeingatimelymanagementtooland/ordepicting“apointintimesnapshotofthevalueofacompany,”itmaybereplacedbyaseriesofperformancestatisticscomparedtoindustrybenchmarks.

Thefirstdecadeofthe21stCenturypresentedaseriesofsharphighsandlowsfortheeconomy.TheCPAprofession,aswell,hasgonefromatimeofrobustdemandforservicestooneofeconomicuncertainty.Aftersomeofthecorporatescandalsearlyinthedecade,theauditshiftedfrombeingacommodityservicetooneofuniquedistinction.Asaresultoftheincreasingscrutinyoftheworkperformed,newindependencerules,andexpandingstandards,CPAfirmscouldchargemorefortheirworkandtakeonfewerclientsbecausetheincreasedscopeofworktappedouttheirresources.Thiscreatedatrickle-downop-portunityforfirmsofallsizes,throughoutthecountry,andgreatprosperityatmanyfirms.Therecessionhaschangedmuchofthatsituation,however.ClientsandthemarketplacestillunderstandthevalueofwhatCPAshavetooffer,butwhenthebusinessesthatuseourservicesareintrouble,wecan’thelpbutbeaffected.Itisatimeofgreatchallenge—andopportunity—fortheprofession.

Demographic ForcesNow,hereisaquickcommentortwoonthedemographicchangesaffectingourprofes-sionallandscape.Wewilllookatage,gender,andretirementtrendsandconcludewithafewpredictionsbasedonthisinformation.

You cannot legislate the market-place.

Key Point



13

Age TrendsTakealookatthistable:

Aging of AICPA MembershipAge 1993 2004 2008

31–54 73.81% 71.24% 65.5%

40-under 53.01% 31.76% 23.8%

Over 40 46.99% 68.24% 76.2%

Addtothisthat,in1990,thenumberofAICPAmembersinpublicpracticewasabout131,500,andnow,nearly20yearslater,thatnumberhasdeclinedbyaboutonepercent.Ourprofessionisnotgrowinginsize,butisadvancinginage.Figure1-1showstherela-tionshipbetweennumbersofCPAsandagedemographicssince1993.Whenyouconsidertheeconomicgrowthoverthistime,itisclearthattheprofessionhasnotattractedenoughyoungpeople. Ideally,ourprofession shouldhaveeachnewgenerationofpeoplebeinglargerinpopulationthanthoseinthepreviousgeneration.Instead,wehavefewerpeopleineachnewgenerationthaninthepreviousgeneration.AlthoughtheeffortsoftheAICPA,thestateCPAsocieties,andmanyvolunteershavehelpedincreasethenumberofyoungpeopleenteringaccountingprogramsincollege,wehaveyettoseeanysubstantialshiftinthepercentageofthosegraduateswhoearnCPAcertificates.

Figure 1-1: CPA Age Demographics

180,000

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0

<=30 31–40 41–54 >=55

xx Figure 1-1: CPA Age Demographics xx

Num

ber

s o

f C

PAs

Age of CPA

1993 2001 2008

124,735153,126

107,349

63,873

40,399

41,94595,014

24,060

16,306

65,224

154,904

106,128

Gender TrendsThehope,supportedbyaconcertednationaleffort,isthattheaccountingprofessionwillattractmanynewentrantsinthenextdecade,butthereisanotherdemographicthatwillhavean impact.Thatdemographic is thenumberofwomenentering theprofession. In


14


1993,about45percentofnewentrantswerewomen,and55percentweremen.In2009,thatsplitwasabout50/50.1Clearly,ourprofessionisbecomingmoreandmoreappealingtowomen.But,ofthewomenthatentertheprofession,historically,asmallpercentageofthemhaveeitherdroppedoutormovedtoapart-timestatus,drivenbylifestylechoices,laterintheircareer.Althoughtherearefewhardstatisticsabouttherateoffallout,thebestanecdotalevidencesuggeststhatitoccursfrequently.Forinstance,almostallofthefirmsIhaveworkedwithoverthepast20yearshaveatleastonewomanwhoworksparttimeinordertomeetfamilycommitments.Onlyoneofthosefirms,tothebestofmyrecollection,hadamanfillingasimilarpart-timerole.Ithasbecomecommonplaceforfirmstoincreasethesizeoftheirworkforcebytappingintoatalentedgroupofpart-timeworkers,almostentirelymadeupofwomen,eitherduringtaxseasonorparttimethroughouttheyear.Ifthecurrentrecruitingefforts result inan increasingnumberofCPAs, itappears that thedemographicshapewillbegintolooklikeanhourglass(measuredbyahigherrateofnewentrants’ certification than thatof theprevious generationofCPAs).Nevertheless, overtime,thatshapemightactuallycontinuetomorecloselyresembleafunnel,dependingontherateofexperiencedCPAswhocontinuetooptforpart-timeresponsibilities.

Retirement TrendsThecurrentdemographicfunnelislikelytocontinueforatleastseveraldecades.Moreover,giventhenumberofCPAsinleadershippositionswhoplantoretireinthenext10to15years,analmostrevolutionaryreshufflingofownershipisabouttotakeplace.ThehistoricalmodelforCPAfirmcontinuationbymostfirmshasbeentofindatleastoneowner(oftentwo)toreplaceeachretiringowner.Asyoucanseefromthegraphic,thismodelcannotbesustainedbecausetheCPAsabouttoretireoutnumbertheyoungergroupthatisavailabletoreplacethem.Thismeansfewerleaderswilllikelyberunningtheevolvingpublicpracticemarketplace.

Also, ifwe fast forward a decade, it is predictable (assuming the reliability of somesuccessionplanningsurveyresultsthatarediscussedlaterinthischapter)thatasignificantpercentageofourfirms’soon-to-be-retiring-ownerswillanticipatethatsellingormergingtheirfirmsistheirexitstrategy.BecauseahigherthannormalnumberoffirmswilllikelypursuesellingormergingatatimewhenthenumberofCPAfirmleaderswillbeshrink-ing,itstandstoreasonthatwecanexpectthecomingdecadetograduallybecomeabuyers’marketplace.Withthisoversupplyofsellers,thebuyerswillbeinapositiontodramaticallyreducethepurchaseormergerprice(belowwhatyoumightexpecttoday),negotiatetobuyonlypartsofafirm(specificclientsoracoupleofindustryniches),thuscreatingforthemselvesveryfavorabledealpoints.

Consolidation Trends Itismybelief,basedontheconvergenceofthesedemographics,thatpublicaccountingwillbepoisedtoembraceagreatdealofconsolidationoffirmsduringthenextdecade.Logi-cally,firmswithstrongleadershipandwell-definedprocessesandprocedureswillbewellpositionedtoconsumetheexcessdemandfrombothfirms(tryingtosell)andclients(look-ingforanewCPAfirmbecausetheirCPAsappearlostintransition).

1 AICPA. 2009 Trends In the Supply of Accounting Graduates and the Demand for Public Accounting Recruits. New York, AICPA. 2009.



15

Acoupleofothertrendsthatarelikelytocontinueoremergeduetothisdemographicshift are: •AstheoversupplyofCPAfirmsupforsaleisinclearviewofourprofession,itwill

becomeincreasinglymoredifficulttofindownerswhowillwanttotakeonthe fullburdenofbuyingouttheirpredecessors,especiallygiventheunfundednature ofthesebuyouts.Becauseofthisshortage,youngerpeoplewhoareinterestedinsteppinguptothechallengewillbeinapositiontocutverylucrativedealsforthemselves.

•Theconsolidationthatwilllikelyoccurwillcreateamuchwiderchasm,inthefirmsunder$10millioninsize.Rightnow,thereareabout42,000firmswith10orfewerowners,withthevastmajorityofthatnumberbeingfirmsaround$2millioninrevenuesorless.Itisinthissmallersizefirmrangethat,Ibelieve,mostofthecon-solidationwilloccur,resultinginmanyfirmsthatwillremainunder$1millioninsize,whilemanyconsolidatedfirmswillexceed$4million.Inotherwords,15yearsfromnow,insteadof42,000firms,therewilllikelybehalfasmany,orabout21,000firms.

•Evenafterconsolidationiswellonitsway,themarketplacewillnotrollupintojustafewfirmsbecausethelimitingfactorwillbeservicepricing.Asfirmsapproach$10millioninrevenues,theirfeestructuresandpreferredclientprofilemovethemawayfrombeingabletoprofitablydeliverservicestothetruesmall-businessmarketplace.So,theprospectsforthesolepractitionertobecomethelifelineforsmallbusinessclientslookstrong,assumingthesesmallfirmspositionthemselvescorrectly.

Marketplace ForcesBesidestheformidablemarketplaceanddemographicforcesthatareinplay,therearealsothree trends that areorwill have anoteworthy impact on“the sizeof themarketplacewaves”thatweeitherareorwillbeencountering.

Trend 1. An Uncertain MarketLegislativechangesearlyinthedecadecreatedamarketsurgeanomalybecausetheyex-pandedtheneedforservicesandrequiredmanyorganizationstohiremultipleprofessionalfirmstoperformtheservicestraditionallydonebyonefirm.Thisdefinitelycreatedaddi-tionalopportunity.However,basedonmyexperienceworkingwithCPAfirms,Ibelievethatforthevastnumberofbusinesses(whichincludethosethathavenotbeenaffectedbylegislation),regardingcomplianceservices,ifonefirmpicksupanewtax,audit,orfinancialstatementclient,itismostlikelybecauseanotherfirmlostthatsameclient.ThismeansthatCPAfirms,inordertosurvive,havetobecomemoreawareof: •Developingclientloyalty. •Satisfyingtheirclients’needs(ratherthanjustprovidingthemwiththeservicesyou

havealwaysprovidedthem). •Buildingawallofservicesaroundthemtoprotectthemfrompoachingbyother

CPAfirms.


16


Trend 2. Reshaping ServicesBecauseof the legislativeenvironmentand increased focuson independence,duringthenextdecade,manyfirmswilldrasticallyreshapetheservicestheyoffer.Anumberoffirmswillsurroundalloftheirofferingswithacloakofindependence,whileothersmovetotheotherendofthespectrum(becomingmanagementadvocates),withroomalongthecon-tinuumforeveryoneinbetween.Iampointingthisoutbecausethosefirmsthatrethinkthesynergyoftheirservicesanddeveloptheirservicestrategyearlywillbeableto: •Createallianceswithotherfirmsquicklytominimizeservicegapsintheirofferings, •Attractclientsfromfirmsthatdiscontinueservicesthatyouofferthatthoseclients

stillneed,and •Createaculturethatunderstandsthatthegreaterthenumberofdifferentservicesa

clientpurchasesfromyourfirm,thegreatertheirloyaltytothefirm.

Trend 3. Milking the Cash CowManyfirmsarebehavingasiftheyweresellingdeclining-demandserviceswithinadyingindustry(i.e.,theydonotwanttoinvestanymorethannecessarysotheycantakeoutasmuchcashaspossibleeachyear).Thisstrategyiscommonlyreferredtoas“milkingthecashcow,”anditisgoingtohurtmanysmalltomedium-sizedfirmownersinthecomingde-cadebecausetheirfirmswillhavebeenstrippedbareofmuchofthevalueotherfirmslookforinapurchaseormerger,namely,thatthefirmsarewellrun,haveadiversityofskills,highlytrainedpeople,and/oraretechnicallysavvy.

CPA Firm Practice ForcesWehavelookedatourprofessionallandscapefrom30,000feet.Now,Iwouldliketohigh-lightfouruniversalissuesthatIhaveencounteredoverandoveragaininworkingcloselywith firms. They are foundation and consistency; management, staffing and operations;growth;andsuccessionstrategies.Theseissuescoincidentallyalsooutlinehowthebookisorganized.

Issue 1. Foundation and Consistency MostCPAfirms,especiallythoseunder$15millioninsize,operatemorelikealocalrealestateofficethanasinglefirm.Inotherwords,ownersshareoperatingcostsbut,forthemostpart, theypracticeandmanage independently.However,witha corporatemodelofgovernance: •Thefirmownstheclients. •Theactionsoftheownersareinlockstepwithfirmgoals. •Thereiscleardelineationbetweenbeinganownerversushavingasayinevery

decision. •Thereareestablishedrolesandresponsibilities,identifiedlimitationsandpowersfor

thosepositions(boardofdirectors,CEO/MP,firmadministrator)sothateveryonecanbeeffectiveattheirjobs.

Mostfirmshavenotadequatelygroomed,mentored,orgrowntheirreplacementown-ersornewmanagers.



17

Issue 2. Management, Staffing, and Operations Firmshavereliedtoolongonspecificpeoplefortheirsuccessratherthandevelopingcon-sistentprocessandmethodologythatwillallowtheorganizationtoflourishaspeoplecomeandgo,andleadershipchangestakeplace.Also,firmsarenotaddressingthereversepyra-mid.Thisisthereversalthatresultswhenownersdotoomuchmanagerwork,managersdotoomuchstaffwork,andthestaffisunderutilized.Underperformingstaff,management,andownersaretheresultsofthiscareer-directionlessmodelthatdoesnotforcepeopletoliveuptotheirrespectiveroles.

Mostfirmsrarelyholdanyoneaccountable,especiallytheowners.Thiscanbereadilyascertainedintheabsenceofanydocumentationoforganization-wideprocessesandpro-cedures.Accountabilityisnotpossibleunlessthereisclarityastowhatactionsareexpected(desirable),alongwithconsistentlyenforcedconsequencesforinappropriatebehavior.

Toomanyfirmsunderpaytheirbestperformersandoverpaytheirmarginalemployees.Thesalarysystemnolongerworksbecausesomanyemployeeselecttobecareerprofes-sionalsratherthanaspiringowners.Thetraditionalsystemshavenotchangedtofittoday’senvironment and are, therefore, shrinking profits.Compensation systems for the typicalfirmhavenotchangedmuchinthepast20years(apercentagechangehereorthereisaboutall).Atthesametime,thestrategiesthatdrivethefirmshavechangedsignificantlyduringthissameperiod.Yet,firmsarealwayssurprisedthattheirstaffsdonotfollowtheorganiza-tions’communicatedpriorities.

Issue 3. GrowthThesmallerthefirm,themorethemarketingrestsonanindividual(orasmallgroupofindividuals).Thelargerthefirm,themorethemarketingreliesonaprocess(amarketingenginethatrunsallthetime).Asyouwouldguess,businessdevelopmentskillsareatapre-miuminsmalltomedium-sizedfirms,andtechnicalcompetenceandprojectmanagementskillsareatapremiuminthe largestfirms.Until thesmall tomedium-sizedfirmsbegintreatingmarketingasafoundationprocessthatdrivesthefirm’sfuture,theirlong-termvi-abilityisextremelysuspect.

Historically,afirm’snewserviceshavebeendrivenbyanowner’sormanager’sdesiretospecializeratherthanwhatwasbeststrategicallyforeitherthefirmortheclientsbeingserved.Thismodelhaslostalotoffirmsagreatdealofmoneyforavarietyofreasonsoverthepastdecade.

Issue 4. Succession Strategies Becauseoftheageofourprofessionals,itisbecomingahigherpriorityforfirmseverywheretoestablishaplanfortheseniorownersto“cashout”oftheirpractices.Thismightcomeintheformof: •Ownersbeingabletoretireandbepaidtheirownershipvalueovertime •Sellingtoanotherfirm •Mergingwithanotherfirm •Ownersrunningtheirfirmslongpastretirementage,maximizingtheirincomewith

diminishingworkloadandclientattritioncoincidingthroughoutthisperiod


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Regardlessofthestrategy,thetransitionandretentionofclientsbyeithertheexistingfirmorthebuyingormergingfirmisakeytomaximizingvalue.Andtherearenumerousotherissues,fromagreementstocompensationadjustments,thathavetobeconsideredtoensurethesuccessofthisprocess.

Survey Results Intheparagraphsbelowandthroughouttheremainderofthebook,Irefertotwodiffer-entsurveys.Thefirstisthe2008PCPS/TSCPANationalManagementofanAccountingPracticeSurvey(MAPSurvey).Thatsurveyhadover2,700respondents,withover2,200ofthosefirmshavinglessthan$2millioningrossrevenues.Thesecondsurveyisthe2008PCPSSuccessionSurvey(SuccessionSurvey).Almost500firmsrespondedwithoverallav-eragerevenuepermultiownerfirmof$5.9millionandabout$500,000atsoleownerfirms.Bothsurveysarereportingon2007year-endrevenues.

This discussionwill focuson the followinghighlights from the surveys-growth andchangesinrevenue,operations,andsuccession.

Growth and Changes in RevenueAsthe21stCenturybegan,thedemandforCPAservicesseemedtohavereachedasatura-tionpoint.Thegrowthofonefirmwasoftenduetothelossofclientsatanother.Thatchangeddramatically,however,afterthepassageoftheSarbanes-OxleyActof2002,and

therenewedemphasisonbetter governance andobjective assurance. Forseveral years afterward,firmsenjoyedstrongreve-nuegrowth.Thatgrowthsurge slowed in 2008,however,after theglobalbanking crisis and steepdeclines in stock marketandrealestatevalues.Fig-ure1-2depicts2008firmgrowthratestatistics.

CPAfirmshaveheldtheirownintheseuncer-taintimes,but theheadygrowth of past years hasslowed. The 2008 MAPSurvey found that CPAswere continuing to ex-perience high income

Figure 1-2: Firm Growth Rates (+ or –) 2008 MAP Survey

Grew =>5%48%

Grew =>5%48%

Shrank,19%

Flat, 10%

Grew <5%,23%



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levels and billing rates asthe recession was poisedto begin, but the resultsraisedquestionsaboutthefuture economic outlookforfirms.

Figure 1-3 showsthat a total of 26 percentoffirmsgrewbetween10percent and 19 percent,while another 8 percentexpanded by 20 percentto 29 percent and 5 per-cent grew by 30 percentormore.Only10percentsawnochange,andfewerthan10percentdecreasedin size. Those numberswere little changed fromthe2006 survey, attestingto the success many firms were seeing before the recession began. In terms of servicesperformed,CPAfirmsgenerallyearnedmostoftheirmoneythroughtraditionalservices,withmorethan50percentonaveragecomingfromtaxclientsandabout23percentfromwrite-ups,compilationsandreviews.Thesurveyresults,althoughgenerallypositive, stillraisequestionsabouttheprospectsforcontinuedstronggrowthinthemidstofapersistentrecession.Andevenbeforethedownturnbegan,CPAfirmswerereportingsomeplateausindemand.Itseemssafetosaythatitwillbecomeincreasinglymoreimportantforfirmstodosomebasiccompetitiveanalysisaspartoftheirplanningprocess.

OperationsOperationalspendingissueshavealreadybeenaddressed,including,“milkingthecashcow”asacashmaximizationstrategy,orrelyingonthefirmsuperstarsinsteadofinvestinginthefirm’sfoundationprocessesandprocedures.Herearesomestatisticsthatsupporttheideathataccountingfirmsarenotmakingthenecessarylong-terminvestmentsininfrastructureor indeveloping theirpeople.Wewill lookatmarketing, information technology (IT),training,andnetrevenuesandthenofferaconcludingobservation.

MarketingIfmarketingandbusinessdevelopmentissuchanimportantfoundationforfirmstoem-brace,why is the averagemarketing-expense-to-net-client-revenues ratio across all sizesoffirms so low?TheMAPSurvey showed the averagepercentageof revenue spentonmarketingwas1.2percent.Ifafirmwantstosafeguarditsfuture,itmuststoprelyingonits

Figure 1-3: Self Reported Firm Growth for 2008

Grew =>5%48%

26%10–19%

19%1–5%

18%6–9%

10%None

9% Decrease

8%30+%

8%20–29%

2%N/A


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superstarmodelandbegindevelopingafirm-widemarketingengineandmarketingculturesothattheorganizationhasachanceoflong-termcontinuedsuccess.

Information TechnologyIffirmsareshortstaffed,whyarepersonnelallowedtowasteonesecondoftheirscarcetimedoinganythingthattechnologycandoforthem?TheMAPSurveyfoundanaverageIT-expenses-to-net-client-revenueratioof2.1percent,eventhoughITspendingisanumberthatcantrulyaffectefficiency.Ihavefoundthatthelargerthefirm,thegreatertherealiza-tionthattechnologycosts(whilehigh)arefarlessthansalaries.Sincesalaries(exclusiveofowners)typicallyrepresentover30percentofoverallfirmcosts,itseemsthatleveragingthisinvestmentwouldbehighonthelistofprioritiesforfirmsofallsizes.

TrainingEventhoughitisnotsurprisingthatCPAfirmsarenotinvestingintheirpeople,asnotedintheprecedingdiscussion,thestatisticsareshocking.The2008MAPSurveyshoweda.8-percenttrainingexpensetonetclientrevenue,littlechangedfromthepercentageinpastsurveys.Asaprofession,thisleveloftrainingbudgetsupportsmyearlierclaimthat,despitestaffshortages,notenoughisdonetodeveloptheavailablestafformovethemalongdefinedcareerpaths.Therecessiononlyreinforcestheneedtomakethemostofthestaffyouhaveandtoequipyourpeopletodealwithchangingcircumstances.

Net Revenue per Full-Time EquivalentIntheMAPSurvey,overallnetrevenueperemployee,i.e.,full-timeequivalents(FTEs),averagedalmost$200,000withtopperformingfirmsaveragingover$240,000,asillustratedinfigure1-4.However,thelargerfirms(above$10million)reallyskewthataverageup-ward.Whenyouconsiderfirmslessthan$2millioninsize,theoverallaveragefallsbelow$152,000 and a little over $144,000 for those ranked as top performers. If your firm isproducingatarateoflessthan$144,000perFTE,youprobablyareencounteringbothanupside-downpyramidandanorganizationalmodelthatneedssomeattention.



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Figure 1-4: Net Revenue Per Employee (FTE)

250,000

200,000

150,000

100,000

50,000

0MAP Survey—Overall MAP Survey—Top Performers

Firms Overall Firms $2M & Less

xx Figure 1-4: Net Revenue Per Employee (FTE) xx

Survey Group

Net

Rev

enue

s

$195,000

$151,443

$240,000

$144,000

A Final Word on Operations Insummary,theanalysisofthetwosurveysrelativetooperationsuncoversobvioushand-writingonthewall.Thereareanumberoffirms(probablyabout10to15percent)thatare,rightnow,investingheavilyinmarketing,technology,andtraining.Intheshortterm,thismoneywillfalloutintheformoflowerprofitsfortheownergroup.Inthenextfiveyears,thesefirmswillstartdevelopingarealstrategiccompetitiveadvantageoverotherfirmsastheirenhancedinfrastructure,processes,andmethodologiesbecomefoundationalfortheirfirm.

SuccessionSuccessionistheareainwhichalloftheissuesmentionedabove,orthefailuretoaddressthem,intersect.Forexample,yourabilitytodevelopyoungleaderswithinyourfirmdirect-lycorrelatestothelikelihoodthatyourfirmwillattractownerswhowanttobuyyouout.Themoretheinfrastructuresupportingyourorganizationisbasedonconsistent,repeatableprocesses thatareuniformlyappliedandbuiltonobjectiveaccountability, theeasier it istochangeleadershipwithoutnegativelyaffectingprofitabilityorviability.Themoreitisafunctionofthefirmtoserveitsclients,ratherthananindividualservinghisorherclients,thegreaterchancethatthefirmcanefficientlymanageitsscarceresourcesbybalancingtheworkload,developingnecessaryskillswithinthefirm,creatingtherightbreadthanddepthof scopeof services,andtransitioningclients.Succession is the light that shinesbrightly,revealingouraptitudeatworkingonourbusinessratherthanjustin it.

AfewPCPSSuccessionSurveyhighlightstoconsiderarediscussedbelow.Let’sstartwiththequestionofwhetherfirmshaveawrittensuccessionplaninplace.Inthe2008sur-vey,35percentofmultiownerfirmsdid,alongwithonly9percentofsoloproprietors.


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Sole PractitionerFirmsinthesoleproprietorgroupwerealsoaskedwhethertheyhadpracticecontinuationagreementsinplace.Theseagreements,bydefinition,createaplanforanotherfirmtotakeoverthepracticeandpaythesoleproprietor’sestateaspecifiedvalue.Theyalsooutlinewhathappensintheeventofthesoleproprietor’stemporaryorpermanentdisability.Theyarecriticalbecauseafirm’svaluecandiminishatanexponentialratestartingasearlyasthreeorfourmonthsafterthedeathordisabilityofthepractitioner,andevenfasterduringthetaxseason.ThisrapidlossinvalueoccursbecauseanumberofclientswillscrambletofindanotherCPAtoassistthemassoonastheygraspthesituation.Bythetimethesurvivorfindsafirmtotakeover(evenifitisonlyafewmonthslater),50percentormoreoftheclientsmayhavealreadygoneelsewhere.

Given theclearnegativefinancial implicationsofnothavingapracticecontinuationagreementinplace,itshouldcomeasasurprisethatonly9percentofsoleproprietorssaidthattheyhadanexistingwrittenpracticecontinuationagreementwithanotherfirm.That’sanincreaseofonlyonepercentagepointfromthe2004survey.

Retirements on the HorizonNomatterhowconscientiousfirmsareaboutbeginningtheirsuccessionplans,it’sdifficulttocreateaconcreteprocessorstrategyifownerscan’tsetaconcretedateforretirement.Insmallandmedium-sizedfirms,ownerstypicallydonotwanttosetthedateoftheirde-parture,foreconomicreasonsandbecauseofthedesiretocontinueworking.Incontrast,seniorownersinlargefirmssetdeparturedatesbecausetheirretirementismandatory,notnegotiable.Duringaseriesofphoneinterviewswithpastsurveyrespondents,seniorowners,whethertheywere55or75,allsaidthesamething,namely,“IthinkIwillworkanother5to10years.”Thislackofclarityregardingthechangeinownershipandvotingprivilegeshasmanyrepercussionsonthetransitionandviabilityofthefirm.

Figure1-5showsthepercentageofpartnersretiringinthenextfiveyears.Sixty-threepercentofthefirmsinthesurveynotedthatatleastoneownerwouldretirewithinthattime;32percentanticipatedtheretirementofmorethanoneowner.Regardingownership,52percentofthoseinthemostseniorownercategorywere60orolder.



23

Figure 1-5: 5 Year Horizon re: Retiring Partners

70%

60%

50%

40%

30%

20%

10%

0%Partners Retiring

1 Partner Retiring in 5 years More than 1 Partner Retiring in 5 years

xx Figure 1-5: 5 Year Horizon re: Retiring Partnersxx

Per

cent

age

Succession PlansTheresponsestoafollow-upquestionregardingstatusofthesuccessionplan(onlyaskedofthoserespondentswhodidnothaveawrittensuccessionplan),theresponseswere: •42percentofmultiownerfirmsand66percentofsoleproprietorssaidtheywould

starttheprocesswithinthenextfiveyears. •35percentofmultiownerfirmsand17percentofsoleproprietorshavestartedtheir

planandsoonhopetocompleteit. •10percentoftherespondentsstatedthatthey“didnotfeeltheneedtohaveasuc-

cessionplan,writtenorotherwise.” •9percentofmultiownersand3percentofsoleproprietorshaveaplanthathasnot

yetbeenapproved.Aquality-enduringsuccessionprocesstakesyearstoputinplace.Thus,ifyouhavea

seniorownerfiveyearsfromretirement,youhavelittletimetowaste.Atroublingstatisticisthat10percentofthosewithoutasuccessionplanbelievetheydonotneedone.Follow-upinterviews,aswellasmypersonalconsultingexperience,revealthatasignificantpartofthisgroupbelievesaplanisnotnecessarybecauseeither: 1.Theyaregoingtosellormergetheirfirms,or 2. Theyhaveanowneragreementinplacethataddressesbuyout.

Item1,theassumptionthatthefirmisgoingtobesoldormerged,isaviablestrategytoconsider,thoughitisaveryriskyandshort-sighted,singular-option.Item2,owneragree-ments,isproblematicalbecauseIhaveseentoomanyfirmsmiscalculatethatsuccessionisjustalegalissue.Youngownercandidatesmaysignalmostanythingtobeallowedtojointheownerclub.Butoncetheyarein,theyknowfullwellwhattheiroptionsare.Thesinglebiggestcardtheyareholdingisthetimingoftheirdeparture.


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Timing of SuccessionMostfirmsappeartobeawareoftheneedtoplan.Atotalof20percentofmultiownerfirms—and14percentofsoleproprietors—hadcurrentsuccessionplanningchallenges.An-other30percentofmultiownerfirmsand33percentofsoleproprietorsexpectedtohavetheminthenextthreetofiveyears.

Regardingthetimingofsuccessionchallenges,roughlyhalfofthefirmssurveyedareexpecting tobeconfrontedwith successionchallenges in thenextfiveyears.Another3percentofmultiownerfirmsand5percentofsoleproprietorsdonotexpecttoaddressthisissueinthenexttenyears.

Funding of RetirementAstowhetherretirementprogramsarefunded,67percentdonotplantofund,another12percentdoplantofundbuthavenotgottenstartedandtherestareinvariousstagesoffund-ing,withonly7percentfundedby61percentormore.However,eventhisnumbermaybeoverlyoptimistic.Infollow-upinterviewsconductedinthepast,itbecameapparentthatmanypeoplewhosaidtheirplanswerefundedwerecommentingonwhethertheowners’401(k)accountswerebeingfundedeachyear—notthebuyoutretirementamounts.

Ihadaninterestingdialoguewiththeownersofonefirmaboutfullyfundingretire-ment.Theyhadfundedtheirfirm’sretirementprogramata50percentrateanddidnotplanoneverincreasingthatpercentage.Naturally,Iaskedwhy,andtheanswerwasrevealing:“Wehavefoundthatasindividuals’retirementfundsapproach100-percentfunding,whichmeansthattheirpayoutisnotatrisk,thesepeopleloseinterestin: •Doingtherightthingforthefirm, •Makingthenecessaryinvestmentstosecurethefuturesuccess;and •Takingonrolesandresponsibilitiesthatpushthemoutoftheircomfortzone.”

Ididnotexpectthisresponse,butIcancertainlyseethelogic.

Form of TransitionOnequestionaskedwhatthelikelytransitionofthefirmwouldbewhenthecurrentseniorowner(s)retire.Theresponseswereasfollows: •11percentnotedsaidthefirmwouldmostlikelybesoldsothattheseniorowners

canmaximizethevalueoftheirinvestment. •8percentansweredthatthefirmwouldmostlikelylookforamergercandidatedue

totheseniorowners’lackofconfidenceinthefirm’scontinuation,tothesurpriseordispleasureofthejuniorowners.

•7percentsaidthefirmownerswouldrunthefirmlongpasttypicalretirementage,maximizingtheincomeofthefirm,withdiminishingworkloadandclientattritioncoincidingthroughoutthisperiod.

•6percentstatedthatthefirmwouldmostlikelylookforamergercandidateinordertofundtheretirementoftheseniorowners,whichisfullysupportedbythejuniorowners.

•4percentrespondedthatthefirmwouldmostlikelybesoldbecausetheremainingleadershipwouldnotbestrongenoughfortheretiringownerstofeelconfidentthatthefirmcouldsucceedthroughtheretirementpayoutperiod.



25

•2percentsaidthefirmwouldlikelybesplitupbecausetheremainingownergroupdoesnotshareavisionofwherethefirmshouldbegoing.

Thepercentagesabovecanbemisleadingbecausethisquestionaskedfora“selectallthatapply”response.Seventy-ninepercentoftherespondentsalsoselectedthechoicethat“their firm’s clients would be transitioned to the remaining owners or incoming own-ers.”Butthe79-percentresponsedoesnotchangemyobservation:Manyseniorowners,especially those controlling themajority interestof thefirm,while they are consideringfollowingtheowneragreementandallowingtheremainingownerstobuythemout,arealsoquietlyconsideringtheoptionsofsellingormergingthepracticewhenitcomestimefortheirlastdayofwork.

ConclusionAdditionalsurveydatawillbediscussedinsubsequentchapters.However,thedataaddressedintheprecedingprovidesabroadoverviewofthecurrentlandscape,aswellasperspectiveonhowfirmsarepositioningthemselvesinthemarketplace.



27

Structure and Leadership: Establishing a Foundation and Consistency

Chapter 2

The objectives of this chapter are to: •Outlineoperationalstructuresthatenablechange;specifically,decision-making

authorityandastandardoperatingprocedurefoundation. •Demonstratehowtheseoperationalstructuresoperateindifferentsizedfirms. •Giveguidanceonimplementingpowers,administrative,andaccountabilitypolicies. •Discussleadershiptraitsthatcanmeanthedifferencebetweenadysfunctionalfirm

andaneffectivefirm.Thesuperstarandtheoperatormodelsbothtendtofollowdifferentpathswhencre-

atingoperationalstructure.Regardlessoftheapproach,planninghastobethecatalysttodevelopanyenduring,holisticallyintegratedsupportinfrastructure.Withplanningcomeschange.Andchangewithoutaclearlycommunicatedlong-rangepurposejustcreatesun-necessarystress,confusion,andfrustration.

Earlyinmycareer,IconductedretreatsforCPAfirms.Often,threetofiveyearslater,Iwouldbeaskedtoreturntofacilitatefollow-upsessions.Formostfirms,Iobservedthatnothinghadreallychanged.Thelistofissuesandtheirorderofpriorityhadchangedverylittle;thesameold“sacredcows”werestillpointsofcontention.Thisbaffledme,giventhecontrastwithmostofmyplanningclients,whowerecorporateclientsthatinvariablyexperiencedsignificantchangesduringcomparableintervals.Iaskedmyself,“WhyisrealprogressinachievingidentifiedstrategicinitiativessorareamongCPAfirms?”


28


IfoundmyselfhypothesizingthatCPAfirmretreatsweremeanttobemorecatharsisthancatalyst,andthatthespiritofmanyofthefirms’strategicobjectiveswere“it-would-sure-be-nice-if-we-could”ratherthan“this-is-what-we-need-to-accomplish.”AsIbeganinvestigatingfurther,Ifoundthatthevastmajorityoftheownersweretrulycommittedtoachievingtheirstatedstrategicdirection.Theirexcusefortheirshortfallwasalwaysthattheday-to-dayroutineofservingclientsseemedtokeepgettingintheway.Astimewenton,Ipaidcloserattentiontowhatwashappeningbetweenretreats.Ifoundsomefirmsmadesignificantprogress,butmostdidnot.Myhypothesischanged;Ibelievedthatsomefirmsarejustbettermanaged,andthatmanagementisthecriticalsuccessfactordrivingchange.

Onceagain,mytheorywasnotsupportedbythestatisticsforfirmprofitabilityandsuc-cess.Thenitdawnedonme…therearetwodistinctenablersthatarealwaysdiscerniblewhenmajorchangeisembraced.

Thefirstenableristhepresenceofdecision-makingauthority,andthesecondisthepresenceofastandardoperatingprocedure(SOP)foundation.Withoutboth,thereisonlydirectionlessspinning.

Thischapterdiscussesdecision-makingauthorityandSOPfoundationaswellasleader-shipissuesthatcansignificantlyaffectafirm’sabilitytoeffectivelyimplementthesecriticalenablers.AlthoughanSOPfoundationis introduced,thereal focusof thischapter isondeveloping the necessary decision-making authority with supportive leadership that canconfidentlyandefficientlynavigatetheturbulentwatersofsuccession.

Enabler 1. Decision-Making Authority Decision-makingauthorityissimpletoascertain.Couldthechiefexecutiveofficer/manag-ingpartner(CEO/MP)orasmallexecutivecommitteeforce the acceptance of change through mandate?Commonly,thisauthorityisoneoftwovariations.Thefirstauthorityisvotingcontrol.WhenIlookatmysmallbusinessclients,theyhavenotroubleimplementingplansbecauseoneortwoowners,withvotingcontrol,makethedecisionsandeveryoneelsehastoeither(1)goalongor(2)findanewjob.Withmylargercorporateclients,theCEOrarelyhasvotingcontrol,yetimplementationisrarelyaproblemthereeither.Thisledmetothesecondauthorityvariation—organizationalinfrastructure,whichIdefineas:

Definedorganizationalhierarchy,roles,andresponsibilitiesthatareputinplacetodis-

tributethenecessaryindividualauthority,powers,andlimitationstosupportattaining

operationalcompliancewithstrategicdirection.

TheCEO/MP’sability tomandatechange rests in thedistributed individual authority, powers, and limitationscomponentofthisdefinition.Asyouknow,midsizedandlargerfor-profitcompaniesaretypicallyorganizedwithbothaboardofdirectors(board)andaman-agementteam.Theboard’sroleistoestablishthestrategicdirectionoftheorganization.Themanagementteam,headedbytheCEO,ischargedwiththeimplementationoftheboard’splanwithintheauthorizedlimitsandpowers(withthebroadestauthorizationofbothlimitsandpowersusuallycomingfromtheapprovedbudget).



29

The ProblemNormally,whenaCPAfirmisfirstformed,votingcontrolisnotanissue.Thisispartiallybecausemostare soleproprietors.For instance,overhalfof themore than40,000CPAfirmsregisteredwiththeAICPAaresoleproprietors.Evenstartupandsmallfirmshavingmorethanoneownerdonotstrugglewithvotingcontrolbecause,often,morethan50percentofthefirmisownedbyoneperson.Asthefirmsgrow,moreownersareusuallyadded.Atthepointofredistributingownership,votingisspreadthroughoutthegroupsothatoneortwopeoplecannoteasilymandatefirmstrategyandtactics.Itisatthistimethatthefirmoftenentersa“noman’sland”regardingdecision-makingauthoritywhereindeci-sionsareoftenmadebycommittee.Typically,whenfirmsareoperatingbycommitteeinthis“noman’sland,”theCEO/MPsareconsensusbuilderswithlittletonoauthoritytoimplementchange.

The SolutionForthosefirmsthatcontinuetoincrementallygrowandprosperwhileinthisdesert,itbe-comesclearthatthevacuumofmanagementandimplementationauthorityhastobefilledinordertosustainlong-termsuccess.Anorganizationalinfrastructureiscreatedtoestablishtheauthorityneededtomanagethefirm.Thisorganizationalinfrastructuremimicslimitedvotingcontrolbydefiningthepowersandlimitationsofthemanagementteam.Dependingonthesizeofthefirmandthedistributionofownership,decision-makingauthorityexistsifthereisvotingcontroloriftheorganizationalinfrastructureisestablishedtomimicsomelevelofvotingcontrol(i.e.,theCEO/MP’sauthorityisdefinedbytheposition,nottheactualindividual’sownership).

Decision-makingauthorityprovidesmanagement,whennecessary,withthepowerstomakesignificantchangestothewaytheorganizationcompetes.Thisabilityisindispensabletokeepitfrombecomingthespinningsailboatdiscussedearlier.Someonehastohavetheauthoritytomaintainthestrategiccourse,regardlessoftheterritorialstormsbrewingwithinthefirm.

Enabler 2. Standard Operating Procedures FoundationThesecondenabler—SOPfoundation—isputinplacetoraisetheminimumstandardsforperformance,generateconsistency,andleverageoverallfirmcapabilities.Idefinethisas:

Thoseprocesses,procedures,systems,andmethodologiesthatcreatethefoundationfor

thefirm’soperationsandarebuilttogeneratethehighestlevelofperformancebythe

teamratherthanbyindividuals.

Anorganization’sSOPmanualdetailsmostofthis,fromcollectiontoinvestmentpoli-cies, fromclientacceptancetoclientfiringguidelines, fromperformanceexpectationstocompensation systems, fromclientmanagement toclientmarketingprocesses, from stafftrainingtopartnerdevelopmentprograms.Thisenablercreatesaframeworkfortheorgani-zationwithinwhicheveryoneisexpectedtowork.


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HereistheanecdotalevidenceandexerciseIaskmyclientstoworkwithtoresolveconflictregardingthispoint.Sitdownandlistallofthecompaniesyourfirmservicesthatare successfully runbycommitteeorbyaweakmanagement teamwithout robustSOPfoundation.Then,startanewlistofthoseclientsyouservethataresuccessfullyrunbyastrongmanagementteam,andavisionaryboard,withSOPfoundationatitsfoundation.Everytimewehavegonethroughthisexercise,therearefewclientsinthefirstcolumn… whilemostofthefirm’stopclientsareinthesecond.

AfirmcanembraceSOPfoundationregardlessofsize,fromaone-personshoptoafirmthatemploysthousandsofpeople.SOPfoundationisstrongestwhendecision-makingauthorityisrobustenoughtoholdeveryoneaccountable.Incontrast,ifthereisSOPfoun-dationbutnodecision-makingauthority,thefirmwilllikelybesuccessful,butthatsuccesswillhingeonthefirm’sabilitytomakeincrementalchangestoitscurrentcourse.Whenmajorcourseadjustmentshavetobemadeforeithercompetitiveadvantageorstrategyfail-ure,thefirmwillhavelittle abilitytoquicklyrighttheship.

Enablers And SynergyAlthoughhavingeitherdecision-makingauthorityorSOPfoundationisbetterforthefirmthanhavingneither,afirm’sbestchanceforsuccessliesinhavingboth.Theformercreatestheabilitytomakeefficientcoursecorrections;thelatterprovidesthefoundationforcon-sistentandhighlevelsofperformance.

Thefollowingareexamplesofeachoftheseenablers.

A sole proprietor (who owns 100 percent of the firm) decides to launch a forensic account-ing service and establishes an educational program for one of his top audit managers. The manager objects to his new assignment. The sole proprietor responds by pointing to the door as a viable option. In this situation, the owner has control and can make these kinds of demands at will.

Sample Scenario: Voting Control

The CEO/MP (who owns 15 percent of the firm) decides that one of the senior owners has client responsibility for too many clients and therefore is underserving many of them. Therefore, it is time to reassign and transfer some of those clients to owners who have both better skills and more time to serve them. The senior owner is given a schedule as to which clients will be moved to which owners in what time frame. In this situation, the CEO/MP is granted the authority through organizational infrastructure.

Sample Scenario: Organizational Infrastructure



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Given the facts of the preceding examples, the CEO/MP, seeking to align compliance and di-rectives, makes a proposal to the board requesting modifications to the compensation sys-tem. This proposed adjustment not only takes into account the reshuffling of client respon-sibility, but outlines the penalties for transitions not made timely (for the senior owner) and for clients lost after transition because of lack of scheduled contact (for the newly assigned owner). Changing the compensation system to immediately align and support the desired behavior requested by management is an example of properly utilizing SOP foundation.

Sample Scenario: SOP Foundation

Theevolution, strengths,andweaknessesof theseenablers requireadditionalclarifi-cation. For example, voting control andorganizational infrastructure have been lumpedtogetherasiftheywereexactlythesame,butthatisnotquitetrue.Ononehand,votingcontroltypicallygrantsmoreauthoritythandoesorganizationalinfrastructure.Thiscanbeeithergoodorbad,dependingonthecircumstances.Ontheotherhand,votingcontroldoesnothavethenaturalbuilt-inchecksandbalances,aswellastheconsistencyofperformance,thatcanbeexpectedwithinanorganizationalinfrastructure.Reflectonthefollowing:

Consider a firm run under a dictatorship in which control is held by a person, maybe two with similar perspectives. Regardless of whether that dictator is benevolent (leads through influence) or not (manages through command and control), the firm’s future potential is directly proportional to the abilities, vision, and philosophies of those controlling owners. Since there is no requirement to operate within a planning framework (such as a vision, and goals and objectives) or within a financial framework (such as a budget), and because these owners are not accountable to anyone, they can revise the direction, priorities, and resourc-es of the organization as often as they desire without any necessity to defend their actions. This tends to create an operating environment in which the owners are rarely challenged by anything outside their own personal desire to minimize their weaknesses or develop their strengths.

Sample Scenario

So,thegoodnewsis thatwhilevotingcontrolallowstheinstant implementationofideasbecausenoonebuttheownerhastosignoff,thebadnewsisthatvotingcontrolal-lowstheinstantimplementationofideasbecausenoonebuttheownerhastosignoff.Letmebeclear.Iamnottellingyouthataone-ortwo-ownerfirmcannotbeincrediblysuc-cessful.NoramIproposingthataone-ownerfirmcannotcreateanSOPfoundationthatwouldcomparewellwiththebestinthecountry.Iamsayingthatthereisnorequirementtojustifywhyactionsareorarenottaken,orwhybestpracticesareorarenotfollowed.Theresultingflexibilitycanbeboththereasonforafirm’ssuccessesaswellasitsAchilles’heeloffutureevolution.


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Enablers And Firm SizeItmaybethattheattitudesandaptitudesrequiredtogrowafirmfromnothingto$2millioninrevenues(throughoutthisbook,millionsofdollarsinrevenuereferstoannualrevenues)aresignificantlydifferentthanthoserequiredtogrowafirmfrom$2millionto$10million.Wetalkedaboutthisinthe“Introduction.”Asanorganizationgrows,acriticalsuccessfac-torinfluencingitsfutureisitsabilitytoshiftfrombeingafirmdrivenbythestrengthsandpersonalitiesofvariousindividualstoanorganizationthatisdrivenbystrategy,structure,process,definedexpectation, andmonitoredperformance.Below is adiscussionofhowenablersoperateinvarioussizedfirms.

Enablers and Up to $2-Million FirmsInsmallfirms(withannualrevenuesofbetweenlessthan$1millionandabout$2million),votingcontrolisthenorm.Becausetheseownersliketheflexibilityofmakinguptherulesastheygo,anSOPfoundationisrarelyputinplace.Theinterestingpointaboutthisisthatmostsmallbusinesses,regardlessoftheindustry,lovetheflexibilityofa“no-rules,”“we-are-all-part-of-the-same-team” structure. This philosophy permeates every aspect of thebusiness, fromdefiningsicktimeandvacationdays toperformancepay.Apparently, thetheory is that, by formalizing expectations, you are establishing an acceptableminimumlevel of performance.There is a general belief amongowners that once youhave set aminimumlevelofperformance,noonewillevermakeanyefforttoexceedthatlevel.Forexample,ifthefirmannouncesthatitsemployeeshaveatotaloffivepaidsickdays,theybelieveitamountstotellingeachemployeetotakeatleastfivesickdays.Thehopeistogetmoreoutofthefirm’saverageemployeesbynotsettingtheminimumstandardbar.How-ever,whatusuallyhappensisthatthemarginalemployeesgetafreerideonthebacksoftheyoung,developingsuperstars.Considerthiscommonlyobservedscenario:

Assume for a moment that there is no policy regarding sick time or sick pay. Also assume that there has never been a problem in this area. The firm continues to grow and prosper from 2 to 12 people. In order to meet the ever-expanding workload, employee number 13, Michele, is hired. Michele works well for the first six months, but by month seven, she starts calling in sick fairly often on Monday. By the eighth month, Michele is occasionally calling in sick on Friday, too. After several counseling sessions, and about six months of elapsed time, a meeting is called to establish a sick time policy. The need for such policy becomes especially clear after the management team learns how hard it is to fire someone for excessive sick leave in the absence of a well-defined policy. The firm creates a policy that allows each employee to earn one-half day paid sick leave for every month worked, up to a maximum of six days.

Sample Scenario

Basedonthisscenario,whowonasaresultofthelackofasicktimepolicy?WasittheemployeeswhohadtocontinuallyperformMichele’sworkwhileshewasabsent?Wasittheemployeeswhoneverabusedthepolicy,butnowarelimitedtosixdays?WasitMichele,



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whonowgetsone-halfdayforeverymonthworkeduptosix…plus…the20daysshehasalreadytaken?SmallbusinessestoooftenbelievethatsettingclearexpectationsthoughanSOPfoundationplacesstiflinglimitsandrestrictionsontheirvaluedemployees.Neverthe-less,whatmostfrequentlyhappensisthat,intheabsenceofclearexpectations,yourmar-ginalemployeeswillcontinuallytakeadvantageofyourgoodemployees;thewronggroupsare satisfied andburdened, respectively. In the end, the consequencesof the“no-rules”philosophyaretheexactoppositeofwhatwasintended.Ibelieveitisfarmoreimportanttoestablishsystemsthattakecareofandrewardgoodemployeesthantosqueezealittleextraoutofbadones.IwouldtakethispointastepfurtherandsaythatIbelieveitisimportanttobuildanSOPfoundationthatdrivesoffthemarginalemployees…hopefully,intotheemployofourcompetitors.So, forthissizefirm(soleproprietorandtwo-ownerfirms),eventhoughvotingcontrolisnotanissue,thelackofanSOPfoundationbecomesabiggerandbiggerburdenasthefirmgrows.

Enablers and $2-Million to $8-Million Firms Now,let’stakealookatfirmsintherangeof$2millionto$8million.Inthissizerange,youoftendon’t find any of the enablersstrongenoughtodrivethefirm,whichiswhythisisthemostdifficultsizedfirmtomanage.Asfirmssurpassacouplemilliondollarsinrevenue,newownersareaddedandvotingcontrolbeginstodisappear.Bythetimethesefirmsgrowtothe$3-to$6-million-dollarrange,theyeitherhavetofindawaytoembraceorganiza-tionalinfrastructureortheyarelikelytosplitandbreakupintoseveralsmallersizedfirms.Firmsthatembraceorganizationalinfrastructurehaveagoodchanceofgrowingthroughthisdifficultperiod(especiallyiftheyalsoembraceanSOPfoundation).Forthosethatdonot,thegoodnewsisthat,afterbreakingup,theremainingfirmsaresmallenoughtore-instatevotingcontrol,andthepreferredsuperstarmodeliseffectiveagain.Firmsthatenjoysubstantialgrowthafterbreakingupbutdonotembraceanorganizationalinfrastructurewillmostlikelyfollowthesamepath…addingmoreowners,losingvotingcontrol,spinning,andthendecidingthattheonlysolutionistosplitup,andstartagainassmallerfirms.Obvi-ously,notallsuchfirmsbreakup.Anumberofthemsimplygetstuckinthisgap.Afirminthissituationcannotgoanywherefast,soitslowlybutsurelylosesitscompetitiveadvantageasthewindinitssailsiswastedbythecountervailingweightofitsanchors.Overtime,thefirmwillprobablystagnateintermsofgrowth,butevenifitisenjoyscontinuedsuccess,thelikelihoodthattheownerswillfurtherdivergeinphilosophyandvalueswitheachpassingyearsetsthefirmonacourseforeventualdisaster.

Whyarestrongenablerssorareamongfirmsinthissizerange?Thefollowingarelikelyexplanations: •Therearetoomanyowners,whichprecludesvotingcontrol. •Thefirmhasevolvedthroughmerger,resultinginafirmthatislargeintermsof

grossrevenues,butreallyfunctionsasseveralsmallerfirmsthatarenomorethanlooselyconnected.Thefirmismostlikelytryingtooperateunderthesuperstarmodel,andeveryownerbelievesthatheorsheisentitledtosteerthesailboat(ordropananchorwheneverheorshechooses).


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•Withtheretirementofoneoftheowners,thefirmlostvotingcontrolbecausetheretireehelddictatorialcommandandcontrol(andprobablywasabullyingperson-ality).Inotherwords,theremainingownerseachhavefairlyequalvotingrightsbutnoonehasthecontrolonceheldbythedictatorialowner.Theresponseoftheremainingownersregardingauthoritywilltendtoswing180degreesintheotherextreme;theresultisakinder,gentler,butineffective“we-are-all-in-this-together”managementbyconsensus.

Themoreownersinafirm,themoretheneedtorelyonbothorganizationalinfra-structureandanSOPfoundationtokeepthefirmheadingtowardapreferreddestination.Becauseafirminthisgrouptypicallylacksanestablishedorganizationalinfrastructure,theCEO/MPrarelyhasachancetobeaseffectiveasatypicalindustryCEO.Basedonmypersonalexperience,thevastmajorityofCEO/MPsthatdonothavevotingcontrolareconsensusbuilders,withlittletonoabilitytomandatechange.TheCEO/MP’sjobistokeep thefirmmoving forwardby taking thepathof least resistance,which is apt tobethepaththatnoonereallywants,butnoonereallyhates,either.Tomakeabadsituationworse,typically,noonehastheauthoritytoholdpeopleaccountabletoexistingpoliciesre-gardingmanagementprocesses.Therefore,rulesandproceduresareappliedinconsistently.Moreover,eachownercanoverridepolicybysimplyasserting,“Thatisnotacceptabletomyclient,soIamnotgoingtocomply.”Thissituationdoesnotgetbetterwithtime… itonlygetsworse.Asfirmsgrow,itbecomesmoreandmoreimperativetoprofitabilityandlong-termsurvivalthattheyshiftfromasuperstarmodeltoanoperatormodel,whichmeansthereisafundamentalrequirementtoaddressbothdecision-makingauthorityandSOPfoundation.

Enablers and Firms of $8-Million and MoreMostfirmslargerthan$8millionrealizethatitisnecessarytoembraceanorganizationalinfrastructure inorder tobuild theequivalentofvotingcontrol.Suchfirmsalso start tograsptheneedforanholisticallyintegratedSOPfoundationaswell.Amongthelargerfirms,around $15million ormore in revenue, both organizational infrastructure and an SOPfoundationareusuallyattheheartoftheiroperatingstrategies.

Thisisnottosaythatfirmsarewrongorun-successful, or headed for failure if they follow adifferentstrategy.Agivenfirmmaybeoneofthebestinthecountryaslongasasuperstarisatthehelm. The point is that, for the same firm, theideasinthisbookmayresonatemoresignificantlywhen contemplating how the firm will operatewhenthesuperstarisnolongerthere.Here’stherealquestion:“Whenthecurrentseniormanage-mentteamretires,dotheownersfeelsecureaboutthelong-termviabilityofthefirm?”Iftheydon’t,itislikelythatyourfirmisbuiltaroundindividu-als (the superstarmodel) rather thanprocess andstructure(theoperatormodel).

I am proposing that a natural evolution is observable among successful firms as they grow and prosper, namely that they mature as follows:

• From the superstar to the operator model

• From voting control to organizational infrastructure

• From “no-rules” to an SOP foundation

Key Point



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Enablers And Their Properties in CPA Firms

Decision-Making Authority—Voting Control PropertiesVotingcontrolistypicallymanifestedbythefollowing: •Oneownerownsmorethan50percentofthefirm. •Twoownersthatownmorethan50percentofthefirmhavealong-livedspecial

relationshipoftrust,havethesamebasicpersonalgoalsforthefirm,andrelyoneachotherforperspective.

•Anydecision,otherthanthoseexpresslyidentifiedasneedingmorethan50.01percentofthevotesthroughthecharterorowneragreement,canbemandatedtoeveryoneinthefirm,includingthehiringandfiringofowners,settingretirementformulas,buyoutformulas,compensation,andprocessandprocedure.

Decision-Making Authority—Organization Infrastructure PropertiesOrganizationalinfrastructureistypicallymanifestedthrough:1

•Creationofaboardofdirectors,which,throughoutthisbook,referstotheroleplayedbythisgroup,notthelegaldefinitionofacorporation’sboardofdirectors

•Understandingthattheroleoftheboardistoestablishthefirm’svision,createpolicy,authorizepowers,andsetlimitationsasaframeworkfortheCEO/MP to operate

•Understandingthattheboarddoesnotgetinvolvedintheminutiaofday-to-dayoperationsexceptthroughthesettingandapprovalofbudgets,compensationplans,marketingobjectives,andtrainingpolicies

•Structureinwhichstaffreportstomanagement,managementreportstoexecutivemanagement,executivemanagementreportstotheCEO/MP,andtheCEO/MPreportstotheboard(Iftherearemultipleoffices,thoseofficepartners-in-charge[PIC]areaccountabletotheCEO/MPandthestaffinthoseofficesisaccountabletotheofficePIC.)

•AccountabilityoftheCEO/MPforthefirmmeetingitsgoalsandobjectives,whichiswhyhisorhercompensationobjectivesshouldbedifferentthantheotherowners

•Owners’understandingthattheyserveontheboardinonecapacity,butalsoreporttotheCEO/MPinanother.(Thedistinctionisthat,asaboardgroup,theydirecttheCEO/MP.Asindividuals,theyreporttotheCEO/MP.)

•FiringoftheCEO/MPifheorshefailstoperformuptothedefinedobjectiveex-pectationsoftheboardorwithinthepowersallowed(However,theboarddoesnothavetherighttooccasionallydropdownandtakeonmanagementresponsibilitiesjustbecauseitdoesnotlikehowtheCEO/MPisperforming.Ifthisviolationeveroccurs,thenallaccountabilityislost,theCEO/MPbecomesafigurehead,andtheboardtakesontherolesofCEO/MP.)

1 Many of the concepts mentioned below can be found in Boards That Make a Difference: A New Design for Leadership in Nonprofit and Public Organizations by John Carver, published by Josey-Bass Inc., San Francisco, 1997.


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Other requirements for clarityoforganizational infrastructure include jobduties forallkeyrolesinthefirm(board,CEO/MP,chiefoperatingofficer[COO]/officemanager,partners,managers),powerpolicies,andhavingafirmorganizationalchartthatreflectshowthefirmshouldactuallyoperate.Adiscussionofeachrequirementfollows.

Job ResponsibilitiesOneofthemostbasicstepstomakingafirm’sorganizationconcreteistooutlinejobduties.Thisistrueatalllevelsinafirm.

Power PoliciesPowerpoliciesarethosepoliciesestablishedbytheboardofdirectorsthatoutlinetheau-thority,includingitslimits,forvariouspositionswithinthecompany.Asimpleexampleofa powers policymightbeanoutlineofwhatpositionstheCEO/MPcanhireandfirewithoutboardapproval(i.e.,itmightincludeallstaffandmanagers,butstipulatethatboardapprovalisrequiredfordirectorsorowners).Anotherexampleofapowerspolicyistoempowerthechairtovoteratherthanjustbreakties.

Organizational ChartIfyouare likemanypeople, thementionof theneedforanorganizationalchartwouldevokeasmirk;anorganizationalchartseemslikeatheoreticalnicetythatcouldnotbelessrelevanttothepracticalrealityofcreatingorganizationalinfrastructure.Sevenoreightyearsago,Iwouldhaveagreed.

Atthattime,Idecidedtoaddanadditionalquestiontotheconfidentialemployeesur-veysthatItypicallysendoutaspartoftheCPAfirmretreatplanningprocess.Thequestionis,“Pleasedrawyourfirm’sorganizationalstructurethewayitactuallyworksande-mailorfaxittome.”Generally,from50to75percentoftherespondentsfromanygivenfirmdrawdifferentcharts.Letmebeclear,ifthereare20respondents,Iamlikelytoreceive10to15differentversionsoftheorganizationalchart.Obviously,thismagnitudeofdeviationwouldnotapplytoasmallerfirm(e.g.,threepeople)orlargerones(inexcessof80people).Inthesmallerfirms,organizationalstructureisverysimpleandclear.Inthelargerfirms,becausethestructuretendstobeexpressedthroughbothorganizationalinfrastructureandSOPfoundationfirmwidecommunication, it iswidelyunderstoodhowthefirmworks.Buteveninthoselargerfirms,whenyourequestadrawingdepictinghowthatorganizationactuallyruns,youwouldbesurprisedatthevariation.Interestingly,thevariationisrarelyattheverytopinlargeorganizations,butalayerortwodown,wheretherecanbemanydisconnects.Althoughtheformalcompanyhierarchymaybewidelyannounced,manyoftherank-and-filewillperceivethatpowerisactuallywieldedquitedifferently.

SOP Foundation Properties ThemostbasicpropertiesofanSOPfoundationarewhatIcalladministrative policies, ac-countability policies,andprocesses.Thesearepractices,processes,andproceduresthatapplytoeveryoneintheorganizationwiththeexpectationthattheywillbefollowed.Thesepoliciesandprocessescreatetheframeworkforactions.



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Awordofwarning:Donotspendalotoftimetryingtodrawblackandwhitedistinc-tionsamongtheseterms.Theyareusedonlytoprovideabetterexplanationofwhatconsti-tutesdecision-makingauthorityandanSOPfoundation.Inreality,theyallgointhesamepolicymanualandneedtobereviewedandupdatedonaregularbasis.

Thissectionwilldiscussadministrativepolicies,accountabilitypolicies,andprocessesandmethodsforcodifyingyourpolicies.

Administrative PoliciesConsidersomethingasroutineasclient acceptance.AnadministrativepolicyaddressingthisshouldhelpanownerdecidewhetherheorshecanserveanewclientonhisorherownormustgetapprovalfromtheCEO/MP.Anownermightbelimitedinanynumberofways,includingthefollowing: •Projectsize(becausetheorganization-wideavailabilityofresourceshastobeconsid-

eredforlargeprojects) •Discountfactor(meaningthattheestimatedearningsoftheprojectbeatleasta

minimumpercentageofthefirm’sstandardrates) •Competence(toassesswhethertheworkbeingrequestedisoutsidethescopeofthis

owner’spersonalexpertise)Anotherexampleofanadministrativepolicymightbeinthehandlingofaccountsre-

ceivables.Thispolicymightaddressthetimingofthefollowingsteps: •Thefirmwillsendoutdelinquencystatements. •Theownerormanagerhastofollowuppersonallytocollect. •Theowner’scompensationisaffectedbynonpayment. •Futureworkisstoppedbecauseofthedelinquency. •Theaccountisturnedoverforcollection.

Thesequestionsmaysoundtrivialorseemtobeanexerciseindocumentingminutia,but an unbelievable number of owners get involved in very serious conflicts over such issues.

Consider Steve, an owner with the firm’s second largest book of business. One of his good clients has exceeded the collection limits to the point that the policy dictates cutting off current work. Also consider that Steve takes offense every time anyone tells him how to run his client practice. Without an accounts receivables policy, odds are that no action would be taken until it was too late, i.e., the client declares bankruptcy or goes out of business. In other words, the client would take advantage of the firm as long as possible in a manner similar to the example given earlier, specifically, the employee abuse of an undefined sick time policy. In this instance, the owners, in order to avoid confrontation, would probably ignore the delinquency, hoping that the situation will take care of itself.

Sample Scenario

Inafirmwithaclearaccountsreceivablespolicy,acollectionsissueseesthelightofdaymuchearlieranditiseitheraddressedaccordingtothepolicyortheownerhastoconvincetheownergroupwhyagiveninstanceshouldbetreatedasanexception;theexistenceofthereceivablespolicymakesthelatteramuchmoredifficultpitchtosell.


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At thispoint, theCEO/MPfirsthas todecidewhether this situation isa legitimateexceptiontothepolicy;nopolicyshouldbeenforcedwithoutthislevelofscrutinybecausepoliciesareguidelines,notlaws.Forexample,whatiftheaccountisaseasonalbusiness,andthefirmknewfromthebeginningthatitwasperformingworkduringtheclient’sdowntime,withtheunderstandingthatpaymentwouldbedelayedforseveralmonths.Ifso,theCEO/MPshouldextendthedatetocutoffworktoconformtotheoriginalagreement.

However, assume there are no legitimate excuses for delinquency. The CEO/MPshouldtelltheownerthatworkcannotbecontinueduntilsomeoralloftheoutstandingbalanceiscollected.Becausethisconditionisbasedonaknownpolicy(onethatSteve,aboardmember,probablyapproved)ratherthanjustanarbitrarydecisionbytheCEO/MP,Steveislikelytocomply,ratherthanresistbytyingupfirmresourcesorplayingpolitics.Moreover,evenifStevedoesdecidetoplaypoliticsoverthisissue,hehastodefendwhyhethinkshisownersshouldsubsidizehisbadclientpractices.Thiskindofdialogue,groundedbythefirm’sestablishedpolicies,iscompletelydifferentandmorebeneficialtothefirmthantheveiledthreatsandultimatumsthatcommonlyresultintheabsenceofpolicies.

Accountability PoliciesAccountabilitypoliciescanbeillustratedbyoutliningtheresponsibilitiesofemployeesinmanagingthefirm’stopclients.Forinstance,youcouldputtogetherapolicythatrequiresface-to-facemeetingsatleastthreetimesayear(outsideoftaxseason)forallclientsinthefirm’stop-tiercategory.Thispolicymightalsodetailtheminimumamountofspecificin-formationthatmustbecollectedduringthosevisits.

Manyaccountabilitypoliciesareincorporatedinowneragreements.Considerthefol-lowingresponsestoaquestionontheSuccessionSurvey.Theysketchtheissuesthatwouldstimulateanaccountabilitypolicy:

“Whichofthefollowingareaddressedinyourfirm’sagreements?” •Mandatoryretirementage 48% •Acceptablearrangementsandsituationsallowingretiredownersowners

tocontinueworkingforthefirm 46% •Allowableactivitywithclientsafterretirementtoensureclientretention 32% •Personalliabilityoftheremainingownersforretiredowners’fullpayout 27% •Specificrecourseorcuresshouldaretiredownernotbepaidinfull 20% •Abilityofexistingpartnerstochangetheretirementbenefitofretiring

partnersduetoimproperclienttransition 18% •Abilityofretiredownerstoblockmergersortotalsaleofthebusiness

unlesstheretirementobligationsarepaidinfullpriortothetransaction 11% •Abilityofretiredownerstoblockthesaleofalineofbusinessunless

theretirementobligationispaidinfullpriortothetransaction 6% •Key-personinsurancetocovertheoutstandingobligationsofretirement

paymentobligations 54% •Actsthatcantriggertheforcedretirementofanowner(illegalactivities) 62% •Actsthatcantriggertheforcedretirementofanowner(misconductlike

sexualharassmentorpublicembarrassmentofthefirm) 57%



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•Actsthatcantriggertheforcedretirementofanowner(lackof performance) 31%

•Actsthatcantriggertheforcedretirementofanownerownerdisability) 52%Thesurveyaskedotherquestionsregardingretirement,payout,andexpectations. In

addressingtheinvolvementofretiredownersinthefirm,itfoundthat: •36percentoffirms,thelargestgroup,didnotallowretiredownerstohaveinfluence

orinvolvementinfirmoperations. •23percentallowedthemtoworkwithformerclients,butasamanagerwhilean-

otherpartnerhandledtherelationship. •17percentallowedretiredownerstohandlethesameresponsibilitiestheyhadal-

wayshad,withfewerhours. •16percentallowedretiredownerstocontinuetomanageclientrelationships,while

thesamenumberoffirmshadretiredownerswhowerestillactiveinthecommu-nityandhadaformalroleasambassadorforthefirm.

Whichcomponentsareutilizedincurrentownerretirementpayoutcalculation?Ac-cordingtothesurvey,theycanbesummarizedintothreegeneralcategories:multiplesofownership,bookorsalary.

Whichoccurrenceswill force a change in thepaymentduration,monthlypaymentamount,and/ortotalpayoutamountofstandardcalculatedretirementpay?The2008sur-veyfoundthatalmostone-thirdoffirmswillpenalizearetiredpartnerforthelossofhisorherclients.Earlyretirementandcompetingagainstthefirmafterretirementalsotriggerareductioninbenefits.

Whenownersaretwoorthreeyearsoutfromretirement,thoseretiringownersare: •Askedtostarttransferringtheirclientstootherownersormanagers. 49% •Notaskedtodoanythinguniqueuntilaboutoneyearawayfrom

retirement. 25% •Subjecttoanewcompensationstructurethatallowshimorhertofocus

ontransitionactivities. 7%Thesequestionsquickly leadonetothinkofanumberofotherpolicies thatwould

appropriatelyaddressissuessuchasretirementage,saleofinterestage(andifmandatory,when),whatfunctionsanddutiesretiredownerscancontinuetoperform,andwhatap-provalisrequiredtoauthorizethem,andunderwhatconditionswouldearlyretirement,ifany,beallowed.Theseareallexamplesofpoliciesyoumaywishtoaddress.

ProcessesProcessesaresystemsputinplacebyfirmstocreateconsistencyinperformanceandrelievesuperstarsofthesoleburdenofcreatingandmaintainingsuccess.Notthateveryfirmdoesnotwanttheirsuperstarstoperformatthehighestlevelpossible,butthereisadifferencebetweensuperstarswhoaretopproducersandsuperstarswhoarethemainproducers.

Consider a sports team.When superstars join a team,whether it isMichael JordonjoiningtheChicagoBulls, JohnElwayjoiningtheDenverBroncos,oranyof theotherhundredsofsimilarexamples,theteamscanlose,eventhoughthesuperstarssetallkindsofpersonalrecords.Theteamdoesnotbegintowinuntiltheperformanceimprovementgap


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isclosedbetweentheaverageplayerandthesuperstar.Thatgapispredominantlyclosedbythedevelopmentofdefensiveschemesandoffensiveplaysthatcapitalizeonthestrengthsofthegroup,creatingincentivesystemstorewardpeopletofocustheirtalentonhowitcanbestsupporttheteam.Putanotherway,whyisitthatcertainteamscan,withlittlenega-tiveimpact,substitutekeyplayerswithlesserknowntalent?Onceagain,thisistheresultofasupportinfrastructurethatputspeopleinpositionswithcleardutiesandrolesthatallowthemtobevaluablealmostinstantaneously.

Process can counterbalance superstars aswell as enabling organizations tomaximizethe talentsof theiremployeesquickly.Consider thefirmwithoneor twoownerswhoareexcellentrainmakers.Becausetheseownerssuccessfullygooutandsocialize,network,andinteractwiththeirclientsandreferralsourcestobringinnewbusiness,theyarecalledintoactionwheneverthefirmisshortofwork.So,therainmakersuperstarsareexpectedtodrumupnewbusinesseverytimeitisnecessary…andtheydothiswell.Therefore,thefirmgrowscomfortablewiththeextraordinaryskillsofafewpeopleandneverdevelopstheseareasfromanorganizationalperspective.AsIhavestatedbefore,thesuperstarmodelreliesonthenaturalinstincts,capabilities,andsenseofurgencyofindividuals.Theopera-tormodel setsprocesses inplace to consistentlymaximize everyone’s ability tobring inbusiness.Thepointisthattheexceptionalabilityofanindividualortwo(inthiscase,therainmakers)willlikelyresultinafirmwideweaknessinprocess(inthiscase,marketing).Asimilarstorycanbeoutlinedfortheownerwhoisthefirm’swalkingtaxlibrary.Theques-tionis,“Whydevelopadditionalcapabilitywhenthefirmhasallitneeds?”Aswediscussedearlier,thetypicalansweristodonothing…atleastuntilthosekeypeopledecidetodosomethingelse(likeretireorstartanewfirm).So,formanyfirms,buildingastrongSOPfoundationincriticalbusinessareasisafarbetterlong-termsolutionthanrelyingonafewspecificpeople.

TheprocesscomponentofSOPfoundationisallaboutcreatingsystemsandmethod-ologiesthatsupportandaugmentpersonnelperformancesothatthefirmcanrelyonsystemsthatsupportpeopleratherthanjustrelyingonpeople.

Codifying Policies Iwanttomakeasuggestionabouthowtoapproachmemorializingyourpolicydecisions.Asyoucantellfromtheforegoingsurveyresponses,someofthefirm’sfoundationalpoliciesarecontainedinowneragreements.Byusingthefollowingtechnique,youarelikelytosavetensofthousandsofdollars.Averysmallsavingscomesfromareductionintheattorneys’fees paid tomodify your legal agreements.But themost significant savings results fromavoidinguglyownerdisputesarisingfromtheunintended consequencesofthoseagreements.Theadage,“outofsight,outofmind”hasvalidity;thefirm’slegalagreementsalltoooftenonlyseethelightofdayaboutonceevery10years,oronceadisputeisunderway.Nomat-terhowyoulookatit,theseimportantagreementsshouldbegivenregularscrutiny.

Onewaytoeffectthisscrutinyistoscanyourowneragreementsandextracteveryref-erencetoaformulaorvalueandplacethesereferencesinanSOPmanual.Drafttheclauses



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oftheagreements,whicharelegallybindingsothattheyrefertopolicynumbersortitlesspelledoutinthemanual.Furthermore,layoutthedetailsofallthisinasectionoftheSOPmanualentitled“BoardPolicy.”Forexample,ifyourowneragreementaddressesthevalueofthefirm,thenthetextoftheagreementshouldintroducethetopicandrefertotheman-ualforthedefinitionofFirm Value SOP.Iftheowneragreementspecifiestheretirementformula,thenrefertothatformulaasthe“Retirement Formula SOP,whichcanbefoundinthemanual,”andsoon.Thisisasimpleprocess.Anythinginyourowneragreementsthatissubjecttoevaluationandchangeshouldberecreatedaspartoftheboard’spolicies.

Aboardpolicycouldbeintheformofamemoandassimpleasthefollowing:

Firm ValueBoard Policy Date created: 12/15/2007Last date revised: 04/30/2009Vote required to update policy: A quorum of the shareholders, 66.66% of the outstanding sharesNext Scheduled Review Date: 04/30/2010

Policy DetailsThis policy sets the agreed-to value of all of the entities affiliated with the shareholder group for purposes outlined in any of the legal agreements, between the shareholders. Any time Firm Value is referred to in our agreements, any legal action, dispute, or question regarding this topic is to be interpreted and/or resolved based solely on the most current board-approved version of this policy.

For the CPA firm: The value of the firm is set at 90 cents on the dollar for firm net revenuesFor the Technology firm: Book value of assets plus 1 times earningsFor the Bookkeeping firm: 75 cents on the dollar of firm net revenues

xx Unnumbered Figure 2-1xx

The following are the steps that should be taken to establish and fully document policies:

Step 1. Identifyandremoveeveryformulathatappearsinowneragreements.Instead,substitutecorrectandcurrentreferencestotheSOPmanual.

Step 2. Identifyandremoveeveryissuethatappearsinowneragreementsthatislikelytoneedregularscrutiny.Instead,substitutecurrentandcorrectreferencestotheSOPmanual.

Step 3. ConfirmthatallexistingandfullyenactedboardpoliciesareincludedorreferredtointheSOPmanual.

Step 4. Regularly,everyyearoreveryotheryear,scheduleaboardreviewandapprovalofallboardpolicies.

Usually,theCEO/MPisresponsibleforbringingagroupofSOPsbeforetheboardonascheduledbasis.Sometimes,variouscommitteesareresponsibleforcertainSOPs,likethecompensation committeemaking recommendations on compensation-related policies. It


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doesn’tmatterwhodoesitaslongasallofthepoliciesarescrutinizedonascheduledbasis.Whoeverisassignedtobringthemforwardisalsochargedwithrecommendingchanges.Evenifnochangesarerecommended,thefactthatapolicyisbeforetheboardforapprovalwillstimulateimportantconversationsabouthowtoincorporatebestpracticesorhowtobestmaintaintheintendedconsequences.

Benefits of Separating Policies and Owner AgreementsTherearetworeasonstoconsiderthebenefitsofseparatingpoliciesandowneragreements.Alltoooften,ownersget“caught”betweenrelationshipsandlegalagreements.Mostlegalagreementsareputtogetherwheneveryoneisexcitedaboutworkingtogether.However,the agreements are not really tested until someone has lost enthusiasm. Only the mostcommonlyviolatedissuesareaddressedinitiallybecausepeopleareoverlyoptimisticinfor-mulatingagreements,andbecausebestpracticesevolveovertime.Withthatinmind,thefollowingisascenariothatcanbegenericallyappliedtohundredsofsituations:

An owner agreement has just been updated for a five-owner firm in order to address how to compensate owners who retire early. Currently, no one is approaching retirement so it is really not a major issue. Consequently, a section is added to the owner agreement that reflects how to calculate the retirement payout should someone decide to retire up to five years early.

Now, fast forward ten years. The most senior owner is retiring as expected and on schedule. Three months later, the other senior owner opts for an early retirement to begin six months from that date of declaration. As a result, an incredible burden is placed on the remaining three owners with regard to both payout requirements and the transition of the clients to ensure their retention. Because the early retirement issue was agreed to 10 years ago, no one has really taken a close look at this issue since then, especially since the early retirement declaration was a surprise to the three youngest owners. Therefore, those own-ers get caught having to comply with an outdated agreement that, in the interim since it was first entered into, should have been updated several times.

Sample Scenario

Complexityisthesecondreasontoremovethesesignificantissuesfromthelegalagree-ments and reflect them in a board policy SOPmanual. Consider the following, typicalexampleofoneownerrespondingtotheconcernsofanother:

Yes,Iagreethatweneedtochangethatformulaintheowneragreement.However,

ifwearegoingtodothis,let’slookateverythingandredowhateverelseneedstobe

donesothatweonlyhavetoinvolvetheattorneyonce.

Theresultisthatowneragreementupdatesareinfrequentbecauseaquickchangethateveryoneagreestoquicklyturnsintoatortuous,six-month(orlonger)review.Intheend,iftheissueswerealladequatelyaddressedaftersixmonths,theeffortcouldbejustified.Buttherealityisthattheprojectbecomesunmanageablylarge.Areasofconflictareabandonedandleftunresolved.Anumberofissuesareinterwovenwithotherformulasandassump-tions,andthesemorecomplextopicsarealsotabled.



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Inshort,theresultsareasfollows: •Illwillarisesamongtheownersaboutthepolicyrevisionsbecausetherearesomany

issuesandeveryonehasoneortwothatareverypersonaltothem. •Thetaskcannotbecompletedbecausethereviewefforttakesupentirelytoomuch

timeandresourcestoaccomplish. •Often,therearetoomanyissuesthatneedtoevolvethroughlengthydiscussion,and

cannotadequatelybeaddressedbyoneroundofrevisions.Thus,thecommonperceptionisthatupdatingowner/firmagreementsisanexercise

tobeavoidedifpossible.However,iftheseissuesarepartofanSOPmanual,updatingonestand-alonepolicyisveryeasy.Atleastthediscussionhasbeennarroweddowntopoliciesthataffecteachother(forexample,compensation,retirementpay,andthevaluationofthefirm,whichmightbeintertwined).Theconversationhasnot,however,beenopeneduptoincludeeverythingintheagreements.Finally,andmostimportant,youwantpeopletolookattheessentialpoliciesandformulasregularlytomakesuretheyarewithstandingthetestoftime.Everyyear,welearnmoreaboutbestpractices.Thefirm’sfutureismanagedbestbychangingyourlegalagreementstorefertopoliciesthatyoucanamendatanytimewithoutcreatingalegalnightmare.Itallowsaflexibilitythatishardtoachievebyembeddingfor-mulasandissuesinadocumentthatonlygetsdustedoffwhenthereisacrisis.

What Policies Should Be in the SOP ManualHowmanypolicies should you create?As few, and asmany, as necessary todocumentareasofperformanceandcomplianceyouexpect fromownersand staff alike.Ageneralruleofthumbisthatapolicyiscalledforifthesubjectmatterisimportantenoughtotakeup30minutesormoreinanownermeeting,ortherearedivergingopinionsabouthowsomethingshouldbedone.Oncethereisagreementorunderstandingabouthowthefirmshouldapproachsuchissuesinthefuture,theconsensuswillnormallydrivethecreationofoperatingpoliciesandprocesses.

Implementing Organizational StructuresToreview,wehave talkedabout therequirement tohavedecision-makingauthority inplacetokeepthefirmfromconstantlyspinning.Aspartofthat,organizationalinfrastruc-turewasintroduced,whichincludedthecreationofpowerspolicies.SOPfoundationwasalsodiscussedasfundamentaltocreatingconsistencyandelevatingemployeeperformance.Administrative and accountability policies,alongwiththedevelopmentofprocesses,wereatthecoreofthisstrategy.So,givenallofthis,thelogicalnextquestionis,“Wheredowegofromhere?”Therearefoursimplestepstomovingforward:


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Step 1. Chooseastrategyforyourfirm.Step 2. Choosewhoyouwanttomanagethefirmandgivehimorherthe

directives,authority,andpowersnecessarytoachieveyourgoals.Then,getoutoftheway!

Step 3. Choosethestyleofgovernance.Step 4. ImplementSOPfoundationwhereveritsupportsstrategytocreate

consistency,improveperformance,andclosethegapbetweentheaverageemployeeandyoursuperstars.

Steps1,2,and3arediscussedindetailbelow.Step4willbediscussedinthenexttwochapters,whichfocusonseveraltop-ratedareasasexamples.Chapter3,“ManagementandOperations:ExtendingtheLifeandCultureoftheFirm,”discussesmanagementandop-erationalissues,andChapter4,“GrowthandTransition:IncreasingtheValueoftheFirm,”spotlightsbusinessdevelopment.

Step 1. Choose a strategy for your firm.Iknowthiswillsurpriseyou,buttheimplementationstartswithstrategy.Thismeansask-ing,“Whatareasofthebusinessarethemostimportanttoaddress?”Youranswerwillde-terminetherightplaceforyourfirmtostart.

Togetmyclientstoconsiderthebigpicture,Iaskthemtoanswerthefollowingques-tionsastheyimaginethemselvesfouryearsintothefuture:2

•Whatwouldyoumostliketoseehappen? •Whatshouldtheorganizationlooklike? •Howshouldtheorganizationoperate? •Whatshouldtheclientexperiencebe?(Moreover,whatshouldclientssayaboutus?) •Howshouldemployeesfeelabouttheorganization? •Whatshouldtheorganizationhaveachievedbetweennowandthen?

However,sothatwehaveastartingplacetocontinuethisdiscussion,herearefourverycommonquestions(innoparticularorder)thatrisetothetopatalmosteveryCPAfirmplanningsession.Theyare: 1.Howdowecreateandimplementafairsystemofaccountability? 2.Howdowebecomeafirminsteadofagroupofindividualpractices? 3.Howdowedevelopafairsystemthatwillpayforperformancenotonlytoday,but

allthewaythroughretirement? 4.Howdoweensurethateveryoneknowshisorherrole,thatthereareclearlimita-

tionsandpowerswithinthoseroles,andthatwehavecreatedanoperatingfounda-tionthatisdesignedtogiveusthebestchanceforsuccess?

Ifvotingcontrolisinplace,thenthefirstthreequestionsareonlydiscussedopenlyifthedictatorisbenevolentandislookingforsolutionsthatwillworklongafterheorsheisgone.Otherwise,thesequestionsarenotanissuebecausethedictatorwilllikelyinstitute

2 Adapted from Built to Last: Successful Habits of Visionary Companies by Jim Collins and Jerry I. Porras, published by HarperBusiness, New York, 1994.



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accountabilityhoweverheorshechooses,makeallthedecisionsforthefirm,anddecidewhateveryoneshouldbepaid(mostlybasedonverysubjectivecriteria).Thismaysoundlike a criticism of the style of the dictating owner, but it is merely what I commonly observe.

Forthosefirmswithoutvotingcontrolinplace,theanswerstothefirstthreequestionshingeontheanswertothefourth.Questionfourisallaboutsettingupthestructuretoen-abledecision-makingauthorityinawaythatispalatabletoalloftheownersandsharehold-ers.Forareminder,pleasereviewthedelineationofdutiesbetweentheboardofdirectorsandtheCEO/MPoutlinedaboveundertheprevioussectionentitled“Decision-MakingAuthority—OrganizationalInfrastructureProperties.”

Step 2. Choose who you want to manage the firm and give them the authority to do it.LetmesharewithyouhowIanswerthequestion,“Howdowegoforwardfromhere?”ThefirststepistonameanMPorCEO,whichmeansfindingsomeonewhoissufficientlytrustedbytheownergrouptofillthisrole.EveryfirmhasanMPorCEO,butmanyinthispositionarejustfigureheadswithoutmuchpower.Sothequestionis,“Towhomareyouwillingtoactuallygivesomepower?”Oncethatdecisionhasbeenmade,thenextques-tionis,“Whatarethelimitsofhisorherauthority?”Theanswerissimple—thelimitsarewhatevertheownergroupwantsthemtobe.However,Iwillputthiscaveatonmystate-ment:Whereverthelinesaredrawn,theymustbedrawninawaythatkeepstheremainingownersfocusedonstrategy,budgets,policy,andoversightattheboardlevel;andoutofthedailymanagementandimplementationofoperations.

Akeyquestionthatshouldalwaysbeineveryone’smindwhenattendingboardmeet-ingsis,“Astheissuesarebeingdiscussed,isthefocusonpersonalpreferencesastohowthefirmoperates,oronmodifyingstrategy,updatingpolicy,andreflectingvalues?”Sometimesthesubjectmatterisveryunclear.Forexample,let’srevisittheearlierdiscussionbetweenanownerandtheCEO/MPaboutaccountsreceivabledelinquency.Iftheownerdoesnotaccepthowthismatterwasresolved,heorshewilllikelybringitbeforetheboard—andthis is thepoint atwhich the systemmostoftenbreaksdown. If theboardbelieves thepolicyshouldbemodified,thatbeliefdefinesthefunctionoftheboard.Theboard’ssolu-tionisanupdatedpolicythatappliestoeveryone.IftheboardoverrulestheCEO/MPinordertoaccommodatepersonalpreferences,thedecision-makingauthorityoftheCEO/MPisundermined,nomatterhowinsignificanttheissue.Moreover,thelessontaughttoeveryoneisthataccountabilityisnotaboutfollowingtherules,butaboutplayingpolitics.HowdoyouexpecttheCEO/MPtoholdanyoneaccountableifeveryissuegoesbeforetheboardandtheCEO/MP’sdecisionsareoftenoverturned?Iftheboardregularlydistrustsordisrespectstheday-to-daydecisionsandinterpretationsoftheCEO/MP,itistimetofindanewCEO/MP.Otherwise,byleavingtheCEO/MPinplaceandconstantlyoverridinghisorherdecisions,theboardofdirectorsisassumingthemanagementresponsibilitiesoftheorganization.

Thus,itisnecessarytowalkafinelineorthesystemstartstofallapart.Thebalancingacthastwodimensions.AnytimetheCEO/MPstartsactinglikeheorshehasthepowers


46


oftheboard,oranytimetheboardstartsactinglikeithasthepowersoftheCEO/MP,thefailureofthesystemisimminent.

Onceeveryoneunderstandshowthismodelissupposedtowork,itstartstofallintoplacefairlyquickly.Youwillalwayshaveatleastonemajorviolatorwhoconstantlywantstoimposehisorherpersonalpreferencesonthewaysituationsarehandled.However,be-causealltheownersunderstandthedelineationofresponsibilities,themicromanagercanquicklyandeasilybeputincheck.

Avoiding Common TrapsSomecommontrapsthatshouldbeavoidedarethefollowing: •Firmsadoptaneworganizationalinfrastructurebutkeyindividualsdonotchange

thewaytheyoperate.Itbecomesclearthatdecisionsaremoreaboutpoliticsthanpolicy.

•Micromanagingisadangerbecauseitiseasy.Macromanagingisoftenavoidedbecauseitisverydifficult.Focusingontherootcausesandtryingtoeasethechaoslongtermismuchmoredifficultthansolvingtheprobleminfrontofyou.

•Boardsneedtoconstantlyberemindedtomanageauthorityandresponsibilitythroughbudgeting,performancemeasurement,andpolicy.

•Boardstrytodotoomuchatonetime,whichresultsinachievingverylittle.Pictureimplementationasbeingallabouttheturtle,nottherabbit.Slowmethodicalprog-ress,consistentlyapplied,isfarmorevaluablethanquickstartsthatareapttofizzleoutandbefollowedbyinactivity.

•BoardsarewillingtoturnovertheresponsibilityofmaintainingcertainperformancelevelstotheCEO/MP,butnottheauthoritythatisrequiredfortheCEO/MP’ssuccess.

Supporting the CEO/MPThemostcontradictorydirectivegiventotheCEO/MPbytheboardgoessomethinglikethefollowing:

Wechargeyoutoimplementtheabove(orcurrentstrategy)withthreecaveats.They

are:

•Donotspendmuchmoney.

•Donotreduceyourbillabletimebymorethanacouplehundredhoursoverthe

restoftheownergroup.

•Donotasktheownergrouptochange,inanyway,howtheywanttoindividu-

allyservicetheirclients.

Obviously,theboardisnottakingtheCEO/MPpositionveryseriouslyifitdoesnotimmediatelyreducethenumberofclientbillablehoursexpectedofthisperson.MyruleofthumbisthataCEO/MPshouldspendabout40percentofhisorhertimemanagingafirmofuptoabout$2millioninrevenues,about60percentofhisorhertimemanagingafirmwithabout$6millioninrevenues,and80percentormoreofhisorhertimemanaging firmsof$10millionormoreinrevenues.Thepointisthatmanagingthefirmisajob,not



47

anassignmenttodooncetherealclientworkhasbeendone.Ina$2-millionfirm,anextra400billablehoursbytheCEO/MPmightgenerateanadditional$80,000to$100,000dol-lars.However,ifthatsame400hoursisfocusedonfirmwiderealization,itmightenhanceprocesses,understanding, and training,generating an additional$100,000ormoreeveryyear.Thereisagreatdealofmoneytobemadebyimprovingsystems,support,andpro-cesses.Butittakestimeto: •Understandwhatisactuallygoingon. •Determinewhere(andwho)thehurdlesare. •Decidewhatthebestapproachshouldbe. •Developthesupporttoensurethatthenecessarychangesareadopted.

AsIhave saidbefore, ifyoutakeyourfirm’s future seriously,youneed todedicatesomeonetospendmoretimefocusing“onyourbusinessratherthanjustworkinginit.”And,justasimportant,theCEO/MProleisnotapersonalitycontest;itisadifficultjobforwhichnoteveryoneissuited.So,ifthepersonyoufirstselectdoesnothavetheabilitytooperatethefirmprofitablybycarryingoutthedirectivesoftheboard,putsomeoneelseinthejob.Understand,however,thatthebetteryoudefinetheroleanditspowersandlimita-tions,theeasieritwillbeforsomeonetosuccessfullyfilltherole.

Step 3. Choose the style of governance.Nowthatyouhavetakenthebiggeststepforwardanddecidedthatyouaregoingtogivesomeonetheauthoritytorunyourfirmlikeabusiness,thenextdecisionis,“Whatkindofbusinessdoyouwanttorun?”Theanswertothisquestioncreatesthefoundationforthejobdescription,powerspolicies,andanSOPfoundationthatshouldbeputinplace.Therearetwooptionsdiscussedbelow—asilomodelandaone-firmconcept.

Silo ModelIfyouarelikemostfirmsunder$8to$10millioninsize,yourbusinessprobablyoperatesas ifmadeupof individual soleproprietorships sharingoffice space, administration, andsystems.Althoughthismodelworksnicelywithan“eat-what-you-kill”philosophy,anditallowsownerstocustomizetheirwork/life/incomebalanceanywaytheywant, ithassomeorganizationaldrawbacks.It ishardto implementaccountability throughfirmwideprocessesorsystemsinthistypeofstructure.Why?Becauseinthismodel,ownershandletheirclients theway theywant,which isconfusing for staff since theyoftenworkwithmultipleownersandonmultipleprojects.Itisalsodifficulttorateperformanceorcreatecompensationsystemsthatpayforperformancebecausethecriteriaforperformancevarysomuchbetweenowners.Forexample,onegroupofownerscaresaboutwork/lifebalance,thesecondis lookingformoreincome(efficiency,growth),andthethirdisanticipatingretirementandisultraconservativeinordertoprotectexistingassets.

Afinaldrawback,onethatiscurrentlygeneratingthegreatestinterestandprovidedanincentiveforwritingthisbook,isbusinesssuccessionandcontinuation.Themoreindis-pensableapersonistoafirm’ssuccess,thelessvaluethatfirmhastosomeoneelse.So,ifyouhavefiveownersactingasiftheyareallrunningtheirownsoleproprietorships,andthoseproprietorshavenotbeeninvolvinganyoneelseintheirclientrelationships,thenthereis


48


noonetotakeoverandseamlesslycontinueyourfirm.Therefore,youareleftwithaclientlisttosellormerge.Ifyoupositionyourpracticesothatyouronlyexitalternativeistosellormergeit,youarepickingaweakstrategy.

This idea isneithernovelnornew. In JohnMaxwell’s best selling book, The 21 Irrefutable Laws of Leadership, lawnumber21 is theLawofLegacy,whichis“Aleader’slastingvalueismea-suredbysuccession.”Thisvalueisrealizedwhensomeonecanstepintoaleader’splaceandnevermissabeat.

One-Firm ConceptThemostcommonlytoutedsolutiontothe“MultipleFirmsUnderOneRoofConcept”islogicallycalled“TheOne-FirmConcept.”Interestinglyenough,itisthemodelusedbycorporateclients.AlthoughthismodeliswidelydiscussedinCPA/CAfirmsthroughouttheUnitedStatesandCanada,therecordforitsimplementationismarginal.Why?Because,forthismodeltowork,decision-makingauthorityhastobeinplacewithastrongSOPfoundation.Mostfirmsarenotwillingtoinvesttherequiredmoney,time,andresourcestocreatethismodel,foranumberofreasons.Ownerstendtobereluctanttogiveuptheprivilegestheyhavegrownaccustomedtoreceiving.Aninvestmentisrequiredtoclosethecompetencegapbetweenaverageemployeesandsuperstars(eventhough,currently,thesu-perstars’performancemaybeadequatetosustainthefirm).Finally,anunprecedentedlevelofaccountabilitytothefirmisrequired.Specifically,intheone-firmconcept: •Thefirmownstheclientsratherthantheownersowningtheclients. •Theactionsoftheownersmustalwaysbeinlockstepwiththefirm’sgoals,not

withpersonalagendas(i.e.,thefirmcomesfirst). •Thereiscleardistinctionbetweenbeinganownerandhavingautonomytodoas

youplease. •Strategydrivesthebudgetprocess,andcompensationistiedtobudgetachievement;

thenotionofpay-for-performanceshouldbepartofthefirm’sfoundation.Thisap-proachcreatesadirectlinkbetweencompensationandstrategyachievement.

•Allmembersofthefirmmustbeaccountable,notjustnonowners.Standardop-eratingproceduresandfirmmethodologiesshouldbeformalizedandfollowedbyeveryone,withconsequencesfornoncompliance.

•Thefirmmustmakenecessaryinvestmentstosupportlong-termsuccess,suchastechnologyintegration,moreformalizedmarketingprocedures,anddefinedcareerpaths.

•Thefirm—ratherthanindividualowners—shouldcontroldecisionsonclientaccep-tanceandassignmentofownersormanagersorstafftothoseclients.

•Thefirmshouldshiftclientsbetweenownersandmanagerstocreateabalanceofworkandexpectationsinsteadofallowingpersonalempirebuilding.

Inthefollowingsubsections,Iwouldliketotalkalittlebitmoreaboutowneraccount-abilityandbalancingofclients.

The more your organization is run by process, and the more inter-changeable people are in serving your clients, the more value you are adding to your firm.

Key Point



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Owner AccountabilityOwnershavebeenincrediblyaccountabletotheirclientsfordecades.Typically,firmhier-archyisapttobeownerfirst,clientsecond,andfirmthird.FortheOneFirmConcepttowork,thefirmhastobefirst,theownersecond,andtheclientthird.

Nodoubt,thelasttwosentencesarealarmingandoutrageoustomanyCPAs.Theideathatanownerorafirmwouldputthemselvesaheadoftheirclientsseemsludicrous.Italsosoundsunethical,but isnot tobeconfusedwithseekingtobenefit fromclients inwaysthataredetrimentaltoclients.Considerthefollowingexamples.Aclientisterribletoworkwith.Or,aclientwantsyoutoworkfor25percentofyourrates.Or,youthinkaclientisunethical.Ifyouchoosenottoworkwiththeseclients,youareplacingthebestinterestsoftheowners(orthefirmforthatmatter)aheadoftheclients’demands.Overandover,Ihearownerssay,“Iwon’tdothatbecauseitisnothowmyclientwantstobetreated.”Thisisanexampleofputtingclientsaheadofthefirm.Or,Ihearcommentslike,“Iknowthatweofferotherservicesmyclientneeds,butIamafraidthatwemightnotdoagoodjobandthatwillaffectmylong-termrelationshipwiththeclient.”Here,theownerisputtinghim-orherselfaheadofthefirm.Clearly,adifferentargumentcouldbemade,butintheend,theownerisprotectingturf—specifically,hisorherrelationshipwiththeclient—eventhoughtheclientisinneedofaspecificservicethatthefirmmightprovide.Toomanyclientsareunderservedbecauseofthisprotectivephilosophy.AnumberofCPAswillinsistthatitisbettertoprovideoneservicethantolosetheclient.However,thisisjustarationalizationtodefendinaction.Tothecontrary,Icitethefindingsofoneinternalstudybyoneofthe10largestCPAfirms.Itwasfoundthatclients’loyaltyandsatisfactionwiththefirmwasdirectlyproportional to thenumberof services theybought.Forexample, a clientwhoonlypurchasedanauditwasmorelikelytoeventuallywalkawayandfindanewfirmthanaclientwhoboughtbothauditandtaxservices.Similarly,aclientwhoboughtauditandtaxserviceswasfoundtobemorelikelytofindanewfirmthanaclientwhoboughtaudit,tax,andconsultingservices.

Balancing of Clients CPAsmayfindthatbalancingclients ismoreimportantthantheythink.First,balancingclientsisnecessarytobalanceresources.Itissillytohaveoneownerunderservingclientsbecauseheorsheiscoveringtoomany,whileanotherownerscramblestofindsomethingtodo.(Bytheway,thatsomething,whenheorshefindsit,isoftenworkbelowhisorhercurrentabilitylevel.)

Second,balancealsoensuresthatthefirm’stopclientsarebeingadequatelytakencareofbyowners.Theownerscanspendtheneededtimewiththeseclientsandstayabreastoftheirneeds.

Third,andpotentiallythemostimportant,thebiggerthegapinbooksofbusiness,themorethosewiththe largebookswillholdeveryoneelsehostagetotheirdemands.ThisstoryissocommonitisalmostfolkloreamongCPAfirmsanditgoeslikethis:


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The firm has four owners, namely, Bob, Jon, and Sue, who each has books of business of around $500,000, and Stan, who has a million-dollar-plus book. Although their ownership shares are equal, Stan always wants everything to be run his way. The minutia in dispute literally include the cotton content and color of the firm’s letterhead. Every time Stan does not get his way, he threatens to quit. Moreover, although Stan is great at bringing in busi-ness and doing the work, he is a Tasmanian devil about managing people. The other three owners spend an enormous amount of time working with staff to keep them from walking out.

The three owners have continually rationalized their decision to put up with Stan’s mi-cromanagement because they do not want to lose the volume of business that he brings in. They have grown comfortable with their salaries and having access to their current level of support staff, which depends on the $2.5-million-dollar volume. Finally one day, Stan goes too far. The other three owners take him up on his offer and ask him to leave.

Two years later, the three-owner firm has revenues in excess of $2.5 million, and the owners are ecstatic. Stan has a small office, still manages his million-plus business, and couldn’t be happier being the sole decision maker.

Sample Scenario

Thepointofthestoryishowremarkablyoftenthesesplitsoccur,andeveryoneendsupwinning.Stanwasbetteroffbecausehecoulddoexactlyashepleased.Andthethreeown-erswhohadsimilarviewsandvaluesastohowtooperatethefirmflourishedonceStanwasoutoftheirway.Ifthereisconsensusexceptforoneperson,whoalwayswantsadifferentsolution,itmaybetimetopartcompanywiththatperson.Ifthereiscontinualdispute,thebottomlineisthatthetwogroupsarenotseeingvalueinthesameplace.Itdoesn’tmatterwhoisrightorwrong;thechasmwilljustcontinuetogrow.Thesurpriseisthat,whatevertheownersfearedwouldbelostisquicklyregainedasaresultofownersynergyandthewillingnesstobemutuallyaccountable.

Asregardsimplementingchange,themoralofthestoryisthatownerdisconnectscansometimeskeepafirmfrommovingforward.Thosedisconnectsmightbearoundstrategy,philosophy,personalgoals,risk,orwhatever.ItmaybethattoomanypersonalitieslikeStanarestandingintheway,preventingthefirmfromfindingawaytoturnaround.

Itjustmaybethatthecurrentgroupofownerscannotfindhappinessonthepathfa-voredbythemajority.Ifthisisthecase,younotonlyhavetodecidewhereyouaregoing,butwhoisgoingwithyouandwhowillbeleftbehind.Sometimes,takingafirmtothenextlevelrequiresthatyouletgoofanownerortwo.

A Final Word on Implementing Organizational StructuresRegardlessofthestyleofgovernanceorthesizeofthefirm(soleproprietortolargefirm),firmsshouldconsideroperatingwithinthegeneralframeworkoutlinedinthischapterasmuchasispractical.Soleproprietorsandsmallfirmsmightsetupanadvisoryboardtoob-tainabroaderperspectiveandbalance.



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Takethisslowly,liketheturtle.Cultureisdifficulttochange.Inyourfirstyear,trytoworkoutthekinksindecision-makingauthoritysothateveryonetrulyworksinsidethenewframework.Implementoneprojectthathasbeendifficulttocompleteinthepastusingtheconceptsofcreatingprocesstosupportit.

LeadershipInthefinalsectionofthischapter,IwanttospendsometimeconsideringhowCPAfirmleadershipcancreatedisconnectsand/orsynergiesthatarecriticaltoestablishingaculturethatcanembracechangesyoumightbecontemplating.

Thissectionisnotabouthowtobecomealeaderorwhatqualitiesandcharacteristicsmakeupagreatleader.Ifthisiswhatyouarelookingfor,thereareplentyofgreatbooksonthissubject,includingmypersonalfavoritefromDr.PaulHerseycalledThe Situational Leader. JohnMaxwellwrote an insightful book aswell calledThe 21 Irrefutable Laws of Leadership.

Instead,Iwanttodiscussanumberofleadershipissuesthataffectourabilitytoeffec-tivelyrunandmanageourfirms,whichmakesthisnotaboutstaff,butabouttheownergroup.Inordertoimplementdecision-makingauthorityinaneffectiveway,wehavetoaddressthedysfunctionthatrunsrampantinprofessionalserviceorganizationslikeours.

ThissectionwilladdressvariousaspectsofthedysfunctionalfirmincludingthePeterPrinciple,thelackoforganizationalinfrastructure,andbehaviortraits.

Dysfunction and the Peter PrincipleSomedysfunctionisattributabletothePeterPrinciple,atheoryofoccupationalincompe-tenceformulatedbyLawrencePeter,which,simplyput,isthatweoftenrisetoourlevelofincompetence,andthenweplateauthere.ThisiseasytoimagineforprofessionalssuchasCPAsifyouconsiderthatwhatinitiatesourrisetothetopisourtechnicalabilityandourcapacitytoproduce.Yet,witheachpromotion,ourfocusissupposedtoshiftfromgettingworkoutourselvestogettingmoreworkdonethroughothers.Oureffortsareexpectedtoshiftfromdoingclientworktomanagingclientrelationships.Bythetimeweareaskedtobeanowner,ourjobsareoftendefinedasprovidinghigh-levelclientadvisorysupport,the oversight and management of projects, and the management of client relationships.Thejourneyweareexpectedtomakethroughoutthispromotionalpathistoabandonthenaturaltendenciesandskills,onebyone,whichpropelledoursuccessinthefirstplace.Andweareexpectedtoreplacethosetime-provenabilitieswithskillsthatareentirelydifferentandforeigntous.

ThePeterPrincipleisnotaninsulttothosewhoarerisinginposition;itmaybethehighestcompliment.Suchemployeeshavebeensogoodatwhattheydothatsuperiorsputtheminpositionsforwhichtheyhavelittleexperienceinthebeliefthattheseareprofes-sionalswhowillrisetoanyoccasion.Thecriticismisnotaimedattheascenttoone’slevelofincompetence(whichisasignofsuccess),butratherinone’sdecisionthatonedoesnotneedtodevelopnewskillsrequiredbythenewposition.Unfortunately,oncepeopledecide


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thattheyknoweverythingtheyneedtoknow,theyhaveputthemselvesontheplateauwheretheystagnate(untiltheyarefinallypushedoutoftheorganization,orterminated).ManyownerscanbedescribedaslivingthePeterPrinciplebecausetheonlyrealchangebetweentheircurrentmanagerialrolesandtheirformerrolesisahigherbillingrate.So,unlessyouwantexamplesofthePeterPrinciplerunningrampant,itisimportanttodevelopjobdescriptionsthatspelloutthedifferentexpectationsofvariouspositionsinyourfirm.Thisway,althoughemployeesmaycontinuetorisetotheirlevelofincompetence,theywillknowwhattheyneedtodonexttomakesuretheydonotremainincompetent.

Dysfunction and Organizational InfrastructureThebulkoftheremainingdysfunctioncomesfromthenaturalevolutionfromvotingcon-troltotheinstallation,orthelackofinstallation,oforganizationalinfrastructure.WheneveryouhaveaserviceorganizationlikeaCPAfirm(lawfirmsandconsultingfirmswouldfallintothesamecategoryforexample),easeofentryandthecostofstartuparelow.Therefore,thebarrierstostartingyourownfirmareminimal.Thisfactcreatesageneralattitude,name-ly,“ifthegoinggetstough,thenIwillgetgoing…andsplitofftoformmyownfirm.”Amongowners,thisbecomesafalselevelofsecurity;everyonefeelsthatheorshecangooutontheirowntomorrowanddoaswellorbetterasinthefirm.Generallyspeaking,thisisnottruefromafinancialperspectivegiventhat,thelargerthefirm,thehighertheaveragepayperowner.Spinningoffintoaverysmallfirmwillprobablyreduceanowner’spersonalincome.Nevertheless,ifyouconsiderthefactorsofqualityoflife,work/playbalance,flex-ibility,orpay,mostpeople,ontheirown,wouldprobablyfindacompromisethatworksequallywellforthem.Butinorderforthesespinning-offownerstobesuccessful,theywilllikelyhavetotakeontheexactrolesthatdrovethemoffinthefirstplace.Itsurprisesmehowmanypeopledrawalineinthesandaboutwhattheywillorwillnotdo,causeariftinthefirm,findthemselvesleavingthefirm,andthereaftergoontohappilyfulfillthesamerolestheyrefusedtoacceptinthefirstplace.

So,believingthatyourtopprofessionals,especiallythosewhoarethemostmarketingoriented,willatleastconceptuallykeeptheoptionofstayingorleavinginplay,howdoyoukeepthescaletippedtowardmakingthemstay?Startwithstrategy.Ikeeprepeatingthisdirectivebecauseitistrue.Mostdysfunctioninownergroupsisnotbecauseofworkorcharacter,butratherbecauseofthedisconnectsbetweenowners’personalstrategiesandthedynamicdrivingthefirm.Considerthefollowingstory:



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A firm of about $2 million in revenues has developed a strategy to grow the firm to $4 mil-lion in revenues in five years (about 15 percent growth per year). This means that the firm is planning to add about 17 people (currently, there are 18 people and the belief is that 35 will be enough). This also means that the firm will probably add several new owners, from the current three to five or six.

Of the three owners, Tom is three years from retirement (and owns 45 percent of the firm), Craig is 53 (and owns 35 percent of the firm), and Ralph is 44 (a fairly new owner who owns 20 percent of the firm). The senior owner’s strategy is to retire soon and he is taking a very risk-averse posture because he wants to protect his biggest personal asset—the firm. The two younger owners are the ones with the strategy to double the business (the vote came down 55 percent to 45 percent in favor of growth). However, Craig’s and Ralph’s reasons for wanting to achieve this growth are totally different. Ralph wants to add more owners to help carry the burden of paying out Tom and later Craig. Craig has made it clear that he wants to retire early, but in order to do that, he needs a lot more growth in order to significantly leverage his current income and later retirement payout.

Sample Scenario

Rightnow,thedysfunctioninthisfirmisonthebrinkofrunningrampantandprob-lemownerssoonwillbecroppingupeverywhere.Forexample,CraigandRalphwouldlikelyseeTomasaproblemownertryingtosabotagethefirm’sgrowthplan.Tomfearsthatgrowingthefirmasfastasplannedwillconsumeresourcesand,therefore,minimizehisper-sonaltake-homepayduringhisfinalthree-yearperiod.Thisreductioninpayisimportantnotonlybecausehedoesnotwanthisincometoshrink,butbecausehisretirementpayoutisbasedontheaverageofthelastfiveyearsofhisincome.

However,thecoalitiononthehomefrontof55percentisnotabedofroseseither.CraigandRalph’sstrategiesaregoingtodisconnectsoonbecauseRalphisgoingtowanttoaddownersfasterthanCraig.AlthoughRalphhasnotyetmadeitcleartoCraig,becausetheyhavesimilarinitialobjectives,RalphdoesnotwantCraigtohaveacontrollinginterestinthefirm.IfonlyoneownerisaddedbythetimeTomretires,basedonthenaturalreal-locationofshares,Craigwillendupwithjustover50-percentownership.Iftwoownersareaddedbythattime,noonepersonwillhaveacontrollinginterest.Nevertheless,thequickadditionoftoomanyownerswillshrinkCraig’splannedgrowthinpersonalincometothepointthatearlyretirementmaynotbefeasibleforhim.

Soon,inalllikelihood,alltheownerswillbegintodemonstratedysfunctionalbehaviortosupporttheirprivatelyheldpositions.Asexpected,Tomwillprobablypassive-aggressive-lysabotagethefirm’sgrowthbyfailingtosupporttheinitiatives.CraigpossiblywillholdRalphhostage,demandingspecialaccommodationsandconcessionsinreturnforvotinginnewowners.AndRalphmayformacoalitionwithTomtorestrictearlyretirementop-tions.Everyonehasagreatdealtogainthroughcooperation,butevenmoretolosethroughdissension.Bysittingtheownersdownanddiscussingtheirpointsofview,astrategycanbecreatedthatwillavoidalloftheissuesbeforeanyonegetsrootedinprinciplesandposi-tions.CraigandRalphcansetaretirementpayoutforTombasedonanagreed-toformulathatdoesnotpenalizehimfortheinvestmentingrowththatisabouttobemade.Craig


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canagreethat,regardlessofwhenthenewownersjointhefirm,hisinterestwillnotclimbabove49percent(butthathisinterestwillbere-adjustedbackatsomepointinthefuture).AndRalphcanagreetoprovisionsforearlyretirementforCraig,assumingCraigagreestochangesregardingthenumberofowners,andthetransitionofclientsbeforeheleaves.

Althoughtherecaneasilybeahappyendingtothisstory,thereisafargreaterchancethattheownerswillquietlysabotagetheothers’objectivesjusttoavoidtheconfrontationofhurtingeachother’sfeelingsbyspeakingopenly.

Dysfunctional Behavior TraitsThe followingsectionsaddress someof themostcommonissuesand traits thatgeneratedysfunctionalbehavioramongowners.

Trait 1. Conflicting Personal Goals (Work/Life Balance)Conflictingpersonalgoalsusuallyrevolvearoundtheamountofworkanownerisexpectedtoperform. Someowners feel you shoulddedicate your life to thefirm tomakemoremoney,andotherownersfeellikethefirm’sroleistoallowthemtheflexibilitytospendmoretimewiththeirfamilies.

Neitheroftheseiswrong,norareanyofthevariationsinbetween.Butifminimumacceptableownerstandardsarenotagreedto,thedifferenceswillconstantlybeanactivebattleground.

Trait 2. Different Personal Goals Differentpersonalgoalsamongownerscreateastrategyproblem.Oncethepersonalagen-dasareoutintheopen,youcanusuallyfindastrategyeveryonewillsupport.However,ifyoucan’t,thenitistimetoseparate—everyonewillbebetteroffinsteadofeachpersondraggingtheothersdown.

Trait 3. Need for Special AccommodationTheneedforspecialaccommodationincludesownerswantingresourcestofundtheirspe-cialinterests(services,outings)oranunwillingnesstobeaccountabletothefirm.Itistheoutcomeoflivingin“noman’sland”fortoolong.Ownersactuallystartbelievingthatthefirmbelongsinthethirdpositiononthelist,thattheirwantsanddesirescomefirst,thecli-ent’sneedssecond,andthefirmislast.

Thesolutiontothisdisconnectusuallyliesinaccountability,operationalbudgets,andperformancesystems.

Trait 4. Relentless Advocacy of One’s Own Ideas Thepersonproceedsonthepremisethatheorsheknowsmorethaneveryoneelse.Heorshemaytreatthefirmlikeapersonalbusiness,taketheattitudethatnooneelsehasanyrighttointerfere,orinsistonhavingasayineveryfirmdecision,regardlessoftheinsignificanceoftheissue.

Suchapersonisbestsuitedtobeingspunoffonhisorherown.Ifapersontrulybe-lievesheorsheissmarterthaneveryoneelse,isonlyhappywhenhisorherideasarebe- ingimplemented,orcannotorwillnotpickhisorherbattlesbydistinguishingimportant



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decisionsfromunimportantminutia,thispersonshouldbeonhisorherown.Thisper-sonalityprofilewillprobablybevery successful as a soleproprietor.Nevertheless, if thisindividualremainsinthelargerfirm,heorsheislikelytoholdtheentirefirmbackfromachievingthesuccessitshouldbeexperiencing.

Trait 5. Voting Rights in Excess of Contribution Ifanownerhasvotingrightsinexcessofhisorhercontributionorbusinessacumen,orifheorshenevershouldhavebeenmadeowner,youmust“putoutafire”thatshouldneverhavebeenallowedtostartinthefirstplace.Ifthefirmhasapartner-in-trainingprogramwithidentifiedobjectivehurdles,thenwhoevermakes“owner”isqualifiedtobeone.Butthisisn’twhatalwayshappens.Herearesometypicalanomalies: •Aperson’sbookofbusinessisallowedtogrowwithouttheoversightofmakingsure

hisorherkeyclientshavemultiplecontactsandloyaltieswithinthefirm. •Apersonwithaccountmanagementresponsibilitiesisnottiedtoanemployment

contractthatrequiresthemtomakepaymentforanyclientsthattheytakewiththemifheorsheleavesthefirm.

•Thefirmlaunchesaserviceandallowsapersontobetheonlyonethatcanmanageorservicethoseclients.

•Mypersonalfavoriteistheseniorownerswhoareconcernedthattherewillbetoo-fewownerstodotheirworkaftertheyretire.Toprotectagainstnotreceivingtheirfullretirementpayout,theyquicklywaivewhateverownerrequirementswereinplaceandseveralofthemostseniorpeoplearevotedinasowners.

Inthescenariosdescribedbythefirstthreebullets,itispredictablethatthefirmwillbeheldhostageandforcedtoaddanownertosalvageabadsituation.Thelastsituation,whichmight seemmorebenignatfirst thantheothers,canactuallyhavea farmoredamagingresult.Althoughtheseniorownersmaygivethemselvesabetterchanceofbeingpaidoutintheshortterm,thelong-termviabilityofthefirmmaybeatamuchhigherriskbecausepeoplewho, perhaps, never shouldhavebeenmadeownerswill, over time, gainmorecontroloverthefirm.

Alloftheprecedinganomaliesaresymptomsofnothavinginfrastructureinplacetodevelopowners.And,bytheway,underthesuperstarmodel,youneedtohaveat leastonenewsuperstar,ormaybetwo,toreplaceeveryretiringowner.Intheoperatormodel,becauseoftherelianceoninfrastructureasthefirm’sfoundation(likepayforperformance,ormarketing)anddefinedrolesandduties,afirmcancontinuetogrowwithareducednumberofownersbecausemoreworkisbeingpasseddowntomanagersandstaff.Beingabletoincreasethesizeofthefirmwithadecliningnumberofownerswillbecomeexceed-inglymoreimportant,givenourprofession’scurrentdemographicsandtheprobablebuyer’smarketdiscussedinChapter1.

Trait 6. Disorganization and Lack of Planning Disorganization and lackof planningbyoneowner,oftenbecomes everyone else’s cri-sis.Thisisacommoncharacteristicwithinsuperstarfirms.Superstarsneedtobeinvolved ineverything.Theywant tohelp,but theyalsowant tokeep theirfinger ineverypot.


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Therefore,theybecomebottleneckstogettingworkout.Workcompletedbystaffsitsontheirdesksfordaysorevenweeks.Andthen,atthelastminute,theownerpitchesafitsothateveryonewillputdownwhatevertheyaredoingatthemomentandjumpthroughwhateverhoopsarenecessarytogettheprojectoutontime.Thisperson’sinabilitytoletgoofsomecontrol,delegatemoreeffectively,andfocusonwhatisreallyimportantalsoallowsthedisorganizedowner’schaostoinfecttheentirefirm.Thissituationcreatesagreatdealofillwillanddestroysthemotivationofthestaff.

Thesolutionrestswithaccountabilityandprocess.Theowner’sfirstjobistoplanandmanageprojects.Iftherearenoconsequencesforthislackoforganization,thenthefirmisensuringthatitwillcontinue.

Trait 7. Manipulating and Undermining the Process Rather thanaddress issueshead-onwitheveryone involved, thisownerstartsbyputtingtogethersidedealsandbringingideasforwardonlyafterbackroomprivatemeetings.Or,thispersonwillnotletgoofanythingbybringingupthesamepreviouslyresolvedtopicsateverymeeting.Youcannotfocusenoughtimeongoingforwardbecauseheorshekeepsrelivingeverydecisioninordertogethisorherway.Thispersonisunwillingtoacceptthedecisionsandpoliciesofthegrouptoguidehowheorsheoperateswithinthefirm.

Ownersarealwayscaughtbysurprisewiththisone.Inpublic,thedissentingownerkeepsalowprofile.Butthatownerisalwaysshootingflarestofindoutwhoisdissatisfiedwiththedecisionsbeingmade.Onceaweakness inthearmorisdiscovered,oneownerapproaches another tobuild an alliance.These alliances are formedwithmanydifferentpersonalagendas,asillustratedintheexamplegivenpreviously.Theseshort-termsynergieshelpeachownerinthealliancebecausenoneoftheiragendashaveachancetosucceedun-lessthecurrentagendaisderailed.

Asdiscussedpreviously,opendiscussionsareessentialifthisdilemmaistoberesolved;theownergroupwillbecrippledwithdysfunctionifthiskindofmanipulationbecomespartoftheoperatingnorm.Justaswehavediscussedabove,thesolutionmayalsorestinseparatinganownerortwofromtheherd.

Trait 8. Passive-Aggressive BehaviorPublicagreementtosupportideasandinitiatives,followedbypassive-aggressiveattemptstokillthosesamedecisions,isprobablythemostdisablingofalltraitsbecauseittakessolongtouncover.Youhaveallseenit.Attheownermeeting,thereisananimateddiscussionthatgeneratesexcitement,andasolutionisidentified.Assignmentsarehandedout,andownersreadilyacceptthem.However,akeyownerisnotwillingtofollowtheagreed-todecision.Therefore,everytimetheprojectneedstomoveforward,thisownerfindsadifferentlogi-calanddefensibleboatanchortothrowinthewater.Finally,theprojectdiesduetolackofmomentum,whichwasalwaystheintent.

Someonemustbeheldaccountable.Projectrewardsmustbedevelopedtomotivateappropriatebehaviorandpenaltiesmustbecreatedtodemotivateinaction.



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Trait 9. Refusal to Participate or Attend Important Firm Meetings Generally,theownerwithanonattendanceproblemisthefirsttosecond-guessalldecisionsmadewithouthisorherinput.

Thesolutiontothisproblemisprettystraightforwardandbynow,youalreadyknowwhat I amgoing to say.However,myfirst commentmight shockyou:Donot ask forcomplianceifitisnotneeded.Asaccountants,wesometimeswanttodotallofouri’sandcrossallofourt’s,eventhoughthatmaybeapersonalpreference,notanecessity.Ifyouarefrustratedbecausesomeonewillnotdowhattheyaretoldtodo,makesureyouarenottellingthemtowastetheirtime.Manytimes,peopledonotneedtobeatmeetingsandshouldnotbeaskedtoparticipateinthefirstplace.Manytimes,thepeoplewouldcomeifthemeetingswerenotsopoorlyrun.Sometimes,weaskpeopletocometomeetingswhenitreallyisnotthebestuseoftheirtimeforthefirm,butitisconvenientforsomeoneelse.So,startbynotaskingpeopletocometomeetingswhenitisnottrulynecessary.

Nowtothepartyouexpected.Ifthemeetingisrequired,andsomeonedoesnothavealegitimatereasonforbeingabsent,thenheorshejustforfeitshisorhersayinthedecisionsmadeduringthatmeeting.Thisisapolicythatissimpleandrepresentsaccountabilityatitsbest.Itboilsdowntosaying,“Ifyoudon’twanttopay,thenyoucan’tplay.”

Trait 10. Obliviousness to the Needs of Others Obliviousnesstotheneedsofothersalsoincludesbeingobliviousastohowheorshecomesacross,orbeinggiventoconstantoutburstsoftemper,whichrequireotherstofollowupbyregularlymakingtheroundstomendfenceswithcriticalstaffandmanagement.Thisde-scribesagreatnumberofaccountants.Weareverygoodatwhatwedo.Weoftenconsiderthatourtechnicalprowessiswhatreallydemonstratesourvalue,notourinterpersonalskills.Inpsychologicalterms,wearelow self-monitors.Thismeansthatweareoftenunawarehowouractionsoremotionsmightaffectothers.Considerthetempertantrumthrownbyanownerinreactiontothissituation:Thedeadlineforasubmissionhascome,andtheprojectisbeingreviewedatthelastminute.Duringthereview,itcomestolightthatthereareer-rors.Asyouknowfromtheexamplesgivenpreviously,itislikelythatthebasicproblemisthattheworkshouldhavebeenreviewedearlier.Theownerwoulddowelltoberationalandrecognizehisorherownresponsibility.Nevertheless,severalemployeesarepubliclychastisedovertheincident.Moreover,theownerproceedstotyrannizeeveryoneuntiltheprojectiscorrectandoutthedoortotheclient.Oncethedusthassettled,anotherownerhastomaketherounds,doingdamagecontrolandcalmingtheemployeessothattheydonotquit.

If theownerwhohabitually loseshisorhertemperhasacontrolling interest inthefirm,thisissuewillbedifficulttoresolvebecauseitssolutionliesinaccountability.Con-trollingownersrarelysubmitthemselvestobeingaccountable.Nevertheless,everytimeanownerindulgesinthiskindofbehavior,itcoststhefirmallthetimethatisspentondam-agecontrol,andlostproductivity(includingthetimewastedbyemployeesgossipingabouttheincident).Asimpleremedyistototalallthatlosttimeandbillittotheownerwhosedestructivebehavioristherootcause.Ontheotherhand,iftheindividualisnotcriticaltoyouroperations,heorsheshouldbegivenawarning.Ifthebehaviorisrepeated,heor


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sheshouldbeletgo.Noproductivitylevel,howeverhigh,canjustifythenegativeconse-quencesoftoleratingapersonalitythatcanandwillwreakhavoconyourfirmatanygivenmoment(andusuallyattheworstpossibletimes).

A Final Word about LeadershipIntheend,ifyoucannotagreeonthefoundationprinciples,values,andattitudesrequiredbythefirmfromalltheowners,managers,andstaff,thenyoudonothavemuchtobuildafirmaround.Onceyoudecidewhatyouexpect,thenviolationshavetohaveconsequences.Thatiswhyitisextremelyimportanttokeepfrommakinguprulesthatyoudonotplantoenforce.Ifsomethingisnotimportantenoughtowarrantimposingseriousconsequencesfornoncompliance,thendonotbothertryingtogetcompliance.Moreover,rememberthatanynumberofsolutionscanbefoundbycreativelyutilizingyourcompensationsystemsothatpeople’schoicescanbeaccommodatedinawaythatbenefitsthefirm.

So,nowweareabouttogofullcirclewiththisdiscussion.Mostcommonly,dysfunc-tionflourishesinCPAfirmsthatlackthefollowing: •Definedandagreed-tostrategy(withanopenandhonestcommunicationdriving

thatstrategy) •Decision-makingauthority(becausesomeonehastoholdeveryoneaccountable) •Agreed-toorganizationalchart(whichclearlycommunicatesthehierarchyof

authority) •Definedjobdutiesandresponsibilities(whichprovidesimportantinsightastoex-

pectationofeachrole) •Standardoperatingprocesses,procedures,andpolicies(whichhelpsupportandraise

theminimumstandardsbarforperformance) •Clearobjectiveaccountability(becausepeopledowhattheyarerewardedandmoti-

vatedtodo) •Willingnessto:

•–Quicklyaddressissues(becausetimedoesnotmakeproblemsgoaway,itmakesthemfester)

•–Addresstheconflictinatimelymanner(topreventsmall,butneglectedcon-flictsfromturninginto“timebombs”thatdoseriousdamage)

•–Enforceconsequences(becauseaccountabilitycannotworkiftherearenoconsequencesforinappropriateactionorbehavior)

•–Takeastepbackwardinordertomoveforward(e.g.,bewillingtoletanownergoevenifheorshehasthelargestbookofbusiness,orfireabadclientevenifitisoneofyourbiggest;investinfoundationsystemsevenifitreducesownerincome;everyday,considerstepsthatmighthurtintheshorttermbutaretherightthingtodotoprotectthelong-termviabilityofthefirm)

Often,ifthediscussionturnstomovingafirmtoamorecorporatemodelwithprocessandprocedurebasedmodesofoperations,thereisaconcernaboutthepotentialdamagetotheculturethatthenewmodelmaybring.Preservingtheindividualityofthemembersandthefirm’scultureisseenaspart-and-parcelofprotectingthefuturesuccessoftheorganiza-tion.Myresponsewhenthisisbroughtupissimple.



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Iamnotsuggestingthecreationofabureaucracy.Iamnotproposingthecessationofcreativityandentrepreneurialism.Iamnotrecommendingaprisontohouseyouremploy-ees.Iamnotadvisingthatyourvalues,ethics,orprinciplesbecompromisedinanyway.Iam,tonameafewideas,describingabusinessmodelinwhich: •Youaskeveryonetopracticewhattheypreach. •Desiredbehaviorisappreciated,reported,andrewarded. •Unacceptablebehaviorisdefinedandpenalizedquicklytominimizethedamageto

thefirmanditspeople. •Authorityandlimitstothatauthorityareopenlyoutlinedandshared. •Rolesandresponsibilitiesareidentifiedandfollowed. •Expectationsareclearlycommunicatedandembraced.

Thefactthatafirmoperatesundermoredefinedprocessesandproceduresdoesnothavetochangetheculture.Asamatteroffact,thesestepscanjustaseasilystrengthenitbecausepeople(1)feelmoresecureintheirpositions,(2)havelessambiguityaboutthedi-rectionofthefirmandtheirrolewithinit,and(3)canavoidconflictbystayingwithintheknownunacceptableboundariesofacceptablebehaviorandperformance.Additionally,justbecausesomeonehastheauthoritytodictateasolutiondoesnotmeanthatheorsheshouldstoplisteningtoothersorbeinconsideratetothosearoundthem.Justbecauseapolicyisinplacedoesn’tmeanthatitshouldn’tberewritten,orthatanexceptionshouldn’tbemadewhenthesituationjustifiessuchaction.

Good leadership requires inclusiveness, building consensus, having empathy, beingflexible,caringaboutpeople,andsomuchmore.Nothingwithinthecorporateoroperatormodelsprecludesthesefromblossoming.Itisonlythroughabusesofpowerandprivileges,likeauthorityandleadership,thatafirm’scultureislikelytochangeinanegativeway.Andquitefrankly,itisfarmorelikelythattheseabuseswillflourishinasuperstarthananop-eratormodel.Itisfarmorelikelythatthefirm’soverallculturewillsuffermoreundertheindividualpracticemodel(inwhichemployeesareputatoddswitheachotherbasedonturfprotectionandpersonalloyalties)ratherthanunderthecorporatemodel(inwhichthefirmhastocomefirstandeveryone’sloyaltiesshouldbemoresynergistic).

It iscritical that leadershipunderstands thatprocesses,procedures, andpoliciesareawaytoempowerpeopletofullyleveragetheirsituationandappropriatelyrespondtotheirresponsibilitiesratherthanassumingtheyaremechanismsofrestraint.Formostofus,beingprivytothiskindoforganizationalintelligenceisnotawaytoclipourwings,butawaytobetterunderstandthefreedomwehavetosucceedintheroleswefill.

ConclusionIwouldliketoendthischapterwithonefinalsuggestion.Asyoudecidehowyourfirmwilladdressthevariousissuesraisedinthisbook,youwillnotallbeonthesamepage.Therewillbemanyheatedargumentsbeforeeveryonegetstothepointatwhichtheboardhasavisionthatitisreadytoimplement.Therewillbemanymisstepsaspeopleconveymoreauthoritythanallowed,diveintodeeperminutiathanappropriate,putthemselvesbeforethefirm,


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violateprocedures,andshirktheirresponsibilities.Thisisallpartofanevolution—a“grow-ing-up”processinyourfirm.Ifyouwanttoreachyourfinaldestination,youhavetoagreetodisagreeintheboardroom.Youhavetobewillingtoshareyourthoughtswithoutwor-ryingaboutbeingjudged.Youhavetobeopenandhonestaboutwhatyouwantandneed.Butonceallofthishasbeenaired,youhavetounderstandtwocriticalsuccessfactors: 1.Whathappensandissaidintheboardroomstaysintheboardroom. 2.Whateverdecisionsaremade,everyonemustagreetosupportthemasiftheywere

hisorherownideas.Ifthefirmcannotaccomplishthesetwogoals,thenyouwillfindthefirmbehavinglike

DonQuixote,spendingtoomuchtimetiltingatwindmills.


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Management and Operations: Extending the Life and Culture of the Firm

Chapter 3

The objectives of this chapter are to: •Takealookattoday’sworkforceandthetoolsbeingusedbyfirmstomotivatethis

force. •Presentthe“upside-down”pyramidconceptandoutlinewaystoreverseit. •Discusshowenforcementofaccountabilitycantakeafirmtothenextlevel. •Outlinetheroleandresponsibilitiesofamanagerinafirm. •Considervariousstandardoperatingprocedure(SOP)foundationprogramsto

implementinyourfirm. •Demonstratehowtoalignafirm’scompensationsystemwithitsstrategy.

DevelopinganSOPfoundationisaboutputtinginsupport(systems,procedures,poli-cies, andprocesses) thatwill help your employees, overall, produce at ahigher level. Itisaboutcreatinganenvironmentthatmotivatesyouremployeesto“dowhattheyenjoyandenjoywhattheydo.”Standardoperatingproceduresrefertocreatingbridgesthattietogetherseeminglyunrelatedissues,fairness,culture,andprinciplestomake“doingwhatisbestforthefirm”theeasiestchoicetomake.Itconcernsmanagementandthevarioustechniquesthathelpsynergizetheneedsofyourpeopleandtheirpersonalevolutionstotheobjectivesofthefirm.


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CreatinganSOPfoundationisaboutmovingfromasuperstarmodel,inwhichpeoplecreatesystemstoleveragetheirpersonalcapabilities,toanoperatormodelinwhichfirm-widesystemsareputinplacetoleveragetheoverallgroup’sperformance.Systemssuchastheseareparamounttothesuccessandseamlessnessofsuccessionbecauseoftheclarityandconsistency theyprovide toroles, responsibilities,expectations,evaluations,andrewards.Peoplearethesinglelargestcostofaservicebusiness.Consequently,itonlymakessensethatcreatinganinfrastructurethatmotivatesandleveragesemployeeperformancenotonlyaddssignificantvaluetothefirm,butalsoallowsleadershiptochangewithminimaldisruptionofservicedelivery.

So,tokickoffthischapter,thefollowingdiscussionoutlinesthecurrentsituationbe-tweentheworkforceandfirms,followedbydiscussionsonavarietyofthekeyprinciplesandvaluesthatformthefoundationofafirm’scultureandworkingenvironment,whichthencanbetranslatedintopolicies,processes,andproceduresthatsupporttheorganization.Thesekeyprinciplesaretheupside-downpyramid,accountability, theroleofmanagers,staffreportingmodels,SOPfoundationprograms,andeffectivecompensationsystems.

Today’s Workforce and Firm CultureDiscussionofthemanagementofaserviceorganizationoftenbringstomindthemammothhurdlesthatmustbeovercome.Thediscussionbelowisintwoparts.First,Iwanttotalkaboutthegenerationalgapanditseffectonhowweaddressyoungeremployees(gener-allyspeaking,thisincludesCPAsintheirlatethirtiesandyounger).Second,Iwilloutlinemotivationissues,meaning,whatreallymotivatesstaffandwhatfirmsdotoprovidethatmotivation.

The Generation GapInanarticlecalled“ManagementandtheGenerationGap,”1authorRobertReeddiscussessomeimportantcharacteristicdifferencesintheyoungergeneration,including: •Theywant“everythingnow.” •Theywanttobeindependent. •Theyhave“neverhadtodowithout.” •“Instantgratificationiswhattheyareaccustomedto.” •“Thisgenerationhasnorespectforauthority.” •“Theyarerude,impatient,spoiled,stubborn,andunreasonable.”

Apopular,often-quotedpassagedescribestoday’syouththisway:“Theyloveluxury,hateauthority,theyareboredandill-mannered,andlackrespectforadults.”TheproblemisthatRobertReed’sarticlewaspublishedin1971.Thesecondquote,froma1966speechreportedbytheNewYorkTimes,wasattributedtoSocrates.2Clearly,everygenerationhasmadethesamekindsofobservations,notjustabouttoday’syouth,butaboutbabyboomers,theirparents,theirgrandparents.Thecurrentyounggenerationisalwayslackingintheeyesoftheoldergenerationthatiscurrentlyinpower.

1 Robert Reed, “Management and the Generation Gap,” S.A.M. Advanced Management Journal, January 1971, pages 16-18.2 The New York Times quoted Gijsbert van Hall, the Mayor of Amsterdam, when he reminded the people of Socrates’ quote in his

speech following a street demonstration in 1966 (The New York Times, April 3, 1966, page 16).



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Toseebeyondthegenerationgap,wemustmakeanefforttoclosethechasm.Thethreeaspectsof thischasmare issuesarisingfromenvironment,revisionism,andrealism.Eachisdiscussedbelow.

The Environmental GapFirst,wehavetoconsiderhowtheenvironmenthaschanged.Muchofthebabyboomgen-erationgrewupinhouseholdsinwhichonepersonworkedtomakemoney,andtheotherranthehome.Babyboomerswereoftenabletomeetorexceedtheirownparents’standardoflivingbeforereachingtheageof30.Thiswaspartiallyduetoparentalsupport,bettereducation,andbetteropportunities,includingthechancetoleveragetheincomefromtwowageearners.Boomersgotsupportfromallangles.Theycouldenjoytheluxuriesofhavingtwoincomeswhilecountingonthewomenintheprecedinggeneration(whodidn’twork)tobecomegrandmotherswhowereavailablewhenevertheywereneededtohelpwiththekidsorassistwithfamilymatters.

Incontrast,excludingthewealththatmaybepasseddowntothem,today’syouthisthefirstgenerationinalongtime,inmyopinion,thatcouldbeverysuccessful,yetonav-erageunabletoeasilyduplicatethewealthoftheirparents(especiallyifbothparentswereprofessionals).

Today, immediate families often provide a flimsier support structure; younger peo- plearelikelytobeontheirownmore,becausebothparentsworkandarelessavailabletoassist.

Moreover,becauseitnormallytakestwoincomestomakeendsmeetintoday’shouse-holds,thebalancebetweenworkandplayhastippedtowardwork.Thetypicaldayofayoungprofessionalstartsat6:30a.m.andgoesuntil6:30p.m.(includingcommutingtime),andfamilyandhouseholdissuesconsumethehoursbetween6:30and9:30p.m.Thisgivesouryounggenerationabout30minutestodecompressfromthedaybeforetheygotosleepandstartalloveragain.Mypointis…it’scertainlynotthatouryoungpeoplearenotwill-ingtowork;itisthatthereislittleexcesscapacityforthefirm,orthem,topullfrom.

The Revisionist GapAnotherchasmstemsfromtherewritingofourpast.Simplyput…weforgethowwewereviewedwhenwewereyoung.Idaretosaythatthereisnotanownerinourprofessionto-daythatwasn’tviewedbyhisorhersupervisorsyearsagoashavinga“questionable”abilitytoearntheircurrentposition.IbringthisupoftenwithfirmsandoccasionallyIseeshockonafaceortwoinanownergroup.Theirresponsesarepredictable,“Yourcommentisnottrueaboutme.Iwasalwaysconsideredownermaterial.”Yet,ineverycase,whenIhavehadthechancetotalkwiththatowner’smentororsponsor,thedebriefingwasalwaysthesame.“Yes,wesawagreatdealofpromise.Butwewereconcernedabout…anddidn’tknowiftheycouldmakethecut.”Insomecases,aperson’stechnicalabilitywasnotinquestion,buttheirabilitytobringinbusinesswas.Inothers,althoughtheirbusinessdevel-opmentacumenwassuperior,projectmanagementskillsfellshort.Inafewsituations,eventhoughapersonwasperceivedashavingagreatbalanceofskills,theirworkcommitmenttothefirmwassubstandard.Thepointis…Ihaveyettofindanyonewhohassaid,“Yes,


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thatpersonwasalwaysownermaterialandhadthefullpackagewewerelookingfor.”Inotherwords—we,thecurrentownersinpower—werejustlikethosewhoreporttous…“to some degree, there were question marks next to our names.”

The Realist GapAfinalchasmcomesfromtherewritingofourcurrentjobdescriptionstomatchourcomfortzonesandstrengths.Ratherthanlookingatwhatthemarketplaceisexpectingfromown-ers,orwhatourfiercestcompetitorsaredemanding,webegintoassumethatthestrengthswealreadypossessaretheonlyonesthatmatterandourweaknessesarenotrelevant.Manyownershavestagnatedintheirownpersonalgrowth,aresufferingfromtheconsequencesofthePeterPrinciple,andaretryingtosustainthenextevolutionoftheirfirm’soperatingmodelonfoundationsthatgetweakerwitheveryregenerationofthem.Asowners, it isirrelevantwhatourseniorgenerationdidbeforeustobesuccessful.Theenvironmentisdif-ferenttoday;itismorecompetitiveand,inordertoremainanowner,weneedtoembraceanevolvingrolethatneedstokeeppacewithmarketexpectation.

A Final Word on the Generation GapTosummarize, today’syouthareoperatingatmaximumcapacity;wewereasquestion- able as ownermaterial as our young people are today; andwe are probably falling just

as short of realizing our “marketplace-adjusted-roles-and-responsibilities”astheyareatlivinguptoourexpectations.

So,givenmypremisethatweallhavesomegrowing todo,howcanwemotivatepeople towanttostepuptothischallenge?

Motivating Staff BasedonseveralsurveysIhaveseenoverthepast15years,mostmanagersrankmoneyastheirnumberonecarrotformotivatingtheiremployees.Employees,however,rarelyrankmoneyeveninthetopfivemotivators.Whatdoemployeesusuallyrankfirst,second,orthird?Theirchoices,paraphrased,are“Feelinggoodabouttheworktheyperform,”“Feel-ingthattheirworkmakesadifference,”or“Feelingthattheydidagoodday’swork.”

The ProblemSo,howcanmanagementbesowrongaboutsomethingsoimportant?It’seasy.Thereal-ityisthatwedon’tpaymuchattentiontothepeoplewhoworkforus.Tomostmanagers,managing (addressing the issues of employees) is an inconvenient, low-reward function.Wevaluetechnicalnotmanagerialexpertise.Usingthesuperstarideology,managementissomethingyouhavetodotoleverageyourpoorperformersbecausesuperstarsdon’tneedguidance…theyjustneedmorerope.Sowerarelytakethetimetoadequatelycommuni-cateourexpectationsupfront(partiallybecausewewanttheflexibilitytomakeuptherulesaswegoalong).Instead,wecreateenvironmentsinwhichweaskpeopletotakeinitiative,andthenwemistreatthemwhentheyfallshort.Considerthisexample.

Our younger people aren’t much different than we were.

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The receptionist, Sue, has many duties, from having the responsibility of giving a good first impression of the firm to handling a variety of overflow work from other administrative po-sitions. She does a great job. The orders from management are “take initiative and do what is necessary. Don’t expect people to hold your hand.” So, the time comes when a group of marketing mailers to clients needs to go out with the deadline of that day. Without much instruction or anyone around to ask (because there is an all-day office-wide meeting going on), Sue figures out how to print the labels, puts them on the materials, stamps them, and drops them off at the post office on her way home. She believes she really accomplished something special that day. A couple days later, a client calls about an unrelated matter, but while on the phone, comments that they had received multiple marketing pieces. After investigation, it turns out that Sue selected the wrong label list. Rather than using the mar-keting list, she used the master list (so people with multiple companies received a market-ing piece for each entity). One of the owners, embarrassed by the client’s comment and frustrated by the mistake, marched to the front of the office and publicly scolded Sue for what he called “her brainless error.”

Sample Scenario

Whilethismightsoundinsignificant,Iamusingitasanexamplebecauseithappens—insomeversion—allthetime,acrossalllevelsofjobsinaccountingfirms.Firstofall,giventhisscenario,everyonehastorememberthatitisdifficulttofindpeoplewithpersonalitiesthatcanhandlethechaosofthefrontdesk,maintaintheirpoise,andbewillingtoworkforwhatthatpositionpays.Sowhenyoufindsomeonegood,youneedtotakegoodcareofhimorher.Inthissituation,Sueiscomfortablemakingdecisionsandtakingactionwhensheneedsto.Butgiventhepublicreprimandbytheowner,especiallyifthiskindofassaulthappensmultipletimes,Suewillquicklybetrainedtonevertakeinitiativeagainbecausethepriceofbeingwrongistoohigh.Thenexttimeshehastomakeacallinthefield,evenifsheisfairlyconfidentaboutwhatsheshoulddo,shewillsitonthedecisionandwaitforsomeonetotellherspecificallywhattodo.

Peopleshouldberewarded—notpunished—when they are willing to venture outside theircomfort zoneand takeaction.The idea thatwerewardcorrectanswersandpunishmistakesmeansthatyouarecreatinganenvironmentthatwillstifletheoverallproductionofyourfirm.Noonewillpushveryhardtoexpandtheircapabilitybecausetheriskandrewardsystemmakesthatlearningex-periencetoopainful.Theownermaybefrustrated

thatmoneywaswasted in postal costs andmoremarketing pieces thanwere necessary.However,Sue’sdiminishedinclinationtotakeinitiativeinthefuturewillcostthefirm20timesoverthosecosts,andisapricethatwillbepaideveryyearfromnowon.

We have to keep a perspective. If our people are not making some mistakes, it is because they are only doing what they know how to do rather than what they can do.

Key Point


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Whenmistakesaremade,wewanttocorrecttheactiontopreventarepetition,butwewanttoalsomaintainthedignityandrespectofthepersondoing thework. Ifyouwantyouremployees tobemotivatedtogointobattlewithyoueveryday,you need to support their mistakes and respecttheir learning curves. Do not tolerate managerswhocannotcontroltheiremotionsandconstantlyburden the firm with the temperamental chaos

theycreate.

The Solution InthemostrecentPCPSTopTalentStudy,firmswereaskedaboutstaffpoliciesthathelptomotivateandretainstaff.Hereisasummaryoftheirresponsesindescendingorderoffrequency: •Opendoor/accessiblemanagementstyle 96% •Frequentclientcontact 96% •Paidpersonal/vacationtime 96% •Comfortableofficeatmosphere 95% •Medicalbenefits 92% •Interesting/challengingprojects 90% •Paidsickdays 90% •Retirementsavingsplans 89% •Respectforwork/lifebalanceissues 88% •Training/professionaldevelopment 87% •CPEcreditreimbursement 83% •Flexibleworkschedule 81% •Careergrowthopportunities 79% •Casualdresscode 78% •Regularperformancereviews/feedback 77% •On-site/in-houseCPE 76% •Accesstothelatest,cutting-edgetechnology 74% •PaidtimeofftotakeCPAexam 73% •Lifeinsurance 73% •Teamorientationoffirm 72%

Firmshavebecomeverycreativeinlookingforwaystomotivatetheiremployeesandrespondtotheirneeds.Becauseofthepressureonyoungpeopletospendtimeaddressingfamilymattersduringtheday,jobflexibilityisbecomingacornerstoneofourprofession.Considerthat81percentofthesurveyrespondentsofferflexibleworkschedulesforem-ployeesand88percentsaytheyrespectwork/lifebalanceissues.Itisclearthatfirmsrecog-nizetheneedtoreleasecapacitypressurethroughthebenefitstheycanbestow.Thisextratimebecomesmotivationalbecauseemployeescanmorereadily“feelliketheyaremakingadifference”becausetheyarebetterequippedtosuccessfullymeetthedemandsofboththeirprofessionalandpersonallives.

If you want to leverage one of the top motivators your firm has at its disposal, create an environment in which people can feel good about what they accomplish, even if it is wrong.

Key Point



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The Upside-Down Pyramid Duringthelastfewdecades,publicaccountingfirmshavedramaticallyexpandedthescopeofservicestheyoffer.Manyoftheseserviceshavebeeninspecialtyareas,alignedwithin-dustrieslikeautodealersorhealthcare,orserviceslikebusinessvaluationorfrauddetection.Whentheseservicesarelaunched,theyaretypicallychampionedbyanowner,principal,orsomeonehighlyrespectedintheorganization.Becausesomeoftheseareashavesporadicdemandor require ahigh levelof expertise,firmshaveoften reliedon the same seniorpeopletomanageanddothebulkofthework.Thishassupportedatrendinsmalltomid-sizedfirms,basedonmypersonalobservation,tobuildawork-flow processthatlookslikeanupside-downpyramid.Thisoperatingenvironment,formanyfirms,functionsasfollows:

Thelion’sshareofthefirm’sincomeisgeneratedbytheownersandmanagers.The

owners and managers are very hands on and involved in the details of most client

projects.Thework-flowhierarchytricklesdown;partnersdothetechnicalworkuntil

theyhaveworkedallthehourstheycanstand,andthentheexcesstricklesdownto

themanagers.Themanagersdothetechnicalworkuntiltheyhavelaboredalltheycan

stomach,andthentheremainstrickledowntothestaffpool.Ateachlevel,keepingthe

workersinthelevelbelowbusyisalmostanafterthought.

Thissectionisintwoparts.Firstitwilldiscusstheproblemscausedbythe upside-down pyramid(seefigure3-1)and,second,itwilloutlinehowtoreverseit.

Work

xx Figure 3-1: The Upside Down Pyramid Workflow Process xx

Partner Partner Partner

Manager ManagerManager

Partner Partner

Staff Pool

Work is passed down once each

layer

has

reac

hed

its sa

tura

tion

point

.

Figure 3-1: The Upside Down Pyramid Workflow Process


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The ProblemsInanupside-downpyramidenvironment,firmsseemtohaveanattitudethatsubordinates(1)areemployedtodotheworkthattheirsuperiorsdon’twanttodoand/or(2)areconsid-eredtobeadministratorsprovidingassistancewhenneeded.Utilizingthisprocess,ownersandmanagersareoverworked,andstaffisunderworkedandpoorlytrained.Therearethreemajorproblemscreatedbythisprocess: 1. Ownersdoingnonownerwork 2. Undertrainedstaff 3. Ownerconflict

Thesethreeproblemsarediscussedinmoredetailbelow.

Problem 1. Owners Doing Nonowner WorkThiswork-flowprocesscaneasilyharmtheprofitabilityandlong-termviabilityofthefirm.Forexample,insteadofpushingworkdowntothelowestpossiblelevel,nearlytheexactop-positehappens.Workisperformedbythemostexperiencedpersonpossible.Althoughonecouldsurmisethatthisapproachwouldgarnerhigherfees(becausetheworkisperformedbypeoplewithhigherbillingrates),mostofthetime,thatassumptioniswrong.FormuchoftheworkwedoasCPAfirms,ourtotalfeesareeitherfixed-in-factorin-presumption.Obviously,feesarefixed-in-factwhenaspecificprojectpricewasspecified.Thefeesarefixed-in-presumptionwhenwedorecurringwork,likepreparingataxreturneachyear,andtheclientassumesthatthisyear’sfeeswillbesimilartothosechargedinpreviousyears(unlessthescopeoftheworkchanged).So,ifyouconsiderthatmuchofourworkisfixedinprice,thenusingmoreexperiencedpeoplethannecessarytodotheworkonlycreateslargerwritedowns.Ifyoutakethepositionthatyourmoreexperiencedpeopledotheworkfastersothatwritedownsarenotafactor,thenIwouldrespondwith“I’llbetthereishigherlevelworkyourexperiencedpeopleareavoidingthatshouldbedonebytheminstead.”Ifownersormanagerstiethemselvesupdoingworkthatisbelowtheircapability,theyarenotonlydoingworksomeoneelsecoulddoatalowerrate,buttheyarealsodiminishingtheamountoftimetheycandevotetoworkthatonlytheycando.

Problem 2. Undertrained StaffBecausethesefirmsfollowa“workfirst,managesecond”strategy,ateverylevelofthefirm,employeesarepoorlytrained.Theresponseastowhyissimple.Itcommonlyis,“IfIweretogivethisworktosomeonebelowme,Iwouldhavetospendsomuchtimesupervisingthemontheprojectthatitisjustquickertodoitmyself.”Myresponse…“Therolesofbothownerandmanagerarebasedonthephilosophythatyouaresupposedtogettheworkdonethroughothers.”

So the next time you hear yourself utter thewords, “Itwill take toomuch time to trainmy people to do this,” stop and remind yourself, “Hey, itmay take longer,butmy job is totrainthemsothattheycandothiswork.”Bytheway, another classic reaction from this reversed

As a manager, your title is de-scriptive of your job—to manage. Otherwise, your title would be “doer.”

Key Point



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work-flowpyramid is that employees rarely get feedbackon theirwork. Insteadof theownerormanagersendingbackalistoferrorsfortheoriginatortofix,theseniorpeoplereviewingtheprojectmakecorrectionsandgettheworkoutthedoor.Onceagain,ifthisgroup shirks its responsibilities, it creates employees below them that lack thenecessarycompetencies.

Problem 3. Owner ConflictFinally,thisupside-downprocessstimulatesownerconflicts.Thereislittlefinancialleverageunderthismodel,whichcreateseconomicfrustration.Conflictsarisebecauseofthedispar-ityofrolesanddutiesbetweenowners.Anumberofownersareembracingtheirrespon-sibilitieswhileothersarefunctioninginthesafeandunchallengingspaceofbeingglorifiedmanagers(unchallengingonlybecausethat iswhattheyweredoingbeforebecominganowner,sotheyarereallyhidingintheirpreviousjobs).

The Solution or Reversing the PyramidReversingtheworkflowisaverystraightforwardconcept:Ownersmuststartfocusingonowner-levelwork,whichincludescreatingandimplementingstrategy;developingsystemsthatbenefittheentirefirmratherthananindividual;managingclients;activelynurturingnewbusiness; andperformingonly thehighest level advisoryorexpertwork.Managersmustdomoremanagerwork,whichismadeupofoverseeingtheworkqueue,supervisingandtrainingstaff,providingguidancewhennecessary,reviewingwork,andtalkingwithclients. Finally, the staff needs to become the workhorse. Consider this process. Whenworkcomesin,everythingthatcanbedelegatedtostaffisdelegated.Next,everythingthestaffcandowithadditionalsupervisionandtrainingispasseddownandmonitoredaswell.Oncestaffhasnomorebandwidth,managerscanbegintoperformthedetailedwork.Thisapproach reverses the pyramidsothatownersarefreeduptospendmoretimebuildingclientloyalty,managersarefreeduptospendmoretimedevelopingtheirpeopleandtakingonresponsibilitiestomanagemid-levelclients,andstaffreceivestheconstantfocusandtrain-ingtohelpthemevolveatamuchfasterpace.Thisreshufflingofworktypicallyincreasesrevenuesandprofitsbecause: •Theownersspendmoretimeassistingtheirtopclients,whichuncoversmoreop-

portunitiestoservethem. •Theownersperformmoreadvisoryandspecialtypremiumbillingworkgenerating

higherfees. •Themanagersaregeneratingopportunitiesaswellaspremiumbillingworkbecause

theyhavebeenassignedclientmanagementresponsibilityforthefirm’smid-to-lowerlevelclients.

•Thestaffaremoreproductivebecausetheirworkqueueisbettermanagedandtheirskillsareimprovedbecauseoftheincreasedscrutinyandoversightbymangers.

•Moreworkiswrittenupbecausemoreworkisbeingdonebytherightlevelofpeople.

Reversing thepyramid isan importantSOPfoundation for thefirmtobuildupon.Therearefourstepsyoucantaketoreversethepyramid.Theyare:


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Step 1. Assigninterimroles.Step 2. Transitionandfireclients.Step 3. Stafffirmfornontaxseason.Step 4. Avoiddiscountingfees.

Thesestepsarediscussedinthefollowingsections.

Step 1. Assign interim roles. Asyoumanagethefirm’semployeeswhileworkingonreversingthepyramid,keepinmindthateveryoneinyourorganizationisprobablyprettybusyalready.Excesscapacityhastobecreatedfromsomewhereandonelikelyplaceisatthestafflevel.Ahighpriorityistocor-rectthesituationinwhichstaffareattheirmaximumutilizationgiventheircurrent level of knowledge and training.However,asIhavestatedbefore,youareprobablyunderestimatingstaff.Ifthereisashortageofmanagerstomanagethework,thenyouhavetobewillingtodeveloporhireadditionalones.Thisobviouslyisapriority,too,andwilltaketime.Asaninterimstep,whichassumesthefirmhascommittedthenecessaryresourcesfortrainingorhiring,someownersintheneartermofsixtoninemonthscanbeassignedthetemporaryroleofmanager.Andsomemanagerscantemporarilytakeontheroleofseniorstaff.Atleastwiththesemodifications,exceptforthosefillingtemporaryroles,everyoneelsecanstartfunctioningintheirappropriatecapacities.

Step 2. Transition and fire clients.Besidesthecapacityyoumightquicklygainfrombetterutilizationofstaff,themostfertileotherareaisthroughfiring a bunch of clients!Acriticalfirststepinthisprocessistobreakthefirm’sclientsintotwocategories;topclientsandeveryoneelse.Forthose20percentofyourclients(topclients)thatmakeup80percentofthefirm’srevenue(justusingageneralruleofthumb),ownersneedtochangetheirfocusandstartschedulingasignificantportionoftheirtimetobeoutinthefieldinfrontoftheseclientstomakesurethefirmisadequatelyservingthem.Thismeansthat,generallyspeaking,inordertofreeuptimetodothis,alltheclientresponsibilitiesforclientsthatfallbelowthis20percentneedtobeconsideredfortransitiontojuniorowners,directors,ormanagers.Thisincludesfunctionslikestayingincontactwiththesepeopleandmanagingandcollectingthebillings.Formanagerstohavetimetotakeonthisadditionalresponsibility,theyneedtopushdowntheworktheyarecurrentlymanagingtotheirseniorstaff.Andfinally,togivestaffsomeroomtotakeonadditionalresponsibility,someclientsneedtobeletgo.

Tobefrank,Idon’tactuallybelieveinfiringclients,eventhoughIhaveemphaticallystatedotherwise.Forme,unlessthereisanethicalissueortheclientisjusttoomeantoworkwith,Idon’tfirethem—theyfireme.Forexample,ifsomeonehasbeenwithmeforalongtimeandtheirratestructureislow,whenthegapgetstobetoobig,Ijustraisetheratesbacktowhattheyshouldbe.Ifsomeoneisalwaysmakingmedropotherworkbecausetheywantlast-minuteservice,Ijackuptheirratesandchargethemapremiumfortheirservice.Iftheyaredifficulttoworkwith,thenImighttellthemthateitherIamgoingto



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tripletheirfeesortheyneedtofallinlinewithcertainexpectedbehaviors.Thepointis…mostofthetargetedclientswillfirethemselves.ButIamalwayssurprisedbythenumberofpeoplewhoarealsowillingtopaythehigherfees.Consequently,thefirstreasontoputclientsthroughthisprocessistogettheirratestructureinlinewiththeservicelevelyouareprovidingsothattheworkisprofitable.

Firmsdon’tactuallyhavenearly as big a staffing shortage as they have an unprofitable work overage.Toomanyfirmshavejustifiedtakingonmarginalworkwiththeideathatitwillkeeptheirpeoplebusyduringdowntimes.Myphilosophyissimple.

My personal experience is that most firmscouldeasily: •Reducetheirtotalgrossincomeby20per-

centbyfiringclients. •Letafewmarginalemployeesgobecause,

asaresultofworkloadreduction,youdon’tneedasmanypeople. •Makemoremoneybecausetheworkyouhavein-houseismoreprofitable. •Incurfarfewerhasslesbecauseyourmarginalemployeesandunprofitableclientsare

notthereconstantlylightingfiresthateveryoneelseisforcedtoputout.Thus,oneofthebestwaystosolveyourstaffingshortageandanyunderperformancein

profitabilityisfiringyourmarginalclients!

Step 3. Staff firm for nontax season.Tome,therealissuealmostalwayscomesdowntomanagement(orthelackthereof).Ifyoutrulyhavetwicetheworkduringtaxseasonasyouhavetherestoftheyear,thenstaffyourfirmatthelevelofstaffyouneedforthewholeyearanduseresourcessuchaspart-timehelp,workingwithotherCPAfirms,outsourcing,andfiringmarginalclientstogetyouthroughthepeakseason.Tohireworkersallyearlongsoyoucanmakemoneyonthemduringtaxseasonandthendonateallofthoseprofitsawayduringtherestoftheyearispoorstrategy(andawasteofyourlife).

Step 4. Avoid discounting fees.Thereareonlyafewgoodreasonstoofferdiscountedfees,suchas: •Youaretryingtobreakintoanewmarketplaceorservice,andyouareprovidingan

incentivetobuildclientsorreferences(whichmeansthediscountsareofferedforaspecificperiodoftimeanddon’tbecomethenormalpricing).

•Thelengthoftheprojectprovidesanincreasedutilizationratethatmakesupforthediscount.

Otherwise,mostdiscountedprojectsarejusthiddenfirmlosses.Thiscommittedwork-loadcreatesa spiral thathasa long-termnegativeeffectonthefirm.Becausethere is somuchworktodo,eventhoughsomeofitisbadwork,everyonespendsalloftheirtimedoingit.Clientsthatactuallyneedhelpandareevenwillingtopayapremiumforthatas-sistanceareignoredbecausenoonecangivethemtheattentiontheyneedonaregularbasis.Becausetheseclientsareignored,thefirmofteneitherlosesthemorforgoeslucrativead-ditionalwork.Thiscanputthefirminthepositionofneedingtofindmoremarginalwork

Unprofitable work is unprofitable work, regardless of the season.

Key Point


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tokeeppeoplebusy.Thekeytoreversingthecycleistofreeuptheownersandmanagersandputtheminfrontoftheirclients;haveownersdohigh-levelpremiumadvisorywork;pushworkdownthroughouttheorganization;andforcethediscounted,marginalworkoutthedooranddownthestreettooneofyourcompetitors.

AccountabilityAccountabilityisanotherpartoftheSOPfoundationthatisrequiredifyouwantyourfirmtoevolvetoahigherlevel.Accountabilityisasimpleconceptunderwhichpeoplearegiventheappropriateauthorityandresponsibilitytoaccomplishtheirworkandareanswerablefortheiractionsorinactions.However,fewcompaniesimplementthiseffectively.Account-abilityattempts tominimize the subjectivityofevaluatingemployeeperformance.Usingobjectivemeasuresasmuchaspossible,employeesreceiveclarityregardingthefollowing: •Exactlywhatisexpectedofthem •Thesystemthathasbeenputinplacetomeasureandreporttheirperformance •Performancemeasuresthatarebasedonunbiasedandfairinformation

Accountabilityiscentraltonotonlymotivatingtheworkforce,butalsotogivingem-ployeesasenseofsatisfactionabouttheiraccomplishments.Inmyopinion,aqualitysystemofaccountabilityhassevenelements.Employeesshould:

Element 1. Receivewagesandbenefitsinlinewiththoseoftheemployee’speers.

Element 2. Haveachallengingjob.Element 3. Knowwhatisexpected.Element 4. Beheldaccountable,asmuchaspossible,tononsubjective

measurementsElement 5. Learnonthejob.Element 6. Receiveadequatetraining.Element 7. Berewardedforoverachievement.

Eachoftheseelementsisdiscussedinthesectionsthatfollow.

Element 1. Align wages and benefits.Itiseasytoidentifywhatyouremployees’wagesandbenefitsshouldbeascomparedtotheirpeers.Lookatsurveys(liketheMAPSurvey),contactfriendlyfirms,orjoinCPAfirmas-sociationstofindoutwhatcomparablefirmsinsimilargeographicordemographiclocationsarepayingtheirpeopleforvariouspositions.What’shardistofindawaytointegrateyourcompensationsystemwiththeobjectivesofyourfirm.

The ProblemIfyourfirmwantstopayyouremployeesthelowestpossiblewages,thenitshouldcome as no surprise that you are likely to attract marginal performers. However, there are compensatingfactorsthatoffsetwages.Thesefactorsincludeabetterworkenvironment,



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telecommuting,flexiblehours,apositiveworkclimate,jobtraining,day-care,and/orthemanyotheralternativesthatcancounteractwagedepression.

Nevertheless,payingthehighestpossiblesalariesisnotnecessarilyagoodanswereither.Ifyoucommittohighersalaries,thereislessopportunitytopayforsuperiorperformance.

Hereisthegeneralproblemwithsalariespaidforpositions: It is acommonbelief andpracticethatpeopledeservearaiseoncetheyhaveworkedinapositionforaspecificperiodoftime.Obvi-ously,peopleimprovetheirearningsmuchmorerapidlythroughpromotions,butlongevityslowlybut surelyalso raises salary levels.Thisoldpara-

digmisonethatneedstobechallengedforthesakeofourlong-term,notourshort-term,viability.Overandover,Ivisitfirmswithseveralemployeeswhoarepaid20percentto100percentmorethantheirmarketvalue,ormoreimportant,muchmorethantheiref-fortswarrant.Howdoesthishappen?Simplyandsystematically;throughoccasionalmeritincreasesandregularinflationcompensationadjustments,employees’salariescaneasilygetoutofsyncwiththeircontribution.

The SolutionItismybeliefthateveryone,fromthereceptionistthroughthechiefexecutiveofficerandmanagingpartner(CEO/MP),shouldbepaidbasedonperformance.Ratherthandefault-ingtopayingemployeesforshowingupandputtingintheirtimeonthejob,weshouldtrytoidentifyexactlywhatwewant—andpayforanendresult.Thisway,whenpeopleaccomplishmore,theygetpaidmore.Ifemployeescan’tliveuptothetotaldemandsoftheirwork,theworkloadshouldbereshuffledandtheirpayshoulddecreaseaccordingtotherelativereductioninoutput.Moreover,employeeswhocan’tperformtoaminimumworkstandardcan’tkeeptheirjobs.

ObjectionsTwoobjectionsarecommonlyvoicedwhenIverbalizemyapproach.

Objection 1. Theobjectionfirstis,“IttakesanactofCongresstofiresomeone;youtrivializeasignificantprocess.”Itistruethattheprocessoffiringpeoplehasbecomeahumanresourcesnightmareformostcompanies.Why?Rightfullyso,itishardtofiresomeoneifheorshedoesn’thaveobjectiveexpectationstomeet.Ifemployeesarejudgedonmeetingasetofoutputtargets(whattheyproduce),andtheyfailtomeetthosetargets,thenmanagementhasjustcausetodischargethem(assumingthoseemployeeshavebeenadequatelytrainedorhavepresentedthemselvesashavingappropriateskillsets).Firingsomeoneshouldbedifficultifmanage-ment: •Failstoclearlycommunicatetheoutputtargetstoemployees, •Allowsthetargetstochangewiththewind,or •Convenientlyconjurestargetsatamoment’snotice(usuallyaroundevaluation

time).

Firms should look at wages as a function of performance and return on investment more than position.

Key Point


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Employeesshouldn’tbefiredjustbecausetheirmanagerswon’ttakethetimetoman-agebyclarifyingexactlywhatisexpectedfromtheirsubordinates.

Objection 2. ThesecondcommonobjectionIreceiveis,“Theapproachnotonlysoundstoohardtoimplement,butdoesn’tappear tobeworththe trouble.”Iunderstandthisposition,andquitefrankly,atfirstglance,Iwouldagree.However,thinkofthesystemwehaveinplacetoday.Weawardmeritandinflationincreasestoemployeeswhocanbecountedontoshowupforwork,aregoodatperformingtheirjobs,havepositiveattitudes,andareloyaltothefirm.Thissystemworkswellifyouassumethatthereisanunlimitednumberofpromotionopportunitiesavailablewithintheorganization(becausehigherlevelpositionshavedifferentmonetaryranges).Giventhattherearefewerjobsatthetopthanatthebottom,andthatourprofessionalsareworkinglonger,thereisverylimitedupwardmobilityinmostfirms.So,forouraveragegoodworkerswhowillbeseldompromoted,weembraceapaysystemthatconstantlyprovidesminimalsalaryincreasesuntilwepricethemoutofthemarketforthepositionstheyhold.Then,duringanoccasionalrushoffiscalprudence,wefirethemfortheirloyaltyinanattempttobettermanagethecompanybudget.Theworstpartofthisstoryis…theonlyrealmistaketheseemployeesevermadewasbeingloyaltothefirmandbeingsubjecttobadwagepracticesfortoomanyyears.

Now,Iwanttodiscussthetendencytojudgeemployeeson“linger-put”versusoutput;linger-putbeinghowlongemployeeshangaroundorlinger.

Through skill development, Susan learns to work smarter and accomplish her current eight hours of job duties in five hours. As a reward, she receives a pat on the back, three more hours of work, and a tribute such as, “It must feel good to know that you are one of the 20 percent of us that does 80 percent of the work.” Now, on the other hand, Tony (another employee) has been around the block often enough to recognize time management training as just another way his superiors can squeeze more work out of him. He knows the answer. It’s simple. If he just looks busy and uses the organizational techniques taught during the training, he can convert his eight hours of effort into ten.

Sample Scenario

InvariousmanagementsessionsIconductaroundthecountry,mostownersassertthatTonywillbefiredforhisinsubordination.Ichallengethatassertion;forthemostpart,man-agersarenotarmedwiththeonecriticalingredientneededtoidentifyTony’ssubstandardbehavior:Theydonotknowhowlongitshouldtakehimtoaccomplishtheworkhehasbeforehim.Projectplanningandobjectiveoutputthatwouldgivethemthisinsightisrare.So,sincethemanagementisunabletoidentifyTony’spassive-aggressivebehavior,hewilllikelygettreatedinoneoftwoways—ifnotboth.First,hewillbepaidovertimeorgetcomptimefortheextraworkhours.Second,someofhisworkwillbeshifted,probablytoSusan,sinceshehasextratime.Thiskindofsystemmakesyouwonderwhyanyoneboth-erstodeliveranyeffortatall.Theexamplealsoshowswhyitisimperativethatwebeginemphasizingemployeeoutputratherthanlinger-put.



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Alongthesesamelines,itisalsocriticalthatwealignouremployees’motivationsandourexpectationstosupport theobjectivesof thefirm.Considerthis scenario,whichas-sumesthatpersonalbillingsareouronlyinterest.

David is a manager and is paid $75,000 a year. He worked 2,400 hours last year and billed 1,600 hours; his billing rate was $125, and his realization was 80 percent, earning a total net billings to the firm’s clients of $160,000. Now Diane, on the other hand, is a manager who was paid $70,000, worked 2,080 hours, billed 1,100 hours at a billing rate of $150, and had a realization of 94 percent, earning her total net billings to the clients of $155,100.

Sample Scenario

Whoisthebetteremployee?MostownerswouldchooseDavidbecausehebilledmorehours,billedmoredollars,andworkedlateallthetime.However,Diane’sprofitratiowas2.2timeswhatsheearns(netbillingsagainstsalary)andDave’swas2.1.Dave’sworkgrossedamarginforthefirmof$85,000,whileDiane’sgrossed$85,100,withanannualinvestmentof$5,000less.

Thepointofthisexampleisnottodebateafewdollars,buttoask,“Howdoyoualignyouremployees’wagegoalswiththefirm’sprofitmotives?”Asimplewaymightbetoseta minimum net billings to salaryratioandpayemployeesapercentageofeverythingtheyearnoverthatratio.Thisway,thefocusisn’tonbillablehours(whichreallydonotmeanany-thing),hoursworked(whichweshouldn’treallycareabout),orbillingrates(whichshouldbeafunctionofexpectedutilization,nottotalhours).Bymakingitcleartoyourpeoplewhatthefairobjectivemeasuresare,theyarearmedtodowhatisbestforthemselvesandthefirm.Notethat,ofcourse,manyfactorsgetinthewayofthis—rangingfromgettingsomeonewhowilltakeonthelowmarginwork,tothemotivationtooverbillaclient,ortobillinguncollectiblefees.

Element 2. Offer a challenging job.Offeringachallengingjobismuchharderthanitsounds.Achallengingjobisonethatoc-casionally,notregularly,requirestheindividualtogetoutsidehisorherusualcomfortzoneinordertoperformthework.Anexamplemightbetocompareamanagerwhoisexpectedtostayintheofficeandperformqueuedupworkalldaytoamanagerwhoisexpectedtoapportion timebetweenqueuedupwork,mentoringand training staff, andmanagingaselectgroupofclientrelationships.Thelattershouldbeamorechallengingjobbecauseitincorporatesbroaderexpectations,whereastheformerismoresimilartoastaffjob(assemblylineproduction).Achallengingjobincorporatesseveralfeatures,suchas: •Apositivelearningenvironment •Aphilosophythatsupportsrisk-takingsopeoplearecomfortableabouttryingnew

taskswithoutfearofreprisal •Management’scomprehensionoftheemployee’sskilllevel •Projectsthatoccasionally,thoughnotalways,reallystretchtheemployee’sabilities •Mostofthetime,meaningfulworktodo


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Element 3. Communicate clear expectations.Howdoyouinformemployeesoftheirexactjobresponsibilities?Inmostsmallcompanies,andinsomelargeones,managersonlygiveeachemployeeavagueinsightintowhatisim-portant.Thebeautyofthissystemisthatwhenitistimeforanevaluation,dependingonthemanager’ssubjectivefeelingsatthatmoment,theemployeecanberatedanywherefrominadequatetosuperhuman.

WhenIaskmanagementwhyasystemthisimprecisecontinuestobeused,thecom-monreplyinconfidenceis,“Thissystemgivesusmaximumflexibility.Wedon’twanttobepinneddowntoaspecificjobexpectation.What’simportantcanchangehourlyaroundhere!Andwedon’twantouremployeeshidingbehindsomeestablishedjobdescription.Idon’twanttohearanyonesay,‘That’snotmyjob.’”

Thismanagementresponseisexactlywhymanyemployees feel insecureabouttheirperformance. If anemployeedoesn’tknowexactlywhat is expected, then, regardlessofthequalityorquantityoftheworkdone,heorshecannotfeelsatisfied.However,ifajobiswelldefinedwithclearlyexplainedexpectations,anemployeeisempoweredwithtwoimportanttools: •Tool 1. Self-evaluation.Employeesaremoreapttogohomefeelinggoodaboutwhat

theyhaveaccomplishedwhentheycancomparewhattheyhavedonewithwhatwasexpected.

•Tool 2. Defense.Atevaluationtime,theemployeedoesnotbecomeacasualtyjustbecausehisorhermanagementishavingabadday.Instead,themanagerisforcedtojudgeperformancebasedonfacts,notemotions.

Howdomostcompaniesoutlinejobexpectations?Formally,thisismostoftendonethroughjoborpositiondescriptions(i.e.,outlineexpectationsinbillingperformance,clientcontact,firmsupport,andmentoringandtraining)andcompensationplans(payistiedtoexpectedperformance).Positiondescriptionsshouldbeatwo-waynegotiation.Theman-agerhasspecificjobfunctionstoperform,andtheemployeeofferscertainskillsandtalents.Thepositiondescriptionisashort-termcontractoutliningwhatisexpected.Noteverythingaskedofanemployeehastobelistedinthejobdescription,buttheprimaryday-to-day,month-to-monthconsumersoftimeshouldbeclearlyidentified.Thecompensationsystemthendefinestheprioritiesforeachoftheobjectivesidentified.Forexample,iftheroleofmentoring and trainingisnotbackedupbyeconomicgainorsanction,thenitwillfallofftheemployee’s“to-dolist.”

Element 4. Give objective performance measurements.AsIhavementionedmanytimesthusfar,acriticalsteptobeingaccountableistoutilizeperformancemeasurements,asmuchaspossible,thatarenotsubjective.Thehardpartiscomingupwithobjectivemeasuresthatwilldrivethedesiredperformance.

Objectivemeasurescomeintwobasicforms,namely,lagandleadmeasures.Anexam-pleofalagmeasuremightbenew client project dollars billed.Itiscalledalagmeasurebecauseitisthefinalresultofstayingincontactwithyourclients,identifyingopportunity,selling



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thefirmastheserviceprovider,andkeepingtrackofthehoursworkedonthatprojectandtheamountbilled.Thisindicatorlagsbehindtheperformanceitmeasures.Aleadmeasureisjustthereverse.Itindicatesadirectioneventhoughitistooearlytoestablishresults.Anexampleofaleadmeasurewouldbe“thenumberofclientsyouvisitedlastquarter.”Thisleadmeasurecreatesametricthatisalogicalpreludetogeneratingthedesiredlagmeasure(i.e.,newclientprojectdollarsbilled). In thiscase, ifafirmis looking to increaseworkfromcurrentclients,itisfairtoassumethatthegreaterthenumberoftimestheirCPAsareinfrontoftheirclients,themorenewworkwillbedeveloped.Whenyouareinitiatingchange,youdevelopleadindicatorstomeasurecompliancewiththenecessarystepsintheprocess.Whenthedesiredbehaviorbecomesroutine,youcanswitchtojustmonitoringlagmetricstomeasuretheeffectivenessoftheeffortsbeingmade.

The ProblemWhenyoutalkaboutpay-for-performance,mostemployeesgetexcited.Tothem,therewillfinallybeasysteminplacethatshowseveryonehowwelltheycarrytheirweight.Aswell,itwillhighlighttheshirkers.Rarelydoesanyonethinktheyarepartofthemarginalperformers’group.However, inpractice, thecloser to actual implementation, themorenervouseveryonegetsbecause,inreality,nooneissure.Ononehand,weallcanidentifythosewhomweperceivedolessthanwedo,whichmakesusfeelsafe.Ontheotherhand,thereisagenerallackoftrustbetweenmanagementandemployeesthatdefinitelycomesintoplaywhennewsystemsareunderconsideration.

It iskeytounderstandthatanytimeperformancemeasurementsystemsdepart fromobjectivity,employeesimmediatelybegintorelyonrelationshipsforsurvival.Thiscreatesa bad situation because employeesworking in relationship-centered, rather than perfor-mance-centeredorganizations: •Areconstantlyinsecureabouttheirjobs. •Overcommunicate;gossipisrampantandthegrapevineisoveractive. •Suffermoraleproblemsattributabletoexcessiveemployeepositioningandpostur-

ing;peoplesteponeachotherintheireffortstostayinthegoodgracesofamanagerorowner.

•Areofteninefficientbecausetheyspendtoomuchenergyplayingpoliticsratherthanworking.

The SolutionThereareseveralsolutionsforafirmtoconsider.Theyare: 1. Provideregularfeedback. 2. Baseperformanceonoutputs. 3. Understandhowtoholdemployeesaccountable.

Eachofthesesolutionsisdiscussedinthefollowingsections.

Solution 1.Provideregularfeedback.Toavoidthesenegativeeffects,ownersneedtopro-videemployeeswithinformationsuchasjobrequirements,expectations,andperformancefeedback—regularfeedbackbeingessential.Forexample,reconsidertheprecedingsamplescenariowithDavidandDiane.Ifweexpecteachofthemtominimallyperformata2.25


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ratio(ofbillingstosalary),thenbothDavidandDianeshouldreceiveweeklyreportsnotonlyshowinghowtheyareperforming,buthowtheirpeersareperformingaswell.Thiskindofawarenesswillnotraisetheperformanceofyoursuperstars(theyliveandbreathethebusinesseverydayanyway),butitwillsureraisethebarforthoseshowingupatthebottomofthelist.Althoughmanypeopledon’tmindtheobscurityofdisappearinginthemiddleofthepack,noonelikesthespotlightofbeingatthebottom.Thiskindofrecognitionlaysthefoundationforaperformance-orientedorganization.

Solution 2.Focusonoutputs.Wheneverpossible, jobperformanceshouldbebasedonoutputsratherthaninputs.Forexample,having8chargeablehoursisaninput,butbillingandcollecting$1,200forthatday’sworkisanoutput.

Solution 3.Maintainemployeeaccountability.Accountabilityisalsofacilitatedbyman-agement’s understanding of the difference between setting goals andholding employeesaccountable.Alltoooften,managementmisinterpretstheoldArmyslogan,“Beallthatyoucanbe.”Instead,itisnecessarytodistinguishbetweenmotivatingemployeestostretchtheircapabilitiestoreachpersonalgoalsversusmaintainingaccountabilityfortheworkthatneedstobeperformed.Considerthesequestionsbeforecontinuing: •Question 1.“Howhighshouldyousetyouremployees’performancegoals?”The

possibleanswersare“(1)easilywithintheirgraspor(2)justoutofreach.” •Question 2.“Wheredoyouestablishminimumacceptableperformancestandards?”

Thepossibleanswersare“(1)atalevelofaccomplishmentjustaboveshowingupforworkeverydayanddoingareasonablejobor(2)“uniquetoeachindividual’scapabilities?”

Considerthefollowingstory.

Bob is the senior tax accountant for the firm and is considered one of the best employees in the department. Last year, he worked an average of 50 hours a week and did high-quality work. Now, a new year is starting. The organization embraces a pay-for-performance philosophy. Therefore, it’s time to determine what to expect from Bob over the next twelve months. Because Bob is such a good employee, and because the plan is to promote him to manager soon, the management wants him to stretch his abilities. The firm believes that goals should be set at the furthest reach of an individual’s grasp to achieve the high-est level of performance. So, Bob is given some lofty goals, tied in with some nice bonus incentives.

Bob steps up to the challenge, and it quickly becomes apparent that he is taking the objectives in stride. He puts in more than 60 hours a week during tax season, and still man-ages to put in more than 50 the rest of the year. His work has never been better. However, at year-end, he falls a little short of the targeted objectives.

Sample Scenario (Part 1 of 3)

Ifyouwerethefirm’smanagement,whatwouldyoudo?Ingroupdiscussions,mostownersanswerthattheywouldrewardBobwithonlytheperformancebonusesheactuallyachieved.Why?Theansweris,“Becausehedidnotmeettheidentifiedobjectives.”But



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maybeitwouldbewisertoavoiddiggingaholethatonecannotgetoutofbythinkingthroughthissituationdifferently.First,rememberthatthegoalssetforBobwereloftyinthefirstplace.Second,theintentwastogiveBobaworktargetthatwouldstretchhiscapa-bilities.Third,Bobisoneofthefirm’sbestemployees.Inanutshell,anemployeewhohasputinarecordyear,isbeingtold,“Youaregettingonlythebonusesthatyouhaveactuallyachieved.”Anyfirmthatactuallyfollowsthismodusoperandiwillsuccessfullyrunoffeverygoodemployeeithas.

Nevertheless,inthissituation,mostcompaniesdooneoftwothings;bothbad.Themostcommonresponseistorestructurethegoals(ormovethebar)sothatBob’sactuallevelofaccomplishmentallowshimtoattainthenewobjectives.Thus,he“earns”theper-formanceincentives.ThesecondoptionisthatBobisdeniedthepaytiedtoperformance,butiscompensatedwithabogusrewardthatiscreatedtomakeupfortheshortfall.Giventhis,let’scontinuewithourstory.

It’s objective-setting time again and because the firm was so generous last year, this time the management really wants Bob to earn his keep. Bob is told as much, and exceptionally high goals are set for him for the upcoming year. Bob is considered potential owner mate-rial and the management wants him to learn the ins-and-outs of how the firm works. Bob makes a valiant effort, too. His average workweek exceeds 60 hours. His billings are higher than they ever have been, and his clients rave about him. But still, at year-end, Bob falls short of several outlined targets.


Ifyouwerethefirm’smanagement,again,whatwouldyoudo?TheansweristhatyouarelikelytomakegoodonallofBob’scompensation,eventhoughtechnicallyhehasnotearneditforthesecondyearinarow.Whymaketheseexceptions?Theansweriseasy…becauseBobistoovaluabletolose.Heisthebestworkerinthetaxdepartment.So,thesagacontinues.

In year three, Bob is burned out. He realizes that he must spend more time with his family if he wants to avoid a divorce. Bob still performs quality work, but he only puts in about 45 hours a week. His work is still excellent, his clients still love him, but his output was signifi-cantly smaller. By year-end, Bob is not even close to any of his annual targets.


Onceagain,whatwouldyoudoifyouwereanowner?Inalmosteveryinstanceofthisscenario,managementaroundthecountryrespondsthatBobshouldreceive“noperfor-mancebonuses.”Thereasoningbehindtheresponsevaries,butincludedthefollowing: •Bobmissedhistargetsbytoogreatadelta. •ThedropinBob’sperformanceevokedanunwillingnesstobreaktherulesforthe

thirdyearinarow.


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•Bobdidnottryhardenoughorhaddevelopedabadattitudetowardswork,com-paredtohisenthusiasminpreviousyears.

•Bobperformedsignificantlylessworkthanhadbeennormalforhim,eventhoughhisworkwasstillhighinquality

Management’srationale,inshort,isthatthesysteminplaceclearlycallsforBobtobedeniedperformancepay.Andbecauseofhismarginaloutputduringtheyearinquestion,therewasnoreasontocreatesomespecialcompensationreward.

Now,letusstepbackandanalyzeexactlywhatBobhasbeentaughtaboutaccountabil-ity.Theansweris,“Nothing!!”Thissystem,whichexiststhroughoutthecountry,makesitclearthatwhatBobdoesisnotasimportantashisboss’sattitudetowardshim.Hehasbeentaughtthataccountabilityismuchlessaboutmeetingexpectationsthanaboutmaintainingarelationshipwithsomeonewhocanadjustthebar.Anytimeyouusethe“Bosses’Attitude”astheunderpinningof“EmployeeAccountability,”youcomeupwith“TheGoodOleBoySystem,”whichmeansthat,“it’snotwhatyoudothat’simportant,butwhoyouknow.”Accountabilityhastobefirmlyentrenchedinideasandidealssuchasthefollowing: •Eachemployeeknowsexactlywhatheorsheisaccountabletoperform. •Wheneverpractical,theresultsofeachemployee’sworkshouldbeobjectivelymea-

sured,monitored,andreported. •Employeesshouldbeabletoeasilyassesswhethertheyaremeetingorexceeding

expectations. •Performancemeasurebarsshouldremainconstantandnotshiftwiththewind. •Itisuptotheemployee,notthemanager,toensurethattheproperlevelsofoutput

areachieved. •Althoughpersonalgrowthgoalscanbecustomizedtoeachindividual’scapabilities,

performancemeasuresshouldbebasedontheassumptionsthatwouldbemadeifa“generic”oraverageemployeewasfillingthespecificposition.

•Achievinglessthantheorganization’sminimumlevelofperformancemeanstheemployeedoesnotgettokeephisorherjob;forthatreason,thesebarsshouldbesetexceptionallylow.

•Incentivesystemsneedtobeinplacetorewardeveryoneachievingoutputinexcessoftheminimumexpectationsbar.

InBob’ssituation,onlythefirstthreeofthekeyfactorslistedabovewerepresent.Inaddition,performance measures were established to push the capabilities of a particular individual,ratherthanrewardachievementthatexceedsthenorm(whichBobdidallthetime).Bob’spersonalgrowthgoalscouldhaveeasilybeenthesameasthoseidentifiedabove.However,thesystemwasdoomedtofailureinthemomentthatloftypersonalgoalsweretiedtoin-centives.Inotherwords,ifincentivegoalsarebasedonanindividual’scapabilities,theresultismultiplebarsfordifferentpeopledoingthesamejob.Thisisnotfairbecauseyouare,inasense,handicappingyourbestemployeessothatyouraverageonescankeeppace.

Element 5. Support learning on the job.Itisinterestingtomehowquicklypeoplelosesightofwhatallowedthemtogaintheskillstheynowpossess,namely,throughtheprocessof“failingonthejob.”Typically,eachof



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uswasgivenprojectsjustalittlebiggerthanourcapability,andwefailedourwaythroughthem,learningimportantjobandlifelessons,includingwhatnevertodoagain.Nowthatweknowhowtomanagethesecomplexprojects,manyofusarereluctanttoprovidetoothersthesamesafetynetthatbenefitedus.Often,wetaketheconservativeposturethat“theriskistoogreattoletourstafflearnonourclients.”However,wewouldnotbewherewearetodayifsomeonehadnottakenthatriskwithus.

IwanttosharewithyoutheresponsesIgetfromalmosteveryfirmIhaveeverworkedwith: •Theownerssay,“Ican’tpassthatworktothemanagersbecausetheyarenotready

orcapable.Iwoulddelegateiftheywereready.” •Themanagerssay,“Iwouldpassonmoreworktostaffbuttheyarenotableor

willing.Iwoulddosoiftheywere.” •So,theconclusionateverylevelinthefirmis,“Iamcapable,andeveryonebelow

meisnot.Whentheyareready,Iwillrespondappropriately.”This requires significant change in philoso-

phy.Forthosewiththeresponsibilitytomanagepeople, the thinking needs to change to, “Myjobisnottodotheworkmyself,buttogrowmypeoplesothattheyarereadyandprepared.Theyneedanopportunitytolearnwithasafetynetun-derneaththem.Iftheyarenotready,itisbecauseIhavefailedinmyjobastheirleader.”

PleasedonotassumethatIamadvocatinganenvironmentinwhichmarginalworkershaveasafehaven.Actually,quitetheoppositeistrue.Ifsomeonefailsoften,makingthesamemistakesoverandoveraftertheyhavebeentrainednottodoso,thentheyarenot“failingonthejob,”theyareeithernottryingorjustincompetent.Regardlessofthereason,theansweristhesame—”Letthemgo.”Butmoreoftenthanyouexpect,whenyougivesomeoneenoughropeandsupport,theywillmakemistakesalongtheway,buttheirperformancewillalsosurpriseyouinapositiveway.

Delegating Versus DumpingMostpeopleconfusedelegationwith“dumping,”asituationdescribedintheSituationalLeadership™ materials and course training by Dr. Paul Hersey’s Center for LeadershipStudies.Inhisbook,TheSituationalLeader,3Dr.Herseyexplainsthatyoumanagepeoplebyprovidingthelevelandamountofdirectionandmotivationaccordingtotheirreadi-nessandabilitytodothework.Delegationbecomesanalternativewhentheemployeeisready,capable,andself-motivated,andthemanagerhasahighdegreeofconfidenceinthatemployeeforaspecifictaskorproject,whichwilltranslatetoalowlevelofbothdirectionandsupport.

Toooften,CPAsbelievetheirsubordinatesareincapableofdoingtheworkcurrentlyqueuedupaslongastheythinktheyhavebandwidthtodoitthemselves.TheseCPAsreal-izethattheyhavemisjudgedthecapabilitiesoftheir“directreports”onlywhenthey:

3 The Situational Leader by Dr. Paul Hersey, published by the Center for Leadership Studies, Escondido, CA, 1997.

Your best investment for build-ing value in your firm is to spend the time and money required to develop your current employees and future leaders.

Key Point


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•Areliterallyoutoftimeandhavereachedtheprojectdeadlines. •Stillhavetoomuchworkontheirplatestocompletewithoutassistance. •Theclientisbeginningtosqueak.

Atthispoint,workthatjustafewhoursagowasdeemedundoableisreadilydumpedonthedeskofanemployeewiththenote,“Getthisbacktomebytomorrowmorning.”

Theideathatyouwouldnotpassontheworkonedaybecauseyou,thesupervisor,wouldhavetoholdtheirhandsallthewaythroughthepro-cess, and then the very next day, put that samesubordinateina“sink-or-swim”positionisaboutasfarfrommanagementascanbeimagined.

Obligations When DelegatingAsthedelegator,youcannotgiveupyourobligationofoversight.Andjustasimportant,thedelegateecannotbereleasedfromhisorherobligationtokeep the delegator informed.

Eitheryouremployeesarereadyandyouareholdingthemback,whichshowsyourfailuretomanage,ortheystillarenotreadyfortheworkyouaregivingthem,whichalsoshowsyourfailuretomanage.Eitherway,thefingerpointstothesameperson.

Element 6. Provide adequate training.Today,becauseofthedemographicsIdescribedearlier,wehavetoworkhardtofindquali-fiedworkers.Thismeansthatwecannotbecavalieraboutthepeoplewehave,especiallyiftheywanttodoagoodjob.Wehavetoprovideanenvironmentthatallowsthemtobesuccessful.

Ourroleasleadersandmanagersistohelpourpeopleevolveprofessionallyasfastastheyarewilling,ready,andcapable.Wehavetokeepinmindthatweareworkinginadifferentstaffingsupply/demandcurvetodaythanyesterday…andwehavetoadjustourapproachtoleveragetoday’sreality.Itdoesn’tmatterwhatwedidorwhatwehadtodo.Whatmattersiswhetheryoucancorrectlyassessthepoolofpeopleavailabletoyou,nur-turethatgroup,andfindawaytocreatesynergybetweentheirtalentandthewell-beingofyourfirm.

Iamremindedofastorythathappenedataweek-longleadershipworkshopIwasco-facilitating.Duringadiscussionabouttrainingandmentoring,inamomentoffrustration,oneoftheparticipantscommented:

Weusedtodoalotmoretrainingthanwedotoday.Asamatteroffact,wehardlydo

muchtrainingoutsideofon-the-jobstuffanymore.Wereallygotfrustrated,investing

ourmoneyonpeopleandstillseeingsomeofthemleave.Wefeltlikewewerethrow-

ingourmoneyawaytrainingthecommunity;someemployeesevenwoundupwith

our competitors.” My cofacilitator responded, “What’s better, spending the money

trainingyourpeopletomakethemmoreeffectiveandhavingafewofthemleave,or

nottraininganyofthemandhavingthemallstay?

Dumping the work is not ever an acceptable management alternative.

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Obviously,itcostsagreatdealofmoneytodevelopyouremployees.Soyouhavetobeconscientiousaboutdeterminingwhatthetraininginvestmentwillbeandwhatcanbeexpectedfromit.Butwhenyouconsiderthatemployeesarethesinglelargestassetandex-penseinservicebusinesses,poorlyleveragingthisinvestmentistotallyunacceptable.

Element 7. Reward overachievement.Receiving reward for overachievement acknowledges the successful culmination of theothersteps.Ifemployeesknowexactlywhatisexpectedofthem,havebeenlearningonthejob,havetakentheirtrainingseriously,andareproducingatahighlevel,rewardingthemisavitalaffirmationstep.Oranotherwaytoputitis…ifyoueverwanttoseetheirsuperhu-maneffortrepeated,youhadbetterrecognizetheirperformance.

Aswediscussedearlier,therearemanywaystomotivateandrewardyourpeople.Compensa-tionisrarelythetopmotivator,butitisoftenoneof the employees’ top “score-keeping” mecha-nisms,whichiswhypay-for-performanceissuchafundamentalcomponentofSOPfoundation.Pay-

for-performancecreatesawayforeachemployeetoassesshisorherownaccomplishments,aswellasprovideawaytocomparethemselvestotheirpeers.Itisarewardmechanismandanoverachievementcommunicationdevice(aswellasanunderachievementcommunica-tiondevice).However,thisisjustone—albeitagoodone—ofthemanysolutionsyoucanleverage.Althoughitisclearlyuptoyoutoselectwhatevertechniquesaremostdesirabletomotivateandrewardyourpeoplefortheirsuperstarproduction,thekeyistomakesureyouchoosesomethingandimplementitassoonaspossible!

A Final Word on AccountabilityAccountabilityisnotpassive.Accountabilityrequiresachangeinthephilosophyofmostorganizationalcultures.Itdemandsthatemployees,notmanagement,beandfeelmoreem-poweredregardingtheirperformance.Itisuptotheemployeestokeeptheirjobs,influencehowmuchtheyearn,determinehowmuchworkproducttheyproduce,andsoon.Itisuptomanagementtobecometheresourcetohelpthosewhowanttohelpthemselves.Ifanemployeewantstoperformjustattheminimumbar,that’sfine.Don’tkidyourself—everyfirmIhaveworkedwithcouldusemore“minimumbar”producers.Minimumbarproduc-ers are notmarginalemployees.Theyareemployeeswhoareproducinggoodworkatapaycommensuratewith their level of production.Generally speaking,minimumperformersshouldearnabasewage(lessthantheaverageforthatpositionthatyoupaynow).Fromthislevelofperformanceandhigher,themorepeopleaccomplish,themoretheyearn.Butthekeyis,incentivesareearnedeachyeartheemployeesproduce,ratherthanbeingearnedonce,suchthattheirsalariesareadjustedforalltime.

Receiving reward for overachieve-ment is the capstone of the ac-countability process.

Key Point


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Roles And Responsibilities Of Managers Thissectionwillcovermanytopicsrelatedtotherolesandresponsibilitiesofmanagers.Itwilldefinetypesofmanagers,utilizingpart-timemanagersversusfull-timemanagers,andthestructureofreportingmodels.

Types of ManagersThefirstthingIwouldliketochallengeisthatthetitleofmanageristoobroad.ItisbettertobreakthisdownintotwocommoncategoriesinCPAfirms;thetechnical managerandthesupervising manager.Asimilardistinctioncanapplytoownersaswell;thetechnicalownerandtheclientrelationshipowner.

Technical ManagersLet’sstartbyintroducingthetechnicalpositions.Typically,infirms,thetechnicalmanagersorownersareknowntobetechnicallycompetent,producequalitywork,andcrankoutproductallday.Theyarethekindofpeopleyoucanhandaprojecttoandneverhavetoworryaboutitagainbecauseyouknowitwasdonecorrectly.Thesepeopletypicallyhavethetitleofmanagerpurelybecausetheirexperienceandbillingrateswarrantsuchastatuslevel,notbecausetheyactuallymanageanyone.

Inmanyenvironments,youwillfindsomeofthepeoplethatfillthisrolearegoodinclientcommunications,butterribleatinteractingwiththeinternalstaff.Thesepeopletendtoholdthemselvestoahighstandardforthetechnicalqualityoftheirwork.Theyaretheminoritytowhichownerswillactuallydelegatework.Technicalmanagerstendtobelieveinthesuperstarmodel,whichiscompatiblewiththeirattitudetowardthosearoundthem,andtheirexpectationthatotheremployeesshouldtaketheinitiative,astheyhave,andfig-ureeverythingoutontheirown.Theybelievethatstarswillemergethesamewaycreamrisestothetop,withoutassistance.Thestarscanthenbeleveraged,andeveryoneelsecanbeignored.

Severalpointsneedtobemadeaboutthetechnicalmanagerposition: •Thesepeopleareveryvaluable,eitherinfull-orpart-timeroles. •Thesepeopledonotmanage—theycrankoutwork.Somealsohavemid-levelcli-

entrelationshipresponsibility. •Technicalmanagersshouldberewardedfortheirsuperioroutputofwork. •Technicalmanagerswhoarepronetocondescendingbehaviormustbestopped.

Thecompensationsystemmustincludepenaltiesthatcanbeimposedonthosewhosepoortreatmentofotherscreateschaos.

Theidealistocreateanenvironmentinwhicheveryone’sskillscanbebestutilized.Technicalmanagerswhoareinclinedtopredominantlycrankoutworkcanbeputinposi-tionsthatallowthemtodoso.Nevertheless,theycannotbeallowedtostartfiresthroughoutthefirmasaresultoftheirlackofemotionalcontrolandrespectfortheworkofothers.

Supervising ManagersNowlet’stalkaboutsupervisingmanagers.Itshouldbenosurprisethatasupervisingman-ageractuallysupervisesstaff.Unlikewithtechnicalmanagers,thesepeopleshoulddefault



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togettingworkdonethroughothersratherthanthemselves.Supervisingmanagersshouldbeheldaccountablefortheirownpersonalproduction,butwithlowertargetsthanthoseoftheirtechnicalmanagercounterparts.Theirrealfocus,however,istheproductionofthestaffbelowthem.Thismeansthatthejobofsupervisingmanagersincludesschedulingthework,trainingandmentoringtheirpeople,aswellasqueuingupworkforthetechnicalmanagerswhennecessary.Tosummarize,supervisingmanagersareresponsiblefor: •Managingpeople. •Schedulingtheworkandmakingsureeveryonethatreportstothemisbusy. •Identifyingareasinwhichpeopleneedextraattentionandprovidingthenecessary

trainingormentoringsothatthestaffcancontinuetodevelop. •Recognizingthat,althoughtheycandotheworkfasterthemselves,thatisnottheir

job.Itistheirjobtofindawaytoplanthework,breakitdownasnecessary,reviewthework,andprovidefeedbackandtrainingtotheirsubordinatesabouttheworktheyhavedone.

•Keepingtheirsubordinatesbusyfirst,andthentakingontheoverflowwork.Asupervisingmanager shouldberewardedmore for theachievementof thosewho

reporttothemthanfortheirownpersonalproduction,assumingthesupervisingmanagersmeetcertainminimums.

A Final Word About Technical Managers and Supervising ManagersEveryfirmneedsbothtechnicalandsupervisingmanagers.Butitisimportanttocreateacleardistinctionbetweentherolesofeach.Notethatgoodsupervisingmanagersaremoreimportant toaCPAfirm’s future successbecause theyaredeveloping themanagersandownersoftomorrow.Technicalmanagersaremoreimportanttomaintainingtoday’sproj-ectqualityandtimeliness.

Youmaybesurprisedtofindsomepeopleyouhavetaggedastechnicalmanagerswanttobesupervisingmanagersbecauseoftheaddedstatusofmanagingstaff.Ifthishappens…great!Butyouneedtomakeitclearwhatyouexpectandmonitorthemcloselytoensuretheyareprovidingthenecessarytrainingandmentoringsupportstructurestothosewhoreporttothem.

Part-Time Versus Full-Time ManagersBecauseofthestaffingshortagethattheprofessionhasfacedinrecentyears,firmsevery-wherebegantoleveragetheirproductioncapacitybyutilizingahighlytalented,part-timelaborpool.AlthoughIbelievethateveryfirmshouldbeimaginativeincreatinganenviron-mentthatwillattractpart-timers,theyshouldnotfilltheroleofsupervisingmanagers.

The ProblemUnfortunately, many firms have told me that their best supervising manager candidates(“best”beingthepersonwiththeattitudeandaptitudetomanagepeople)arepart-timers.However,hereiswhatalwayshappens.


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A part-time manager works three days a week (let’s say, for this discussion, Monday through Wednesday). Projects come in, are scheduled, and are delivered to staff, so as to work around the part-timer’s schedule. Clients call in on Thursday, Friday, or Saturday (when the part-time manager is unavailable) and change their deadlines, or the staff gets stuck on a certain phase of a project, or a project encounters some last-minute problems as it becomes due. Then, the work falls to an owner or another manager to handle who (1) has to be brought up to speed, and (2) has to drop everything they have planned to resolve the crisis, and get the work done and out the door on time.

Sample Scenario

Somepeoplewouldarguethatthisshouldnotbeabigproblembecauseapart-timerworkingMondaythroughWednesdayisatthefirmmorethantheyaregone(sincetheyareonthreedaysaweekandofftwodays).However,therealhurdlesareproblemsoftimingandcapacity.Thetimingproblemiseasytosee.FiresthatbreakoutonThursdayandFridayhavetobehandledbysomeoneelse,whichcreatesduplicationandfrustrationforeveryone.Second,bydefinition,part-timershaveapotentialcapacityproblem.Forexample,ifsome-thingseriouscomesuplateonFridayafternoon,afull-timeworkerwouldbeexpectedtocomeinandhandleitonSaturday.But,ifsomethingoccurredlateTuesdayevening,thepart-timerwouldonlyhaveWednesdayavailabletoworkthatweek.Hisorhertimemayhavealreadybeenscheduled,sothateveniftheimmediatesituationisresolved,pushingofftheworkplannedforWednesdayuntilMondaymightnotbeacceptabletoanotherclient.Thepointisthattherearetoomanytimeswheneithertimingorcapacityavailabilityfromyourpart-timeworkersareincompatiblewiththeneedsoftheclients.

The SolutionFor this reason,experiencedpart-timeworkers shouldalmostalwaysbeput in technicalmanagerroles.Becausetheschedulingoftheworkqueuefortechnicalmanagersisoverseenbyeitherasupervisingmanagerorowner,whenproblemsoccurasaresultoftimingorcapacity,someoneelsecaneasilypickuptheballandrunwithit.Also,part-timersarebestleveragedineithersmallorlargeprojects,bothofwhichusuallyhavemoreflexibilityinbothtimingandcapacity.Theyshouldalsobeused,becauseoftheirexperience,asoverflowworkers.Anexampleofoverflowworkmightbewhenasupervisingmanagerhassomespecificworkthatneedstobedonetoday,likereviewingacomplextaxreturnbeforeitgoesout,whentheownersarealloutoftheoffice.

Part-timeworkers,asmuchaspossible,shouldbeleftoutofalladministrativefunctions.Their jobs shouldbe tocrankoutwork,nothelpprovideguidance throughcommitteeinvolvement.Firmsneedtomakethebestuseofthelimitedhoursthesetalentedpart-timeaccountantshavetoofferandsittinginonmanagementmeetingsisn’tanoptimaluseoftime.Obviously,mydiscussionwouldnotapplytosomeonethatisparttimeforashortperiod,andwilljoinorrejoinfull-timestatussoon.



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ExceptionsArethereexceptions?Yes,therearealwaysexceptions,buttheyshouldberare.Forex-ample,twopart-timerscouldsharethesamesupervisorymanager’sjob(oneworkingMon-daythroughWednesdayandtheotherworkingThursdaythroughFridaywithoverflowresponsibilitiesonSaturday).Anotherexamplemightbesomeonewhocanworkfourdaysaweekwithsomecapacitytohandlesomeoverflowworkeitherafternormalhoursduringthosefourdaysoroccasionallypickingupahalfdayonthefifthday.

Staff Reporting ModelsDependingonthesizeofafirm,staffwillbepredominantlyassignedaccordingtoeitheratraditionalhierarchy(reportingtoamanager,whoreportstoanowner)ortoapool.Eithercanwork;bothhavestrengthsandweaknesses.Both,inmyopinion,thoughtheyfunctiondifferently,needtobestructuredunderdirectreportingrelationships.Thefollowingsec-tionsshowhowthesetwocanbeseenconceptually.Theywillcovertypesofstaffreportingmodels, reporting responsibility, and project responsibility, and theywill concludewithsummarizingpoints.

Types of Staff Reporting ModelsAsmentioned,therearetwotypesofreportingmodelsforstaff—thedirectreportmodelandthestaffpoolmodel.Botharediscussedbelow.Alsodiscussedisahybridmodelthatiscommoninfirms.

Direct Report ModelUnder the traditionaldirect reportingmodel, it isup to themanager tokeephisorherdirectreportsbusy.Ineffect,thisimpliesthatthereisenoughworkthatneedstobedoneforthemanagertokeeptheassignedstafffullyutilized.Forexample,considerafirm’sauditdepartmentwiththreestaffmemberswhoreporttoamanager,whoreportstoanowner.Ifyouchoosethisorganizationalapproach,existingprojectsshouldprovidetheauditdepart-mentwithmorethanenoughworktokeepallfivepeoplebusy.Ontherareoccasionsthatthereisdowntime,themanagermustworkwithotherdepartmentstofindworktofullyutilizehisorherstaff.

Staff Pool ModelConversely,underthepoolmodel,showninfigure3-2,workcancomefromanyonebe-causenooneconsistentlyhasenoughworktofullyutilizeallthetimeofaspecificnumberofstaff.Therefore,youhavemultipleworkinstigators(whichmightincludeeveryownerandmanager),whothenmakerequestsoftheschedulingsupervisorymanager,whothenallocatesthatworktomembersofthepool.Thepoolmodelisoftenchosentosolvethepoliticalproblemofsuperstarallocation.Ifafirmissmall,itmighthaveacoupleofsuper-stars(whomightbestafformanagers)thateachownercouldkeepbusyallthetime.Butinordertoavoidplayingfavorites(givingoneowneraccesstothefirm’stoptalentallthetimewhileforcingtheotherownerstoutilizeweakerteammembers),firmswillconstructapooltosharetheirtopperformers.


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Pools don’t have to bemade up of staff only. Somefirmshavestaffpoolsandman-agementpools.BothcanworkassumingtherightstructureandSOPs.

Hybrid Staff Report ModelUnfortunately, toomanyfirmsadhere to neither the directreportor the staffpoolmodel.Instead, these firms have pro-ducedhybridsthatarefounda-tionally dysfunctional and are

always breaking down. Under this system, no one actually reports to anyone and eachpersoncanreporttoeveryoneabovethem,dependingontheproject.Thewayitworksissimple,anditappliestoallmanagersandowners.Supposeamanagerorownerhasaproj-ecttodo.Dependingonthecomplexityofthatproject,heorshewillenlistthehelpofamanagerorstaffmemberorboth.

Oneresultisthatnoonespecificallyorexclusivelymanagesanyoneelse.Thus,stafformanagerevaluations,training,mentoring,coaching,andcareerdevelopmentareconsideredtobemoreofagroupproject,eventhoughaparticularmanagermightbeassignedtothetask,especiallyinordertomeethumanresources’requirementsconcerningevaluations.

Thiskindoforganizationalchartisoftenfoundinfirmsthatusethesuperstarmodelbecausetheassumptionisthatthecream(thetopperformersateachlevel)willrisetothetopontheirownandwilldemandthecareandfeedingtheyneed.Therestarejustworkersandwillbeleveragedaswellaspossible.

Reporting ResponsibilityFromanoperatorperspective,wheneverpossible,everyoneshouldreportdirectlytosome-oneinordertoensure,mostsimply,thatsomeonetakesresponsibilityforoverseeingtheprofessionaldevelopmentofevery individual.Accountabilityandemployeeperformanceismostconsistentlyandeffectivelyimplemented,monitored,andadministeredunderthisstructureandeachemployeeknowsexactlywhoisresponsibleforhisorhertraining,as-signments,andevaluations,andwhowilldefendhimorherifthatbecomesnecessary.Anytimeyouhaveasituationinwhichanumberofpeoplearechargedwiththeseresponsi-bilities,theusualresultisthatnoneisdonewell(becauseeveryonehopessomeoneelseistakingresponsibility).Inthepoolmodel,withoutdirectreporting,whilethebesttalentisconstantlyoverworked,theaverageemployeesaremarginallyutilized.Moreover,theaver-agetalent inthepoolwill likelysuffer frommalnourishmentinbothcareertrainingandcareerdevelopment.Iamnotsayingthattheaverageworkerwon’thaveaccesstotraining,butratherthathisorhertrainingwillbemoregenericratherthantiedtotheindividual’s

xx Figure 3-2: xx

Manager Manager

Manager Pool

Staff Staff

Staff

Staff

Staff PoolPartner

Partner

Partner

Figure 3-2



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personalgoalsandcareerpath.Fortrainingtohavemaximumimpact,itneedstobepartofawell-thought-outcareerdevelopmentprogram,notjustrandomcontinuingprofessionaleducation(CPE)courses.

Nevertheless,infirmafterfirm,managementbalksattheideathateveryoneneedstoreporttospecificpeople.Managersarguethatthefirm’sstaffaccountantsneedtobeac-cessibletoeveryone.Theyareapprehensivethattheconceptofdirectreportswouldcre-atenothingbutbureaucracyandempire-building(astheyquicklyclaimithasdoneinthepast),andenablethehoardingoftalentsothatcertainownersandmanagersalwayshavetheresourcestheyneedattheirbeckandcall.Myresponseis,“Allofthesethingscanandwilloccurifyouassumethatthefirmwillnotproperlymanagethesituation.Butwithoutpropermanagement,nothinghasmuchchancetowork.”

Project ResponsibilityPlease don’t confuse reporting responsibility with matrix project responsibility. Report-ingresponsibilityiswhatwehavebeentalkingabout,orthequestion,“Towhomdoyoureport?”Matrixprojectresponsibilityreflectstherealitythat,giventhenumberofdifferentprojectsthroughouttheyear,astaffmembermightreporttoorworkasateammemberwithalmosteveryownerormanagerinthefirm.

The ProblemEmployeesinCPAfirmsareconstantlyscreamingbecauseprioritiesarecontinuallybeingreshuffledbyanumberofpeople,whichleavesemployeesnotknowinghowtoorderthepriorityoftheprojectsforwhichtheyareresponsible.

Let’s assume Beth is a supervising manager who schedules work for all of the staff mem-bers each week and the work allocated to each person is expected to consume their avail-able time. Now, let’s add Sandra, an owner, to the mix. She walks in on Tuesday and makes this request to one of the staff members: “I need some help on this right now. Could you put everything down and prepare this schedule before 2:00 p.m. today?” Then, at noon on the same day, Bert, the CEO/MP and controlling owner of the firm, comes over to that same staff member and says, “We need to take a long lunch and talk about a project that I think we are going to land and which is a perfect fit for your background.”

Sample Scenario

Obviously,anyintelligentstaffmemberworkinginapoolthatdidnothavedirectre-portingresponsibilitywouldabandon’sBeth’sweeklyplantotakecareofSandra.Andmoststaffmemberswouldn’tdreamoftellingtheCEO/MPthattheyaretoobusytohearaboutapotentialcareer-boostingassignment,especiallywhenthe2:00p.m.deadlineisfromanownerwithlesscloutthanBert.Still,itreallydoesnotmatterhowthestaffpersonwouldhavemadethiscall.Thepointisthatitshouldnotbeleftuptoastaffmember,inthefirstplace,todecidewhotodisappointinthiswebofrequests.Inotherwords,itisnotfair,orjustifiable,toputyoursubordinatesinthepositionofhavingtoresolveconflictsbetweenownersand/ormanagersaboutjobpriority.


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WhatIregularlyhearfrommanagersandownersalikeis,“Wheneveroneoftheseniorownersmakes a request,myprojects automaticallyget set aside,even if theyarehigherpriorityworktothefirm.”TheproblemisthateveniftheCEO/MPismakingtheseworkrequests,thepersonwhodecideshowtoreshuffletheworkshouldbesomeonewhohasknowledgeoftheentireprojectqueueanddeadlines.Underthesystemdescribedbythestoryabove,thisfirmwilltypicallymovefromhandlingoneclientcrisistothenextbecausetheworkplaniscontinuallybeingusurpedbyprojectsofconvenience.Potentialresultsin-cludeevenmoreclientchaosifthefirmmissesthedeadlinesofhigherpriorityprojectsthatarequeuedupandinprocess.

The SolutionIfyouwanttoutilizeapoolandtakecareofyourclientswiththeleastnumberofinternalcrises,youhavetodevelopanSOPthatoutlineshowworkisscheduled,whatconstitutessomethingthatcanoverridetheschedule,andwhatprocessistobefollowedwhenthoseoverridesarenecessary. Iamaware thatoverrides to theschedulewillbecommon.Butthoseoverrideswillbefarlesscostlytothefirmiftheyaremanagedwithinaprocessthatidentifieswhatfiresare about to be startedbythepriorityreshufflingbeingproposed.

Ibelievethatanytimeaparticularworkloadandskillsjustifyfull-timesupport,directreportsmakethemostsensefromthestandpointofaccountability.Ifyouhaveasituationinwhich the demand for talent is inconsistent, a poolmakesmore sense.Nevertheless,evenwithapool,onceagaininmyopinion,someoneneedstohavethedirectresponsibil-ityformanagingthatpool.So,inlightofthedysfunctionalhybridshowninthegraphic,Iproposeadifferenthybrid,granting,obviously,thatthespecificsofagivensituational-waysdictatewhatstructurehasthebestchanceofsuccess(seefigure3-3).Inthiscase,theCEO/MPisthedirectsupervisorofboththeownersandthesupervisorymanager.Thesupervisorymanageristhedirectsupervisorofthestaffpool.Thesupervisorymanageralso

hasaccesstothetechnicalmanagerforas-sistancewithmorecomplexprojects.Thetechnicalmanagerreportsdirectlytooneoftheowners.Thepointisthat,attimes,itwouldbeappropriatetohavebothdi-rectreportsandapool,dependingontheworkloadoftheowners,departments,ormanagers.Inreality,allthreeownershaveaccesstobothmanagersandthefourstaffmembers, even though, in the graphic,theCEO/MPisresponsiblefortheown-ersandthesupervisorymanager’strainingandcareerdevelopment,andtheresolu-tionofpriorityconflicts.Asforthetech-nicalmanager, theownerthatsuperviseshimorherwouldberesponsibleforthosemanagerialroles.

xx Figure 3-3: xx

Staff Staff

Staff

Staff

Staff Pool

Partner Partner

TechnicalManager

SupervisoryManager

CEO/MP

Figure 3-3



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Thismayseemfoolishlytheoreticalratherthanpractical,butanyefforttoclarifyhowreporting, authority, and responsibilityworkswithinyourfirmwill return rewards veryquickly.Youwill find that once supervisors at every level knowwho they are respon-siblefor,andthattheirsuccessinmanagingthosepeoplehasasignificantimpactontheircompensation,theresultwillbeaheightenedinterestinperformingthetasksofthecareerdevelopment(e.g.,providingcoaching,training,andfeedbackonworkperformed)oftheirdirectreports.Justasimportant,youwillfindthatyourweakpeopleareflushedoutmuchfaster.Thereasonissimple:Aweakteammemberwhohaslittleimpactonanother’sper-sonalperformanceorsuccessismerelyconsideredanuisancetobeavoided.Ifthatsameweakteammemberdirectlyandregularlyaffectsanother’sperformanceandsuccess,heorsheisimmediatelyshowneither(1)howtoevolveor(2)howtofindtheexit.Thisleveloffocusonyourpeople,regardlessoftheoutcomes(employeeswhoeitherimproveorarefired)benefitsthefirm.

A Final Word About Staff Reporting ModelsConsiderthefollowingsummarizingpointswhenconceptualizinghowyourstaffcanbeheldaccountable,fullyutilized,anddeveloped: •Inapool,asupervisingmanagershouldbeinchargeofthescheduleandevery

projecthastobeclearedthroughtheschedule.Theprimaryjobofthepoolman-ageristomanagetheworkqueue,scheduletheprojects,assignthework,trainanddevelopthestaffmembers,andresolvetheclientworkconflictsthatnormallyarise.Theworkloadcomesfromtheotherownersandmanagersbecauseworkinitiationisnotaprimaryresponsibilityofapoolsupervisor.Whentheworkloadislow,themanagerwillbemotivatedtosolicitworkfromotherareaswithinthefirmsincehisorherperformanceisheavilyweightedtowardsthepool’soverallperformanceagainstbudget.

•Withdirectreports,themanagerhastobeheldaccountableforthefullutilizationofstaff.Directreportsarearewardforthemanagerwhocaninitiateandcontrolenoughworktokeephisorherpeoplebusyratherthantoscheduleeverythingthroughthepool.Sincethemanagerisresponsibleforthefullutilizationofassignedstaff,whentheworkloadislight,thatmanagerisresponsibleforsolicitingworkfromotherareasinthefirm.Underutilizationofstaffreflectsnegativelyonthesuc-cessofthatmanagerandheorshewilllosedirectreportsthatarenotfullyutilized.

•Ifanownerormanagerrequestsworkfromastaffmemberinapool,thatstaffmemberimmediatelyreportsthedetailstohisorhersupervisorymanagersothattheworkcanbeproperlymanaged.Iftheworkcanbedoneasrequested,thesuper-visorymanagershouldadjustthescheduletoreflecttheadditionalwork.Ifthereisaconflict,itisuptothesupervisorymanagertoapproachtheownerormanagerinvolvedinordertocomeupwithanequitablesolution.

•Ifasupervisorymanagermisuseshisorherschedulingpowerandbecomesagate-keeperwhoisrudeandabusive,orplaysfavorites,orisnotfocusedonthebestinterestofthefirm,heorsheshouldberemovedandtransitionedtotheroleoftechnicalmanager.


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•Anorganizationcanhaveeitherdirectreportsorapool,orboth.Regardless,anemployeewhohasmultiplesupervisorsisinanuntenableposition.Note,however,thatanemployeemayneverthelessreporttoanumberofpeopleinthecourseofworkingonvariousprojectsthroughouttheyear.

•Directreportingcancreatesilos,whichprecipitatesownersandmanagershoard-ingpersonnel,fightingoverwhogetsaccesstothebesttalent,protectingpersonnelbecausetheyarevaluabletoanownereventhoughtheyareburdenstothefirm.ThesesituationsaremanagementissuesthathavetobeaddressedquicklybytheCEO/MP.ThecompensationsystemisoneoftheCEO/MP’sbesttoolstopro-motecompliance.

•Youcanhavemanagementpoolsmanagestaffpools,butifyoudothis,youneedclarityabouttherolesandresponsibilitiesbetweenmanagers(likescheduling,train-ing,andthebalanceofindividualworkperformedwiththetimespentmanagingothers)andacompensationsystemthatdiscouragesthepredictableabuses.

•Toooften,firmshaveacoupleofmanagersmanagingatotalofthreeorfourpeople.Onesupervisingmanagercaneasilyhandlefourtosixpeople.Still,donotjustallocateyourstaffequallytothosepeoplewhohavemanagertitles.Decidewhatmakessenseandwhocanbestfilltheroleofdevelopingyourpeople.Minimizethesupervisingmanagerstoasensiblenumber,andtransitiontherestofyourmanagerstobetechnicalmanagers.

Ifyouusedirectreports,toomanypeoplemaywindupreportingtoonedepartmentorowner.Atthispoint,theCEO/MPshouldproposetotheboardthattheworkloadberear-rangedsoastobemoreevenlydistributed.Theboardinturnshoulddoeverythingpossibletosupportthisrequest.Largeimbalancesinworkloadconstructsilos,an“us-against-them”mentality,andoftentriggertheearlyformationofaspin-offcompetitortothefirm.

Although every organizational option youcomeupwithwillhavestrengthsandweaknesses,youhavetomakesurethatregardlessofthevaria-tionyouchoose,yourpeoplearedeveloped,heldaccountable,haveaccesstoaclearconflictresolu-tionhierarchy,haveanopportunitytogrow,andarenotputinthepositionofhavingtofighttheirboss’sbattles.

SOP Programs That Support Employee PerformanceBelowareelevensuggestionsforwaystoformallydocumenttheprocessthatsupportsem-ployeeperformance.Includedinthediscussionare: 1. Performancereviewsystem 2. Pay-for-performancecompensationsystem 3. Businessdevelopmentprogram

Regardless of whether you use pools or traditional direct report-ing, each staff member needs to be managed by someone specific (i.e., managed, not just adminis-tratively reporting to someone).

Key Point



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4. Leadershipdevelopmentprogram 5. Motivationandrewardsprogram 6. Partner-in-trainingprogram 7. Careerprofessionalprogram 8. Ownerevaluation 9. Internprogram 10. Employeeorientationprogram 11. Mentoringandcoachingprogram

Performance Review SystemAperformancereview(PR)systemallowsthestaffandmanagerstounderstandwhatisex-pectedofthemandhowtheyperformagainstthatexpectation.Thissystemshouldincludeinformationaboutreviews,includinghow,bywhom,andthroughwhatprocesstheyareconducted;therightsoftheemployee;therightsofthereviewingmanager;andtheimpactofreviewsoncontinuedemployment.

Pay-for-Performance Compensation SystemApay-for-performance(PFP)compensationsystemalignsperformancewiththestrategicinitiativesoftheorganization.Itchangeswhenthestrategicinitiativeschange,ispredomi-nantlybasedonobjectivecriteria,paysforbillingandmanagementperformance,andmain-tains client relationships.There is a thoroughdiscussionof this system in the followingsectionofthechapter.

Business Development ProgramAbusinessdevelopment(BD)programidentifiesfirm-widehowadditionalbusinesswillbegeneratedforthefirm,includingvariousapproachesforgrowthbyattractingnewbusinessandreferralsofnewclients;increasing“theshareofthewallet”ofexistingclients;definingthemarketingdutiesexpectedatvariouslevelsofemployees;andgatheringtheresourcesrequiredtosupporttheseefforts.

Leadership Development ProgramAleadershipdevelopment(LD)programhelpspeopleunderstandhowtheybehave,howtobettermonitorandcontroltheirownbehavior,howtoinfluencethebehaviorofothers,howtocommunicatemoreeffectively,howtomanageclientrelationships,howtodeveloplong-termrelationships,andhowtoappreciatediversity.Theprogramcouldalsoaddressthe attitudes and values encountered between the various generations working in your organization.

Motivation and Rewards ProgramAmotivationandrewards(MR)programidentifiesuniquewaystomotivateandrewardyouremployeesotherthanthroughdirectcompensation.Theprogramcanensureclientcontactandinvolvementinfirmwidemeetings.Motivationsandrewardsmayalsoprovideemployeeswithhealthbenefits,401(k)plans,travel,firmoutings,day-care,andflextime.


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Partner-in-Training ProgramEveryoneshouldknowandunderstandtheminimumthat isrequiredtobecomeapart-ner. The typical firm just lists a number of subjective criteria. As we have discussed inthis chapter, although objective criteria should not replace all subjective measures, theyshouldreplacemanyofthem.Apartner-in-training(PIT)programshouldclearlyidentifytherequirementstobecomeapartnerandspecifythetitleandcompensationchanges—ifany—thatarepartofparticipatingintheprogram.Typicalpartnerrequirementsincludethefollowing,attheminimum: •Aminimumsizeofclientbook •Aminimumamountofnewbusinessorclients •Theabilitytomaintainandgrowwhateversizeclientbookismanaged •Leadershipqualitiesandcharacteristics

InthePCPSSuccessionSurvey,theparticipantswereaskedabout“identifiedandfor-malizedrequirementsfornewowners,”andweregivenananswerchoicethatrequestedthemtoselectallthatapply.Theresponsesfollow: •Wedonothaveformalwrittenrequirements,butratherinformalones

thatchangebasedontheperspectivesofthecurrentowners. 70% •Wehaveidentifiedcrucialcompetenciesthatmustbemetinordertobe

consideredforownership. 33% •Wehaveidentifiedminimumanddocumentedsubjectivequalitiesand

characteristicsthatmustbemetinordertobeconsideredforownership. 24% •Wehavecreatedanon-equitypartnertracktomakesurenewpartners

fitculturallywiththefirmbeforebecomingequityowners. 22% •Wehaveidentifiedanddocumentedaminimumclientbooksizethat

potentialownersmustmeetinordertobeconsideredforownership. 11% •Wehaveidentifiedanetrevenueperpartnerrequirement,sopartner

slotsopenupasthefirmreachesrevenuethresholds. 11% •Wehaveidentifiedanddocumentedaminimumnewbusiness

developmentamountforpotentialownerstomeetinordertobe consideredforownership. 6%

Asyoucansee,mostfirmshavenottrulyformalizedthisprocessbuttherequirementsareprettybasicformostofthosethathave.Asforbooksize,mypersonalexperienceisthatfirms,dependingontheirsize,settheminimumbarbetween$250,000and$1million.Inareversepyramid,itisdifficultforapartnertogrowhisorherbookbeyondabout$400,000because,atthatlevel,thepartnerissobusydoingthedailywork,heorshedoesnothaveanytime left forbuildingclientrelationships.However, if thepyramidworksoptimally,thenapartnercouldeasilyhandle$1millionormore.Obviously,thisismoreaboutadol-larvolumeincombinationwithclientvolume,thaneitherfactor.Forexample,apartnercouldpotentiallymanage$20million if itentailedonlyoneclient relationship.Alterna-tively,$600,000mightbeastretchifthattotalwasmadeupof$10,000clients.Onethingiscertain:Thebiggerthedollars,thefurtherawaythepartnerisfromdoinganydetailworkandthemorehisorherjobispurelythemanagementofprojectsandclients’expectations.



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Andthebiggerthedollarsorthelargerthevolumeofclients,themoreyoucanbetthatthepartnerhasdirectreportsthatdomostoftheday-to-daymanagementoftheclientbase.

Career Professional (or Career Manager) ProgramAcareerprofessional(CP)programclearlyidentifiestheexpectations,titles,compensationalternatives,andotherbenefitsthatareavailabletothosewhodonotchooseorhavenotbeenchosenfortheownertrack.Thisalsoincludesaroadmapofthetraining,technicalcapability, personal characteristics, and leadership skills that employees need tomaintaintheirpositions.

Everyoneshouldknowandunderstandthatbecominganownerisnottheonlyviableandrespectedcareerpath.Manyfirmscreatenonequityownerpositions for senior-levelpeoplewhodonotwantordonotqualifytobecomeowners.Otherfirmshavedirectorpositions,seniormanagerpositions,seniorconsultantpositions,oruseanumberoftitlestoconveyrespect.Earningsthatexceedthenorm,alongwiththetitlesofthesepositions,ac-knowledgethelevelofexpertisethattheyrequire.Inaddition,careerprofessionalsareoftenhighlytechnicalCPAswhoaregreatatwhattheydo,butdonotwanttobedistractedbyfirmpoliticsand/ormanagement.

Owner Evaluation and/or 360 Feedback ProgramAnownerevaluation(OE)and/or360feedbackprogramallowstheownerstobeevalu-atedbytheirpeersandtheiremployees.Thisfeedbackiscompiledtoalloweachownertheinsightofacomparisonbetweenhowtheybelievetheyperformandtheviewsofothers.

Intern ProgramFirmsof all sizes arediscovering thebenefitofworkingwith local colleges (fromcom-munitycolleges tomajoruniversities) toestablishprograms thatgive thefirmsaccess tosomeverytalentedpart-timehelp.Internsusedtobehiredtoshufflepaperandfile.Today,however,manyfirmsuseinternstodobasictaxreturnpreparationorroutineauditwork.Moreover,mostfirmsmakeofferstothoseinterns—notbecausetheyhavetoaspartoftheprogramrequirements,butbecausethoseinternsprovethemselvestobevaluable.Aninternprogramidentifiesthenumberofinternsinthefirm’ssystematanyonetime,howinternsarerecruited,programbenefits,internduties,andthefeedbackprocess.

Employee Orientation ProgramAnemployeeorientation(EO)programidentifieshownewhiresareeducatedaboutthefirmanditspractices,procedures, systems,andculture.Suchaprogramlikely includesaroadmapandchecklistsforeachemployee’sfirstdaysorweeksonthejobthatspecifythecontentandtimingofeachemployee’sintroductiontothefirm.

Mentoring and Coaching ProgramAs for mentoring and coaching, the AICPA’s Women’s Initiatives Executive Commit-teehasput togethermentoringprogramguidelines that areagreatbeginning ifyouareinterestedinmovinginthisdirection.Althoughtheguidelinesbuildaframeworkfortheprogram,thematerialsinthischapterabsolutelyapplytothefoundationuponwhichthisprogramshouldbebuilt.


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Compensation SystemsItispossibletotiealloftheconceptspresentedsofartogetherintoacompensationprogram.So,letmesharewithyoumyapproach,thoughitcertainlyisnottheonlyonethatcanwork.Ibelievethataperson’spayshouldbeafunctionof: 1. Level of job.Thisreferstothelevelofcompetencerequiredtodothejob,whether

internormanagingowner. 2. Expectations of the job.Thisreferstotheassortedrolesandresponsibilitiesofpositions,

suchasthedifferencebetweensupervisoryandtechnicalmanager. 3. Return on investment for that job.Thisreferstothegrossmarginthatisanticipatedto

bereturnedbyanindividualforthefirm’sinvestmentinpayroll.The following sections outline the specific steps to creating a compensation system

framework.Butfirstwewillbeginwitha lookat theproblems in typicalcompensationsystemsandwhatcriteriaarecurrentlyinusebyfirms.

The ProblemsI surveyed a small groupof about 40CPAfirms to accumulate somebasic informationabouttheircompensationsystems.Thesefirmswerehandselectedandrangedinsizefrom$500,000 to $50million in gross revenue,with themedian-sizedfirm a little under $4million.Fromthatsurvey,andbasedonmyconsultingexperience,thereweresixtypicalcompensationsystemproblems:

Problem 1. NonalignmentofcompensationwiththecurrentstrategicobjectiveProblem 2. RewardingpastworkratherthanwhatisbeingdonetodayProblem 3. FocusingonbillablehoursProblem 4. IgnoringgrowthfromexistingclientsProblem 5. NoincentivesforclienttransferProblem 6. Basingretirementformulasonsalary

Abriefdiscussionofeachproblemfollows.

Problem 1. Nonalignment of Compensation With the Current Strategic ObjectiveInotherwords,insteadofthefirm’scurrentstrategydrivinghowincentivesandbonusesarepaidout,itisafixedsystemthatrarelychanges.Mostcommonly,formulasaresubstantiallyrevampedwhenalargeblockofownershipandvotingchangeshands(i.e.,retirementordemerger).Thistendstoleadtocompensationsystemsthatpayforunwantedperformancelikeloggingchargehoursratherthanaccomplishingwhatthefirmhasdeemedimportant.Examplesofcompensationnotalignedwiththecurrentfirmstrategyinclude: •Continuingtodoworkformarginallyprofitableclientsratherthanmakingtheef-

forttoeitherconverttheworkandfeestoamoresuitablearrangementorrunningthemoff



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•Lettingtheday-to-dayminutiaofthepracticegiveyouanexcusefornotsettingupmeetingstomaintainvisibilitywiththetop20percentofyourclients

•Notgivingthetimeagreedasimportanttodevelopnewskillsorservices •Doingworkbelowyourlevel(thereversedpyramid)

Problem 2. Rewarding Past Work Rather Than What Is Being Done TodayToomuchof the compensation is paid on the book-of-businessmanaged even thoughownershaveeffectivelyturnedtheresponsibilityoftakingcareofsomeofthoseaccountstootherpeople.Theownersarebeingpaidanannuityforeffortmade10yearsagoand,therefore,theybecomecomplacentaboutmakingtherequiredefforttoday.

Itiscommonforcompensationsystemstobedevelopedwithsomeobjectivecriteria.TheproblemisthatitisalsocommonforthosecriteriatobevirtuallynegatedwhentheCEOs/MPsorcompensationcommitteesusetheirdiscretionarypooltoequalizetheeffectsoftheobjectiveformula.Inotherwords,theownerearningsareadjustedbacktofallinlinewithpreviousyears’allocations,regardlessofcurrentperformance.

Problem 3. Focusing on Billable HoursOwnersandmanagersateverylevelseemtobeoverlyfocusedonthebillablehour—doingtheworkthemselves—insteadofprovidingthenecessarytrainingsotheycanpushworkandaccountmanagementtomanagersandstaff.

Problem 4. Ignoring Growth From Existing ClientsLittleattentionispaidincompensationsystemstothegrowthofthebookmanagedfromexistingclients.Thegrowthfocusformostfirmsseemstobeonnewclients,whichputstheemphasisinthewrongplace.Incentivepayfornewclientsisagoodidea,butitismoreinlinewithanexpectationfortheseniorownersorthefirm’smarketinginitiatives.Incentivespaidtogrowadditionalservices(your“shareofthewallet”)withexistingclientsareafarmoreimportant,achievable,andsustainablegrowthemphasisforallownersandmanagersalike.

Problem 5. No Incentives for Client TransferFewincentivesorrepercussionsareincludedinthevastmajorityofcompensationsystemsfortransferringclientstootherownersormanagers.SystemsusuallypayCPAstobringinbusinessandmanageclients,but theydonotpaytotransfer thoseclients toownersandmanagers with the additional bandwidth to serve them. Client transfers increase in im-portancewhenyouhaveownerswhoareafewyearsfromretirement.Mostofthetime,thetransitionofthoseclientsoccurstoolate,becausetoolittlepressurewasplacedontheretiringownertomakethistransitiontimely.Theendresultisusuallylostclientsorseniorownerswhocreativelyextendtheirretirementpaybycontinuingtoperformafunctionthatshouldhavebeenpassedontoothersyearsearlier.

Problem 6. Basing Retirement Formulas on SalaryRetirement formulas are allover the lot, ranging fromthosebasedon themarketvalue of the firm to those based on salary, and everything in between. One of the biggest


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disadvantagesof salary-basedretirementpay (theretirementpayoutamountcalculatedasamultipleof salary) is that it is too closely tied to annualproduction.Fewfirms freezetheretirementpayunderthesesystemsthreetofiveyearsoutsothattheretiringownerisencouragedtoshifthisorherfocustothetransitioningofclientsratherthanmaximizingretirementpayout.Undersalary-basedretirementpayouts,retiringCPAstendtoholdofftransitioningclientsbecausetheirfinalretirementamountisnegativelyaffectedbylimitingthebookofbusinessmanaged.

Current CriteriaInthePCPSSuccessionSurvey,therespondentswereasked,“Whatcriteriadoyouusetodetermineownercompensation(selectallthatapply),”theresponseswere: •Asalaryorbasedraw 82% •Ownershippercentage 48% •Thesizeoftheowner’sclientbookorfeesmanaged 34% •Newbusinessdeveloped 34% •Billableorcollectiblehours 32% •Profitabilityofbook 30% •Performingcertainidentifiedfirmfunctions(chairingcommittees,

certainleadershiproles) 29% •Growingtheexistingbusinesswithacurrentclient 21% •Capitalaccounts 20% •Training/developmentofstaff 19% •Cross-sellingotherservicesintoyourclientbase 14% •Businesstransferredtootherownersormanagers 13% •Profitabilityofdepartment 11% •Leverageofworkbeingdone(ratioofpartnertostaffwork) 10% •Clientsatisfactiongoals 9% •Other,specifiedbytherespondents 9%

Another question, and the answers obtained from the Succession Survey was the following:

Whichofthefollowingdescribes(selectallthatapply)yourcurrentcompensationplanforretiredowners.Ourfirm’scompensationplan: •Doesnotaddresstheseissues. 41% •Willpayretiredownersasalarytocontinueworkingforthefirm. 24% •Willpayretiredownersapercentageoftheirbillingsorcollectionsfor

clientwork. 23% •Willpayretiredownersforthebookofclientstheystillmanage. 4% •Havebeenmadeavailabletoeveryretiredpartner. 21% •Willpayretiredownerstobringinnewbusiness. 14% •Willpayretiredownerstoremainactiveinthecommunity;serveon

boardsofdirectors;beinvolvedincharityevents. 5%



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The SolutionEverytimeyouchangeyourfirm’sstrategy,youshouldimmediatelyrealignthecompensationsys-tem to support it.Compensation systems shouldbebuilt to reward thebehaviorsyouwantcon-tinued,effect thechanges thatyouwant started,

andpenalizetheactionsthatyouwanttoprevent.Ifyoulookatthisfroma30,000-footlevel,youwantyoursystemtomotivateownerstodoowner-levelwork;managerstodomanager-levelwork,andstafftodostaff-levelwork.Youalsowanttohighlycompensateyourexceptionalemployees,rewardyourgoodworkers,anddriveoffthemarginalones.

Most compensation systems reflect a philosophy of “to-the-victor-goes-the-spoils.”Therefore,althoughthesystemcanbetweakedannually,itrarelychangesverymuch.Asyouknowfromthesurveyresultscoveredabove,thesesystemsmightnotbemodifiedfor10yearsormore.Someofthismightstemfromthereflexesthatsupporteitherthesuperstaroroperatormodel.Peopleoperatingunderthesuperstarmodeltendtofeedthesuperstarsandstarveeveryoneelse.Thisisgreatifyouareoneofthe“chosen,”butnotsogreatifyouarepartoftheherd.Ontheotherhand,operatorstendtotryandfeedeveryone,andbecauseofthat,theycanstiflethesuperstars.Ifanorganizationhasbeenrunbyoperatorsfortoolong,thesefirmsoftenfindthemselvesgraduallylosingtheirentrepreneurialspirit.Asstatedearlier,eithersystemwillwork.Thesuperstarmodelisgreataslongasthesu-perstarsareactiveanddriven,butitisadifficultmodeltotransition,especiallywithanyconsistency,tonewleadership.Theoperatormodel,whilefarbettersuitedforsuccessioninmyview,requiresimplementationbyvisionarysuperstarswhohavetovoluntarilygiveupthepowerandauthoritytheyhaveearnedinordertosetupasystemforthebenefitofthosethatfollow.

Theproblem is… there is anaturallyoccurringconflictbetween the superstar andoperatormodelsanditgoeslikethis:

Mostbusinessesarefoundedandbecomesuccessfulbuiltonthesuperstarmodel.How-

ever, for themtoprofitablythriveeitherpastacertaingrowththresholdor through

generations,theyusuallyhavetoshifttoanoperatormodel.So,withoutthesuperstar,

thebusinessprobablywouldhavenevermadeitofftheground…butwithoutanop-

eratortakingover,thelimitsoftheorganizationaretieddirectlytothepersonallimita-

tionsofthefoundingsuperstar.

WeseethisallthetimeincorporateAmerica.Whenastart-upcompanydoeswell,once thebusinessgrows to thepoint thatdemand forproducts/services is recurringandpredictable,itdoesn’ttakelongforthatorganizationtomovetheirfoundingsuperstartoaboard-levelpositionsothecompanycanputtalentedoperatorsinplacetomethodicallygrowandmanagetheorganizationprofitably.

So,ifyouareasuperstarfirm(whichmostCPAfirmsaremodeledafter),someoftheconceptsintroducedinthefollowingsectionswillcontradicthowyoursystemhasworked.Moreover,implementingthesechangesisapttobeuncomfortableforthefirm’ssuperstars,whowillbeaskedtogiveupmorethantheymightwant.

Compensation should be based on firm strategy.

Key Point


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Build A Pay-for-Performance SystemTherearefourbasicstepsinbuildinganeffectivepay-for-performancesystem.Theyare:

Step 1. Identifypersonalbillableproductionforeachstaffmember.Step 2. Adjustpersonalbillableproductiontomatchexpectedrevenuetarget.Step 3. Establishperformancetargetsfor(a)staff,(b)managers,and(c)owners.Step 4. Conductperformanceevaluations.

Guidanceoneachstepisgivenbelow.

Step 1. Identify personal billing production.Yourfirststepistocreateaspreadsheetlistingeverybillingemployee,andhisorherbud-getedchargehours,billingrate,personalexpectedrealization(notagenericrealization),andsalary.Itisimportanttolookattheperformancehistoryofyouremployeesasyoupopulatethisspreadsheetratherthanrecordyourexpectationsbecausethepurposeistoidentifyac-tualanomalies.Icreatedthebillingworksheetbelow(table3-1)touseasanexampleasweworkthroughthesteps.

Table 3-1: Billing Rate Analysis

Billing Rate Analysis

Accountants Budgeted Charge Hours Billing Rate Salary Suggested

Multiplier

Avg Paid CEO/MP 975 225 270,000 0.85

Avg High Paid Partner 1,000 210 240,000 1.25

Avg Low Paid Partner 1,300 185 150,000 1.65

Avg High Paid Manager 1,300 150 82,000 2.25

Avg Low Paid Manager 1,500 120 60,000 2.50

Avg High Paid Staff 1,500 105 52,000 2.75

Avg Low Paid Staff 1,700 90 40,000 3.00

Thisdataprovidedinthechartabovegivesinsightintotheestablishmentofbillingratesthatarecommensuratewithsalaries,realization,andutilization.

Then,youneedtopluginamultiplierthatyouthinkisfair;butdon’tworrytoomuchaboutaccuracyatfirst.Youwillbemakingmultiplepassesatthis,sojuststartwithsome-thing.HereisageneralsetofguidelinesthatIoftenuseinmyfirstroundofanalysis: CEO/MP .85 Seniorowners 1.25 Juniorowners 1.65 Supervisingmanagers 2.25 Technicalmanagers 2.75 Seniorstaff 2.75 Staff 3.0 Bookkeepers 3.5



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Notice the differences between the multipliers of the supervisory manager and thetechnicalmanagerandtheseniorstaff.Thesupervisorymanager’spersonalproductionob-jectivesarelower,reflectingthatheorsheisrequiredtoschedulework,developstaff,andbeaccountableforthegroup’sproduction.Theassumptionbeingmadeonbehalfofthetechnicalmanagerandstaffsenioristhatthesepositionsdonotmanagemuchandaremorefocusedonpersonalproduction.Themorejobsrequirepeopletospendtimeproducingthroughothers, themore personal production requirementsmust be lightened to allowthesestaffenoughtimetomanagetheirdirectreports.

Also,justsoyouknow,theCEO/MPisassumedtospendagreatdealoftimemanag-ingthefirm.IftheCEO/MPcarriesoutadministrativedutiessimilartothoseoftheotherseniorowners,themultipliershouldprobablybecloserto1.25.If,however,theCEO/MPspendsmostofhisorhertimemanagingthefirm(whichiscertainlyappropriateassoonasthefirmachievesrevenuesofabout$3millionandhigher),thenthemultipliershouldstartdeclining.Onceafirmgetstoabout$6millioninsize,theCEO/MPshouldnotbespend-ingmorethan250to400hoursofchargeabletimeworkingwithclients;iftheyare,theyareneglectingthefirm.

Create an internal billing rate or multiplier.RatherthanusetheformulaadoptedbymanyCPAfirms(whichisbasedonanexternalrate[i.e.,4x(salary/2,080hours]),Ihavedevelopedonearoundaninternalrate.Therea-sonissimple.WiththeexpansionofservicesCPAfirmsoffer,expectedutilizationcanvarydramatically.Considertheseexamples: •Abudgetforataxpersonmightbe85-percentutilizationwitha90-percentrealiza-

tion(1768hourschargeableat90percentoffees). •Abudgetforsomeonepredominatelyperformingadvisoryworkcouldbe60-per-

centutilizationat98-percentrealization. •Abudgetforsomeoneperformingbusinessvaluationsmaybeplannedfor70-per-

centutilizationat95percentoffeesSo,whenyoucalculatebillingrates,inordertogiveeachemployeeachancetobeof

valuetothefirm,theirrateshavetobebalancedwithutilizationexpected,giventhetypeofserviceperformed.Veryfewnontraditionalservicescancomeclosetothefullutilizationpercentageswehavebecomeaccustomedto fromour traditional services.So,under thetraditionalformula,peoplewiththesamesalaryareassignedapproximatelythesamebillingrate.Butunfortunately,thisapproach,appliedtostaffsupportingnontraditionalornicheservices,likelysetsthemupforfailure.Thismeansthatbillingrateshavetobedisengagedfromstatusinordertogivethesemoreuniqueservicesachancetocontributevaluetothefirm.Forexample,itisreasonableforamanagerperformingnichespecialtyworktohaveamuchhigherbillingratethananownercarryingouttraditionalworkduetothedifferencesinexpectedutilization.

Tocomputewhat I call themultiplier, the internal rate is simple.Foreachposition,givenits levelandexpectations,andthepayrolldollars investedin it, there isarequiredreturn.Thismultipliersetsagenericrevenueexpectationorgrossmarginforvariousposi-tionsinthefirm.So,lookingatthechartabove,ifafirmpaysamanager$82,000andthat


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thepositionhasa2.25multiplier,itmeansthatthismanagershouldgenerate,onhisorherownpersonalproduction,acollectible$184,500dollars(agrossmarginofover$100,000assuming100-percentrealization).Herearesomethoughtstoconsideraboutmultipliers: •Dependingonthepositionyouhold,themultiplierchanges.Forexample,themul-

tiplierfortheCEO/MPisthelowest,whilethemultiplierforstaffisthehighest. •Forthemostpart,owners,basedonthissurvey,especiallyseniorowners,basically

payforthemselvesandearnjustalittleextrathatdropsbackintothefirmkitty.Youngerownersandeveryoneelseinthefirmareexpectedtomakeahighercon-tributiontooverheadasapercentageofwhattheyarepaid.

•Themultiplierscalculatedabovewerebasedonthesurveyresults.Themultipli-ersrangedfrom.85fortheCEO/MPto2.75forhighlypaidstaff.Notethatthesenumbershavenotbeenadjustedtorepresentbestpractices,butareaveragesforthefirmsinthesurvey.Therefore,itissolelyuptoyoutochoosewhatlevelofreturnyouthinkisfairforyourpeople.

•Recentfindings,basedondatanotcollectedintheoriginalsurvey,arethatgeneralaccountingstaffmightaverageabouta3.0returnwithparaprofessionals(likebook-keepers)averagingaround3.5.

Alloftheseresultsandthespreadsheetareforinformationonlyandmeanttobeastart-ingplacetobeginyouranalysis.Thisinformationshouldnotbeutilizedasanauthoritativeguideandanychangesyoumaketoyourcompensationsystemshouldbepurelybasedonyourjudgmentofwhatisappropriateforyourfirm,notthecalculationsthatresultfromus-ingtheseformulas.Nevertheless,thistoolshouldhelpyoudevelopsomebasiccomparisonsbetweenyourpeople,intermsofhowtheyperform,againsttheinvestmentyoumakeinthem.

Identify disconnects. Icreatedthespreadsheetbelowtofirsthelpfirmsunderstandthedisconnectsbetweentheirbillingrates,budgetedhours,andthereturnoninvestmentmatchedagainstthesalariestheywerepaying.So,let’swalkthroughtheexamplesandseehowtheseaveragesprovideuswithsomeinterestinginsight(seetable3-2).



Accountants Realizations Budgeted Revenues

Suggested Revenues

Billing Shortage (Overage)

Avg Paid CEO/MP 90.00% 197,438 229,500 32,063)

Avg High Paid Partner 90.00% 189,000 300,000 111,000)

Avg Low Paid Partner 90.00% 216,450 247,500 31,050)

Avg High Paid Manager 90.00% 175,500 184,500 9,000)

Avg Low Paid Manager 90.00% 162,000 150,000 (12,000)

Avg High Paid Staff 90.00% 141,750 143,000 1,250)

Avg Low Paid Staff 90.00% 137,700 120,000 (17,700)



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Assumingageneric90-percentrealizationforeachoftheprecedingpositions,herearetwoexamplesofhowthesenumbersworkout.

Highly Paid Owner Example: Let’stakethehighlypaidowner.Ifheorshebillsathousandhoursatarateof$210witha90-percentrealizationonthattime,budgetedrevenuestotal$189,000.Now,comparethatamounttohisorherexpectedreturnonsalarybasedonthemultiplier.Inthisexample,youwouldmultiply1.25timessalarytoarriveatatotalof$300,000.Thevariancecreatedis$111,000.Althoughthisspreadsheetisonlyintendedtohelpyouthinkthroughtheconnectionofthesevariables,suchanextremevariancepointsoutaconflict.Inthiscase,theownerinquestionisunderperformingintermsofpersonalproduction,tothetuneof$111,000.However,therecouldbemanyvalidexplanations.Forinstance,thisownermayhavespentagreatdealoftimeduringthisperiodmarketingandbringinginnewbusinessorimplementingahugeadministrativeproject.So,ifthiswerethecase,themultiplierpertainingtopersonalproductioncouldbetoohigh.Alternatively,somethingmorebasic,suchasthebillingrate,expectedchargehours,realization,orutilizationareinconflictwitheachother.Ifyouas-sume,forthesakeofdiscussion,thatthemultiplierandsalaryareacceptable,thenmaybeasolutionwouldbeacombinationofnewexpectations.Byuppingthebudgetedchargehoursto1,150,thebillingrateto$270,withearningsatanaver-agerealizationof96percent,theshortfallisonly$1,920.

Low Paid Manager Example: Considerthelowpaidmanager.Witha$60,000salary,expectedchargehoursof1,500,abillingrateof$120,amultiplierof2.5,andarealizationrateof90percent,thispersonis$12,000moreprofitablethantheexpectedreturndemands.Inmyopinion,thispersonshouldbeearningincentivepaybecauseofthisoverperformance.

Asyoucansee, thisworksheet ismeant tohelpyou identifyanomalies inyourpaysystem.Themultipliersthatyoudecideareappropriateforyouremployeesaretotallyuptoyou.Nevertheless,ifyouconsidersimilarmultipliersforsimilarpositions,andthencomparetheresultsagainstexpectationsandwages,youwillbesurprisedbywhoturnsouttobeoutofsync.Youcanfixthevariancebychanginganyoneoranymultipleofthevariables,andbyadjustinganyorallofthefollowing: •Themultiplier,inthelightthatsomeonehasspecificoruniquedutiesdifferentfrom

thoseofothersinthesamejobcategory •Thebillingrate,whichisusuallywayoffforsomepeople •Theexpectedchargehours •Thesalary •Therealizationrate


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Interestingly enough, theworst violations of this formula usually concernpart-timeemployees.Firmsoftenuncoversignificantimbalancesbetweenwhattheypaytheirtalentedexperiencedpart-timestaffandthereturninrevenuesproducedbythoseemployees.Mostofthetime,thebillingratesforthesepeoplearewaytoolow.Sometimes,itisbecausetheirrealizationhasfallentoaridiculouslevel.Regardless,anyvarianceofmorethanacouplethousanddollarsshouldbereconciled;asolutionshouldbeidentifiedandimplemented.

Finally,someofthesuggestionsthatthespreadprovidesforeachpositionaboveareoutlinedintable3-3.



AccountantsCalculated Targeted Hours*

Current Expected Multiplier†

Automated Suggested

Billing Rates‡

Rate Variance Current to

Suggested§

Avg Paid CEO/MP 1,133 0.73 262 37)

Avg High Paid Partner 1,587 0.79 333 123)

Avg Low Paid Partner 1,486 1.44 212 27)

Avg High Paid Manager 1,367 2.14 158 8)

Avg Low Paid Manager 1,389 2.70 111 (9)

Avg High Paid Staff 1,513 2.73 106 1)

Avg Low Paid Staff 1,481 3.44 78 (12)

* Calculated Targeted Hours is the number of hours that would meet the suggested multiplier without changing rates or hours.

† Current Expected Multiplier is the multiplier that is currently calculated considering current hours, billing rate, and realization.

‡ Automated Suggested Billing Rates is the billing rate that would allow the current hours and realiza-tion to achieve the suggested multiplier.

§ Rate Variance is the increase (decrease) between the Suggested Billing Rate and the Current Billing Rate.

Torepeatmyself,thepositionsinthisexamplearegeneric;youwillwanttobuildyourspreadsheettoincludeeachbillingemployeeandtheirhistoricalperformancedata,andstartworkingthroughthisprocess.

Step 2. Adjust to reflect the reality of the firm.Oncethespreadsheethasbeenfilledoutwithactualdataandtheconflictsidentified,yournextpassistoaddacolumnshowingadjustedrevenuetargets,andpluginsuggestedrev-enuesperperson.Inthefirstround,youdefaultedtothecalculationofthemultipliertimessalarytogiveyouarevenuetarget(toidentifytheanomalies).Now,itistimetoconsiderwhatthispersondoesandmakeadjustmentsto(1)revenuetargetsand(2)chargehours,realization,andbillingrates.

Adjust revenue targets.Somestandardadjustmentsmightinclude: •Lowertherevenuetargetforanindividualbecauseheorsheworksonalotof

marginallyprofitablejobs,inwhichcase,hisorherlowerrevenuesarenotthefault



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oftheemployee,butattributabletothenatureoftheworksold.Atthesametime,thisworksheetwouldquicklypointoutthatchangesinpricingneedtooccurattheownerlevel.Still,inthenearterm,theemployeeshouldnotbepenalizedbecauseaclassofworkiscontinuallybeingsoldatadiscount.

•Raisetherevenuetargetbecausethetechnicalmanagerworksonthemostlucra-tiveprojects,whicharenormallywrittenup,inordertoeffectanadjustmenttotherevenuetarget.

•Lowertherevenuetargetbecauseanindividualprovidesasignificantamountoffirmsupport,whicheatsawayathisorherchargeableutilization.

•Altersomeone’sjobdescriptionandduties.Forexample,youmightdecidetoreclassifyasupervisorymanagertothepositionoftechnicalmanager,whichwouldrequireanupwardadjustmenttoexpectedrevenues.

Duringthispass,youwillbeconvertingthisspreadsheetfromatheoreticalanalysistoonebasedon your situation, your employees, and your expectations.Thenewcolumn(“AdjustedRevenueTargets”) should approximate thefirm’s total revenuebudget. If itdoesnot,anditoftenwillnot,itistimetoreflectonthedifferencebetweenrealityandperception.Formanyfirms,whenthechargehoursarepluggedinwithexpectedrealizationrates,thecalculatedrevenuetotaledbythisexerciseissignificantlyhigherthanthecurrentbudget.This result is attributable to thefirms’historical focuson the inputs (likehourscharged)insteadofoutputs(likerevenuebilledandcollected).Thereasonisthat,althoughemployeesrecordtheirchargehours,allofthesehoursarerarelybilled.Finally,asurprisingphenomenonisthatmanyfirmsfailtofacethattheirrealizationissignificantlylowerthanassumed.Recently,goingthroughthisexercisewithafirmofabout$3millioninrevenues,itbecameclearthatabout$400,000inprofitwasdroppingoffthetablebecauseofpoorlysoldjobs.Theanalysisofthisexercisefurtherrevealedthatthebiggestobstacletogreaterprofitabilitywasnot inpushingtheemployees todobetterwork,butrathertostoptheownersfromgivingitaway.

Adjust charge hours, realization, and billing rate.Onceperceived fair revenue targetshavebeenestablished foreach individual,youwanttoadjust thechargehours, therealization,orthebillingratesothat their total iscloselymatchedtotheexpectedrevenuetarget.Rememberthatthisisnotatheoreticalexercise.Ifyoucannotincreasethechargehours,ortherealization,orthebillingrateofagivenin-dividual,maybetheanalysisistellingyouthatyouareoverpayingthatindividual.Grantingthatchargehoursisoftenthehardestnumbertochange,realizationratescandefinitelybeimprovedwithalittlefocus.Asforbillingrates,thisnumberisfareasiertochangethanmostpeoplethink.Basedonmyexperience,thisnumberistheonethatisfarthestoffthemarkinmostCPAfirms.Overandover,Ihaveconvincedfirmstoraisetheratesofsomeoftheirpeople(especiallytheowners),notby$5or$10anhour,butby25to35percent.Thefearisalwaysthatalltheclientswillleave.Therealityexperiencedisthatofthefewclientsthatleave,thevastmajorityarethosethatthefirmwaslosingmoneyservinginthefirstplace.Alwayskeepinmindthateachtimeyouletanothermarginalclientgo,youhavefreeduptimeforbetterservingyourbestclients(andusuallyatfarbetterrates).


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Step 3(a). Establish performance targets for staff.Mostfirmshaveaprettyshortlistofprioritiesforacompensationsystemthatwillmotivatestaff.Acommonshortlistwouldprobablyincludemotivatingstaffto: •Producegoodqualitybillableandcollectabletime •Developtechnicallytobeabletohandlemorecomplexwork. •Lookforadditionalopportunitiestoservetheclientstheyareworkingwith. •Developinterpersonallytomanageclientrelationships. •Referfriendsandfamilytothefirm. •Desiretobecomeleaderswithinthefirm.

Thefirstbulletonthislistisusuallythehighestpriorityforfirms.So,ifyouhavees-tablished your targeted revenues for each individual, setting staff compensation is prettystraightforwardfromhere.Ifanystaffmemberoverperformstheirpersonalproductiontar-gets,thenheorsheshouldmakemoremoney.Ihaveseenfirmspayanywherefrom10to40percentoftheexcessrevenuesinperformancebonusesforthisonecriterion.Butanypercentagewillworkdependingonthefirm’sgoalsaslongastheincentiveissignificantenoughforsomeonetowanttomakeanextraefforttoearnit.Forexample,ifyouhavea$40,000peryearemployeeandhisorherannualincentivetoprovideaHerculeaneffortis$500,thenyouhavemadeitclearthatoperatingin“average”modeisthebeststrategybecausetherewardisnotworththenecessaryeffort.However,ifthateffortcanfairlyeasilyconverttobetween$3,000and$6,000,youhavepaintedadifferentpicture.

Forlargerfirms,thedifficultyofthisfirststepisthehoursofanalysisthatisrequiredtotrytofigureoutwhycertainpeopleunder-oroverperform.Isittheresultofthetypeofservicesbeingprovided,workthatisbeingeitherdiscountedorwrittenup,ortheorgani-zationalabilityandskilllevelofthestaff?Compensationsystemsareriddledwithexceptionsbecause somanyvariables influenceperformance.Many times,underperformance resultsfromacombinationoftheseissues.Obviously,youshouldnotpunishyouremployeesforunderperformanceforwhichtheyarenotresponsible.Forinstance,considerthefollowing:

Sally makes $75,000 and is a technical manager. For this example, assume that the firm sets her multiplier at 2.75. Therefore, her personal billings for next year are expected to be $206,250. However, Sally is the technical guru for the nonprofit niche. But much of the nonprofit work has been discounted by 15 percent or more below the standard rates. This occurs because the owner in charge of this niche (Ann) has worked with many of these clients for 25 years and does not want to upset them by dramatically raising their rates to what they should be. Ann fights to keep the rates down with the justification that much of the work is done during their low season, so it is good work because the firm is keeping their people busy.

Sample Scenario

Well,youhavealreadyheardmyrantabouttakingonworktokeeppeoplebusyandthatthispracticeoftentrapsfirmsintoworkingharderforless.Iwouldrecommendmultiplefixes.First,weneedtorunoffsomeofthenonprofitworkbyraisingratestowhatthey



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shouldbe.Second,wecannotholdSally,atleastthisyear,toher2.75multiplebecausetheworkshedoesiswrittendownbeforesheevenstarts.Managementhastoexercisejudgmentabouthowtoproceedanddecidewhatexceptionsshouldbemade.

Iwouldsuggest,basedontheinformationwehave,reducingSally’sperformancetargetby15percent(becauseofthediscountedwork)to$175,000forthecomingyear.Then,IwouldrecommendconfrontingAnnaboutthefactthatherpricingpracticeshavebasi-callycost thefirmover$30,000intermsof justoneemployee:AdjustingSally’snormalgoal of $206,250 downward to $175,000 in order to accommodate the in-house workgeneratedlostprofitsof$31,250.Inaddition,partofAnn’scompensationshouldbetiedtoherprogressinclosingthegapenoughtorestorestandardpricingforthisservicearea.Bynextyear,forexample,therewillbeanagreed-tostandardforAnn’snonprofitwork,possiblyachievedbyraisingtheaveragediscountby7percenteachyear.Moreover,Ann’scompensationwillbereducedby50centsonthedollarforeverydollardiscountedbelowthatagreed-tostandard,i.e.,anyworkthroughouttheyearthatwasnotpricedatthenewminimumstandards.ThepointisthatthefirmismakingitclearthattheotherownersarenotwillingtoassumetheburdenofpayingforAnn’spricingpractices.Inaddition,althoughthefirmismakinganexceptionforSallythisyear,theymusttellherthatthepricegapontheworksheisdoingmustbereducedoverthenextcoupleofyearsandthatherexpectedtargetrevenueswillbeadjustedaccordingly.

Themoreemployeesinafirm,themoreexceptionstothecompensationsystemwillbenecessaryinthefirstfewyears.ThatisOKaslongasthereareplanstoprogressivelyresolveorremovethoseexceptions.Typically,theanalysisthatpavesthewayfortheimplementa-tionofacompensationplanfocusesattentiononclientpracticesasmuchasonemployeeperformance.Anomaliesinclientpracticesshouldbeaddressedbyadjustingtheemployees’performanceexpectationstoensurefairness,andbythenmakingthenecessarycorrectionswithinthefirm.

Forthesmallerfirms,thegoodnewsisthatthesesystemsareprettyeasytodevisebe-causetheycanbetailoredtooneortwoindividuals.

Assume a sole proprietor with no employees who took home $150,000 last year. This year, an assistant was hired. Obviously, the owner is concerned that his or her income will be reduced by the amount being paid to the assistant. A possible simple performance plan is for the owner to take home the same amount as last year, and then share 10 percent of the extra profits with the assistant. If the assumption being made here is that the owner would not have been able to overproduce last year’s success without the additional help, then the objective is to motivate the assistant to help free up the owner’s time (making it possible to provide more client services), rather than to isolate and delegate specific activities.

Sample Scenario

Intheend,regardlessofthesizeofthefirm,thefirststepinanycompensationsystemistodeterminetheperformancethatisanticipatedforthesalarybeingpaid.Intheexampleofthesoleproprietorabove,theexpectationwasincreasedfirmbillings.


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Thefollowingdiscussionswillcovertimingofrewards,communicatingtheprogram,timingofincentives,creatingpolicies,andcreatinginnovativeincentives.

Timing of RewardsInordertosetupyourcompensationsystemsothatyourtopperformersarebeingpaidincentivesbythebeginningofthefourthquarter,youmuststartpayingrewardsbeforetheexpectedbudgetedamountsareactuallyachieved.Inotherwords,ifastaffmember’san-nualrevenuegoalis$115,000;youmightwanttostartpayingincentivepayaround93to95percentofthatnumber.Thinkofitasgreasingawheel.Asindividualsapproachtheirannualnumbers(whichshouldbebasedonaverageexpectations,notpersonalcapabilities),theystartearningincentives,whichmotivatesthemevenmoretomakeachargeinthefinalweeksormonthoftheyear.Considerthefollowing.

The firm has an owner (Sheryl), a manager (Lee), and a CPA staff member (Lila). Sheryl wants Lee to meet a personal performance goal of $100,000 in billings over her salary. Lee is paid $75,000 a year. So, staying with the idea that the incentive plan should start pay-ing for performance below the annual target, Sheryl sets the base incentive bar for Lee at $165,000. However, because Lee can easily hoard work and Lila would then sit idle, Sheryl’s plan also requires that Lila must meet a minimum billing number (say, $108,000, since her annual budget is $115,000) if Lee is to qualify to be paid under this compensation system.

Sample Scenario

Inshort,Leemustbemotivatedtoproduce,LeemustbemotivatedtomanageLila’swork,andLilamustbemotivatedtobill.Therefore,onepossibilityistopayLila10per-centofthecollectiblepersonalbillingsover$108,000uptoherannualbudgetof$115,000.Then, that incentive can be accelerated to 20 percent for the collectible billings above$115,000.Lee’scompensationmightworkthesameway,exceptLilahastomeethermini-mumbarof$108,000forLeetoqualifyforherplan.Additionally,Leewillbepaid5percentofeverythingLilabillsabove$108,000.So,ataminimum,foreverydollarovertheannualbudgetedbillingamountsforheremployees,Sherylwillgettotakehomeanextra75centsonthedollarbecauseofexcessperformance.

Now,Iamnotsuggestingthatthisscenarioissuitedtoallsituations—whatmotivatespeoplewillvaryfromfirmtofirm.Thekeyistodeviseasystemthatistiedtoobjectivecri-teria.Forexample,onefirmIworkwithsetsannualrevenuetargetsforthefirm.Ifthetar-getsaremet,everyoneinthefirmandtheirfamiliesgoesonvacationtogetherforaweektosomeexoticlocation.Nevertheless,thissystem,whichworksfantasticallyforafirmwith15

employees,willnotworkforalotoffirmsbecauseitcanalsoallowsometeammemberstohideandgetafreerideonthebacksoftheworkerswhileenjoyingthesamereward.Peerpressurehelps,butifmanagementisnotwillingtosupportthatpeerpressure by getting rid of slackers, a system likethiswillfailquickly.

The key is to put together a system that fits the personalities of your employees and hence is meaningful to them.

Key Point



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Communicating the ProgramInmyexperience,discussingthecompensationsystemwiththestaffhelpsthemgraspthattheirtotalcollectiblebillingsareamajordeterminingfactorinhowmuchtheycanmake.Givingthemsomeinputintotheirbillingrateandwrite-upsorwrite-downsbecomesanimportantpartof theprocess. I interviewedafirmrecently thatallowsemployees to settheirownsalaries.Notwithstandingthecontrolmechanismsthatarealsoinplace,thephi-losophyis,“Whatyouaskforinsalarysetsyourhurdlesandtargets,andaslongasyoucanmeetthosetargets,morepowertoyou.”Manytimes,staffdiscussionsabouttheconnectionbetweenpersonalearningsandbillingscreatesanewperspective.Ifemployeeswantmoremoney,theyrealizethattheyhavetocomeupwithawaytoincreasetheiroverallbillings(andtheyunderstandthathoursworkedisnottheironlylever).Italsoneedstobeclearthatamajorcriterionforsuccesscontinuestobeclientretentionandloyalty,whichmeansthatbillingfeesthatareunacceptabletoclientscanbackfire.Oncethestaffunderstandsthatmultiplemetricshavetobebalanced,theyareempoweredtolookattheirvaluedifferently.But,onceyouempowerthem,donotbesurprisediftheystartchallengingthestatusquo.Thismightcomeintheformofpressureontheownerstostopassigningdiscountedworktodo,raisebillingrates, stopwritingoff timestaffbelieveswasgoodwork,orgivestaffinput regarding their clientbilling.Manyownerswill instantly react,believing that staffdemandsof thiskindviolatetheowners’authority,butonreflection, it shouldoccurtoownersthatthestaffisonlyaskingforbettermanagementofthefirmanditsprofitability.Thatisnotsobad.

Ontheotherhand,somestaffwantmoremoney,eventhoughtheyarealreadyover-paid,(i.e.,all theirvariablesarealreadymaxedout).Inthesesituations,therealvalueofthecompensationsystemis tomakeclear to theowners that theyare treating theotheremployeesunfairlybycontinuingtoprovidetheoverpaidstaffwithraises.Itisavictoryforanycompensationsystemifitsimplementationconvincesownerstoholdfirmaboutpeoplewhoarenotgeneratingafairreturnorpullingtheirweight.

Timing of IncentivesIncentivespaidhavebeendiscussedonlyasifearnedannually,which,inmyview,isthereality.However,firmsdonothave towaituntil theendof theyear topay incentives.Manyfirmswilladvanceperformancepayquarterlyorsemiannually.Thiscanbebestac-complishedthroughpersonalbudgetsthattakeintoaccounttheseasonalityofindividuals’work.Forexample,ifhalfofanindividual’stotalbillabletimeaccruesduringthetaxseason,hisorherperformancetargetsshouldbeinalignment.Otherwise,youwillenduppayingsomebonusesafterpeakseasononlytofindtheemployeefallingshortofhisorherannualtargetsbyyear-end.Thisputsyouintheawkwardpositionofhavingpaidincentiveswhennonewasactuallyearned—andyoucanbetthiswillneverbereconciled.

Creating PoliciesConsiderthefollowingtwopoliciesregardingpayforperformance: 1. Compensationsystemscanbechangedatanytime.Theyarenotannualcontracts.

Theycanbealteredwithoutadvancenotice.Allcompensationearnedunderaprevi-ousplanwillbehonored,andasofthedateofthenewplan,allcompensationwillbepaidinaccordancewithit.


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2. Payforperformanceisbasedonachievingannualtargets.Anypersonwhoisnotanemployeebytheendofthepay-for-performancetermisnoteligibletobepaidincentivepay.

Thesetwopoliciesarecriticalbecauseyouneedtheabilitytochangethecompensa-tionsystemwheneverrequiredtomotivateordemotivatecertainbehaviors.Returningtoanearlierscenario,assumethatSally’sannualtargetwasreducedbecauseofthediscountednonprofitworkshewasassigned,butmidwaythroughtheyear,alargeverylucrativenon-profitjobwassold,andSallyisthelead.Youwouldwanttobeabletoadjusthertargettoreflectthechangedenvironment.Or,conversely,ifsomeoneistakingadvantageofthecompensationsysteminanegativewaythatwasnotanticipated,youneedtherighttobeabletoplugtheholeimmediately.Asfortheannualrequirementtoearnincentives,somefirms,asapolicy,donotpayanyincentivesformidyeardeparturesbecausetheirsystemsarebasedonthepremisethattheemployeesharesinanyexcessreturnoninvestmentforhisorherposition.Midyeardeparturesmeanthattherewillnotbeanyexcessreturntoshare,givenrehiringcostsandtheproductivitylossesincurreduntilthereplacementstaffgetsuptospeed.Otherfirmsmightcreateamoreflexiblepolicybyonlypayingincentivesforper-formancethatexceedstheannualtargets,nottheperiod-to-datetargets.Firmsthatdecidetopayformidyeardeparturesbasedonperiod-to-dateperformanceneedtounderstandthatanirregularworkloadflowmightgenerateadditionalpayrollcoststhatcouldonlybeearnedresultingfromtimingratherthanbecauseofprofitgainsthatwillbeenjoyed.

Creating Innovative IncentivesBesidespersonalproduction,arethereotherincentivestopaystaff?Yes.Referringbacktotheprecedinglist,itiseasytopaystafffornewclientsorthegrowthinbusinessfromexist-ingclients.Anexamplewouldbeafamilymemberorfriendwhobecomesaclientofthefirm.Thesenewclients,generatedfromlong-timepersonalrelationships,areabouttheonlynewbusinessyoushouldexpectfromstaff.Thelargestbusinessdevelopmentareathatstaffcaninfluence,whichtheyshouldbecompensatedfordoing,isidentifyingadditionalworkwiththeclientstheycurrentlyserve.Thisisthegrowthgoldminethatfewfirmstapwiththeiryoungeremployees.Acommoninducementis topay10percentofthefirstyear’sbillingsfortheadditionalproject.Somefirmspaythisfortwoyears.Personally,Iwouldrecommendpaymentonlyduringthefirstyearbecausepaymentovermultipleyearsmeanscommittingfuturedollars.Suchcommitmentsareentitlementsthatimmediatelyreducethesizeofyourfuturecompensationpoolandlimityourflexibilityindevisingthefollowingyear’sprogram.Thefinal,mostcommon,approachistotiefinancialrewardstosubjectiverequirementssuchashowthedirectsupervisorbelievestheindividualisdevelopingtech-nicallyorinaleadershipcapacity.ButasIhavesaidsomanytimes,whendecidingwhatemphasistoplaceonincentives,firstconsiderthefirm’sstrategy,thenidentifythebehaviorsyouwanttorewardorpenalize,thenputtogetherwhateversystemmakessenseforyou,youremployees,andyourfirmforthecomingsixmonthstoayear.



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Step 3(b). Establish performance targets for managers.Inmyview,thecompensationoftechnicalmanagersshouldbeevaluatedjustasitisdoneforstaff.They,too,mustmostlybeenticedtoproduce.Justlikestaff,technicalmanagersshouldbe rewarded for identifyingadditionalopportunities for servicingexistingclients.Incentivesshouldalsoencouragethemtobringinnewbusiness,althoughthelikelihoodofthisoccurringisminimal.However,workingexistingclientrelationshipsisacompletelydifferentstorybecausetechnicalmanagershaveplentyofopportunitiestoidentifyadditionalservices to offer.

ThescenariowithSheryl,Lee,andLilaaboveshouldgiveyougoodinsightintomyapproachtosupervisorymanagers.Supervisorymanagers,inmyopinion,needtobemoti-vatedtoproducethroughothers.Unlikethetechnicalmanager,whowillbepredominatelyrewarded forhisorherownproduction (billings,business growth, clientmanagement),supervisorymanagersshouldberewardedfortheaccomplishmentsoftheirstaff.Thiswillmotivatethesupervisorymanagerstospendtimemakingtheirpeoplemoreproductivebydeveloping,mentoring,andcoachingthem.Ifyousetupasystemthatallowsasupervisorymanagertomakemoneythroughhisorherownpersonaleffortsratherthanthroughthepeoplemanaged,donotbesurprisediftheyignoretheirstaffandcrankouttheworkthem-selves.Myadviceistopaysupervisorymanagersfortheirpersonalaccomplishments,butpaythemmoreforthetotalproductionovertargetforallthestafftheymanage.

AnumberoffirmshavecreatedsituationssimilartothatdescribedforLeeabove.Inthesefirms,thesupervisorymanagershadtomeetcertainminimumperformancenumbers.Moreover, staffs, cumulatively, had tomeet certainminimumperformancenumbers fortheirmanagerstobeeligiblefortheincentives.Thetrickistoplaywiththenumbersandalterthevariablestoensurethatthesupervisorisalwaysbetteroffwhenheorshemethisorherminimumperformancerequirementandthestaffexceedtheirs.Youwanttocon-vincethesupervisorymanagersthatthebestwaytooverachieveistoinvestintheirstaff.SinceperformingthroughothersisforeigntomostCPAs,itmaytakeastrongincentive(ordisincentive)toconvincethesemanagerstochangetheirhabits.However,oncetheydo,thepyramidwillreverseveryquickly,andthestaffwilleitherstartdevelopingorbeaskedtoleaveatamuchfasterpace.Obviously,justlikethetechnicalmanagers,supervisorymanagersshouldalsobegivenincentivestomanageclientrelationships, lookforgrowthopportunitiesamongtheirclients,andattractnewclients.

In summary, at the technical manager level, the biggest incentive areas tend to bepersonalproductionandclientmanagement(growth,loyalty,satisfaction).Forsupervisorymanagers,thebiggestincentiveareastendtobestaffproduction,clientmanagement,andpersonalproduction.

Step 3(c). Establish performance targets for owners.Obviously,thisisthemostcomplexpartofthecompensationplan,mostlybecauseitissopolitical.Ownersdonot like tobeaccountable.At theowner level,manyfirmsexpectownerperformance that is similar to thatof technicalmanagers, aspreviouslydescribed.


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However,ownerresponsibilitiesshouldmorecloselyemulatethesupervisorymanager(i.e.,withanemphasisonhowwellworkisdonethroughothersandthedevelopmentofthosebelowyou)withtheaddedcaveatsofafocusonbusinessmanaged,newbusinesssold,andclientstransitioned.

Therolesandresponsibilitiesofownerswithinfirmsareoftenveryvague,whichisasecondhurdle.Theprimaryobstacleinanalyzingownercompensationisbalancingexpecta-tionsbetweenperformancepayandownerbenefits.Withstaff,becauseownerbenefitsarenotapplicable,youcanfocusmostofthesystemonaphilosophyof“Whathaveyoudoneformelately?”Withowners,thequestionis,“Whathaveyoudoneforthefirmsinceyourinductionasanowner?”Thetheoryisthatownersarepartiallybeingpaidforthecumulativebenefitandvalueprovidedtothefirm.Otherwise,theconcernisthatownerswillburnoutearlyundertheheavypressuretoconstantlyperformassuperstars.Thediscussionsthatfol-lowwillcoverbenefitcreep,ownershipandretirement,andownershipandcompensation.

Benefit CreepManyfirms,especiallylargerones,tieownersalariestotheirsharesorunits(ownership).Theproblemwiththisis“benefitcreep.”Hereiswhathappens.Eachownerisallocatedapercentageofthebudgetedprofitsasannualearningsbasedonhisorhershareofownership.Asexcessprofitsabovebudgetarerealized,additionalsharesaregenerated.Thesesharesarethendistributedbacktotheownergroup;somefirmsdothisonaproratabasiswhileoth-ersdistributethemequallyamongallshareholders.Addacoupleofretiringseniorownerstothisscenario,withtheirsharesandclientsbeingallocatedtotheremainingowners,andbenefitcreepisinfullswing.Thefollowingisanexample.

Bill, Sam, and Jerry were all owners, each owning 33.33 percent of the firm. Jerry retired and Gale was brought in as an owner to replace him. Gale was given an ownership interest of 20 percent, with the remainder of Jerry’s shares going to Bill and Sam (giving them both 40 percent each). Later, Howard was added as a 10-percent owner, which reduced Gale’s ownership to 18 percent, while Bill and Sam dropped to 36 percent each. Then, Sam retired, and the shares were distributed by ownership percentage again, with the result that How-ard owned 15.62 percent, Gale 28.13 percent, and Bill 56.25 percent. So, as several owners were added or retired, Bill, who started with 33.33-percent ownership of the firm, ended up with 56.25-percent ownership.

Sample Scenario

Byitself,Billowning56.25percentofthefirmisnotaproblem.Inmyopinion,theproblemisthatallofthishappenedthroughthenaturalevolutionofaflawedshare-redis-tributionSOPfoundation.Moreover,whatifBillhasbeentheweakestlinkinthechainduringthelastsevenoreightyears?WhatifalltheotherownershadtoconstantlycarrymorethantheirshareoftheburdentomakeupforBill?Whatdidhedothatwarrantedsuchapowerfulcontrollingownershippositioninthefirmnow?Whatifownercompensa-tionwasbudgetedprofitsallocatedbasedonshares?AssumethatwhenBilljoinedthefirm,hisallocatedprofitsamountedto$175,000,butnowbecauseofbenefitcreep,itstartsat



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$500,000.Howisthefirmbalancingbenefitcreepwithaccountability,valuetothefirm,andperformanceinthiscase?

Wehavebeentalkingaboutshares,butthesamecreepislikelyoccurringwithbookofbusinessmanaged.Billmighthavemanageda$350,000bookinthebeginning(whichisthesmallestbookofthethreeowners),but,bynow,hemightbemanaginga$1.5millionbook.ThisisfineifBillactuallygeneratedmostofthisbusiness;however,itisanentirelydifferentmatterifthelion’sshareofthisbusinesswastransitionedtohimfromretiringown-ers.Benefitcreepwasdevelopedtoprotectowners,butitisalsoastrategythatcaneasilyundermineafirmovertime.

JustsoyouknowthatIamstillonearth,Icanhearyousay,“ThisisirrelevantbecauseifBillhasn’tbeenperforming,hewouldhavebeenfiredalongtimeago.”Myresponseis…“Veryfewfirmseverfireowners,andwhentheydo,itisapttobetheresultofaviolationofethics,values,oramajorpersonalityconflictratherthanaccountability.”Thereasonissimple.Althougheveryoneknowswhotheweakownersare,theotherownerswillnotturnonthemforfearthatoncetheweakownersareremoved,theymightbenext.Nevertheless,benefitcreepcanbekeptincheckinthosefewfirmsinwhichthereisdecision-makingauthoritythatcanandwill: •Fireoratleastdemoteownersoveraccountability. •Holdbacksomeportionoftheownerallocationandpayitbasedonestablished

andpredominantlyobjectiveperformancecriteria.Note,however,thatthiswillbeineffectiveunlessthefirmholdsbackenoughcompensationtocreateasignificantincentive(orpenalty).

•Reallocatesharesbasedonasignificantlyalteredowner’svaluetothefirm. •Givethemanagementteamtheauthoritytoshiftout-of-balancemanagedbooksof

business.Otherwise,youcaneasilyendupwithownerswhoaresooverpaidthatevendinging

themby20percentwillnotmatter.Or,justasbad,youwindupwithexceptionallylargebooksofbusinessbeingunderservedbythesesameowners,whichputsthoseclientsandthefirm,atriskofsignificantloss.Intheend,terribleasitmaysound,adjustmentsarenecessaryifanowner’svaluetothefirm,includinghisorherabilitytomanagetheclientbook,isfargreaterorlessthanhisorherownershipand/orcompensationpercentage.Thus,althoughIamnotsuggestingthatthereareeasysolutionstothisproblem,Iamsuggestingthatirrevo-cablytyingtogetherownershipandcompensationisnotinthefirm’sbestinterest.

Thisisnottosaythatseniorityandpastcontributionlackresidualvalue.Theyabso-lutelydo—justasmuchasiscurrentlyattributedtothemundermanysystems.Forinstance,maybe thefirm shouldpay someportionof its compensationpurelyonownership andshares(maybe25to40percent),andtietheresttoperformance.Iamalsonotopposedtoagreementsthatgivecertainownersaminimumsalaryregardlessoftheiractivitiesinrecog-nitionoftheirseniorityorlifelongvaluetothefirm(unlessthoseownersarenotperform-ingatalevelwheretheycancontinueasowners).Atleastwiththisunderstanding,goingforward,fairperformanceassessmenthasachancetooccurbecausethesubjectiveperksareknownandhavealreadybeenbuiltin.


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Often,ownercompensationsystemsarecreated,andperformanceobjectivesareidenti-fied,aftersignificanteffortshavebeenmadetodevelopandmonitorobjectivecriteria.Nev-ertheless,bythetimethecompensationcommitteemassagestheresults,anyonecouldguesswithin$10,000whateachownerwasgoingtomakebasedonpreviousyear’sallocations.Firmsthatallowsuchashamefforttoimplementpay-for-performanceintheownergroup,inmyopinion,arewastingthetimeandmoneyofboththemanagementandthefirm.

Ownership and RetirementI believe that ownership and retirement should havemore in common thanownershipandcompensation.Compensationisaboutwhatyoudotomakethefirmmoresuccessful.Ownershipisaboutyourshareofthemarketvalueoftheassetcalledthefirm.Manyfirmstieretirementpayouttosomemultipleofsalary,butconsiderthislogically.Ifyoubuyastockonthestockmarket,yourownershipisbasedonthevalueoftheorganization,notwhatyoupersonallydotosupport itsoperations. IfyouownpartofaCPAfirmanditdoublesinvalueoverthetenyearsyouworkthere,itseemstomethatyouareentitledtoyourshareofthegain.So,ifthebusinessisworth$1.5millionandyouown15percentofit,whetheryoumade$75,000or$300,000lastyearseemsirrelevant.

Whyhasthisapproachbeenabandonedbysomanyfirms,eventhoughitmakessomuchsense?Quitefrankly,Ithinksomefirmshopethisstrategycancounterbenefitcreep.Ratherthaneveryonebeingassignedsharesthatconstantlygrowaspeopleretire,everyoneisassignedanownershipinterestthatdoesnotchange.Sothe“salary-tied-to-retirement”alternativehasbeencreatedtorecognizeownershipandcontributionwithoutactualowner-ship.Twomajorproblemshavespawnedfromthisderivation: 1. Equalizingownershipmakesitincreasinglydifficulttocreatethenecessarydecision-

making authority to operate the firm. This “we-are-all-the-same” approach putsownerswithstrongbusinessacumenandvisioninweakpositionsandownerswithweakbusinessacumenandvisioninstrongpositionsbecauseeveryonehasthesamevotingrights.Andbecause,intheend,votingrightsruletheday,theresultshavebeendisastrousformanyfirms.

2. Because salaryoftendrives retirementpayout, in thewaningyearsof anowner’scareer,theretiringownerismotivatedtocontinuebusinessasusualtomaximizehisorherretirementpayoutratherthanbeingmotivatedto:

a.Transitionclientstoyoungerownersandmanagers. b.Introduceotherstothatowner’sbusinessnetwork. c. Getmoreinvolvedinvisiblecommunityactivitiesandboardstobolsterfirm

imageandpublicrelations. d.Mentorandcoachothers toexpedite theirdevelopment in the technicalor

nicheexpertisebeinglost.

Ownership and CompensationSometimesownershipandcompensationgetdisconnected for thewrongreasons,whichgeneratesawebofinconsistencies.Forinstance,anumberoffirmsdonotconsiderfirmmanagementatoppriorityjob(i.e.,developingbudgets,establishingperformancegoalsfor



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eachperson,holdingpeopleaccountable),butratherconsiderclientworktheonlyrealpri-ority.Theresultisthatnotenoughplanninggetsdoneinadvanceandtoomanydecisionsaretactical.Here’sastorytoconsider.

A small firm has gross revenues of about $800,000. One of the two managers of the firm, Dave, expressed an interest about a year and a half ago in becoming an owner. Because the sole proprietor, Becky, has been so slow in responding to Dave’s request, Dave finally tells Becky that he is going to start his own practice. Becky, realizing that Dave has strong relationships with $200,000 worth of her business, offers Dave a 25-percent equity interest to stay. Becky rationalizes that she did not give away the farm with this offer because she knows she can still set the salaries, control the bonuses, and dominate the voting with her 75-percent share. So, Dave takes his 25 percent of the business and goes back to work.

Sample Scenario

There are anumberofproblemswith this situation.First,Becky shouldhavebeenproactiveregardingDavebydecidinghowshewantedtohandlethis.IfDavewasownermaterial, she shouldhave comeupwith some alternatives thatwerebetter thoughtoutratherthanwaitingforthisimpassetounfold.Forexample,shemighthavegottenbacktohimimmediatelywithasetofreasonablecriteriathatheneededtomeetinordertobecomeanowner.Or,BeckymighthavecreatedaprincipalpositionsothatDavecouldshareintheprofitsforacoupleofyears,whichwouldallowhertoassesshowheworkedoutasanownerbeforecomplicatingthearrangementwithequity.If,ontheotherhand,Daveisnotownermaterial,BeckyshouldhaveimmediatelystartedshoringupherrelationshipswiththeclientsDaveregularlycontacted.

Second,nooneshouldeverbeputinasituationinwhichheorshecanholdthefirmhostagetomeetdemands.Nevertheless,itwilloccasionallyhappenregardlessofwhatyoudo,andfirmsneed tobewilling to standupandfight.Dave shouldhavehad to signanoncompeteoremploymentagreementwhenhefirststartedhavingregularcontactwiththefirm’sclients.Suchanagreementwouldhavemadeitmoredifficult forhimtotakeclientsor, ifhedidtakethem,at leasthewouldhavehadtopay for them.Eitherway,havinganagreementinplacechangesDave’spositiondramatically.Forexample,ifBeckywantedDavetobecomeanowner,shewouldhavebeeninapositiontochargehimfortheprivilege.Sincehewouldhavehadtopayherforanyclientshetookifhestartedhisownbusiness,payingherforashareoftheownershipwouldsoundreasonable.ShemighthaveofferedDavethatsame25-percentequityinterestatthecostof$200,000(tobepaidoveranumberofyearsthroughwhateverarrangementsuitedthesituation,whetherthatbepartlycash,partlythedefermentofsalaryincreases,partlythedefermentofbonuses,orpartlypaymentthroughgrowthinprofits).ButthebiggerwordofwarningisthatifDaveisnotownermaterial,itwouldhavebeenamistaketomakehimanowner,regardlessofhowmuchhemightfinanciallyhurtBeckyintheshortrun;marginalownershurtthefu-turevalueandsuccessofthefirmfarmorethananypriceyouhavetopayforlettinggoofunsuitablecandidates.


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Inlargerfirms,becausetheytendtobemoreoperator(corporate)run,noownercandi-datethattriestoblackmailorforcetheownergroupintomakinghimorheranownerwillsucceed.Theindividualwhotakessuchanactionhasproventhatheorsheisnotownermaterialbecauseitisimpossibletobuildafirmwithownersthatconstantlyholdeachotherhostage.Buttobefair,becauselargerfirmstypicallyhavecreatedpoliciesandproceduresaroundissueslikeownerrequirements,theprocessismoreformalandproactive.Insmallerfirms,however,ownersoftenprocrastinatetothepointthattheypracticallyrequireem-ployeestousethreatstobetakenseriously.Thisstateofaffairshighlightstheproblemofnottakingthejobofmanagementseriouslyasmuchasitillustratesanythingelse.

Third,givingDave25percentofthefirmisprobablyonlythefirstofmanybadmoves.Logically,Beckywillnotwanttoputmuchvalueonthatownershipinterestsinceshegaveitaway,soshewillstartcomingupwithothervariablestostalematetheimpactofDave’sownershipinterestonhiscompensationandretirement.

Althoughcompensation,ownership,andretirementgohandinhand,theyhavebe-comeatangledwebinmanyfirms.Asdiscussedabove,ownershipcanbecomethemajordetermining factor in annual pay, which then drives the retirement payout calculation.Often,compensationissointerconnectedwithownershipandretirementthatitcannotbeusedtosupportstrategicachievement.

IhaveyettoobserveasystemthatIconsideredexceptionalbyitself.Ihavebeenin-troducedtosystemsthatseemtoworkwellbecause(1)anumberofSOPfoundationpro-cessesandproceduresareinplacetosupportthemor(2)theownershavearelationshipandcommitmenttoeach other and the firmthatovercomestheweaknessesofthesystem.Suchsupportstructuresdonoterasetheweaknessesofimperfectsystems,buttheyminimizethepredictabledamages.Ontheotherhand,Ihaveencounteredsystemsthataretheunderly-ingsourceofchaosandconflictinfirms.Theissuesinthesetroubledfirmsaresopersonaltoeachownergroupthat,ratherthantrytodescribethem,Ihaveonlyidentifiedsomeoftheproblemsthatareapttoappear.However,youmaywanttoconsiderthefollowingindevelopingthenextincarnationofyourfinancialremunerationweb: •Asyouknow,tyingownershiptoretirementisacceptablebecausethereisalwaysa

directcorrelationbetweenownershipandthesaleofabusiness(whethersellingtheentirebusinesstoanoutsideorganization,oronlypartofittotheotherowners).Thisisespeciallyapplicabletothesmallfirm.Ifitisappropriate,considerusingthefairvalueofthefirmaspartofyourformulafordeterminingtheretirementbenefitamount(andmaintainthatformulawithinaregularlyreviewedandupdatedSOP).Connectingownershipandcompensationisanentirelydifferentmatter.Ownershipcancorrectlybeafactorincompensation,butifownershipdrivescompensation,theconnectiondisablesacriticalmanagementtoolformotivatingandpunishingbehav-iorsandperformance.

•Keepinmindthatinlargerfirms,retiringownersaretoocommontopermitthecontinuouscomplexityofhavingtodeterminethefirm’scurrentvalue.Justliketheircorporatecounterparts,largerfirmscreatemoreshorthandmethodsofde-terminingretirementbenefits.Forexample,atop10-sizedfirmpaysownerstheir



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capitalandamultipleoftheowner’ssalaryoverfiveyearsastheretirementpayout.ABigFourfirmjustpaysthecapitalaccount.Inthissituation,theretiringownersonlygettheir401(k)sandcapitalaccounts(whichcanbequitelarge),basedonthetheorythattheownerswerepaidenougheachyearinsalaryandbonusesthattheyshouldhaveenoughmoneyonwhichtoretire.

•Ownercompensationshouldpayforbusinessgrowthwithexistingclientsaswellasnewclients.Toomanysystemsonlyfocusonnewclients.Sellingadditionalser-vicestoexistingclientsisamuchbetterlong-termstrategyforbuildingthebusinessbecausesomanymorepeoplecanhaveapositiveimpact.

•Allownersshouldberesponsibleforcross-sellingadded,neededservicestotheclientstheymanage.However,notallownersareequallysuitedfornewclientde-velopment.

•Ownersshouldbecompensatedwhentheytransferclientstootherownersorman-agers(assumingtherelationship,notjustthework,istransferred).Inmyopinion,transferringaclientshouldbethoughtofassellingadditionalbusiness.Theownerwhogivesupcurrentclientrelationshipsshouldberewardedforbeingwillingto:

•—Giveituptosomeonewhohasmoretimeorskillstobetterservicetheclient. •—Reducehisorherbookofbusinessmanaged. •—Putthefirmandtheclientbeforehim-orherself.

•Ifafirmissubjecttothenegativeoutcomesofbenefitcreep,eitherintheshareofownershiportheclientbasemanaged,theyneedtobeputincheckbyastrongSOPfoundation,similartothatdiscussedabove.

•Owners,justlikemanagers,shouldbeheldresponsiblefortheproductionofanyoftheirdirectreportswhoareeitheroverorunderbudget.Iftheproductionisunderbudget,thenegativeincentiveissubtractedfromotherearnedincentiveamounts.

•Billingsmanagedshouldbepartoftheownercompensationformula.Butequallyimportantistheidentificationofkeyaccounts(thetop20-percentclientsandrefer-ralsources)andtheinstitutionofincentivesandpenaltiesregardingtheadequacyandfrequencyofcontactsbeingmadetomanagethoseaccounts.Inyourcompensa-tionsystem,youwanttoavoidpayinglargesumsofmoneyeveryyearforownerswhojustsitontheirclients.Forexample,considertheownerswhohabituallypassoffworktoothersandhavenothaddirectcontactwiththeiraccountsinyears.Generally,themoreanowner’sincomeisbasedonworkperformedyearsagoratherthancurrentwork,themorecomplacenttheownersareandthegreatertheirun-willingnesstotakeonactionsandactivitiesforthebenefitofthefirm.

•Ownersshouldbeseverelyfinanciallypunishedwhenevertheyloseaclientasaresultoflackofservice.Thereisnoexcuseforthis.Ifanownercannotadequatelyserviceallofhisorherclients,thosethatcannotbeservicedneedtobetransitioned.Iftransitionedaccountsarelostasaresultofamistakemadebyajuniorstafferlearn-ingtomanagingaccounts,atleastthefirmgainedsomevalueeitherinlifelessonsorinsightintothisjunior’sabilitytomanageaccounts.Bothoftheseoutcomesarebet-terthananownerwhohoardsclientsanddoesnothingtotakecareofthem,thereby


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guaranteeingthattheseclientswillseekoutacompetitorfirmthatwillshowinterestinthem.

•Individualperformanceplansareamustforowners.Whatisexpected;howitwillbemeasured,monitored,andreported;whatgoalsareset?However,noperfor-manceplanisbetterthanaperformanceplanwithnoteeth(i.e.,rewardorpenaltyforactionorinactionthatissufficienttoholdownersaccountable).Anineffectiveperformanceplanmakesamockeryofpay-for-performanceinfullviewofyouremployees.

•ThebulkoftherewardoftheCEO/MPor,potentially,thisowner’steamshouldbebasedontheoverallsuccessorachievementofthefirm.TheCEO/MP’sincen-tiveshouldnotbeaboutclientwork,butratherwhetherthefirmmetitsgoalsasidentifiedandagreedtobetweentheCEO/MPandtheboard.

•Theownergroupshouldalsohaveanincentivetomeettheirprofittargets,butincombinationwithalloftheothertargetspreviouslyidentifiedinthischapter.

•Inthelastthreetofiveyearsbeforeretirement,ownersshouldbeoperatingonatransitionplanlaidoutbytheCEO/MPthatidentifieswhichclientstotransfer,towhom,andbywhen.Thelargestclientsneedtobetransitionedfirstbecauseittakesseveralyearsforthereplacementownertodevelopstrongenoughpersonalrela-tionshipstobeabletomaintainthoseaccounts.Forthelargeraccounts,youwanttheretiringownertobeactiveforaminimumofacoupleofyearstosupportthistransition.Amajorpartoftheretiringowner’scompensationplanduringthisperiodshouldentailadheringtoandfollowingthetransitionplan.Iftheretiringownerdecidesnottofollowthetransitionplan,thentheannualfeesforanyclientslostforthefirst18monthsafterhisorherretirementshouldbedeductedfromtheretire-mentpayoutamount.

•Althoughitmightmakesenseforretiredownerstobeinvitedtoselectboardmeet-ingsasadvisers,itdoesnotmakesenseforthemtohaveasayinfirmdirection,nordoesitmakesenseforthemtocontinuetomanagesomeclientrelationships.Althoughretiredownersshouldbeallowedtocontinueworkingonaccountstheyhavemanagedinthepast,themanagementofthoserelationshipsshouldbecarriedoutbyanexistingowner.Noclientaccountsshouldbemanagedbysomeonewhoisnotanactivepartofthefirm’sleadership.

•Itmakessensetopayretiredownerstobringinnewbusinessandforthefirmtosupportthemintheircharityandcommunityeffortsaslongastheypositivelyrepre-sentthefirm.

•Offeringselectedretiringownersconsultingagreementstocontinueworkingwiththefirmafterretirementtapsintoanexcellentsourceoftalent.However,retiredownersshouldpreferablybepaidasapercentageofthebillingsandcollections(25to40percent).Hourlybillingcanworkwiththepropercontrols.Salarydealsrarelymakesense,however,andareoftenjustdisguisedextensionsoftheretirement payout.



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•Theobligationoftheretiredowneristoeitherspeakpositivelyaboutthefirm,actpositivelytosupportthefirm,ordonothingatall.Shouldaretiredownerdisparagethefirmduringthetermofhisorherpayout,eitherinwholeorinpart,thepayoutshouldbeinjeopardy.

Step 4. Conduct performance evaluations.If awell-thought-outcompensation system iscreated,performanceevaluationsaredoneeverydayandweekbytheemployeesastheycomparetheirperformancetotheirobjectivesaswellastotheaccomplishmentsoftheirpeers(hence,theimportanceofroutinefirmwidesharedperformancereporting).Then,theonlythingleftisthesubjectivepartoftheevalu-ationinwhichthesupervisorsratetheirdirectreportsonmeasuressuchasthefollowing,tonamejustafew: •Beingateamplayer •Self-development •Self-motivating •Attitude •Controlanddelegation •Decisiveness •Resourceutilization •Timemanagement •Leadership •Projectmanagement •Clientrelations •Developingothers(mentoringandcoaching) •Stresstolerance

TheAICPA’sManagement of an Accounting Practice Handbookhasalengthysectionen-titled“Personnel,”sothereisnoreasonforthisbooktoreinventthewheel.Therein,thesubsectionentitled“PerformanceEvaluationSystems,”hasanumberofexamples,toassistCPAfirmsinputtingtogetherthesubjectivesectionoftheirappraisalformsandprocesses.Butthekeyisthatwithapay-for-performancesystem(whichroutinelymeasures,monitors,andreports),peoplecandetermineontheirownwheretheystandatanytime.Returningtoathoughtcoveredearlyinthischapter,recallthatacriticalmotivationforpeopleistheirfeelingthattheyhavedoneagoodjoborhavemadeadifferencetothecompanytheyserve.Whatbetterwaytocultivatethis feelingthantogiveemployeesthepowertoself-assesstheirprogress.

A Final Word About Pay-for-Performance SystemsIfallyouwanttoknowaboutpay-for-performanceishowtomakethisconceptworkforyourightnowbecausewhenyoudecideit’stimetogo,youplanonturningoutthelightsandwalkingaway,thenjusttakeanyconceptthatringstruetoyouandplugitintoyourformula.Alternatively,ifyouarelookingforsomethingthatwillendurethroughchangesinleadership,thenconsiderdevelopingamuchmoreformalsystemforperformanceob-jectiveidentification,monitoring,feedback,andevaluation.Obviously,thelatterwilltake


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significantlymoretime,money,andenergytoputinplace,butyouaredoingitsothatitwillbecomearoutineprocess(partofyourSOPfoundation)thatcurrentandfuturefirmmembersadoptasanormalpartofgoodbusinessmanagement.

Also,youneedtokeepinmindthatthereisnosinglecompensationsystemthatwillworkforeveryfirm.Andevenasystemthatworksperfectlyforyoutodaymaybecomean

albatrossacoupleyearsfromnowbecauseitisoutofstepwiththenewbehaviorsthatyouwillneedtomotivate.Strategyidentifiesrequiredbehaviorsandactions,accountabilitydrivesthecompliancethat produces these behaviors and actions, andcompensation is the infrastructure “stick” thatsupportsaccountability.So,donotbesurprisedifyouremployeesdowhateverisreinforcedbyyourcurrentcompensationsystem.

ConclusionWewanttoelicitthebestofthepeoplewehavebecausetheyallcomefromthesamelaborpool,whichisnotnearlyaswideordeepaswewouldlikeforittobe.Exceptfornewgraduates(whohavevirtuallynotrackrecord),everyoneyouconsiderhiringisprobablysomeonewhowasletgoorwalkedawayfromanotherorganizationasaresultofsomelevelofdissatisfactionononesideortheother.Thisisnotasominousasitsoundsbecauseonefirm’sbademployeemightbeanotherfirm’soutstandingperformerasaresultofdifferencesinculture,jobduties,ortraining.Recognizethatthelaborpoolisprobablynotasdeepasthepersonnelpoolyoualreadyhave,butthepeopleyoualreadyhavemustbesupportedbytherightSOPfoundation.So,maketheefforttogetthebestoutofyourgoodpeopleanddonotbeshyabouttradinginyourmarginalones.

If you are asking people to per-form one way, but paying them to perform another, you must, to put it simply, “Change your approach so that you are consistently putting your money where your mouth is!”

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Growth and Transition: Increasing the Value of the Firm

Chapter 4

The objectives of this chapter are to: •Presentfundamentalgrowthphilosophies. •Confirmthepremisethatfirmgrowthisreferraldriven. •Discusstheimportanceofsynergybetweennewandexistingservices. •Definethefortressandempireapproachestomarketing. •Outlinestepsforcreatinganeffectivebusinessdevelopmentplan,includingclassify-

ingclientsandutilizingpassiveandactivemarketing. •Giveanoverviewoftransitioningbusinesstotherightstaff.

Foranybusinesstobesuccessful,itmust,mostsimply,offeraproductorservicethatthemarketwantstobuy,andthenmustsellthatproduct,anddeliveritataprofit.WhenyouaskmostCPAfirmsabouttheirbusinessdevelopmentstrategy,themostcommonre-sponseis,“Wedogood,timelyworkandareresponsivetoourclients.”Ourprofessionisbuiltaroundthemodelof“ifwedogoodwork,they(clients)willcontinuetocome.”Theproblemis,thatwasthen,andthisisnow.Goodqualityworkisnotenough.Theenviron-mentismorecompetitive.Ourclientsneedandareaskingforadditionalassistancefromtheirtrustedadvisersabouthowtobecomemoresuccessful.Thesepressures,plusthemanyothersdiscussedinthisbookthusfar,createanenvironmentthatrequiresamoreformalizedmarketingapproachtocompetethanhaseverbeenneededbefore.Forthesereasonsand


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more,Ihavedevelopedthisentirechaptertowalkyouthroughhowyoumightapproachcreatingamarketingstandardoperatingprocedure(SOP)foundationforyourfirm.

Althoughtherearemanysophisticatedmarketingstrategiesthatyourfirmcanembrace(andthatarenotcoveredinthischapter),thestepsoutlinedbelowarethebasicsofprofes-sionalservicesmarketing.Leveragingvariousadd-onstrategiescanbeverybeneficial,butputtingtheminplacebeforeyour“perpetualmarketingengine”isrunningatfullspeedislikebuildingthewallsofthehousebeforeyouhaveapermanentfoundationonwhichtosetthem.

ThischaptertakesthesameapproachbylayingouthowsomebasicmarketingSOPfoundationsshoulddrivethefuturegrowthofyourfirm.Wewillfocusfirstonreasonswhymarketingis importanttoanSOPfoundation.Discussionsongrowth,businessdevelop-ment,andthentransitioningbusinesstotherightpeoplefollow.Wewillconcludewithanoutlineofstepsthatyoucanworkthroughtocreateaneffectivebusinessdevelopmentplan.

Why Marketing Is Important to an SOP Foundation Therearethreereasonsthatexplainmyrationaleforwhymarketingisworthyofthiskindofattention.

Reason 1. Marketing is an ongoing SOP process.First,marketingisanessentialoperatingprocessforanybusiness, inanyindustry, inanycountry,atanytime.Marketingisnotsomethingyoudowhenbusinessopportunitiesdryup…itisafoundationprocessthatneedstooccurallthetime.Ifyourfirmisnotidentify-ingandprovidingadditionalservicestoyourexistingclients,ornewservicestonewclients,overtime,itwillstartshrinkingduetonormal,“not-your-fault-and-nothing-you-can-do-about-it”clientattrition(death,sellingthebusiness,retirement,ormovingaway).Becauseourrelationshipswithourclientsaresopersonalandintimate,withlittleeffortonourpartinthepast,wehaveeasilyleveragedournaturallyoccurringreferralnetwork.Thishasbeenourmarketingsalvation.However,inourprofession’scurrentmarketplace—inwhichonefirm’snewclientislikelysomeotherfirm’slostclient—marketingisstartingtoassumethesameprominentrolethatitoccupiesinbusinesseseverywhere.Andthemorecompetitiveourmarketplacebecomes,themoredominantwillbetheroleofmarketinginafirm’sfu-turesuccess.

Reason 2. Marketing is the least understood SOP strategy.Second,marketingisprobablytheleastunderstoodofalltheSOPstrategiesmostcommonlyimplementedbyfirms.Iwanttodispeltheairofmagicthatsurroundsmarketing.Sellingnewbusinessisnottheresultofbeinga“silvertongueddevil,”butrathertheprocessofhelpingyourclientsunderstandhowyoucanhelpthem.Whenyouprovideprofessionalservices,yourreferralnetwork(clientsandotherreferralsources)willdriveyourgrowth.



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Ifyouare“outofsight”ofthatnetwork,youaremostlikely“outofmind,”too,whichminimizesyourgrowth.So,Idescribesimplesystemsandstrategiestomakesurethatyourfirmbuildsitscriticalmarketingfoundationonsomerock-solidideas.

Reason 3. Marketing can generate owner conflict.Third,mostimportant,andasaresultofthefirsttwoissues,marketingcreatessomelargechasmsbetweenowners,andthesehavetobebridged.Toomanybusinessdevelopmentowners use theirmarketing prowess to hold their technical owners hostage.And inter-estinglyenough,becauseof thatprowess,firms toooftenmisdirect resourcesaway fromstructuring and formalizing themarketing function.This in turn encourages evenmorerelianceonthemarketingownerstobringinbusiness, therebymakingthemevenmoreindispensable,morevaluable,andmorehighlycompensated.Unfortunately,nomatterhowgoodyourmarketingownersare,ifthefirmgrowthexceedsacertainlevel,theseownerswillnotbeabletogenerateenoughvolumewithoutsystemstosupportthem.So,please,saveyourselfagreatdealofgrowingpainandownerdisputesinreachinganoutcomethatalwaysendsupthesame.

Doing this is alsoagreat leveler. Itputs thetechnical and the business development ownersbackonmoreequal footing, therebyclosingthegapbetweenthem.Closingthisgapisessentialifyouwantthenecessarybuy-intosupporttheon-goingdevelopmentofSOPfoundationthrough-outthefirm.AndSOPfoundationimplementedthroughoutthefirmisacriticalsuccessfactorsup-porting seamless leadership transitions and firmsuccession.

Size of Firm CommentaryThebusinessdevelopmentinformationandapproachescoveredinthischapterareasap-plicabletosoleproprietorsastheyaretothetop-10largestfirms.Ofthematerialcoveredthroughoutthisbook,theissuesdiscussedherearethemostuniversalandtheapproachesdescribedarethemostuniformlyapplied.Thegreatestdifferencesemergeasaresultofthemagnitudeoftheprocesses,support,systems,training,andreportingrequiredforthelargerfirms.Obviously,thefewerthenumberofpeoplerequiredtobuyintothisapproachandmodifytheircurrentbehavior,theeasiertheimplementationwillbe.

Althoughmanyof theprinciplesoutlined in the transitionsectionat theendof thechapterapplytoallsizesoffirms,theyarebestappliedtotheday-to-dayoperationsoffirmsrangingfromabout$750,000to$20millioninrevenue.Forthesoleproprietorsandfirmsunder$750,000,thetransitionissuesareveryrelevantifthefirmisbeingsold(becausetheownercantypicallysignificantlyaffecttheoverallpricepaidbythebuyerbasedonhowthetransitionishandled),butlessrelevanttherestofthetime.Forfirmswithrevenuesof

To sustain your firm over time, you have to convert marketing from an individual function (i.e., the superstar model) to a firm-wide function (i.e., the operator model).

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around$15millionandmore,thetransitionissuesarefarlessimportant.Achievingcompli-ancewiththetransitionobjectivesisverystraightforwardinthesefirms,giventheircorpo-ratestyleofgovernanceandengrainedapproachofmanagingthefirm’sclients(ratherthananindividual’sclients).

Growth Oneofthesinglebiggestfactorsindeterminingthevalueofafirmisitstotalrevenues.Ob-viously,manyotherfactorscomeintoplayandaffectthefinalprice,rangingfromthetypeofclientsserved,theskillsoftheemployees,thelikelihoodofclientretention,transitionar-rangement,thequalityofthefees,realization,andutilization.However,well-managedandsustainedgrowthistheeasiestwaytoimprovethemarketvalueofyourfirm.

Intheprecedingchapters,boththe“one-firmmodel”aswellas“reversingthepyra-mid”werediscussed.Yourapproachtoaddressingeachoftheseareaswillhaveasignificantimpactonhowyoutacklethegrowthobjective.Regardlessofthosedifferences,therearesomefundamentalideasthatIbelieveapplyacrosstheboard.Theseideasare:

Idea 1. Clientrelationshipstaketime.Idea 2. Mergersandacquisitionsarecostly.Idea 3. Superstarmodelsarelimiting.Idea 4. FirmwidemarketingSOPfoundationssucceed.

Eachoftheseideasisdiscussedbelow.

Idea 1. Client relationships take time.Ownershavetheprimaryresponsibilityofmanagingallofthefirm’stopclientrelationships.Ownertimemustbefreetoadequatelyaddressthisresponsibility,whichmeansthatmanymid-levelclientrelationshipswillhavetobepusheddownwardtotheprofessionalsinthenextlowertierofyourfirm(typically,themanagers)inordertofreeupownertimetoad-equatelyaddressthiscriticalresponsibility.Fromthe30,000-footlevel,clientmanagementincludes: •Continuouslyupdatingyourunderstandingofeachclient’scurrentandfuture

priorities. •Identifyingadditionalservicesthatwouldbebeneficialtothoseclients. •Managingtheworkperformedforthoseclients. •Billingandcollectingfees. •Maintainingclientsatisfactionwithandloyaltytothefirm.

Inmostfirms,unfortunately,ownersgettoocaughtupin“doingclientwork”ratherthan“workingtheclient.”Themostsuccessfulfirmsembracethegeneralrulethat“asmuchaspossible,theowners’jobistobeattheirclients’officesmanagingthoserelationships.”Thisusuallyequatestoowners’splittingtimebetweenmaintainingclientcontactforbusi-nessdevelopmentpurposes,performinghigh-levelfor-feeadvisoryservices,andmanagingandcoordinatingthevariousprojectsperformedthroughouttheyear.



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Manyfirmshavealsoinvokedateamapproachtomanagingtheirtopclients.Thereare a numberof reasons. First, this duplicationof effort improves client service and in-creasesloyaltytothefirmbyprovidingtheclientwithmorethanonecontactpersonwhoisknowledgeableabouttheclient’ssituationandprojects.Second,thispracticefacilitatestransitionbyprovidingclientswithmorethanoneongoingrelationshipwithsomeoneinthefirm.Asownersretire,clientsfeel lessabandonedbecausetheirrelationshipwiththeretiringownerisnottheonlyonethathasbeennurtured.

Idea 2. Mergers and acquisitions are costly.Thesecondstrategicissueisone,Ibelieve,ofmis-placedcomfort.Mostfirms,whenfacedwiththeobjectiveofgrowth,defaulttomergeroracquisi-tion.Frommyperspective,thisisoneofthemostcostlyalternativesafirmcanchoose.Why? 1.Because you roughly pay about 75 cents

to a dollar for every dollar in revenue you acquire.

2.Youendupbuyingalotofclientsyoudonotreallywantorwhodonotfityourclientprofile.

3.Youinheritallofthebadbillingpractices,fromfeestorealization,oftheotherfirmanditsemployees.

4.Youtakeonaculturethat,moreoftenthannot,isvastlydifferentthanyours. 5.Youareapttoendupwithakeyownerormanagerwhowillbeproblematicalto

workwithinthefuture.(Typically,thissituationgeneratesastrugglethatdisruptsthefirmforyearsandyetisusuallyresolvedonlybyrunningofftheseinheritedown-ersormanagers).

6.Youhavetospendthemoneytoretrainthepeopleintheacquiredcompanytoworkwithyourtechnology,systems,processes,andmethodology.

AndIcouldgoonforparagraphs.Itseemsprettystraightforwardthatbuyingormerg-ingapracticeprobablycostsfirmsatleast1.5times(andoftentwice)whatevertheypayforitbythetimetheneworganizationmatchestheoperationoftheoldone(beforethepurchaseormerger)inefficiencyandeffectiveness.Andbytheway,thispositiveassessmentassumesthatthecombinedpracticesactuallyreachthatsynergisticpoint…toomanytimes,thatgoalisneverachieved.Myexperiencesuggeststhattheactualpriceofacquisitionsandmergerscanexceedthenumbersgivenabovebecauseofthenumberoffirmsthathaveto: •Spinasmallgroupoutofthecombinedfirmasaresultofunresolvableculture

conflict. •Overtime,fireasubstantialpercentageofthepurchasedclientsasaresultofincom-

patiblefeesorservices. •Fireorarrangeearlyretirementoraspecialdealforanownerwhoisincompatible

withtheattitudesandobjectivesoftheneworganization.

Managing the firms’ client relationships is not a job that can wait until the work queue is empty (which is how most firms proceed), but rather is the job, whereas working the queue is a very low priority.

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•Fireorarrangeearlyretirementoraspecialdealwithsomeofthetalentthatwasgivenahighvalueonpaperduringthenegotiationsforthemergeroracquisition,butwho,inreality,provetobetoodisruptiveoruncooperativetokeep.

ItmightseemlikeIambashingmergersoracquisitions,butIwanttomakeitclearthatIamnot.Therearemanyinstancesinwhichamergeroracquisitionisthebeststrategyforgrowth.However,itshouldrarelybethedefault-business-development-strategythatithascometobe.Ibelievemergerandacquisitionhasbecomeprominentinourprofessionbecauseofthealmostmysticalviewofmarketing.SincemostCPAsmaturedbythrivinginatechnicalenvironment,thesales,marketing,andbusinessdevelopmentsideoftheprofessionisfor-eignorunnaturaltothem.However,ratherthantrytounderstandandleveragemarketing,firmstrytotakeashortcutbybuyinganotherfirm’s“magic”inthisarea.

Nevertheless,manyfirmswouldsay,“Weacquireotherfirmstogainaccesstotheirstaffasmuchastotheirclients.”Butmyobservation,asaprivilegedoutsidersittinginonmanyof theownerdiscussions regardingacquisitions andmergers, is that suchdeals arealmostalwaysdrivenbythedesireforfirmgrowth.Ifacquiringstaffisthecentralconcern,thereareother far lessexpensiveandchaoticSOP foundationprocesses toconsider (forinstance,internprogramsandrecruitingprograms).

Idea 3. Superstar models are limiting.Putthisintoperspective.Firms,onthestrengthofoneortwobusinessdevelopers,cangrowfromrevenueofabout$200,000toseveralmilliondollars.However,firmsthattakethisapproachconfrontanaturallimitbecausethegrowthenginerestsonacoupleofsuperstars.Theproblemisthat,asfirmsgrow,theimpactofthesuperstarsshrinks.Forexample,inafirmwithabout$1millioninrevenue,oneortwopeoplecanhaveahugeimpactongrowthbybringinginseveralhundredthousanddollarsinnewbusiness,amuchmoresig-nificantincreasethanthesameamountofnewbusinesswouldbeinalargerfirm.Asfirmsseetheirannualgrowthpercentagecontinuetoshrink,theyoftendecidethatthesolutionistobringinothersuperstars.Forexample,thebusinessdevelopersintwofirmsengageinawell-intendedbutunrealisticdialogueinwhichtheyagreethattheycouldsubstantiallygrowthebusinessiftheyjusthadenoughsupportstafftodothework.Theflawintheirlogicisthatlackofstaffislessofanobstacletogrowththanthecircularityofthefollowinglineofreasoning: 1.Given theburdenof client responsibilities,firmshitnatural limitsonhowmuch

businesstheycanactuallydevelop. 2.Althoughfirmsarewillingtofocusmoretimeonbusinessdevelopment,theircom-

pensationsystemsdonotallowthemtodosounlesstheygiveuptheirpowerbase,i.e.,thedailymanagementofclients.

3.Nosoonerdofirmsbegintothinkthattheircompensationissuescanbeaddressed,thantheyareforcedtorecognizethatmostoftheirnewbusinesscomesfromrefer-ralsfromtheirexistingclients.Consequently,businessdevelopmentislesseffectivewithouttheregularclientcontactthatissustainedbymanagingclientwork.

4.Inthelightofitem3,thebusinessdevelopersrenewtheirfocusonworkingtheirclientbaseandreferralsourcestodevelopmorebusiness.



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5.Theprocessofitem4takestime,forcingthebusinessdeveloperstoquicklyhitthenaturallimitsofhowmuchbusinesstheycanactuallydevelop.

Inworkingwithfirmsofallsizesaroundthecountry,ithasbecomecleartomethatrelyingonafewindividualsforfirmgrowthbecomesafailingstrategyasthefirmgrowslarger.Andrelyingonacombinationoffirmstosolvethegrowthproblemoftencreatesasignificantnumberofinternalproblems,highercosts,andlowerprofitsanddistributionsfortheowners,whicharenottheobjectivesthatdrovetheideaofgrowthinthefirstplace.

Idea 4. Firmwide marketing SOP foundations succeed.Thesolutionthatisleft,whichistocreateafirmwidemarketingenginewithallownersandmanagershavingsomeresponsibilityforgrowth,isleastoftenchosen.Whattrulybafflesmeisthatafirmwith$3millioninrevenuewillnotblinkaneyeaboutbuyinga$1-millionfirm(whichwilllikelycostthematleast$1.5millionormoreforthereasonsIdiscussedabove),yetthatsamefirmprobablyhasamarketingbudgetoflessthan$75,000peryear.

So,hereisthequestioninanutshell:Whyisitthatthesame$3-milliondollarfirmidentifiedabovewillnotevenconsiderthecommitmentof$1milliontoamarketingbud-get,spreadoutoverseveralyears,whichwouldallowthemtoorganicallygrow(i.e.,growitthemselves)$1millioninrevenue?Moreover,thiskindofcommitmentwouldnotentailtheaddedobstaclesandcostsofmergingcultures,takingonbadclients,andweedingoutproblematicowners.Bestofall,thefirmwouldbedevelopingacapabilitythatitcanrep-licateoverandover.

Business DevelopmentUnsurprisingly,therestofthischapterisdevotedtounderstandinghowfirmshavegoneaboutcreating theirfirmwidemarketingengines.Businessdevelopment, just likeevery-thingelsediscussedinthisbook,startswithaplan.But,beforestartingtheplan,therearesomemarketingconcepts thatneedtobeclarified.Thefollowingsectionscoverreferralmarketing,nichemarketing,newservicesselection,andfortressversusempiremarketingstrategies

Referral MarketingMybusinessdevelopmentmethodologyformarketingCPAfirmservicesbeginswithmyfoundationpremisethatservicebusinesses,especially professional service businesses, are predomi-nantly referral driven.Thismeansthatalthoughfirmscanuseavarietyofmediatoadvertiseandexposetheirpractice(likeTV,newspaper,radioadvertising),verylittlewillcomeofthis investmentwithout the support of referrals.This statement seems controversial andatoddswiththeapproachoffirmsacrossthecountry.AlookatthemarketingeffortandinvestmentofmostCPAfirmssuggeststhatmostignoretheimportanceofreferralsintheimplementationoftheirplans.Considerthepotentialeffectthatmyviewwouldhaveondevelopinganeffectiveapproachtobusinessdevelopmentandmarketing:IfCPAservicesarereferraldriven,firmsshouldnotspendanytimeormoneyonanydevelopmentefforts


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thatarenotprimarilytailoredtopush the referral button.Onceafirmhasastrongfoundationinreferral-drivenmarketing,thenand-only-thenshouldeffortsbeputintoplacetosup-portnonreferral,prospect,andnewclientmarketing.Inmostfirms,thereverseistrue… firmsspendthelargestamountoftheirmarketingbudgetonnonreferral,prospect,andnewclientmarketing,whichleaveslittletotapintotheirgreatestgrowthasset,namely,referralmarketing.

Referralmarketingissimplymarketingtothoseindividualsandbusinessesthatalreadyknowandrespectyourfirm.These sourcesarecurrentclients; friendsand familyof thefirm,aswellassupportiveprofessionalresources(suchasattorneys,insuranceagents,stock-brokers,andbankersthatcurrentlyworkwiththefirm).Whyisthereferralsoimportanttofirmgrowth?Simply,noonewants toexperimentor relyon luckwhen itcomes toobtainingassistanceonimportantfinancialmatters.Ananalogycanbemadetothemedicalprofession.Ifyouneedaheartdoctor,themostcommonfirsttacticwouldbeforyoutoaskthoseyoutrustforareferraltosomeonetheytrust.LookingforassistanceintheYellowPagesmaybeefficient,butisfraughtwithrisk.Unansweredquestionsare: •Whatexperiencedoesthispersonhave? •Howcapableisheorshe? •Howmanytimeshasheorshesuccessfullyresolvedproblemslikemine? •HowcanItellwhetherheorsheiscompetent?

Supposesomeoneemphaticallytellsyouabouthowsatisfiedheorshewaswithapar-ticularprofessional.Asaresultofthatassurance,youwillbefarmorecomfortableandfarmorelikelytocontactthatprofessionalinordertogetaccesstohisorherexpertise.

Myapproachtomarketingfocusesondevelopingtwobasictypesofreferrals.Themostobviousapproachistoattractnewclientstoyourfirmthroughreferralsfromclients,friends,orotherprofessionals.Second,educateyourclientsaboutthediversityofservicesyouoffer.Thiswillencourageexistingclientstomakereferralsfrom,forinstance,otherdepartments

in theirorganizations,orotherkindsofengage-mentsthattheymaybeseeking.

Thesestatisticsare thebasisofmyadvice tofocusalmostallofafirm’smarketingresourcesonreferralmarketing. If increased shareof thewal-let(growthofservicesforexistingclients)andre-ferrednewbusinessisthemostlikelysourceofafirm’srevenuegrowth,thentheseareasshouldbethefocusofthebusinessdevelopmentplan.

Niche MarketingAsyoumightguess,therearealsotimeswhenreferralmarketingisthewrongstrategyforaCPAfirm.Considerthissimplisticcasestudyasthebeginningofourdiscussionofalterna-tivestrategies:

Based on my personal experience consulting with CPA firms over the past 25 years, a conservative estimate is that referrals account for more than 90 percent of the annual growth of most firms.

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Winters and Associates, a successful CPA firm, decided to expand its offering to include the nontraditional service of technology support. As a logical place to start, this service was marketed to their existing client base. Immediately, there were several leads. Within six months, the technology projects fully utilized what normally would have been off-season idle time by the technology-savvy management and staff. Yet, additional requests were still coming in. Rather than miss these lucrative opportunities, management hired a full-time information technology (IT) expert for the sole purpose of satisfying the growing client demand for this service.

Six months later, after adding and shifting personnel to operate this new growing IT department, the pent-up demand from the existing client base had been satisfied. The technology support requests continued, but slowed down. Over the next 12 months, the nonbillable time of the technology staff was growing and becoming problematical.

Management recognized that the firm’s financial resources were being drained and that the owners’ willingness to support this service was dwindling. Some IT people were shifted back to more traditional departments. But in order to salvage the IT service, management also put together a comprehensive marketing campaign to expand the firm’s IT visibility. The result was an even more restricted cash flow because, although the expanded market-ing effort generated significant interest, the new business was slow to materialize. The firm quickly discovered that it takes more time and is much harder to sell IT services to new clients than to sign up existing clients for the same services. The owners were not willing to support the losses being incurred by the technology department, at least not for the time it would take for demand to catch up with supply. They decided to go back to their bread-and-butter services and leave technology support to other CPA firms. This decision prompted one of the owners to leave to start a technology-focused CPA firm; he took several of the firm’s key employees and a good number of the clients with him. It took Winters and Associates years to recover from this technology adventure, specifically, from the losses incurred by launch of the technology niche service and the personnel losses triggered by the formation of the spin-off firm.

Sample Scenario

Thisstoryshouldsoundfamiliarandanynumberofnicheareascouldbesubstituted,includingwealthmanagement,valuation,litigation,oreldercare.Evenifyourfirmhasnotexperiencedthis,youmostlikelyknowfirmsthathave.Historically,CPAfirmshavehaddifficultyimplementingvariousnontraditionalservices,mostlyasaresultofthreefactors: 1.Lackofsynergybetweennewnicheofferingsandexistingservices 2.Lackofdifferentiationbetweentheobjectiveofdevelopingnewclientsandthatof

growingthe“shareofthewallet,”i.e.,providingmoreservicestoexistingclients(Inotherwords,whatisthesourceofthegrowth?)

3.Inconsistently focused firm marketing, with little distinction between owner andmanagermarketing responsibilities and the implementationof an administrativelydeliveredcampaignofreferraldevelopment

New Services SelectionForthepast25years,CPAfirmshavecontinuedtoexpandtheirscopeofservices.Inthebeginning,expandedserviceswereusuallyamigrationofexistingservices,oreventheresult


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ofaredefinitionofthescopeofaserviceratherthantrulynewservices.Forexample,manyCPAfirmsofferedinformaltax,estate,orwealthmanagementplanningaspartoftheirtaxreturnpreparationprocess.Manyofthosefirmseithergaveawaytheseadditionalservicesorchargedminimallyforthem.Therefore,astimewenton,itbecameincreasinglymoreim-portantforfirmstoformalizetheseaugmentationsoftheirprimaryservicesoclientswouldunderstandthefollowing: •Theuniqueservicesbeingdeliveredwerenotanormalpartofthetaxreturn

process. •TheirCPAfirmhadspecialexpertisetoshare,whichallowedthefirmtodifferenti-

atethemselvesfromotherCPAfirms. •Iftheywereinterestedinreceivinganyoftheseaugmentedservices,theirfees

wouldrise.Firmsexperiencedlittleresistancetoexpandingtheirservicesbecause,inthebeginning,

thesenewservices,bythenatureoftheirmigration,wereverysynergisticwitheachother.Forexample,taxreturnpreparationcannaturallyleadtotaxplanning,whichcannaturallyleadtodiscussionsaboutestateplanning.

Asfirmsevolvedandtheredefinitionorformalizationoftheirtraditionalserviceswascomplete,firmscontinuedtominethissuccessfulstrategybyaddingnewservices.Conver-sationsamongownersshiftedto“Whatnicheserviceorspecialtyareashouldwedevelopnext?”Insomecases,firmsaddednewservicesthatweresynergistictotheirexistingser-vices.Forexample,afirmwithanumberofclientswhoarewealthyindividualscouldeasilyaddwealthmanagementservices.Or,afirmwithaspecialtyniche,likeconstruction,mightaddanestimatingorbondingsupportservice.Asynergisticserviceisanewservicethatisanaturalextensionofservicesthatfillstheadditionalneedsofexistingclients.

New Service Selection and Island ServicesFormanyyears,CPAfirmsalloverthecountryaddednewservicesataphenomenalpace,encounteringlittleresistance,andmostlyenjoyingsuccess.Evennotwithstandingeconomicupsanddowns,firmsfindthataserviceexpansionstrategyhaslimits.Oneofthoselimita-tionsariseswhenofferinganonsynergisticservice.Why?Becausewitheachnonsynergisticservice,long-termprofitabilityrequiresthedevelopmentofanewmarketplace(i.e.,anewclientbase).MostCPAfirmsdidnotunderstandandanticipatethis.Instead,firmsassumedthatallnewserviceshaveanequalchanceofgeneratingdemand,anddrewnodistinctionbetween existing clients (those currently being served) and prospects (potential clients).Firms loseagreatdealofmoney in theprocessof learning tomake thisdistinction; theprecedingexampleofWintersandAssociates’expansionintoITiscommon.Technologyservicesaresynergisticifmostofafirm’sclientsarebusinessesandavarietyofoperationalsupportservicesarealreadybeingofferedbythefirm.However,technologyisnotsynergis-ticifmostofyourclientsareindividualsorbusinessesthataretoosmalltobeabletoaffordthislevelofexpertise.Idescribeanyservicethatisnotsynergisticwiththeneedsofyourexistingclientsasanisland service,meaningthatitstandsalone.Foranislandservicetomakesenseforafirm,it:



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•Mustbepartoftheirlong-termservicestrategy(itmaybeanislandservicenow,butgiventheclientsthefirmistryingtoattract,thecurrentislandserviceisjustthebeginningofasetofsynergisticservices).

•Shouldbeadifferentiatorservice.(Inotherwords,youmightnotplantomakemuchmoneyontheserviceitself,butyouusetheprovisionofthisservicetoopennewdoorsandattractclientsawayfromcompetingfirmsbecauseitisseenasvalu-able).

•Needstobeprofitable.Foralongtime,manyfirmsbelievedthatpickingaserviceoutofahatgaveasmuch

chanceofsuccessasanyothermethodofdecidingwhichservicestoprovide.However,overthepastfiveorsixyears,firmafterfirmhasfoundthataddingnonsynergisticnewser-vicescanbeveryexpensive,bothintermsofthecostsofmaintainingtheexpertisetodelivertheseservices,andthecostsoflaterdiscontinuingthem.Thecostsarefinanciallosses,thedepartureofownersthatdevelopedislandspecialtyniches,andthelostfocusofthefirm.So,beforeafirmlaunchesanewservice,itneedstoanswersomekeysynergisticquestions,including: •Whyarewelaunchingthisservice?(Areourclientsdemandingit,ordowehavean

ownerinterestedinprovidingit)? •Whatwilllikelyhappeniftheservicesucceedsorfails?(Forexample,iftheservice

succeeds,willitlikelybespunoffbecauseitissodisconnectedfromtheothereffortsofthefirm?Ifso,areyoujustfundingastart-upbusinessforoneofyourownerstosteal?)

•Doesthisservicelogicallyfitwiththeotherservicesyouoffer? •Logically,willthisservicebeusefultoyourcurrentclients?(Ifnot,doyouhavea

strategicpurposetoattractanewsetofclients?) •Whatareyourexpectationsforthisservice?(Whenwillitbreakeven?Howlong

areyouwillingtosupportit?Howdoyoudefinesuccesssothatyouwillknowwhenithasbeenachieved?)

•Whoisgoingtochampionthisservice?(Doesthatchampionhaveanycloutwiththeexistingownergroup?Ifnot,haveyouanticipatedthattheservicewillprobablybedoomedwhenithitsthefirstbumpintheroad?)

A Final Word About New Services SelectionTosummarizethecommonfailingsencounteredinthisarea,itisimportanttounderstandthat: •Allservicesarenotalike;theydonotallhaveanequalchanceofsuccess. •Aservicethatissynergisticforonefirmdoesnotmeanitwillbesynergisticforev-

eryfirm. •Islandservicesthatarenotstrategicallyinitiatedwillwindupcostingthefirmagreat

dealofmoneyifyoueventuallydecidetoshutthemdown.Onceyouhavedecidedwhatservicestoofferandpromote,thenextquestionis,“Who

isgoingtobuythem?”


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Fortress Approach Versus Empire Approach Growth StrategiesMostfirmsthinkmarketingissynonymouswithnewclientdevelopment.However,mar-keting isaboutallbusinessdevelopment.Beforeyouofferany service,youneed toun-derstandwhotheserviceistargetedtoserve,andwhyitisimportantforyoutoservethatmarket.

Tohelpfirmsworkthroughthis,MichaelleCameron,Ph.D.,aprofessorofmarket-ingforSaintEdwardUniversityinAustin,andIdevelopedmarketingconceptscalledtheFortressandEmpireapproaches.Herearesomeverybasicdefinitionswehaveattributedtotheseterms:

Throughouthistory,fortresseswerebuiltinordertoprotectcommunitiesfromoutside

forces.Barrierswerecreated,likewallsandmoatstofendoffwould-beattackers.The

vastmajorityofthedailyneedsofthecommunityweresuppliedfromwithinthewalls

ofthefortress.

Empireswerebuiltbyconqueringnewterritoriesandexpandingwellbeyondorig-

inalboundaries.Thecommunity’sneedsweresuppliedthroughacombinationofthe

resourcesavailablewithintheempire’sownfortressandinthenewwealthfoundinthe

annexed/conqueredprovinces.

Giventhesedefinitions,thefollowingsectionsaddresshowweusethesetermstodrivethemarketingstrategyofprofessionalservicesdevelopment.

The Fortress ApproachTous,thefortress approachembracesafocusonclientretention,anobjectiveofserviceex-tension(“growthinshareofthewallet”),andastrategyofnewclientsthroughreferrals.Thegoalistoinformthecommunity(existingclients,friends,andsupportiveserviceprofession-als)aboutthediversityofservicesofferedbythefirm.

Therefore,bydevelopingoverallclientaware-nessaboutallofyourservices,yougenerateseveralpredictableoutcomesforthefollowingreasons. 1.Because you have made your clients and

friendsmoreawareofthenumberofservicesyouoffer,theyarefarmorelikelytoaskyouforassistance.Withoutthiscontact,those

sameclientsmightseekassistancefromothersbecausetheyarenotawarethatyourfirmcanhelpthem.

2.Apotentiallyevengreaterimpactmaybethatthosesamepeopleareinafarbetterpositiontoreferworktoyounowthattheyknowyoudomorethanjusttheirkindofwork.

3.Youenhanceclientloyaltytoyourfirmwhenclientsfeeltheirtrustedprofessionalscanhelptheminadditionalways(eveniftheydon’tneedthoseservicesrightnow).Logically,evenmoreloyaltyaccruestothefirmwhenyouactuallyprovidethoseadditionalservices.

Remember, the vast majority of your clients think your firm offers no more than the services they currently buy from you.

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4.Bybuildingawallofservicesaroundyourclients(andmakingthemawareofthoseservices),youarelesslikelytofindoneofyourcompetitorsinfiltratingyourclientbasebyprovidingtheservicesthatyourfirmoffersandcouldbeproviding.

Arealplusofthefortressapproachisthatittypicallyreturnsthegreatestbenefitsintheshortestamountoftime(whetherthatbenefitisprofits,utilizationofservices,orattendanceatanevent).Itisfareasiertogettheattentionofandengagewithpeoplewhoalreadyknowyou,trustyou,andhaveconfidenceinyourabilitytoprovideservices.So,assumingyouaremakingcontactwithclientsand/orreferralsourceswithunsatisfiedneeds,youcanuseinex-pensivemediatoquicklytapintoestablishedrelationshipstoattractattentionandsales.

The Empire Approach Asecondmarketingalternative,theempire approachisusuallytakentoacquirenewclientsordevelopanewnichespecialty.Itrequiresalong-termhorizonandistimeandresourceintensive.Youusetheempireapproachwhenyouexpectthedemandfromyourcurrentclientbasewillnotfullyutilizetheservicesupply.Thesuccessofthisservicedependsonaddingnewclients,i.e.,newterritorymustbeconquered.Considerthetechnologyserviceinourearliersamplescenario.Asoftenhappens,thefirminourexamplefoundquicksuc-cessbygoingaftertheiruntappedclientdemandwiththeirnewlyofferedservice.Thisisanimportantinitialstrategywhenlaunchinganempireservicebecauseyoucanunderwritepartofthecostoflaunchinganewservicebyskimmingthecreamofdemandfromyourcurrentclientswhileyoudevelopyourlongertermmarket.However,asmanyfirmsdo,ourexamplecaseoverlookedthesecondpartofthatapproach,the“while you develop the longer-term market”part.Sincethetechnologyservicewasnotsynergisticwiththeirotherservices,thefirmdidnothaveanexistingclientbasethatcouldsustainthenecessarysupply-to-demandratio.BythetimeWintersandAssociatesrealizedthatamixofnewandexist-ingclientswouldberequiredforthetechnologyservicetobesuccessful,thefirmhadlostalmostayearofcriticalempire-building,marketingtime.Itisimportanttonotehere,forclarificationthatthemarketingcampaignapproachandmessagingisvastlydifferentdepend-ingonwhichstrategy(fortressorempire)youchoose.

Fortress Approach Versus Empire Approach and Marketing New ServicesRandomlypickingnewservicestoofferinordertomakeafewextrabucksismostlikelytoproveextremelycostlytothelong-termpositioningandsuccessofthefirm.Herearethesteps,inorder,thatyourfirmshouldtake: 1.Strategicallydeterminewhatservicesyourfirmwantstolaunch. 2.Understandwhetheragivenserviceissynergisticoranislandservice. 3.Considerboththefortressandempireapproachestodeterminethebestmarketing

strategy.Ifyourcurrentclientcommunitycancontinuallypurchasemostofthesupplyavailable

forthisservice,afortressapproachwillbebest.Iftheservicecannotbesupportedlongtermbytheexistingclientbase, thenyouneedtoreevaluatewhyit is important tooffer thisserviceinthefirstplace.Onceyouaresatisfiedthatlaunchingyournewislandserviceistherightcourseforyourfirm,thenyouwillneedtolooktotheempireapproachforguidanceastohowtoproceed.


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Fortress Approach Versus Empire Approach and Their MarketsThefollowingarethreeexamplesthatdemonstratethetwomarketingapproachesandtheaudiencestowhichtheycater.

Example 1. Fortress Approach: Thecurrentclientsandyourreferralsources(professionalrelationships[attorneys,insuranceagents],friends,family)withwhomyoualreadyhaverelationships.Thesepeopleknowyou,andrespectandtrustyourfirm.Theyarelikelytoatleastglanceatanymessageandinformationyousendthem.

Example 1. Empire Approach: Prospectsandnonclientshavenorelationshipwithyouandwillmostlikelyimmediatelytrash,delete,andignoreanythingyousendthemuntilyourorganizationbecomesaknownquantity.

Underthefortressapproach,ittakesonlymonthsforyourmarketingtobegintohaveanimpactoncurrentclientsandreferralsources.Undertheempireapproach,ittakesyears tohavethesameimpactonprospectsandnonreferredclientsbecausethereisnoexistingrelationshiptoleverage.

Example 2. Fortress Approach: Currentclientsandreferralsourcesnotonlyhavenoproblembuyingservicesfromyouorreferringservicestoyou;manyofthemwantto.Ifyoutellthemyoucanhelptheminaspecificarea,theyareeasilyconvincedthatyouarecapableofdeliveringnewservicestothembecausetheytrustyou.Andtheywillcontinuetotrustyouuntilyougivethemreasonstofeelotherwise.Theonlyissueistomatchtheirneeds(ortheneedsofthereferredparty)toyourskills.Therefore,muchofyourmarketingeffortswiththisgroupshouldbefocusedonhelpingthemunderstandthevariouswaysyoucanprovideassistance.

Example 2. Empire Approach: Prospectsandnonclientsdonotknowyou,donottrustyou,anddonothaveanyreasontobelievethatyoucanhelpthem.Inordertogettheminterestedintalkingtoyou,youhavetoconvincethemthatyourspecialexpertise,knowledge,andskillisuncommon.Giventhecriticaldifferencebetweentheempireandthefortressapproaches,itshouldcomeasnosurprisethatempiremarketingeffortsareallaboutestablishingnicheexpertise.Onceprospects(nonclientsthatarenotreferredtoyou)startbelievingthatyouhaveuniqueexpertise,youareabouthalfwaythere.Next,thosesameprospectshavetohaveaneedthatisnotorcannotbeservedbysomeonetheyalreadytrust.Logically,whenyoumarkettoprospects,manytimes,youreffortsfirstbenefiteveryonebutyoubecauseyourmessageswillprompttheprospectstocontacttheircurrentserviceprovidersfortheassistanceyouaretryingtosell.



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Underthefortressapproach,newbusinessandserviceopportunitiesaregeneratedmuchmorequicklyandatfarlesscostthancurrentclientsandreferralsources.If,forexample,yousendtheseclientsamailing,youcandependonthemtoreaditthefirsttimetheygetit.Becauseyouareeducatingthisgroupabouttherangeofassistancethatyourfirmcanprovide,they(orpeopletheyknow)willcallyouasopportunitiesarise.Undertheempireapproach,youhavetotraveldownamuchlongerroadtoreachprospectsandnonclients.First,youhavetoconvincethemthatyouhavespecialexpertisethatwouldbenefitthem.Thisisespeciallydifficult;sincetheydonothavearelationshipwithyou,itishardtogettheirattentionlongenoughtogetthemtolistentoyou.Thebadnewsisthat,evenifyoumanagetogettheirattention,youstillhavetobeluckyenoughfortheprospecttodecidetoseekassistancefromyou,ratherthanfromsomeotherprofessionalwithwhomtheyalreadyhavearelationship.

Example 3. Empire Approach: Inmarketingtoprospectsandnonclients,itisbesttotargetnicheindustriesorserviceareas,because,first,youaretryingtoconvincethemofyourexpertise.Thereasonissimple.Youaretryingtoconveythemessagethatyouknow,understand,andcanhelptheprospectbetterruntheirorganizationsormanagetheirproblems.Itiseasiertoaccomplishthisifyoucanmentionthespecificconcerns,obstacles,andopportunitiesthatfacethem.So,ifyoutargetmanufacturingprospects,youaremoreapttogettheirattentionbyspeakingtheirlanguageaboutthepitfallsofMRP(materialsrequirementplanning),thevalueofdoingsomesimplecapacityplanningandtheavoidablecostsofreworkandidletime.Ifthemessagesyousendaregeneralinnature,theseprospects,withwhomyouhavenopreviousrelationship,havenoreasontobelievethatyouunderstandtheirworld.Whatistrueforanindustryistrueforaservice.Forexample,itisfareasiertocatchtheeyeofalitigationattorneywhomightneedassistanceinanupcomingcaseifyoutalkabouthowyouhaveprovidedlitigationconsultingservicesthathavedeliveredvaluetothefinaloutcomeofatrial,howyourexperiencetestifyingonthestandhasbenefitedthoseyouserve,ortipsandtricksthatexpertsneedtobeawareofwhenbeingdeposed.

Undertheempireapproach,althoughnicheindustryandservicemarketinghelpsyouconvinceprospectsofyourexpertisemuchmorequickly,itstilltakesalotoftimeforyoutobuildabrandwithsomeonewhodoesnotalreadyknowyou.(Forexample,consideramailing.Youwillbeluckyifaprospectpaysenoughattentiontothefirstthreeorfourmailingstorecognizeyournameandlogo.Aftersixorsevenpieces,yournameandlogomightstarttoseemfamiliartotheprospectbecauseheorshehasseenitsomanytimes.Thisrecognitionmightinducetheprospecttoglanceatyourmaterialstoseewhyyouarebeingsopersistentinmakingcontact.Bytheeighthorninthcontact,youwillprobablygetafullreadingofyourmaterials—thelevelofattentionyouwouldhavereceivedhadyousentthispiecetoaclientorreferralsourceforthefirsttime.Consideranichemarketingapproach,inwhichyoustaythecourselongenoughtocreateawarenessofyourorganization.Your


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marketingeffortsarefundamentaltogettingtheprospect’sattention.Nevertheless,eveninthisinstance,mostofthetime,arecommendationbysomeoneinyourfortressisstillthefinaltriggerthatpromptstheprospecttocontactyou.

The Empire Approach and Prospective ClientsGiventheprecedingdiscussion,itwouldbeeasytoconcludethattheempireapproachisbestavoided.However,eventhoughtheempireapproachisdefinitelymoretime-consum-ing,costly,andslowtobringresults,therearemanytimeswhenitisabsolutelythebestalternative.Hereareacoupleofexamplesinwhichempireistheoptimumapproach: •Offeringtechnologyserviceseventhoughmostofyourclientsareindividuals •Launchingalitigationsupportservicetolitigationattorneyseventhoughyoudonot

specializeinservingthelegalcommunity •Offeringtheutilityindustrysupportserviceseventhoughyourclientbaseispre-

dominantlysmallbusinesses •Offeringwealthmanagementandinvestmentserviceseventhoughthebulkofyour

clientshavetotalassetsoflessthanacouplehundredthousanddollarsAnothercommonexampleoftoday’smarketopportunitiesistheserviceareathathas

beenlegislativelycreatedandhasashortwindowofopportunitytoleverage.Considerser-vicesrequiredbytheGovernmentAccountabilityOffice(GAO)andtheSarbanes-OxleyAct.Becauseof this legislation,organizationsof all sizes eithermustorhavevoluntarilyoptedtocreateamoredistinguishable linebetweenattestandnonattest services.Asyouknow,fortheseclients,thismeansyoueitherhavetogiveuptheattestorthenonattestworkthatyouhavehistoricallyprovidedbecauseyouarenolongerpermittedtodoboth.Althoughthisseemslikebadnews,thegoodnewsforamarketing-orientedfirmisthatthenewrulesapplytoeveryotherCPAfirm.GiventhelikelihoodthatalloftheotherlocalandregionalCPAfirmshaveacombinedclientbasethatislargerthanyours,practitionershavehadanopportunitytoacquirefarmorenewworkthantheamountofworktheyhadtogiveup.Therefore,therewasauniqueandrareopportunitytopickuplucrativeprojectsfromorganizationsthatwerealsobeinghappilyservedbyyourcompetition.Severalexamplesthatcometomindare: •Reviewinginternalcontrolsandmakingrecommendationsforimprovements •Projectingrevenues,expenditures,andfundbalances •Assistingwithvarioustechnologystrategyandimplementationprojects •Investigatingfraudmatters

Inthesecases,youshouldusetheempireapproachtotargetprospectsinindustriesyoucurrentlyserveforthoseservicesthatcannolongerbeperformedbytheirauditors.Ex-amplesofindustriesaffectedbythislegislationaregovernmentagencies,schools,SecuritiesandExchangeCommission(SEC)companies,certainnonprofits,andmanymore.Consid-eringbothdiscussionsabove,eitherbecauseoftheservice-synergydisconnectortheforcedchangeresultingfromthelegislationanditsrules,theempireapproachisthebestwaytoleveragethesekindsofsituations.



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The Empire Approach and Existing ClientsItisrightabouthereinmydiscussionswithfirmsthatthequestionarises,“Ifnichemarket-ingisthemosteffectiveforprospectsandnonclients,thenwhynotusethesameapproachonyourcurrentclientsandreferralsources?”Theansweris,“Youmight!”If,forexample,yourfirmhasaspecialtyinconstruction,thenyoumightcreateacampaignwithmessagestargetedspecificallytothem,andsincethemessagesarefocusedonspecialtyandexpertise,thesamecampaigncouldalsobeusedtomarkettoprospects.Thistypeofapproachwillhelpyourcurrentclientsthinkofnewwaysforyoutoservethem,remindthemofwhyyourfirmcanuniquelyservethem,andalsokeepyouintheirminds,forreferraltotheircontractor friendsandassociates.Althoughthiscampaignwill likelyattract someinterestfromprospectsayearortwofromnow,therealbenefitsyouaremorelikelytoreapintheshorttermaregrowthin“shareofthewallet”forserviceswithcurrentclientsandnewcli-entreferrals.

Consider this interesting twist:Youalsowant todo somemarketingof thegeneralservicesyouoffertoyournicheorindustryclients.Why?Ifyouonlymarketnichespecificmessagestoyourcontractorclients,thenyoumayunintentionallylimittheuniverseofre-ferralsthatwillbeprovidedbythoseclients.Inotherwords,contractorshavemanyfriends,associates,andfamilywhoarenotcontractors.So,iftheseotherpartiesaskthesecontractorsforreferrals,thecontractorsmayreferthemtoafirmotherthanyours,inthebeliefthatyouspecializeexclusivelyintheirindustry.

Hereisonefinalidea.Becauseprofessionalservicemarketingisasmuchaboutgen-eratingreferralsasitisaboutsellingnewservicestoexistingclients,everysingleclientandreferralsourceneedstobeincludedinyourcontactlist.Donotbesurprisedifthatsimple1040clientsendsyouagreatbusinessclientbecausethetwohavebeenfriendssincehigh-school.Becauseyourmarketingmadeyourclientawareofthemanyservicesyouoffer,heorshecanstillgenerateexcellentreferralsforyourfirm,eventhoughheorshewouldneverneedthoseservices.

Rememberthat,whenyouselltoyourempiremarket,youaresellingcompetenceandexperience.Why?Becausethepotentialclientsdonotknowyou,youmustgivethemareason(youruniqueability)tocallyouinsteadofsomeonetheyalreadyknow.Whenyouselltothefortressmarket,youneedtofocusyourmessagesonhowyoucanhelp.Why?Sotheclientsorreferralsources,whoalreadytrustandrespectyou,canquicklydeterminehowyourskillsandexperiencecanbeappliedtotheirsituationsorthoseoftheirfriends.

Fortress Approach Versus Empire Approach and Marketing ToolsNow,ratherthanapplythislogic(fortressorempire)justtoservices,letusputthisinalarg-erperspectiveusingcommonmarketingtools.Takeanewsletterforexample.ItisnormalforCPAfirms’newsletterstodedicate70percentormoreoftheiravailablespacetotechni-calmatters.Thistypeofnewsletterconveysthatyouareanexpertandacompetentserviceprovider.Hereisthequestion:“Isthenewsletter,inthesituationdescribedabove,beingusedtosupportempireorfortressmarketing?”Ifyouanswered,“Empire,”youarecorrect.Demonstratingexpertiseandcompetenceisimportantifyouwanttointerestpeoplewhoareunfamiliarwithyourwork.Now,letuschangethenewslettertofocusthesameamount


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ofcontenton“successstories(storiesaboutservicesperformedatvariousclients),”narrativesaboutnewemployeesandtheirskills,andwaysyoucanhelpyourclients.Thisnewsletterisnowreadytosupportafortressmarketingapproach.Overandover,theproblemwithmostfirms’marketingisnotthetoolormediumtheyareusing,buthowtheyareusingit.Toooften,empiremarketingmessagesconsume fortressmarketingcampaigns andviceversa.Comingbacktoourfirstnewsletterexample,ifanewsletterisfocusedonconvincingyouraudienceofyourexpertandtechnicalability,andyousendittoyourcurrentclients,youarewastingtime,money,andpaper.Acommoncommentfromtheaudienceis,“Idon’treadthetechnicalstuffinthenewsletterbecausethatiswhatIpaythemtodo.Ifitappliestome,theywillcallme.”So,thenewsletterisnotabadidea;howyoudeployitcanbegoodorbad.Messagesthatwillmotivatethefortressmarketplacearecompletelydifferentfromthosenecessarytomotivatetheempiremarketplace.Ifyouusebothstrategiesinyourfirm(whichiscommon),itiseasytogetsloppyabouthowyoucommunicatetoeachgroup.Lookateachmarketingpieceyouareutilizingandconsidereachofthefollowing: 1.Determinewhetheritistargetedatprospectsorclientsorreferralsources. 2.Ifitistargetedatprospects,itshouldfocusonexpertiseandcompetence: a.Useamorenicheindustryorservice-orientedapproachtomakeyourmessages

resonate. b.Planonaone-totwo-yearconversionrate,andmakesureyouhaveincluded

manycontactsintoyourplanoverthattime. c. The empire approach is commonlymarketing to somepeoplewhodonot

knowyou,nordoyouknowthem.Consequently,youhavetousemorege-nericmedia,suchasnewspapers,trademagazines,radio,purchasedcompanylists.Thesemediaandapproachesalsoraisethecostbecauseyouarespend-ingmoney contacting peoplewho will never have an interest in your ser-vices.(Yourcostpercontactislow,butyourcostperqualifiedcontactisveryhigh.)

3.Ifitistargetedatclientsandreferralsources,itshouldfocusonhelpingtheaudienceunderstandhowyoucanhelp:

a.Markettoallofyourclientsandreferralsourcesbecauseyouarelookingforbothnewclientreferralsand“shareofthewallet”growth.

b.Thewholepointofyourcampaignistostayonthemindsofthosepeoplemostlikelytohireorreferyou.

c. Becauseyouknowexactlywhomakesupthisaudience,yourcostperqualifiedcontactisverylow.

4.Youshouldonlyselloneortwoservicesatatime.Ifyoutrytoselltoomuch,youwillendupnot sellinganything. (Note that ifyoutry tosell toomany ideaspercontact,becauseoftheminusculeamountoftimeandattentionyougetfromyouraudience,youwillnotconveyaclearmessage.Andmoreoftenthannot,youwillappeartobeajack-of-all-tradesandamasterofnone.Singular,simple,clear,con-cise,andrepetitivemessagesarethefundamentalsofselling.)

5.Donotspendtimeandmoneymarketingtoyourempireaudienceuntilyouhaveastrongfoundationofmarketingtoyourfortress(unlessyoulackafortresstomarket).



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Oncethefortressmarketingengineisinplace,youcanlayeronvariousempirecam-paigns.Themostcommonmistakeisthatfirmsrarelydoanymarketing,andwhentheydo,itisallempiremarketing.Thisisaterribleuseofresourceswhen80to90percentofyourgrowtheveryyearwillcomefromeitherclientservicegrowthorclientreferral.

Byincorporatingandutilizingtheapproachbestsuitedtotheservicesyouofferandthemarketingtoolsyouuse,youshould: •Improveyourabilitytoplanbecauseeachstrategyhasnuancesandmarketreactions

youcananticipate. •Bebetterabletorespondtoyourmarketplacewithappropriateservices. •Beabletomoreconsistentlysendmessagesthatwillmotivateyourclientsandpros-

pectstoaction. •Significantlyimproveyouroddsforsuccesswhenlaunchingnewservices. •Enhanceclientsatisfactionandloyalty. •Beabletoaccomplishalloftheabovemoreefficientlyandatlesscostthanevolving

withouttheuseofthismethodology.We hope this discussion about fortress and

empire has made it more clear how to best le-verage your marketing resources. We hope thisdiscussionalsohelpsyoutakeafreshlookattheservicesyouofferandthesynergybetweenthem.Finally,wehopewedrovehome thepoint thatyouneedtobuildamarketingenginetosupport

yourfortressbeforeyouspendmuchtimeandenergytryingtoexpandyourempire.

Passive Marketing Versus Active MarketingNowthatwehaveestablishedwhowearemarketingto,andhowtoapproachourmarket-ingmessaging,letusconsiderthethreestrategiesofmarketing.Theyare: •Passivemarketingtoourclientsandreferralsources •Passivemarketingtotargeted,segmented,ornicheprospects •Activemarketinginadditiontoourpassivemarketingtoalltopclientsthrough

personalcontactTheprecedingthreestrategiescreatethefoundationofamarketingapproachthatIcall

“thedripsystem.”Thepurposeofthisapproachistokeepyourfirminthemindsofyourclientsandreferralsources.Todothis,youhavetodevisewaystostayintouchwithyourtargetedaudiencesaboutonceamonthtoonceeverysixweeks.Donotexpectafloodofresponsesfromtheuseofthissystem.Expectthesameresultyouwouldifwaterwasdrip-pingoutofafaucet.Inthebeginning,thedripfromthewaterhasverylittlecumulativeef-fect.But,afterhours,days,months,andyears,theaccumulationofwaterbecomessubstan-tialandbeginshavingasubstantialimpact.Thesameistruewiththismarketingapproach.Aconstantdripofcontactfromyourfirmtoyourtargetedaudienceswillbuildagreaterawarenessoftheservicesyouoffer,ahigherchanceofreferralfromthatsameaudience(inmindversusoutofsight),andincreasethelikelihoodthatyouraudiencewillcontactyoutohelpassistthem.

Once your fortress is protected, it is the right time for some well-planned, strategically initiated empire building.

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Now,letusdiscussthedistinctionbetweenthetermspassiveandactivemarketingasusedinthisdocument.

Passive MarketingPassivemarketingreferstothewaywecontactthetargeted,segmented,ornicheaudience.Forexample,typicalpassivemediumsincludeclientletters,postcards,e-mails,andtrade-specificadvertising(i.e.,anindustry-specificmagazine).Icallthisapassivestrategybecauseownersandmanagersdonothavetobeinvolvedintheday-to-dayimplementationofthisapproach.Thisstrategyisreallyanadministrativefunctiononcethevariousmessages,me-dia,andtimeframesaredecidedupon.Itisthefoundationforcreatingafirmwidemarket-ingengine.

Active MarketingOntheotherhand,activemarketingeffortsrevolvearoundface-to-facecontactandlogi-callycenteronone-on-oneinteraction.Thisapproachisconsideredactivebecauseallofthosewhohaveclientaccountmanagementand/orreferralsourcerelationshipresponsibili-tieswillbeaskedtoactivelyandproactivelycreate,maintain,andreportbackonhowtheirregularlyscheduledpersonalvisitsanddiscussionsareprogressing.Thisstrategyisfar-and-awaythemosteffectivetechniqueforattractingnewbusiness(bothgrowthin“shareofthewallet”[newprojects]andnewreferrals).Thisisyourmarketingworkhorse.

Ifactivemarketingissoeffective,shouldallofyourmarketingeffortsbefocusedonthisapproach?No,andthefollowingarethereasonswhy: •Ifeveryoneinyourorganizationmadepersonalvisitswithallofyourclients,you

wouldlikelygobrokeduetononbillabletime. •Youwanttobeinmindthroughouttheyearwithyourclientsandreferralsources,

notjustoccasionally.Creatingamarketingenginethatrunsallofthetimepaysdivi-dends,especiallywhenaugmentedbypersonalvisits.

•Notallofyourclientsareworthy(i.e.,return-on-investmentworthy)ofapersonalvisit.Itdoesnotmakesensetotieupa$200perhourpersontospendacoupleoffreehourstalkingtoa$300peryearclientopportunity.

•IfyourCPAswereinclinedtospendalloftheirtimeselling,theywouldhavechosenadifferentcareer.Youwillgetsignificantpushbackifyoudonotcreateadefinedcontactplanwithspecificclientassignments,andamonitoringsystemtosupportthefollow-throughprocess.

Active Versus Passive Contact ListsIfwearenotgoingtotalkwitheveryone,thenwhogetsincludedintheactivecontactlist?Aswithmostbusinesses,thereisageneralized80/20rule.Althoughthesepercentagesmayvaryforyourfirm,thephilosophybehinditwillmostlikelyapply.Thisrulestatesthatabout20percentofyourclientsgenerateabout80percentofyourtotalfees.Foryou,15percentofyourclientsmaygenerate70percentofyourfees,butthepointisstillthesame.Ifyoumadepersonalvisitstothe70to80percentofyourclientsthatgenerate15to20percentofyourfees,yourchargehoursandprofitabilitywouldtank,andtheamountofbusiness



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gainedoverallwouldbeminimal.Therefore,myactivemarketingapproachfocusesonthefewclientsthatmakeupthemostbusinessratherthanthereverse.Itisalsoimportanttonotethis informationinthecontact list.Finally, includeyourtopreferralsources inthiscontactmixaswell.

AlthoughIwanttomakeitclearthataneffectivefirmwidebusinessdevelopmenten-ginehastoleveragebothmarketingmechanisms(bothpassiveandactive),theunderlyingprinciplethatpermeatesallaspectsoftheplanistheobjectiveforclientstokeepyourfirminmind.Ifyoudevoteallofyourresourcestomakingpersonalcontact,thenyouwillnotbeabletocyclethroughallofyourclientsfastenoughtoaccomplishthis.Yourobjectiveistoeducateyourmarketplaceastowhatyouhavetoofferthemallofthetime.

Thinkofanautomobiledealership.Suchabusinessdoesnotspendallofitsadvertisingdollarstomakeabigsplashinoneortwomonthsofnewspaperads.(Bytheway,theadsarepartofthebusiness’sempireapproach,butbecauseadealershipisaretailbusiness,therulesaredifferent thanforprofessional services.)Autodealerships typicallymarket throughouttheyearbecausetheywanttobeinmindwhensomeoneintheirmarketplacewantstobuy.Forexample,ifyouareveryhappywithyourcar,thelikelihoodofyourlookingatvariousautomobilepromotionaladsisminimal.However,ifyourcarwastotaledonenightwhileparkedonthestreet,yourinterestinareplacementvehiclewouldskyrocketbythenextmorning.Thepointisthatyouwantfrequentexposuretoyourtargetedaudiencebecauseyouneverknowwheninterestwillpeakregardingwhatyouhavetooffer.

Finally,spendingtimesellingservicestoclientsandreferralsourcesisstressfulandwillbeavoidedatallcostsbymanyofourprofessionals.Theonlywaytochangethisdynamicistoshifttheeventfromoneofselling,tooneoflivinguptoourmantraof“beingourclients’mosttrustedadviser.”Theimportantnuanceisthattheclientconversationisnotaboutwhatthefirmhastooffer,butrather,whattheclient’sorganizationneedstomeetitsfutureobjectives.Professionalsareattractedratherthanrepelledfromparticipatingintheseconversationsas soonas theybecomeconvincedthat theobjective is tobetterassistandservetheirclients.Obviously,youcanonlydedicatethislevelofresource(yourpeople’stime)tothoseclientsandreferralsourceswiththegreatestpotential.

Assumeyouwanttoremainprofitable,developmorebusiness,maintainastrategyofbeingkeptinmind,andyouwantyourpeopletobecomfortableandengaged.Thismeansthatyouwillreservetheactivecomponentofyourmarketingstrategyonbeingregularlyinfrontofthe15to20percentofyourclientsthatmakeup70to80percentofyourrevenuesaswellasyourtopreferralsources.Idefineregularlyasonceaquarter(withthenormaltaxseasonconversationscountingasthecontactforthatquarter).Thepassivemarketingstrat-egyisusedtoaugmenttheactivepersonalmarketingeffortsaswellassupportyourin-mindobjectivewiththeremaining70to80percentofyourclients.


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Business Development PlanItistimetomovefromaphilosophicaltoataskfocus.Thefirststepistobuildabusinessdevelopmentfoundation.Thatfoundationhasfoursteps.

Step 1. Createanup-to-datedatabase.Step 2. Classifyclients.Step 3. Developanactivemarketingstrategy.Step 4. Developapassivemarketingstrategy.

Eachstepisdiscussedbelow.

Step 1. Create an up-to-date database. Youneedaneasywaytoregularlyaccessallofyourclientsandreferralsources’namesandaddresses.Animportantpartofthisprocessistoalsoidentifythoseclientswhoshouldnotbecontactedandomit themfromthe list.Clients that shouldbeomittedmight includethosewithmultipleentities.Althoughyoumightdefinitelywantthisclientonyourcontactlist,youprobablywillnotwanttosendthatpersonthreeorfourpiecesofthesamemarket-ingmaterials.Anotherexampleistoomitayoungchildofaclient.Youmaypreparethatchild’ssimpletaxreturn,butyoulikelywouldnotwanttosendmarketingmaterialstohimorher.Whatremainsshouldbeacleanmarketinglistofclientsandreferralsourcesthatcanbemailedasanormalpartofimplementingthedripsystemmarketingplan.

Cleaningupthedatabaseisusuallyadifficultandtime-consumingprocess;donotbesurprisedifittakesseveralmonthsoffocusedeffortbysomeoneinyourfirm.Theownersandmanagerswillcomplainbecausetheywillhavetogothroughnumerouslistsmultipletimes.

Animportantnuancetobuildintothispro-cessistheunderstandingthatownersandmanag-erswillwant toomitvariousclients and referralsources from certain mailings and messages. Af-ter themaster list iscleanedup(byensuringtheproper names, addresses, salutations, and e-mail,andbyomittingduplication),managementshouldfine-tune the list by addressing exceptions. Thisstep is another explanation for why owners and

managerswillhavetomakemultiplepassesatthelists.Anexampleofanexemptionisanownerwantingtoomitseveralofhisorherbankerorbrokerreferralsourceswhenthefirmismarketingwealthmanagementservices.Asyoucansee,withnumerousservicesandclientpersonalities,listmanagementcanbeacomplicatedprocess;eachmarketingsubjectmightliterallycallforthecreationofauniquelist.Logically,beforethisprocesscanbefinalized,thedatabasehastobebouncedagainsteachofthemarketingmessagesplannedforthenext12to18months.Ifyoudonottakethisapproachandgetalltheapprovalsinadvance,theownersareapttoprocrastinateonsigningoffpriortoeachplannedcontacttothepointthatthefoundationforyourdripsystemwillcrumbleundertheweightofinconsistency.

You want to get the database right so that the mailing and e-mailing task of making regular contact can be done by administration, with-out owner and manager approval each time.

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Step 2. Classify clients.Oncethemasterlistisclean,gothroughitandclassifyclients.Firmscommonlysegmentclientsintoclassificationsinordertotargetthem.Forsimplicity,Ihaveusedsomecommonclassifications(A, B, C,andD)andthegenericdefinitionsthatfollow,asastartingpoint.Passivemarketingappliestoallcategoriesofclientsandreferralsources.

ActivemarketingistargetedforallAclientsandreferralsources.Ifthereispersonalmarketingbandwidthleftover,startdowntheprioritizedBclientandreferrallist.Generallyspeaking,firmsincludeallAandwhatIcallHigh Bclientsandreferralsourcesintheactivemarketingprogram,i.e.,thoseBclientswiththemostpotential.

Clientdefinitionsarethefollowing:A AnAclientisoftendefinedasoneof15to20percentoftheclientsthatmakeup

70to80percentofthefirm’srevenues.Ifyousortedyourclientsbyrevenuesforlastyear,youwouldquicklyidentifythoseclientsthatgeneratedsubstantialfeesforyourfirm.AnAclientisonethatyouareprobablyadequatelyserving,onethatwillcontinuallyhavenewprojects foryoutodo,andonethatgeneratessizablerevenuesforyourfirm.

B ABclientisonethatyouarerightnowmostlikelyunderserving,butwhohasanopportunitytogeneratesizablerevenuesforyourfirm.Forexample,youmighthaveabusinessclientforwhomyouonlydotaxreturns.However,basedonwhatyouknowofthebusiness(i.e.,theyare$5millioninsizeorhavea100employees),youcouldeasilyprovidethousandsmoredollarsinneededservices.

C ACclientisaclientthatdoesnothavemuchadditionalserviceopportunityotherthanwhatyoualreadydo,andtherevenuesgeneratedaresmall.However,theyaregoodclients,donothavecomplexsituations,payyouontime,payaverageorbet-terfees,andarepleasanttoworkwith.Thebestdescriptionofthisgroupofclientsistheyareyourtypicalindividualtax-return-onlyclients.DonotconfusetheC ratingwithschoolandassumetheyneedtobecomeBclientstomakethegrade.AfirmcanhaveallCclientsanddoverywell.

D AD client could seemingly fall into any of the classifications above.However,these clients present at least one of a number of possible problems.Theymostlikelyareunprofitabletothefirmasaresultofpoorrates,realization,andutiliza-tion.Theyarehardtoworkwithbecausetheyareabrasive,latepayers,ornevertimely(sotheyalwayscreateschedulingproblems);alwayswantspecialaccommo-dations;requireservicesthataredifficulttoprovide(e.g.,theclientwhoistheonegovernmentalaudityouperform,whichisveryinefficientworkforyou);oronlypayyourlastbillasanincentiveforyoutostarttheirnextproject.NoneoftheseissuesaloneautomaticallyclassifiessomeoneasaDclient.Forexample,youmighthavesomeonewhoalwayspayslate,butisanacceptableclientbecauseyouchargepremiumfeesforhisorherwork.Or,someonemayconstantlynegotiatefees,butnevertheless involvesyou inbigprojects thatareprofitable.Generally speaking,mostfirmsknowquicklywhofallsintotheirdefinitionoftheDcategory.Attheendoftheday,youdonotwantanyDclients.Thismeansthatyourobjectiveis


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toeitherfindawaytoconvertthemintoCclientsorbetter,orintroducethemtoyourfiercestcompetitor.Inthelatterinstance,theseclientswillwasteyourcom-petitor’sresourcesinsteadofyours.

Onceagain,aCPAfirmhavingonlyCclientsisnotabadthing.Inthissituation,thefirm’sclientbasecouldbedescribedasaclusterofsmallclientswhopaytimelyandarefuntoworkwith,butwhohavelittlepotentialtoprovideadditionalbusiness.Inthiscase,pas-sivemarketingmaybeallyouneedtodo.Butinordertogrowtheorganizationandreplacethelossesofnaturalattrition,yourpassivemarketingapproachneedstobeinfullgearallthetime.Ontheotherhand,somefirmshavemovedtoamoreboutiquestyleoffirminwhichtheyareveryhandsonwithalloftheirclients,haveabigshareofeachclient’sprofessionalserviceswallet,andhaveastaffthatismadeuppredominatelyofmanagersandowners.ItmaybethatallsuchclientsfitintoanA or Bclassification.Therefore,byprovidingagreatdealoffrequentpersonalcontactandsupporttoeachofaveryfewclients,activemarketingaloneshouldgeneratethenecessarynewbusinessandreferrals.

Thefundamentalthreequestionsthatyouneedtobeabletoanswerarewithfacts,notconjecture: 1.Doyourclientsknowwhatyourfirmcandotohelpthem? 2.Foryouractivemarketingclients,doyouknowwhatiskeepingyourclientsawake

atnight(i.e.,theconcernsandopportunitiestheyaretryingtoaddressatthistime)?Bytheway,animportantpartofthisprocessisforyoutouncoverissuesregardlessofwhetherornotyouareabletoresolvethem.Forissuesthatyoucannotaddress,giveyourclientsreferralstoprofessionalswhocangiveassistance.Italwayssurprisesmehowmanyfirmsexpectprofessionalstoreferbusinesstothem,butwhodonotre-ciprocate.Providingareferralforaneededservicenotonlyhelpstheclient,itmakestheclientwanttotalktoyouaboutalloftheirissuesbecausetheywantthebenefitofyournetwork.Moreover,givingreferralsstimulatesfuturereferralsbacktoyou.

3.Doyourclientsknowwhatyourfirm’s total servicecapability is so that theyarearmedandreadytoreferyoutofriends,associates,andfamily?

For Aandhigh Bclients,theanswerstoquestions1and2aboveshouldbeidentifiedthroughregularlyscheduledcontact.Question3shouldgetanaffirmativeanswerfromyourclientandreferralsourcesasaresultofyourfirm’spassivemarketingcampaign.

Now,Iwanttotakeamomenttomakeaspecialpointregardingquestion2.YouareindangeroflosingA or high Bclientsiftheownerormanagerinchargeoftheseaccountscannotatleastarticulateeachclient’spriorities.Althoughyouprobablywillnotincurtheselossesovernight,youcanbetthatanyunservicedpriorityneedswillbesuppliedbysome-one.Andwitheachpassingday,asCPAfirmscontinuetobroadentheirscopeofservices,acompetitorofyourswilllikelybecalledintohelp.IfthepartnerormanagerinchargeoftheseaccountscanatleastarticulatewhatyourAandBclients’prioritiesareforthenext12to18months,youhaveamuchbetterchanceofsustainingyourrelationshipswiththeseclients;withoutthisknowledge,youarelikelytobeblindsided.Ifclientprioritiesareidenti-fied,youwillbeabletoeitherdelivertheneededserviceyourself,or,ifyourfirmdoesnotprovidetheservice,youwillatleastbeabletorefertheclienttoafriendlyfirmthatwillnotcompetewithyoufortheservicesyoudoprovide.



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IfaclientisclassifiedasaD,thenthepersoninchargeofthatrelationshipneedstodevelopastrategytoconvertthemtoaCclient.Thatstrategycouldbeassimpleasthefollowing: •Wewillbillthemat95percentofthestandardratesthisyearandseewhetherthey

wanttoremainaclient. •Wewilltransitionthisclienttooneofourseniorstafftomanageandbillbecause

theclient’sneedsarebettersuitedtothesenior’sexperiencelevelandbillingrate.Alternatively,thestrategycouldbeasdrasticasthefollowing:

Theownerneedstoinformthisclientthattheaccountmustbepaidcurrentandkept

thatwayortheclientneedstofindanotheraccountant.

RegardingDclients,acommonmisperceptionisthattheyareatleastcoveringyouroverhead.Somethingyouneed tounderstand is thatas longasyouhave thesemarginalclientsinyourworkqueue,theygiveyouasenseofsecurityaboutworkloadandcashflow,buttheywillkeepyourpeople fromservicingandspendingmoretimewithyourmorevaluableclients.Theargumentisoftenmadethatafirmwouldratherhaveaclientpayinga60-percentrealizationoffeesratherthanhavingonepersonsitidle.Ithinkabetterstrategyisforthefirmto: •PassDclientstomanagersandseniorstafftoconverttoCclientsorgetridofthem. •PassCclientstomanagersandseniorstafftomanageandbilltofreeupownerand

seniormanagertime. •SendownersormanagersouttovisitAandBclientsmorefrequently.

Thisapproachallowsyourpeopleto: •Lookforbetterwaystoservealloftheclients.Thisistruebecauseownersand

managerstypicallydonotconsistentlyspendenoughtimewiththeirAandBclients,andthesesamepeopleusuallytotallyignoretheirCandDclients.Bypassingdownthe CandDclients,aDmayautomaticallybecomeaCclientbecauseyouhavetherightlevelofexperience(andthereforebillingrate)workingonthoseprojects.Inaddition,yougiveyourlessexperiencedpeopleachancetogrowthroughon-the-jobtrainingbymanagingandbillingclients.Iftheymishandlesucharelationship,thelosstothefirmisminimal.

•Findnewserviceopportunities.Thisoccursmorefrequentlybecausemanagersandseniorstaffhavetheexperiencenecessarytoreallyprovidevaluetothelesscom-plicatedlow BandCclients.Becausethoseclientsaretheirstomanage,theyaremo-tivatedtodoso.Obviously,ownersandmanagerswillfindmoreworkbystayingintouchwiththefirm’sAandBclients.Theruleiswellknown,“Themoretimeyouspendonsitewithaclient,themoreopportunitiescomeyourway.”

•Maintainandenhancetheirloyalty.Thisoneissimple.Themoreyouhelpyourclients,thegreatertheirloyaltytoyou.

Accomplishingtheaboveisnotallthatdifficult,butusuallyrequiresasignificantchangeinphilosophy.Formostfirms, itmeans theyhave to“reverse thepyramid” inorder toachievethistransition,whichcanbeadifficultbattletowininmanyfirms.


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Step 3. Develop an active marketing strategy.Nowthatyouhavespentsometimeworkingthrough,classifying,cleaningup,andfine-tuningtheinformationinyourdatabase,itistimetoputtogetheryouractivemarketingstrategy.Thefirststepistodeterminethecutoffastothenumberofclientsandreferralsourcestoberegularlycontactedbyyourpeople.Tosimplifyourdiscussionforthesakeofthischapter,let’sassumeeveryonethatyouclassifiedaseitheranA or Bclientorrefer-ral sourcewill fall intoyouractivecampaign.Fromthispoint, it isverystraightforward.Theresultsrestonconsistentimplementation.Theactivecampaignismoreabout“beingaturtle”than“beingarabbit.”Toomanyfirmstrytomakeupforyearsoflostopportunitybysettingcontactexpectationsthatareunrealistic.Afteramonthortwoofeveryoneviolat-ingtheprocess,theinitiativediesofembarrassment.Toavoidthis,startslowandbuild!Aspartofactivemarketing,considertyingcompensationtothegoalofmakingcontacts.Asdiscussed,startwithpayingforleadindicators(Didthepersonmakethecontact?),andthen,overtime,putmoreemphasisonlagindicators(newprojects,newclients).

Foreachclientplacedintheactivecampaign,considerputtinganactionplaninplacetoprovideclientswithregularcontactandahigherlevelofservice.Developingaclientplanworksheetwillhelpyouformalizeyourstrategyastohowyouplantobestservethemaswellastorecordtheclient’sprioritiesuncoveredduringeachscheduledvisit.Animportantuseofa standardizedreport is foryourowner inchargeofmarketing(or themarketingcommittee)torevieweachowner’sandmanager’splanswiththemonceaquarterasakindofamini-businessdevelopmentsession.Thisensuresthatthefirm’sresourcesareproperlyallocated to thoseclients thatneed them, thatall topclientsare receiving timelyqualityservice,andthatthefirmisnotexposedtoacompetitivethreatbyunderservingtheseim-portantclients.Allyouneedisasimplecontactcalendarsothatyoucanmapoutforeachownerandmanagerwhentheyareexpectedtomaketheirpersonalvisits.Ifyouwanttohaveaccountabilityinthisarea,itmustbeclearwhoisassignedtomakethecontactsandbywhen.

AfirmIworkwithputthistogetherapointsystemtrackertostimulatemarketingin-volvementbyeveryoneinthefirm.Apointvaluesystemwasdevisedforeachmarketingtasklistedontheworksheet,basedonfeedbackfromstaffregardingtheirperceptionoftheeffortanddifficultyrequiredtocompletethetask.Becausethisisthefirstyearofitsrollout,thetotalpointsrequiredbyeachgrouphasbeensetlow(withtheunderstandingthattherequirementwouldgrow).Somepeoplearereachingtheirmarketinggoalsinamatterofmonths.Still,whenchangingthecultureofthefirm,youwanttobuilditaroundsuccessandpositivereinforcement.AsIhavestatedsomanytimesthusfar,agoodSOPfoundation,whetheritpertainstomarketing,orcompensationneedstobedevelopedbybeingaturtle,notarabbit.Thekeyistoputtogetheradefinedprogram,spreadthetasksofmarketingtoeveryoneproportionallyinawaythatmakessenseforhisorherjob,anddevelopandmonitorafeedbacksystem.

Obviously,thesekindsofpointvaluesystemworksheetsaremeanttoserveassamples,whichshouldbetailoredtoyourfirm.Evenbetter,thiskindofinformationshouldbepartof an automated contact management system. Some firms use the contact management



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componentwithintheirtimeandbillingsystems;othersusesoftwaretoolslikeSalesforce.com.Nevertheless,theformswillcertainlyworkforsmallfirmsandasaninterimapproachforlargerfirmsuntilabetterprocessisputinplace.Remember,tomaketheactivecam-paignwork,someone(oracommittee)needstoreviewprogresswitheachpersonintheactiveplanonaconsistentbasis.Thatsameperson(orcommittee)shouldalsodiscusswhattheownersandmanagersarefindingoutduringtheirvisitstoensurethattheappropriateinformationisbeinggathered.Ifthediscussionsarefallingshortofcoveringtheintendedsubjectmatter,considertraining,coaching,orcounselingaslogicalchoicestogeteveryoneontherighttrack.

Step 4. Develop a passive marketing strategy.SinceyounowhaveidentifiedyourAandBclients,andeveryonehasapersonalscheduleofcontactstomake,itistimefortheownergroupormarketingteamandcommitteetoputtogetheryourpassivemarketingcampaign.Thefirstcampaignshouldbeaimedatyourcli-entsandreferralsources.Thiscampaignshouldoptimallyidentifyonemechanismormedi-umpermonththatwilleducateyourclientandreferralbaseaboutaserviceyouoffer.Ifyoucannotaffordonecontactpermonth,thenminimallytrytomakeeightcontactsperyear.Todevelopthisbusinessdevelopmentcampaign,youneedtoanswerthesequestions: •Whatmediumdoyouwanttouseforeachcontactofyourtargetaudience(letter,

postcard,seminar,newsletter)? •Whatistheserviceandmessageyouwanttosend? •Whendoyouwantthismessagetolaunchorarrive?(Eitherdateisfine,justbeclear

whichitis.) •Whatgroupisbeingtargetedwiththiscontact? •Whatisthenumberofpieces? •Whatisthecostofeachcontact?

Justliketheactivecampaignabove,thisisnotcomplicated.Itismoreaboutprioritythananythingelse.Whenpassivecampaignsstall,itisusuallybecausetheownergroupwillnotgivethepropersignoffstoadministrationtoimplementtheprogram(ortheywanttosignoffoneachpiecerightbeforeitgoesoutratherthansigningoffontheentirecampaignandlettingitrun).So,togetstarted,simplyputtogetheratableoutliningyourplanandansweringthequestionsabove.

Youwantthistabletocoveraminimumofa12-monthperiod.Onceyouhavedefinedandpricedyourfoundationmarketingeffort,ifyoustillhavemoneyleftinyourbudget,youshouldconsiderdevelopingoneormorenicheindustryorservicecampaigns.Thesecam-paignsshouldinvolveaminimumofthreetofourcontactsinfairlyrapidsuccession(overthreetofourmonthsoracontactabouteverythreeweeks).Becausethesenichecampaignsarelikelytargetedtoprospectsandnonclients,youwanttoutilizeauniqueservicethatwillcatchtheattentionofthenarrowlysegmentedaudienceyouselect.Forexample,youmightwanttoofferacostsegregationstudytoyourrealestateclients.Thiscampaignmightstartoutwithaletterthatintroducestheserviceandannouncesaseminaryouwillholding,fol-lowedbyacoupleofpostcardshighlightingtheseminardate,concludingwithatelemarket-ingfollowupaskingprospectswhethertheywouldliketoattend.Allfourcontactsshouldbescheduledtooccuroverathree-monthperiodtoachievemaximumfirmrecognition.


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Anotherideamightbeafour-orfive-piececampaignfocusedonlitigationsupport.Inthisinstance,maybethefirstcontactwillbeapostcardonlitigationsupport,followedbyacopyofanarticleyouhavewrittenonhowtoprovidequalityservicestolitigatingattorneys,thenanotherpostcard,andconcludingwithaletteraskingyourattorneyprospectstovisityourWebsiteandsignupforyourlitigationsupporte-newsletter.Remember,ifthemarketingcampaignsarebeingsentaspartofyourfortressapproach,theyneedtofocusoneducatingyourclientsandreferralsourcesastoservicesyouoffer(howyoucanhelp).Ifthecampaignsarebeingsentaspartofyourempireapproach,theyneedtocenterarounddemonstratingyouruniqueexpertise(andexplainingwhyyourexpertisewouldbebeneficialtothemandwhyyouaredifferentfromeveryoneelse).

Youalsowanttocoordinateyourmarketingcampaignsaroundclientpurchasinghabits.Forexample,ifyouweremarketingtoagroupofgovernmentagenciesaboutprovidingtheconsultingsupportthattheirauditorscannolongerprovide,youwouldwanttosendyourfirstpieceabouttwomonthsbeforethatconsultingislikelytoberequired.

Thefinalstepinoutliningyourplanistocraftthepropermessageforeachpieceabove.Oncethishasbeendoneandapproved,thepassivecampaignturnsintoanadministrativeprocesswherebythecreation,printing,andmailingaredonebasedonthetimetableout-linedwithlittletonoownerinvolvementuntilanewcampaignisintroduced.

TransitionNowthatwehaveourbusinessdevelopmentplaninplaceandboththeactiveandpassivecampaignsfiringonallcylinders,itistimetoaddresstheimportantissueoftransition.Westartbydefiningthistermanddiscussingthetwosidesofitsmeaning.ThefirstvariationIwilltermservicing transitionwhiletheotherisfirm value transition.Althoughthedefinitionsareverysimilar,theyareapplicablefordifferentreasonsatdifferenttimes.Eachisdiscussedinthefollowingsections.

Servicing TransitionAsyouprobablyguessed,servicingtransitionisthetransitionthatismostimportanttobusi-nessdevelopment.ThedefinitionIassigntothisissimply“movingtheclientrelationshipfromoneprofessionaltoanotherforclientservicereasons.”Thistransitionistypicallydoneforthefollowingtworeasons: 1. Underservicing.Thebookofbusinessmanagedbytheprofessionalisgettingtoolarge

forthatindividualtoadequatelyserviceallofhisorherclients. 2. Resource matching.Theresourcesofthefirmwouldbebetterutilizedandmaximized

byreplacingtheprofessionalwhocurrentlymanagestheclient.Each is discussed below, followed by a discussion on the benefits of servicing

transition.

UnderservicingRegardingunderservicing, therearemanynegativeconsequences thatemergewhenthisconditionexists,suchas:



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•Lostopportunitytoprovideadditionalservicesandincreaseclientloyaltytothefirm •Lostopportunitytoprovideadditionalservicestocreateadditionalprofitsforthe

firm •Anincreasedopportunityforacompetitortobeinvitedtothetabletoprovide

neededservices

Resource MatchingResourcematchingisusuallydoneifyouhavesomeonewithspecificskillsandexpertisewhobettersuitstheservicestheclientiscurrentlyutilizing.Forexample,consideranauditowneroriginatingthefirstengagementwhoisstillresponsibleformaintainingtheaccountrelationshipeventhoughtheclient’sonlyongoingrecurringengagementistheoperationalconsultingdonebyadifferentgroupwithinthefirm.

The Benefits of Servicing TransitionForreasonssuchasunderservingandresourcematching,clientsneedtobetransitioned.Asaresultofavailabletimeand/oruniqueexpertise,thenewlyassignedprofessionalisableto: •Providetheclientahigherlevelofservice. •Uncoveradditionalopportunitiestoservetheseclients. •Improveclientretention,satisfaction,andloyalty.

Alloftheseoutcomesarefundamentaltoimprovingfirmgrowth.Forexample,itishardtogrowthebusinessifyouarebringinginnewclientsat12percent,butlosingthemata15-percentrate.Itisalsohardtogrowthefirmwithnewclientsalone.Growingthe“shareofthewallet”youenjoywithyourcurrentclientsisessentialtosustaininglong-termconsistentgrowthaswell.Themajorroadblocktoproperlyservingthefirm’stopclientsistheavailabilityoftime.Forexample,oneseniorowner’sBclient,whichistoolowonhisorherlisttoeverproperlyservice,wouldlikelybeatthetopoftheprioritylistforamorejuniorowner.So,aspartofaviablebusinessdevelopmentplan,firmshavetoconstantlylookattheircategorizedclientlistandmakesurethatallAandBclientsarereceivingex-cellentcare.Thismeansthat,fromtimetotime,transitionswillbenecessarytomaximizeyourbusinessdevelopmentopportunitiesbyeitherbetter serving theunderservedorbymatchingtheclients’needswiththebestserviceprovider,whocanuncoveranddeliverclient-neededservices.

Firm Value TransitionNowletusintroducetheseconddefinitionoffirmvaluetransition.Thistopicwillbecov-eredinmoredetailinthenextchapter,butitissimply“movingorexpandingtheclientrelationshiptomaintainfirmloyaltyandretention.”Itcomesintwoforms—transitiontoayoungpartnerortransitiontoanaccountteam.Eachisdiscussedbelow.

Transition to a Young OwnerThemostobviousistotransitionaclientfromaretiringownertoayoungerownersothattheclientmaintainsanongoingrelationshipwiththefirm.Ifamajorcomponentdetermin-ingfirmvalueisgrossfees(revenue),itbecomesclearwhyitissoimportanttoretainclientswhenownersretire.Andbecausesomanyownersretirewithouttransitioningtheirclient


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relationshipsinanadequateandtimelyfashion,itisthetransitionthattendstohurtfirmvalueandprofitabilitythemost.

Transition to an Account TeamThesecondvariationoffirmvaluetransitionwasaddressedatthebeginningofthischapter.Itcommonlyshowsupasexpandingtheclientrelationshipthroughtheassignmentofac-countteams.Obviously,unlessyouareaverylargefirm,youcannotaffordtodoubletheteamassignedtoeachclient,especiallynotwithowner-levelpersonnel.AlthoughaccountteamscanbeagoodstrategyforAlevelclientsanytimeorinanysizedfirm,itcanalsoworkwellforbothAandBclientsifthecurrentpersonmanagingthisrelationshipisanownerwhoislikelytoretireinthenextfiveyears.

ConclusionInconclusion,Ihopethischapterhasstimulatedsomethinkingastohowtoimproveyourfirm’smarketingcapability.ThedevelopmentofamarketingengineisanexcellentexampleofSOPfoundationthatsupportsthesuperstars,butalsospreadsthebusinessdevelopmentloadacrossthewholefirm.Thisnotonlymakesthefirmstrongerandmoreprofitable,butisessentialifyouwantthefirm’svaluetobebasedonitsoperationalcapabilityratherthanjustonanindividualortwo.Belowislistofissuesthatneedtobeaddressedasyoucreateyourfirm’sbusinessdevelopmentstrategy.Thischecklist includesremindersaboutcom-monpitfallsencountered,stepsyoushouldconsidertaking,andissuesthatneedclarityorconsideration.Bymakingsureyouhavecontemplatedandsatisfactorilyaddressedeachissuebelow,youwillhavetakenagiantstepforwardinconstructingacriticalmarketingSOPfoundationforyourfirm. 1.Makesuretheservicesyouoffermakesenseforandhavesynergywiththemarket

youserve. 2.Ifyouaregoingtosupportislandservices,usethemtocreatedifferentiationbe-

tweenyouandyourcompetitorsasawaytoattractnewbusiness.Anddonotsetunrealistic expectations for these services since they are partiallymeant to opendoorsforyourfirmthatotherwisemighthaveremainedclosed.

3.Fornewservices,createabusinessplanwithtimeframes,specifichurdles,andrev-enueandprofitexpectations.Thenallowthoseservicesachancetomeetorexceedthoseagreed-toobjectiveswithoutconstantlycomparingtheirprogresstoexistingtraditionalservices.Ifyoulaunchedanewservicethatwasnotstrategicallyinitiated,shameonyou.Butifitwasproperlyinitiated,giveitthetimeitneedstopullitsownweight.

4.Investyourmarketingdollarsfirstonstayinginmindwithyourclientsandreferralssources.Thisiswhereandhowthebulkofyourbusinessisgenerated...notfromknockingondoors.

5.Considerthefortressandempirestrategiestomakesureyouaretakingtherightapproachandutilizingthebestmessagestoattractyourtargetaudience.



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6.Cleanupyourclientandreferralsourcelists(database)sothatyoucanturnthepas-sivemarketingcampaignovertooneofyouradministratorstoimplementsothatitwillcontinuallyoccur,evenduringtaxseason.

7.Considerthetimingofthespecificmessagesusedinyourpassivecampaignsothattheyareattemptingtostimulateawarenessjustpriortowhentheclientsaremostlikelytotakeactionorhaveaheightenedinterest.

8.Categorizeyourclientssothatyoucanensurethatyourresourcesarebeingproper-lyallocatedtobuildloyaltyanddeliverexceptionalservicetothosemostimportanttoyourfirm’ssurvivalandprosperity.

9.EitherupgradeyourDclientstoCclients,orrunthemoff.Theseclientsareapri-marycauseofmanyfirmstaffingshortages,aswellasthebiggestobstacletobetterservingAandBclientsandgrowingtheirbusinesses.

10.Thepassivedripsystemismeanttoincludeeveryone(allclientsandreferralsourc-es).The active system ismeant to identify anddeliverpersonal service to thoseclientsneedingandwantingitmost(namely,thefirm’stopclients).

11.Donottrytomakethepassivecampaignperfect;justsetitinmotion.Itiscalledadrip systembecause its impact is realizedover time,notbasedononeor twopieces.Asisoftensaidintheliteraryworld,“Don’tgetitright;getitwritten.”Inthemarketingworld,“Don’tgetitright(agonizingovereveryword);getitinthehandsofyourtargetaudience.”

12.Reverseyourpyramidandchangeyourculturesothateveryowner,andpotentiallyeverymanager,understandsthatitisaprimaryrequirementofthejobtostayinfrontofhisorherassignedclientsonaregularlyscheduledbasis.Inaddition,theinformationgainedfromthosemeetingsneedstobeproperlyrecordedwiththeunderstandingthatamarketingdebriefwilltakeplacetodeviseservicestrategiesthatwillallowthefirmtobettersupportthoseclients.

13.Transitionclients to thosepeoplewhohave adequate timeor the right skills toproperlyservicethoseclients.Thehoardingofclientsbyowners forthesakeofinternalpowerorcompensationprivilegeswill,intheend,becomeacriticalfailurefactorforthefirm.

14.Ensurethatifclientmeetingsaretakingplace,ataminimum,yourpeoplearewalk-ingawaywithanunderstandingofandcanlistthatclient’sprioritiesforthenext12to18months.

15.Consider, in thebeginning, focusing somecompensation around lead indicators(whatpeoplearedoing)ratherthanlagindicators(whatresultswereobtained).Ifyouwanttochangeyourpeople’shabits,youhavetorewardthechange stepstheyaretakingalongtheway.

16.Thejobofthepassivecampaignistoprimarilygeneratereferrals(newclients)andsecondarilygrow“shareofthewallet.”Thejoboftheactivecampaignistopri-marilygrow“shareofthewallet”andsecondarilytomaximizereferrals.However,sincetheactivecampaignalsoincludesvisitingkeyreferralsources,thosecontactsarebeingmadeprimarilytomotivatenewclientreferrals.


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17.Makesurethatyourcompensationsystemisbuilttopayyourpeopleforgrowingtheservicesorscopeofcurrentservices(shareofthewallet)toyourclientbase.Thisisanareatowhicheveryoneinyourfirmcancontribute.Toomuchatten-tion,inmostsystems,isplacedonnewclientgeneration,whichismoreafunctionofsizeoftheclientbasemanaged(becauseofthelikelihoodofreferrals)thanactualmarketingeffort.

18.Create a marketing culture in which regularly scheduled dialogue occurs abouthowtobestserviceyourtopclients.Remember,cross-sellingisnotachoicethatanownermakesifyoufollowaone-firmconcept.Cross-sellingstrategiesarede-visedbyownersandmanagersworkingwiththefirm’smarketingdirector,orbyworkingwithamarketingcommittee,orbecauseofthetimesetasidebythesoleproprietortodevisetheproperapproach.Regardless,excellentclientserviceisafunctionofplanning,notjusthappenstance.


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Succession Strategies: Passing the Torch

Chapter 5

The objectives of this chapter are to: •Introduceseveralexamplesofsuccessionwithlessonstolearnfromeachexample. •GiveanoverviewofmergerandacquisitionsofCPAfirms,includingwhatbuyers

andsellersareseeking. •GiveguidanceoncreatingretirementplansinCPAfirms. •Outlinethefundamentalsinagoodsuccessionplan.

Itistimetopullalloftheinformationthatwehavecoveredthusfartogetheranddis-cussvariousstrategiesforpassingthetorch.ThebestwayIknowtokickoffthischapteristotellafewstories.FollowingthesestoriesarediscussionsonthemergersandacquisitionsofCPAfirms,retirementplanningforCPAfirms,andsuccessionplanningforCPAfirms.

CPA Firm Succession Stories Belowarefivesuccessionstories.Eachstoryisfollowedbylessonsthatcanbedrawnfromthestory.


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Story 1. Two Senior PartnersConsidertwoseniorownerswhoown100percentofthefirm.Theyareafewyearsfromretirement.Thecurrentmarketispaying85centsonthedollarforgrossrevenueofthefirm, paidout at 25 percent a year over four years basedon client retention.Thefirmisbillingaround$2million.Therearefourmanagersthathandletheday-to-dayprojectmanagementandclientcommunicationresponsibilityfor70percentofthebillings.Noneofthesemanagershasanemploymentagreementthatrequiresthemtopayforclientsthattheymighttakewiththemiftheyleave.Themanagershavesignedaloose,noncompeteagreementthathashadsketchysuccessinenforcement.Thetwoseniorownersplantosellthefirmandsplitthetakeevenlydownthemiddle.At85centsonthedollar,thatcalcula-tionamountsto$1.7million,buttheownersareexpectingatleastanother$200,000lossofclientsthatwilleitherleavethefirmorbefiredbythepurchasingfirm.

Thetwoownershavehadhigh-leveltalkswithalargerfirmthatisinterestedinbuyingthem,buttherehasbeennodialoguewiththefourmanagersastowhatisgoingon.Thesetalkshavenotoccurredbecausethemanagersareassumingtheywillbuythefirmfromtheretiringownersatonedollarforeachdollarinrevenueatthetimeofretirement,tobepaidoutover10yearsat5-percentinterest.Althoughthisagreementwouldnettheownersatleast$500,000moreinpurchaseprice,theylackconfidencethatthemanagerscanrunthebusinessprofitablyenoughtopaythemoff.

Thetimefinallycomeswhentheownersconfrontthemanagers.Itisnotaprettysight.Themanagersaresurprisedandhurtthattheownershavesolittlefaithinthem.Thiscausesthemtobandtogetherandthreatentoleaveortobecutinasownersinthepurchasingfirm.Oncethepurchasingfirmfindsoutthatthereisdissensionintheranks,theyquicklypulloutofthedealbecause,althoughpartofthepurposeofthepurchasewastoexpandtheirrevenuebase,anotherimportantaspectwaspickingupfourmanager-levelpeoplewhodidnotexpectownerstatusanytimesoon.

The Lessons Learned From Story 1Ihavepersonallyaddressedsituationslikethisaswellasmanyothervariationsofit.Some-timestheownersgoaheadandselltothemanagersbecausetheyhavenootherchoice(tostoptheimminentbreakup),andsometimesthebusinessissoldatafardeeperdiscountthanexpectedtocompensatethepurchasingfirmforhavingtoaddresstheunresolvedproblems.Therearetwolessonstolearnfromthisstory:

First,moretimeandresourcesshouldhavebeenspentdevelopingthemanagerstoalevelatwhichtheownerswouldbecomfortablesellingthebusinesstothem.Thiswouldmeanthatthemanagementofthefirmshouldbetransitionedtotheincomingmanagerssotheowners,whiletheyarestillactive,canmentor,coach,andfieldtestthenewowners.Asawaytoensurestability,theownersshouldincorporatestandardoperatingprocedure(SOP) foundationeverywherepossible (fromperformancemeasurement andmonitoringtomarketingtoqualitycontroltotraining)sothatstatusquooperationscouldeasilycon-tinuelongaftertheywereretired.Usingthisapproach,theownerswouldnotonlyhavetimetodeveloptheirbuyers,andputinprocessesthatallsideswillbecomfortablewith,



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buttheywouldalsostandtogainagreatdealfinanciallybecauseinternalpurchasers(likethemanagersinthiscase)willalmostalwayspayamuchhigherpriceforthefirmthananyarm’s-lengthoutsidebuyer.Inthiscase,theownerscouldhaveeasilyinvestedahalfamil-liondollarsinleadershipandinthedevelopmentofinternalprocesses,andstillcomeoutaheadinthedeal.

Thesecondlessonisthatinsmalltomedium-sizedfirms,ownershippercentageandrealizedrevenuefromthesaleofafirmaredirectlyproportionalonlywhenharmonyexists.So,youcannotpulloffadeallikethiswithout“sweetening”thepotfortheremainingplay-ers.Thissweeteningcouldcomeintheformofnegotiatingownerstatusforthemanagersinthenewfirm,increasedpay,andsellingbonuses.Regardless,theseactionswillreducetheowners’finalretirementtakeonthesaleofthebusiness.Inaddition,ifthemanagersarenotreadytobeconsumedbyanotherfirm,thentheownersprobablycannotsweetenthedealenoughtomakeitpalatabletoallparties.Inthiscase,ifthemanagershaddecidedtoleaveandformtheirownfirm,theywouldprobablytakebetween40and60percentofthebusinesswiththem.Therefore,theowners,whoowned100percentofthefirmbutdidnothaveemploymentagreementsrequiringthemanagerstopayforanyclientstheywouldhavetaken,arelookingatabout40centsonthedollarforwhatisleft(40centsisbasedontheassumptionthatthemanagerswouldhavetakenabout50percentoftheclientsandthepurchasingfirmwouldhaverunoff10percentoftheremainingclients).So,theownersgofromatheoreticalpurchaseof$2millionover10yearsat5-percentinterestto$800,000overfouryearsatnointerest.Clearly,thereisalotofmoneyatstakeforthissituationtohavebeentakensolightlyandhandledsocovertly.

Story 2. A Sole PractitionerSara,asoleproprietorwithoneadministrativeemployee,billsabout$225,000ayearandisgettingtoclosetoretirement.Shehassignedapracticecontinuationagreementwithagroupoffourothersmallfirmsthatkicksinshouldshedieorbecomedisabled.Theyhaveagreedtobuyherpracticeat90centsontherevenuedollar,payableoverthreeyearsat33.3percentperyear,basedoneachyear’stotalbillingsforclientstransitioned.Eachofthefivefirms,whoseownersareaboutthesameage,signsasimilaragreementwiththeothers.

Unfortunately, Sara gets pneumonia and dies due to complications. The group isshockedbecauseshehadbeenthehealthiestofthemall.Nevertheless,nooneimmediatelytookoverSara’spractice.Becausetheagreementaddressedbusinessthathadbeentransi-tioned,noonehadanyaccountabilitytotrytosalvageSara’sbusiness,whichwassimplyleftuponherdeath.Herearethecircumstances: •Noonehadreallydoneanyduediligenceonherpractice. •Noonewasunderanyobligationtobuythepractice. •Thetaxseasonwasjuststarting. •Twoofthefourremainingfirmsboundbythepactwereatfullcapacityandreally

couldnothandleanymoreworkImmediatelyaftertaxseason,thegroupgottogetheranddecidedhowtoproceed.By

thetimetheclientswerecontacted,over45percentofthebusinesshadalreadyfoundotherhomes.Of theremaining55percent,onefirmidentifiedabout$75,000dollarsofwork


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thatwasofinterest,andasecondfirmfoundabout$25,000.Theremainingapproximately$24,000wasofno interest toanyof thefirms.Finally, theadministrativeemployeewasterminated.

Inthissituation,apracticecontinuationagreementwasinplace,butsolooselydefinedthatitdidnotprovidemuchvalue.TheCPAowner’sspousereceived$90,000overthreeyearsinsteadoftheexpected$200,000.Becausethesuccessionofthisfirmwastoopoorlydefined,noonehadtheobligationtoproperlymanageit,norwasanyoneaccountabletomaintainacertainvolumeofthebusiness.TheresultwasthatasignificantpartofSara’sfirm’svaluewasjustthrownaway.

The Lessons Learned From Story 2Acoupleoflessonscanbelearnedfromthissituation.First,knowthatwhatevertermsandconditionsarenotworkedoutinadvancewillbiteyou!Workthemoutnow!!Makesureyouhaveaddressedatleastthefollowingquestions: •Whospecificallyisaccountabletohandlethistransaction(whichfirm)? •Whatconditionstriggertheagreement(e.g.,retirement,death,disability)? •Uponnoticeofatriggeringevent(e.g.,retirement,death,disability),howfastisthe

buyerrequiredtotakeoverthefirm? •Whatisthesalepriceofthefirm? •Howisthesalepricetobecalculated? •Onwhatdatedoesthecalculationapply? •Towhatcriteriadoesthecalculationapply(allclientsatsomespecificdate,retained

clients)? •Overwhatperiodwillthepaymentsbemadeandatwhatinterest? •Whatistheplantokeeptheexistingemployees? •Whatisthecommitmenttocontinuetoservicetheexistingclients? •Willthecurrentratestructurebehonored?Ifnot,willtherebeagradualpriceesca-

lationorjustanew“takeitorleaveit”price? •Ifthetriggeringeventisretirement,whataretheclienttransitionplanrequirements

thatwillmeettheobligationstocompletethistransition? •Ifdisabilityiscovered,whatlevelofdisabilityisrequired? •Ifdisabilityiscovered,includingshort-termdisability,howwillthatbehandleddif-

ferentlythanasale? •Ifdisabilityiscovered,isthereanoncompeteinplaceincasethedisabledCPA

decidestostartpracticinginsomelimitedformlateron? •Ifshort-termdisabilityhasoccurred,whatisthecostforthisshort-termassistance

(percentageofbillings,priceperhour,minimumflatfeeperday)? •Ifshort-termdisabilityiscovered,doesanoncompeteclauseapplythatrequiresthe

assistingfirmtopayforanybusinessthattransitionstothempriortoafinaltrigger-ingevent?

•Ifshort-termdisabilityiscovered,whatexperiencelevelofpersonwillbeassignedtotemporarilyhandletheclientsofthefirm?



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•Ifshort-termdisabilityiscovered,whatqualitycontrolswillbeputinplacetoen-surethatminimumstandardsofworkaremaintainedduringthisperiod?

•Ifinsuranceisacquiredtosupportthistransactionanddeathortotaldisabilityisinvolved,howdoesthataffectthepaymentterms?

Theseare just someof themostuniversal issues toaddress. Ifyouwould likemoreinformationaboutpracticecontinuationagreements,pleasereferto“PracticeContinuationAgreements:APracticeSurvivalKit,”writtenbyJohnA.Eads,CPA,andpublishedbytheAICPA.Thisbookexplainshowyoucanpreservethevalueofyourpracticeandfeaturesasampleactionplan,asamplepracticecontinuationagreement,andsamplecorrespondence.

Second,insmallfirms,especiallyincloselyknitcommunities,thenewsofsomeone’sdeathordisabilitytravelsfast.Clients,especiallythelargerones,tendtohavemultipleCPAsthathavebeencourtingthemforyears.BecausetheseclientsareloyaltotheirCPAs,theyhaveneverseriouslyconsideredchangingfirms.However,oncethenewsofSara’stragedyreachesthem,theseclientswillshifttootherfirmsinaheartbeatifthebuyerdoesnotmovequicklytomakecontact.Soleproprietorshipscaneasilylosehalformoreoftheirvalueintwotothreemonths,soresponsetimewithaccountabilityisacriticalagreementpointtoworkout.

Story 3. A Father-and-Son Firm Thisisastoryofafatherandsonownedfirm,whichgrowstoamultiownerfirm.Danielandhisson,Barry,ownedaCPAfirm.DanielwasatechnicalguruandwasgreatatclientservicewhileBarrylovedthemarketingandthepublicrelationssideofthebusiness.Danielwasperfectlyhappyservicinghisexistingclientsandkeepingthefirmsmall;Barrywantedtobuildanempire.Asdadbegantoslowdown,Barrytookoverandreallyputthefirmonthemap;growingitfromabout$1million,to$3million,andthenupto$8millionoverthenext10years.Duringthisgrowthperiod,giventhatBarrywasnotagreattechnician,heknewhehadtofindandconvincetalentedCPAstojoinhim,andhedidthiswell.Barrykeptmarketing,thenewownersstartedmarketing,andthefirmkeptgrowing.Neverthe-less,itbecameincreasinglymoredifficultforBarrytocontinuetoaddadditionalownersbythetimethefirmhadgrownto$8millioninrevenuesbecausetherewasnotmuchstocklefttoattractthem,givenBarry’sdesiretomaintainabsolutecontrolofthefirm.Duringthishigh-growthperiod,Barryturnedoverday-to-daymanagementtoothers.Butheneverletgoofthedecision-makingprocessandhecontinuedtowanttosignoffonjustabouteverydecision.

Thisfirm,fromthebeginning,wasfoundedonthesuperstarmodelandvirtuallynoth-ingwasformalized,whichallowedBarrytomaintainmaximumflexibilityineverysitua-tion.Bytheendofthe10years,this“free-wheeling”modelwasstartingtocauseproblemsfor all the other owners, including their comfort about their future. The other ownersapproachedBarryaboutinstitutingavarietyofsystems,includingaretirementplan;sellingmoreoftheownershiptodrawadditionalowners;andcreatingmoreformalizedprocessesandprocedures.Barrywasnotpleasedbythischallengetohisauthorityandimmediatelystartedlookingforexitstrategies.


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The Lessons Learned From Story 3Thereisonecentralpointthatcomestomindaboutthissituation.Becausethisfirmhaddecision-makingauthorityinplace,itwaspositionedtogrowandprosper,agoodthing.Butaswealwaysfindoutinbusiness,whatworkswonderfullytodaymaynotworkatalltomorrow.Becausethisfirm’sdecision-makingauthoritywasbasedoncontrollinginterest,thesuccessofthisentitywasdirectlyproportionaltotheskillsandvisionofthatoneentre-preneur.Inthiscase,thefirmhadstartedtooutgrowBarry’sabilitytoleadit.Hewantedtokeephisarmsaroundandhishandsineverything,whichstartedtolimitthefirm’sgrowth,andthetalentofthepeopleitcouldattract.Inthecorporateworld,thisisthetimewhentheentrepreneurialownerwouldbemovedtotheboardofdirectorssohecouldcontinuetoprovideadviceandcounsel,andhierarchicaldecision-makingauthoritywouldbeputinplacesothatanoperatormodelcouldbeintroducedtomaketheday-to-daymanage-mentcalls.Operatorsleveragepeoplethroughsystems;superstarsleveragesystemsthroughpeople.

Inthiscase,Barrywasunwillingtostepasidebecauseherejectedtherealizationthathismanagementofthebusinesshadbecomeitsbiggestlimitation.However,hewasperceptiveenoughtorealizethathenolongermanagedtheclients,couldnolongercontroltheown-ers,andthathiskingdomwasabouttounravel.Hequicklysoughtoutafirmtobuyhimout.Thisisoneofthoserareinstancesinwhichthetransactionworkedintheowner’sfavor…butnotforthereasonshethought.Barrywantedtocashout,themarketplacewasstillpayingabountytomajorityownerstoselltheirfirms,andtheotherownerswerewillingtogoalongbecausetheysawhisremovalasimportanttotheirfuturesuccess.Theycouldhaveeasilysplitoff,takentheirclients,andstartedaneworganization,whichwouldhaveleftBarrywithfarlessthanhegot.Nevertheless,tothem,swappingadictatorforaworkingdecision-makingstructureseemedlikeareasonabletrade,soBarrygotachunkofmoneyforhisshareofthebusiness.Today,herunsasmallshopandisstillaverytalentedCPA.ThesadpartofthestoryisBarrywouldhavebeenwisertorecognizehislimitationsandworkoutadealwiththeotherowners,ratherthansellingoutassoonashecould.Hadhedoneso,insteadofowningthemajorityofan$8millionfirm,todayhewouldownasmallerportionofamuchlargerfirm.Hisexitstrategytodaywouldbeworthmanytimeswhathewaspaidyearsago.Moreover,ineveryyearsincethen,theotherownerswouldhavebeenhappytopayhimmuchmorethanhehasbeenmakingtocontinuetodopublicrelationsforthefirm,theworkhelovesanddoesbest.

Therearemomentsinanyone’spersonalevolutionwhenheorshehastorealizethatinordertogetmoreitisnecessarytogiveupmore.Theharderonetriestoholdonandkeepthingsthesame,themoreresistanceonewillencounter,themorerestrictedone’sop-tionsbecome,andthemorebacklashforceoneisbuilding.HadBarrygivenuptryingtomicromanagethedetailsandfocushisenergyonthestrategyanddirectionofthefirm,hecouldhavemaintainedthecontrolheneededandgivenhisownersenoughroomtobuildtheoperatingfoundationstheyfeltwerenecessary.Also,oneofBarry’sdrivingcriteriawastomaximizehispersonalincome.Onceagain,hadhebeenwillingtogiveupmoreofthebusinesssothatitcouldcontinuetogrow,hewouldhaveownedasmallerpieceofthepie,



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whichisnowamuchbiggerpie.Forexample,what’sbetter?Owning50percentofan$8-millionfirmor25percentofa$25-millionfirm?

Story 4. Four Owners—Two Seniors and Two NewTheCPAfirmCameronandAven(C&A)hasgrossrevenueofabout$3million.AnneCameronisastrongbusinessdeveloperandLeeAvenisthefirm’stechnicalguru.AnneandLeehaveadmitted twootherownersover thepasteightyears,bothof thembeingpredominantlytechnical.

Anne, believing that the firm’s growth has reached a plateau, is rewriting the newownerrequirementstofocusmoreonnewbusinessdevelopmentskills.BecauseAnnehasthelargestbookofbusinessinthefirmandacontrollinginterest,shebelievesthetechnicalownersarereallyalowerclassofownerbecause,shesays,“Ifyoucan’tgeneratenewbusi-ness,youdonothavemuchvaluetothefirm.”Herattitudeisstartingtocauseconflictsbetweenherandtheotherowners.

The Lessons Learned From Story 4Thereareseveralkeyissuestodiscusshere.First,Anneissuchagoodbusinessdeveloperthatherskillhasactuallyhurtthefirmbecauseshehasnevercommittedtodevelopingamarketingengine(SOPfoundation).Ifbusinessneededtobedeveloped,shewentoutanddidit.However,lastyear,withthefirmat$3millioninsize,Annehadalargeclientbooktopersonallyserviceandwasonlyabletodevelopalittlemorebusinessinexcessofwhatwasnaturallylostthroughattrition.

Besides the need to have afirmwidemarketing engine that is constantly operating,Anneneedstoputemphasisontherequirementforallownerstoworktheirclientbase.Insteadofthecompensationsystemfocusingonnewbusiness,Anneneedstoconcentratethegrowthoftheserviceswithintheclientbasemanagedbyeachowner.Bydoingthis,coupledwiththeintegrationofthenewlyimplementedmarketingengine,themajorityofgrowthwillcomefromexpandedservicesfromexistingrelationshipsaswellassomeexpan-sionofnewclientsemergingthroughreferrals.

Anne redefines the new compensation system into two equal status classifications,namely,technicalowneranddevelopmentowner.Eachowner,regardlessofclassification,hasthefollowing: •Aclientmanagementresponsibilityfortheirassignedclients(loyaltyandsatisfaction) •Aprojectmanagementrequirement(totalbillingsfortheirclients) •Apersonalbillingsrequirement(basedontheirownchargehours) •Amanagementresponsibility(todeveloptheirdirectreportsandbeheldaccount-

ablefortheminmeetingtheirbudgetedtargets) •Afirmprofitabilitygoal •Abusinessdevelopmentgoal

Thetechnicalowners,eventhoughtheyhaveslightlyhigherpersonalbillingsrequire-ments,havespecificandstrongclientbasegrowthgoals(achievingadditionalrevenuesfromexistingclientsmanaged).Thebusinessdevelopmentownershaveslightlylowerpersonalbillingsgoalsandthesameclientbasegrowthgoals,buttheaddedrequirementtomaintain


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visibilityinspecificnetworkingorganizations,charitableevents,andboardfunctions.Annerealizedthateveryonehastoberesponsibletomanageandgrowtheclientstheyserve,butnoteveryoneneedstorepresentthefirmin“meet-and-greet”activities.

ThestrongestchangeinbeliefthatAnnehadtoadopttomoveherfirmforwardwastheunderstanding that technicalownerscouldnotbeallowed tohidebehind the singleserviceinwhichtheyspecialize.TechnicalownershadtoberesponsibleforsellingtheirclientsthewholearrayofproductsandservicesC&Aoffered.Andiftheycouldnotdothis,thoseownersneededtobedemotedbacktomanager.OnceAnneexperiencedanepiphanyaboutallthis,andexplainedhernewpositiontotheotherowners,therewaslittleresistance;mostoftheresistancehadalwaysbeenaboutdevelopingnewclients,notworkingexistingrelationships.

Annealsorealizedthatnewbusinesswasmoreafunctionofreferralthanofpersonaleffort.Sheanalyzedthefirm’sgrowthoverthepastfiveyearsandfoundthat92percentofthegrowthcamefromprovidingadditionalservicestoexistingclientsorreferredclients.Thisclarifiedthatshewasnotworkingmagicbybringinginnewbusinessasmuchasshewasgoodatworkingasystem.So,thebestapproachwastoimplementhersystemfirm-wide.Finally,Annerecognizedthathoardingherclientbookwasalsohurtingthefirm,soshedelegatedallofherCclientstovariousmanagersinthefirm.

TheriftbetweenAnneandhermoretechnicalowners—causedbyherattitude—wasstarting to cause cracks in the firm’s armor. She had several heart-to-heart talks with acoupleofherownersaswellasotherchiefexecutiveofficerandmanagingpartners(CEO/MPs)sherespected.Annerealizedthatstayingonthecurrentcoursewouldprobablysplitupthefirm,whichwouldhurteveryone,includingherself.Sheunderstoodthatwithoutqualitytechnicalownersmanagingthecomplexprojectsofthefirm,clientsatisfactionandloyaltywouldfadeaway.Shealsorecognizedthatherstrengthinbusinessdevelopmenthadcreatedaweaknessinthewaymarketingwasconductedthroughoutthefirm.Shefiguredoutthatshehadbeendoingwhatsomanyownersdo—sheovervaluedhercontributionandundervaluedthatofothers.

Whatisinterestingaboutthisstoryisthatthesmallerthefirm,themoreemphasisisplacedonfindingbusinessdeveloperowners.The larger thefirm, themoreemphasis isplacedonfindingverytechnicalprojectmanagementowners.Smallfirmslooktopeopletospontaneouslyandentrepreneuriallymakeadifference,whilelargefirmshavetolooktofirmwideadoptionofprocesstomakethatdifference.Bothcanwork,butthelatterissig-nificantlymoresuccessfulatsupportingthesuccessionprocessbecauseoftheinterchange-abilityofpeople.

Story 5. Seven OwnersWinter,Winter,andSummer(WWS)isa$9millionfirmthatwasfoundedbyJebWinter.Hehadbuilta$3millionpracticeyearsago.Tenyearsago,whenhisfirmreached$1mil-lioninsize,hedecidedtomergewithhisbrotherGerald.Twoyearslater,DonSummermergedhis$1millionpracticewiththatofthebrothers.Sincethen,thethreeownershavegrownthefirmtoincludesevenownersbyaddingtwomore$500,000firmsandtherestthroughorganicgrowth.



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Jebis62,Geraldis60,Donis59,twootherownersareintheirearlyfifties,andthefinaltwoownersareintheirlateforties.Eachofthesemergedfirmswasbuiltaroundthesuperstarmodel.Inordertomakeitattractiveforotherfirmstomerge,JebandGeraldcre-atedanorganizationbasedononevoteforeachowner.Nevertheless,thesalariesforJeb,Gerald,andDonaretwicetheaverageoftheotherfourowners,withJebmakingthemostandDoncominginaclosesecond.AlthoughJebistheCEO/MP,hisleadershipapproachisverydemocratic.Don,ontheotherhand,isconstantlyintimidatingeveryonetofollowhisstrategies.Thebigthree(Jeb,Gerald,andDon)controlabout70percentofthefirm’sbusinesswithJebcontrollingabout$3.6million,Geraldmanagingabout$550,000(downfromamillion),andDonrunningabout$2.25million.

BothJebandDonhavecometotheconclusionthattheir“oneperson,onevote”oper-atingmodelisnotworkingwellbecauseitgivesanownerwithacouplehundredthousanddollarsinbookmanagedthesamevoteaseitherofthem,whoeachhasmorethanfivetimesthatvolume.Foryears,JebandDonagreedonallissues.Now,however,Donhasreallybeengrowinghisbookofbusiness(whichhasmorethandoubledsincehejoined),andheismoredemandingeverymonth.ArecenttrendisforDontopushtheownersintoadoptinghisstrategiesbythreateningtotakehisclientsandleave.Thusfar,theotherownershavequicklygonealongwithDoninordertoretainhis$2.25millionpractice.EvenJebhasputupwiththisbecauseheisstartingtoworryabouttheriskofhisretirementbenefitifDonleaves(whichwouldputalmost$5.85millioninclientvolumeatrisk;Jeb’s$3.6millionthathastobetransitioned;andDon’s$2.25millionthathewouldtakewithhim).Geralddoesnotdomuchanymoreexceptduringtaxseasonbecausehehasbecomeverycomfortablefinancially,especiallygiventheamountofworkhehasdonetoearnit.Rightnow,onlythetwoyoungestownershaveasmallerbookofbusinessthanGerald.

BecauseJebandDononlyhaveonevote,theyhoardtheirclientstoensurethattheymaintainthepowerbasetogettheirwaywhentheywantit.

The Lessons Learned From Story 5Ratherthanoperatebystrategy,thefirmoperatesasabunchofindividualssharingover-head.Becausethesuperstarmodelisinfullswinginthisfirm,conflicthasbeenbrewingbetweenseveralownersthatisstartingtofracturethefirm.Greedistheonlythingholdingthemtogether.JebknowsthatthefirmwouldbebetteroffinthelongtermifDonwasforcedout,butJebalsorecognizesthat,intheshortterm,hisretirementpayoutwillremainsafeifDonisgivenfreerein,whichmeansthefirmwillberunprofitably,andprobablytyrannically.DonstaysbecauseheknowshewillbeabletodowhateverhewantsonceJebretires,whichwilldefinitelymeanthathetakeshomealotmoremoney.Geralddoesnotprotestmuchbecauseheisearningalmosteverythinghebills,eventhoughhebelieveshehasearnedthisprivilege.Geraldisalittleconcerned,however,becausehehasalwaysfeltsafewithhisbrother incommand,andthatcouldchangedramaticallywhenhisbrotherleaves.Thefouryoungerownersanticipateahorribleexperienceinthenearfuture,butalsofigurethatenduringtheshort-termstressandchaosofthenextfiveorsixyearswillberepaidbytheendresult:Thebigthreeownerswillberetiredandtheywillbeinchargeofa$9-million-and-growingfirm.


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So,reflectingonallthatwehavecoveredthusfar,hereiswhatneedstohappenforthisfirmtoflourishandfortheownergrouptoremaintogetheroverthenext10years.

First,Jebneedstopulltheownerstogetheranddevelopastrategyforthefirm,withsuccessionbeingatoppriority.Thesuccessionplanneedstofocusonthetransitionoftheclientrelationshipstotheyoungerownersandmanagers.Thismayrequireredefiningtherolesofvariouspositionswithinthefirm.Italsomayrequirethemtoreversethepyramidsothattheyoungerownersandmanagershaveampletimetomanagethenewclientrelation-shipsassigned.Jebneedstobeturningoverclientsatarateofabout$1millioninvolumeperyear,withhisbiggestclientsbeingfirstonthelist,inorderforhimtobereadytoretirearound65.Donshouldbeginputtinghistransitionplanintoeffecttoo,butfortunately,hecanproceedatapaceofonlyabout$500,000ayear.

AgreementsmustbereachedimmediatelythatwillfreezetheretirementcalculationsandtermsofbothJebandDon,inordertomakeeachofthemwillingtotransferclientrelationships.InordertojustifytheriskthatJebandDonwillbetakinginthetransitionofclients,theremainingownersmustenteranagreementtopayalargepremiumforanyclientstheytakewiththemiftheyleave.Aspartofthisprocess,thefirmmustsetmanda-toryretirementdates,includingclearlyidentifiedoptionsforongoingrelationshipsbetweenretireesandthefirms,andallotherretirementbenefits.Withoutthesemeasuresinplace,JebandDonwillpayonlylipservicetoanyefforttotransitiontheirclientrelationships,becausetheyknowthatgivinguptheserelationshipswillweakentheirpositions.Ontheotherhand,JebandDonwillbemotivatedtocomplywiththefirm’splansiftheyknowthattheirretirementbenefitsareappropriate,theirsalariesarenotinjeopardy,andthattherearefinancialprotectionsinplaceforthetransitionstheyareabouttomake.Inreturnforallthis,theyneedtoagreethatifeitherofthemfailstoactinaccordancewiththeirtransitionplan,theannualfeesofanyclientslostwithin18monthsaftertheirretirementwillautomaticallybedeductedfromtheiragreed-topayout.

AlthoughWWShasanowneragreementthatidentifiesthedetailsoftheretirementpayout,ithasnotbeendiscussedinyears.WhenJeb,Gerald,andDonsetthisuporiginally,thesituationwasdifferent.NeitherJebnorDonhavewantedtochangethepayoutformulabecauseitseemedtoworkforalltheotherowners,however,theyhavealwaysassumedtheywouldnegotiateaspecialpayoutforthemselveswhentheirtimecame(anotherreasontheyhavehoardedclients).Thisisacommonpositionforseniorownerstotake(andiftheydonot,itisprobablybecausethepayoutissoskewedintheirfavorthatassoonastheyretire,therestoftheownerswillchangeitforeveryoneelse.).So,donotbecomelulledintocomplacencybyyourlegalagreements,andmakesureyouareproactivelyaddressingtherealityoftheissues.

Second,decision-makingauthorityneedstobeimplementedwithinthefirm,creatingaseparationbetweenboardfunctionsandCEO/MPfunctions.ThefirmneedstosetstrategyandabudgetandthenallowtheCEO/MPtheroomtoimplement.Asaresultoftheap-proachingretirementsofJeb,Gerald,andDon,thenewCEO/MPshouldbechosenfromamongtheremainingowners.Thiswillgivethebigthreeachancetocoachandmentorthatpersonandgainconfidencethatthefirmisingoodhands.Additionally,thedepartingownersneedtostayoutofmanagementandfocustheirattentionasboardmembersoncre-atingapolicyandprocedureframeworkthatwilllikelyendurelongaftertheyleave.



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Third,ifDondoesnotfallinlinewiththesechanges(thetransitionofclientstoyoung-erCEO/MPs,settingtheretirementamountsnow),thenheneedstobeforcedoutofthefirm.Andevenifhedoesseemtogoalong,thenexttimehethreatenstoleave,lethimgo.Youcannotdevelopasuccessfulfirmsuccessionstrategybyconstantlyputtinganindividu-al’sshort-termpreferencesaheadofthelong-termprofitabilityandstabilityrequirementsofthefirm.AslongasDonchoosestobeaboatanchoroneveryissueinordertoimposehispersonalchoice,thefirmwillsuffer.AssumingDonmaintainshiscurrentstrategyofintimi-dation,thefirm’slong-termfutureisindoubt,andwillcontinuetobeafirmofindividualsandinallprobabilitywillsplitintofactionslateranyway.

Fourth,thecompensationplanneedstobetiedtostrategy,withtheCEO/MPhavingtheabilitytoshiftclientsaroundasneededtoensurethat(1)nooneisbuildingtheirownpersonalempireand(2)theclientsarebeingproperlyserved.Althoughthebookofbusinessmanagedshouldremainsomepartoftheformula,itshouldnotbethemaindriverorevery-onewillcontinuetohoardbusinessandunderserveclientsforthesakeofinternalpower.Gerald’spayneedstobebroughtintolinewithhisperformance.IfthegroupdecidesthatGeraldshouldreceiveaspecialstipendbecausehefoundedthefirm,thensobeit.Buthisperformanceneedstodictatehispayfromthatpointforward.

Fifth, the firm should putmajor pressure on the owners andmanagers tomaintainregularvisibilityforthoseclientsforwhomtheyhaverelationshipresponsibility.AllAandBclients shouldbeassigned tofirmmemberswitha specificquarterlycontact schedule.Monthlymarketingcommitteemeetingsneedtorevolvearounddiscussingthefindingsofthoseconversationsanddevelopingappropriatestrategiestobetterservethoseclients.AandBclientsthatonlysubscribetooneservice(liketax)needtobetargetedforotherservicestoenhancetheirloyalty.IfaCPAwillonlypromoteonetypeofservicetohisorherclients(liketheoneheorshespecializesin),thatpersonneedstoberemovedfromclientrelation-shipmanagement.Allofthesemarketingprocessesneedtobetiedintothecompensationsystembyusingbothleadandlagmeasures.

Thestepsusedtoaddressthissituationhavebeendrawnfromeachoftheprecedingchaptersinthisbook.AsolutionthatwillsuitJeb,Don,andGeraldrestsontheaccomplish-mentandintegrationofallofthesesteps,notjustoneortwoofthem.Insomevariationsofthissituation,IhaveseentheownersinDon’spositionresignorbefired.Insomecases,thegrouphasdecidedtomaketheeffortofputtingthenecessaryfoundationprocessesinplacetomaximizethechanceofeveryonestayingtogether.

Merger And Acquisition PlansNowwehavecoveredavarietyofsituationsthatconcernfirmvalue.Nextisageneralre-viewofthetopicandthequalityofleadershipandorganizationalprocesseswithinthefirmthatwilldriveadditionalpremiumsordiscounts.

Asyoueitherknoworwouldguess,typicaldealsfoundinthemarketplaceforbuyingandsellingormergingpracticesvarywidelyandalmostwithoutlimit,basedontheuniquecircumstancesofthefirmsinvolved.Butforthesakeofthisbook,Iwanttoatleastcover


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someofthemorecommonalternativesthatIhaveeitherbeeninvolvedwithorheardabout.The followingsectionwilldiscuss typicaldealsmade toacquireCPAfirms, typicaldealsmadetomergeCPAfirms,whatthesellerlooksfor,andhowcandidatesareidentified.

Typical Acquisitions of CPA Firms This sectionwillcover typicalmultipliers,whatpurchasers look for,deal structures,andnetworks.

Acquisition MultipliersMostacquisitionstorieshaveamultiplierofrevenueincommon.Overthepast25years,Ihaveobservedmultipliersanythingfrom50percent(.5)orlesstoabout225percent(2.25).Amultiplierof1or100percentisthemostoftengivenasanexample.However,intoday’smarketplace,themultiplierof1pertainingtoallfirmrevenueisdifficulttoobtaininanarm’s-lengthtransaction.Nevertheless,it(orsomethingelse)isstillregularlyusedforin-ternalpurchases,a“rule-of-thumb”valueconsideredwhenoneownerissellinghisorherpartialshareofthebusinesstotheexistingandremainingowners.

Acquisition PurchasersInthepast,therehavebeenseveraltimesinourhistorywhenvariousfirmswouldgoonabuyingfrenzy,acquiringasmanyfirmsthatmettheircriteriaastheycould.Thisactivitytemporarilycreatedasupplyanddemandanomalythatdroveupmarketprices,especiallywhen the criteria for acquisitionwere looselydefined.We saw thisphenomenonwhenfirmssuchasAmericanExpress’sTaxandBusinessServices,H&RBlock,andCenturySer-vicesGroupwereextremelyactive.Today,thedealactioninthemarketplaceisnotfrombigconsolidators,butratherfromlocalandregionalfirmslookingtoexpandgeographically,orintermsofservices,industries,orvolume.

This more constrained and conservative ap-proach toacquisitionandmerger is theresultofyearsofexperienceinthisarea.Leadfirms(aleadfirmbeingonewhichiseitheracquiringanotherfirmorone intowhichthemergedfirmwillbefolded)havefoundthatwhendiverseculturescol-lide, the result is often a terrible explosionwithcasualtiesonallsides.Firmshavediscoveredthatowner competencies, roles, and responsibilitiescanbeextremelydifferent fromonefirmto the

next.Unfortunately, thewidely embraced idea that all owners can easilybe reshaped isaboutassensibleasbelievingthatonecanherdcats.Thephilosophythattwofirmswillbefarbetteroffbyunitingtheirsuperstarshasoverandoveryieldedfrictionandannulmentaspowerstrugglesfragmentthefirm.Themisguidedbeliefthatanyclientcanbeconvertedtoagoodclienthasledtothepurchasefollowedbythefairlyimmediatefiringorlossofclientswhoraisedissuesofpricesensitivity,profitability,and/ornegligibleopportunityforserviceexpansion.Thepresumptionthattwowell-runfirmswithstrongprocessandmethodologywillseamlesslycombinetogetherhastoooftenledtoalossinaccountability;organizational

For the most part, the firms in the market today are not willing to buy just anyone. On the contrary, they are looking for firms that will add synergistic value to their current offerings and strategy at minimal reorganizational costs.

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chaos;andcontroversyoverhierarchy,procedure,andpolicy.Allofthishasgeneratedtherecognitionandobservanceofacriticalsuccessfactorinthemergerandacquisitionprocess.Oncetheleadfirmhasfoundasynergistictargetfirm(thosefirmsofinteresttotheleadfirms)withseeminglycompatiblecultures,comparablepersonnelexpectations,anda fairprice,anytransactionthattakesplacewillcomewiththefollowingcaveatfromtheleadfirm:

Althoughwewilllistentoyourideas,andwearewillingtoconsideryoursuggestions,

therecanonlybeonefirmincharge.Byagreeingtojoinus,youneedtobeclearthat

everyoneinyourorganizationwillbeforcedtoconformtoourwayofoperatingthe

firm.

Withoutclearcommunicationonthisimportantpoint,theentireorganizationbecomesconfusedbythepoliticsandpowerstrugglesthatbegintoripthefabricoftheinstitution.Itisthisreorganizationalcostthathasbeenthemostdamagingtothefirmsthathavesustainedit.ThemostfrequentresponsefromCEO/MPsonthistopicis,“Itwasn’tthemoneywespentthatwassodetrimental.Whatwasmostdestructivewastheinternalchaos,thelossinorganizationaldirection,andthetimeandpainrequiredtounravelthepartsofthedealthatdidnotwork.”Thebestwaytominimizereorganizationcostismakeitclearwhichfirm’sinfrastructurewilldrivetheneworganizationforwardfromthedateofexecution.

Acquisition StructuresThismergerandacquisitionexperiencehasalsoledtoamuchmorecomplexandcompre-hensiveinvestigationprocesspertainingtothecharacteristicsdiscussedabove.Let’stakeasimpleexampleregardingclientmakeupalone.Yearsago,abuyingfirmmighthaveofferedthesellerasimpledealof80centsonthedollarbasedongrossrevenue.Today,youmighthearsomeoneexpressawillingnesstopaythatamount,butwiththecaveatsthat: 1.Thepriceisaroughpredictionofaweightedaveragepayingdifferentvaluesfordif-

ferentsegmentsofbusiness(andtherefore,anexactaveragecannotbedetermineduntilaformalclientanalysishasbeendone).

2.Theclientswouldtransitiontoandstaywiththenewfirm.So,a$2-millionfirmbuyinga$300,000localsoleproprietormightbreakdownthe

transactionasfollows:

Revenues Value Given Extension Weighted Average

Individual tax practice $120,000 50% $ 60,000 20.0%

Corporate tax practice $100,000 110% 110,000 36.7%

Bookkeeping work $ 30,000 75% 15,000 7.5%

Reviews/Assurance work $ 50,000 100% 50,000 16.7%

Total price proposed $235,000 80.9%

Then,assumingthisapproachisacceptable,ratherthanguaranteethatamountorpayitupfront,thepaymentswouldinallprobabilitybemadeovermultipleyears.Frequently,thisisdoneoverathree-yearperiodatarateofathirdperyear,oroverfouryearsat25percent


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peryear.Giventhestandardmodusoperandithatbuyersonlypayforthoseclientsretained,thesepayoutarrangementsmightbeaugmented: •Bybeingcappedforeachclientbasedontheirprioryear’sfeesatdateofacquisition, •Bybeingcappedataspecifictotalfortheentireclientbaseregardlessoffees

charged,or •Toreflectapremiuminthepurchasebyapplyingtheweightedaveragepercentage

toallfeeschargedtothoseclients,includingnewfees,duringthatpayoffperiod.Thepointisthatinyesterday’smarket,youmighthavecommonlyheardofamultiple

of1.25or1.50.Today,thatmultipleismorelikelytobe.75.Andthisisassumingyourcli-entmixiswhattheleadfirmislookingforandyourorganizationcaneasilybeassimilatedintotheirs.Ifnot,theofferisalmostcertainlygoingtobelittle-to-nothingbecausethesoftcostsaretoohightomakenonstrategicacquisitions.

Acquisition NetworksAnothermarketplacemechanism,whichisoftenaprecursortoacquisition,isforsmallfirmstobandtogetherthroughstrategicalliances,networksoffirms,andoverheadandoffice-sharingarrangements.Becauseithasbecomeincreasinglymoredifficultforsoleproprietorsandsmallfirmstohandlethevastarrayofworktheirclientsaredemanding,moreandmoresmallfirmsarecomingtogethertoassisteachother.Althoughthesearrangementsrunthegamutfromjustsharingspecificoverheadwhilekeepingthebusinessestotallyseparatetocombiningthebusinessesbut splittingprofitsonaneat-what-you-killbasis, thearrange-mentsareprovidingthesesmallfirmswithadvantages.Theyincludeaccesstoadditionalstaffwhenneeded,reductionsinoperatingcosts,quickaccesstopeerstoexchangeideas,andgroupstoselltheirclientstowhenthetimecomes.Inotonlybelievethatthisoptionwillcontinuetobuildmomentumonitsown,butitwillexponentiallyexplodewhenfor-profitgroupsandCPAsocietiesputtogetherlocalizednetworksseededwithagreements,talent-sharingpolicies,billingprocedures,practicecontinuationagreements,andsuccessionplans.Note,however, that thesenetworkswillflourishonlywhentheywillhavebuiltqualitySOPfoundationsforthesefirmstooperatewithinandleverage.

Typical Mergers of CPA FirmsThis sectionwill cover the goals of sellers and purchasers, deal structures, and a hybridstrategy.

Merger Sellers and PurchasersTheprimarydriverformostofthemergertransactionsistocreateanexitstrategyforoneormoreoftheseniorownersofthetargetfirm.Smallfirmsarejoininglargeronestoensurethattheirclientscancontinuetoreceivequalityserviceswhiletheownersaresimultane-ouslybeingassuredthattheirretirementbenefitsarefinanciallysecure.Asyoucanguess,thesnaginthesedealsusuallyconcernsanswerstothefollowingquestions: 1.Howlongdotheseniorownershavetoworkforthemergedfirm? 2.What is the owners’ base salary, and how will their annual compensation be

derived?



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3.Whatguaranteesexist?Arethereany?Isthereaone-ortwo-yearguaranteedsalaryoraminimumretirementbenefit?

4.Mostimportant,howistheretirementbenefitcalculated,whatwillitlikelybe,andwhenaretheownerseligibletostartdrawingit?

Besidesprovidinganexitstrategyforowners,thereareothercommonreasonstoenterintomergersandacquisitions.Mostoften,theleadfirmhasoneormoreofthefollowingmotives: •Wantsaccesstoawell-runneedednichespecialtyservice •Wantsaccesstoawell-runneededindustry-specificgroupofservices •Needstopropupamarginallyprofitablesmallofficeinaspecificarea •Desiresaquickbuildupoftalentedstaff •Decidestomoveintoanewgeographicareaandbelievesacceptancewillbehighest

bythelocalcommunityifalocalofficeisbroughtintothefold •Hasbuiltanadministrativeandorganizationalinfrastructurethatiscapableofman-

agingfarmorebusinessatnegligibleadditionalcosts,andthereforeislookingforadditionalvolume

Obviously,thereasonsforonefirmtowanttoacquireormergewithanotherareallovertheboard,butbetweenthebulletpointsaboveandtheneedforanexitstrategy,youwilllikelycapturemorethan90percentofthesituations.

Merger StructuresCurrently,themergerdealsbeingmadeareminimal-to-nocash.Theyaremoreofapool-ingofassetsmorethananythingelse.Althoughthetargetfirmmightgettokeepitscashinthebank(partiallytopaythepayables),typicallythereceivables,workinprocess(WIP),andwhateverfixedassetsareconsideredvaluabletothenewfirmformthebasisofthenewowner’scapitalaccounts.Ifthoseamountsfallshortofthefirm’sminimums,thenanegoti-atedtimeframewillbesetforthenewownerstobringtheirbalancesuptoexpectations.

Once the target firms have been identified in amerger, the deals typically developaroundtwovariables.Thefirstisgrossrevenues,andthesecondisprofitability.Logically,bothofthesevariableswillhaveeitherapositiveornegativeeffectontheadjustmentsthatwillbeproposed.Iftheprofitmarginonrevenuebilledislowerintheleadfirmthaninthetargetfirm,thenapositiveadjustmentisreasonable.Ifthereverseistrue,then,logi-cally,thereversewouldapplytotheadjustment.Someleadfirmswillignorelowerprofitmargins(assumingtheyarenotsubstantiallylower)becausetheyassumethenumberswillworkthemselvesoutoncethetargetfirmbecomesassimilatedintotheleadfirm’soperatingsystemsandprocesses.

Adjustments that areordinarilyconsidered tooffset thevarious identified inequities,eitherproorcon,wouldbe: •Minimum salary guarantees. •Fixing the retirement formulas.Forownerswhowillberetiringsoon,theleadfirm

mightestablishaminimumannualsalaryaswellasfreezetheretirementamountsothattheseownerscanfocustheirtimeontransitioningtheirclients.


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•Adjustment to the variables.Anumberofretirementsystemshavebothayears-of-servicecomponentandanagecomponent,whichaffecttheretirementcalculation.Mostfirmswilltinker,eithermakingpositiveornegativeadjustments,tothesevariablestoreflecttheexceptionalormarginalcharacteristicsofthetargetfirm.Forexample,addingyearsofservice,oryearstoage,oryearstobothareexamplesoftryingtoreflectapremiumvaluefortheuniquenicheorprofitabilityofthetargetfirmwhenbeingincorporatedintoafixedretirementsystem.

•Revenue adjustments.Anumberofmergerswillfreezethegrossincomeofthefirmatthetimeofmergerwhileotherswillconsiderchangestorevenueforsomeperiodoftimeafterthemergerforownership/benefitallocationpurposes.Forexample,afirmmightmakenegativeadjustmentsagainstownersforkeyclientslostduringtransi-tionifthoseclientswereanimpetustothedeal.Or,tosatisfyadifferentsituation,thatsamefirmmightallowtheallocatedrevenuenumberstoupwardlyadjustandbecreditedtothetargetfirm’sownerstoreflectnewservicessoldduringawindowoftime.

•Ownership percentages.Anumberoffirmsascribeownershippercentages(owner-shipinterestorsharesinthefirm)directlyproportionaltothecomparablerevenue/profitabilityofthetwofirmswhileothersmightassignequalunitstoallowners.Dependingonwhichisused,differentadjustmentsmightbemade.Forinstance,foramarginallyprofitablefirm,theleadfirmmightdiscounttheequityallocatedtothetargetfirm’sownersincomparisontowhatthedirectcalculationwouldhavedictated.Or,ifthissamefirmwasmergingwithanorganizationthatonlyhadequalunitowners,theleadfirmmightpenalizethetargetfirmownersthroughsalary,yearsofserviceorageadjustmentstotheretirementformula.

Regardlessoftheadjustmentsmadeatthetimeofmerger,mostofthesearrangements,exceptforthoseaffectingretirement,willquicklydefaulttotreatingallownersthesame.Forexample,mostguarantees, ifgiven,are forayear,occasionally two,but feware formorethanthat.Afterthatprotectedperiod,ownerswillhavetoearntheirmoneybasedonwhateverperformancesystemisinplace.Inyearspast,somefirmsmadetheterriblemistakeofcuttingspecialcompensationlong-termcontractsnotonlywitheachmergedfirm,butwithdifferentownerswithinthatfirm.Thisbackfiredbig-timebecauseratherthanhavingaunitedownergroupworkingtoachievethefirm’sstrategy,theleadfirmsendedupwithmultipleownergroupsmanagingtheirowndisconnectedcompensationstrategy.Silosap-pearedeverywherewiththeowners’personalinterestsindirectconflictwithfirminterests.Untiltheseownershadtheircontractsrenegotiated,werepaidoff,orwereretired,theleadfirmwastrappedwithinitsownexpansionsuccess.Firmslearnedverypainfullythatadjust-mentstocompensationorretirementhadtobemadewithinoneexistingframeworkoritstheoreticalstepforwardthroughmergerwouldactuallybecomeacouplestepsbackward.

Asanaddedstrategytoavoiddissatisfaction,anumberoffirmswilloffera“no-fault-out”agreementaspartoftheirmergerpackage.Thisallowsanewownerawindowoftime(oftennomorethanayear)todeterminewhetherheorshecanoperatewithinthelead



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firm’sorganization.Iftheownercannot,heorshehastherighttoleave,takinghisorherclients,assumingtheidentifiedfinancialissueshavebeenresolved.(Thisiscommonlyapro-cessofadjustingtheleavingowner’stotalpaymentsduringthistrialperiodtobecommen-suratewithsomepercentageofthemoneyheorshedirectlygeneratedduringthistime.)

Merger Hybrid StrategyFinally,thereisahybridmergerandacquisitionstrategythatyouarelikelytoencountermoreandmore frequently.Rather thanbuyingormergingwithanentireorganization,firmsaresolicitingniche,industry,orspecializedteamsofpeopletojointhem.Forinstance,ifafirmneedsadditionalsupportforoneofitsniches,orisinterestedinbuildinganewserviceorindustryspecialization,itmightgooutandfindasmallteamwithinacompetitivefirmand“makeanoffertheycan’trefuse.”Althoughthesefirmsmightpayanicebountytotheirnewemployeesforaniche-specificgroupofclientstotransitionwiththem,manyaremoreinterestedinacquiringtheexpertiseandarehappytopaytheirnewemployeestorebuildthenichefromscratch.WhowouldhavethoughtthatagroupofCPAswithnoclientsbutastrongspecialtyexpertisewouldbeconsideredagoodmergertarget?Logically,mostfirmshavenotputanythinginplacetoaddressthispossibilitybecausethetraditionalthinkingisthatownergroupsmergeasawhole.So,buckleupandgetreadyasthestageissetforsomeveryinterestingdealsinthedecadetocome.

What Sellers Look for IfyouhavebeenwonderingwhethersomeofourearlierdiscussionshavebeenmoreaboutthebestpracticesofrunningaCPAfirmratherthansuccessionissues,herearesomelitmusteststothinkabout.First,excludetheinstanceofafirmthatissellingitspracticeforcashupfront,becauseitskeycriterionissimplytofindabuyerfoolishenoughtomakeanoffer(unlessthefirmisgoingforafiresalepriceofpenniesonthedollar).Therefore,wearebas-ingthisconversationontheassumptionthattransactionsofthistypearepaidoutovertime.Withthisinmind,ifasoleproprietordecidestocreateapracticecontinuationagreement,oranysizedfirmdecidestoconsidersellingormergingwithanotherfirm,certainsituationsandcircumstancesarelikelytoaffectthevalue.

First, consider someof theprevious informationdrawn fromtheSuccessionSurveyregarding practice continuation agreements. Owners that were selling were concernedabout: •Continuedclientservice •Clientresponsiveness •Qualityofservice •Competenceofthenewowner(experienceofthenewowner) •Employeeretentionandongoingemployment

Althoughpriceandtermsaredealbreakers,thereisalsosubstantialconcernabouttheoperatingpractices,values,andcompetenciesofthenewfirmthatwilltakeovertheclientandemployeerelationships.


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Thinkofitthisway:WhenCPAsenterintotransactionstobuythatare(1)notsolelyaboutthemoneyor(2)triggeredduetotheseller’sdeathorunexpected heath impairment or disability, thenitmakessensethatmoneyisevenlessofadriverwhenownersareconsideringmergerandhavinga long-term relationship with this firm. For ex-ample,ifownersanticipatethatfutureretirementbenefits earned after years of servicewill be the

sourceofmostofthevalueofthemerger,thenothercriteriatakecenterstage.Unsurpris-ingly,“confidenceintheleadfirm’sabilitytomanage,”isadecisive,ifseldomtalkedabout,factor.Suchconfidenceincludesmanyvariablesthatrangefromreputation,toperceivedvaluesandethics,totrust.Simplyput,targetfirmswillrarelyallowatakeoverbyleadfirmsthat demonstrate poormanagement practices, haveweak leadership, or operatewithoutcleardecision-makingauthority.Why?Becausethetargetfirmsarenotinterestedinbeingboughtormergedwithfirmsjustlikethemselves(orastheyseethemselvesbecomingassoonasthecontrollingownersretire).Iftheywere,theseniorownerswouldbehappytoselltothejuniorowners.Thetargetfirmsarelookingforaleadfirmthat,unlikethem,hasdeveloped thenecessary leadership, authority, systems,processes, and training to endureoveralongperiodoftime.Targetfirmsarelookingforsellormergecandidatesthathaveproventheir stability thoughchanges in leadership,orhaveayoungleadershipgroupinplace,meaningthatsuccessionwillnotbeanissueduringthesoon-to-retireseniorown-ers’retirementpaymentperiod.Theironyisthattargetfirmsplaceaveryhighvalueondecision-makingauthorityandSOPfoundationintheleadfirm,theverythingsthattheyrefusedtoimplementthemselves.

So,what factors,besides leadershipandmanagement,affectvalue?Letusconsideraseniorownerrainmakerwhoislookingforaleadfirmtoacquireorassimilatehisorherfirm.Whatexcitesthisperson?Youguessedit—afirmthatdoesnothaveaweaknessinthebusinessdevelopmentarea.Whatexcitesthewalkingtaxlibraryownerwhenlookingforafirm?Onceagain,itisafirmthathasstrengthintheareasinwhichheorsheisasuperstar.Whatmotivatesagroupofyoungownerstorefrainfromsplittingoffontheirowntojoinafirmwheretheywillhavelesssayinoperations?Theanswerisoftenafirmthathasac-countabilitybackedbydefinedprocess,procedure, support, training, technology(overallSOPfoundation)becausetheyoungerownerscanseethevalueoftradingcontrolinreturnforgrowthoftheirpersonalincome.Ifyouwanttotesttheimportanceofdecision-makingauthorityandSOPfoundationtosuccession,justreflectonwhatyouaswellaseveryoneelseseemstobelookingforinaleadfirm.Noonewantstowalkintoorganizationalchaos;peoplewantto(1)workinaprovenorganization,(2)thatwillbestableovertime,and(3)issupportedbystrongprocessesandsystems.

Forthosefirmsthatwanttotakeover,decision-makingauthorityandSOPfounda-tion will allow the assimilation of other firms more easily, quickly, and at a lower re-organizational cost.On the other hand, firmswith poor decision-making authority and

An acquisition is not just about money; the selling firm wants to connect with a well-run buying firm that will take good care of the relationships that have been nurtured throughout the years.

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undocumentedormarginally accountableSOP foundationhave found thatmergers andacquisitionsonlycreatemoreconfusion,turmoil,andanarchy.Whenthetargetfirmbeingacquiredormergedcanclearlyseethattheleadfirm’sorganizationalstructuresandprocessesareinflux,itpromotestheadditionoftheirpersonaloperatingpreferencestothemixofconsideredalternatives.Openingthis“Pandora’sbox”createssignificantandunnecessaryinternalconflictandcontroversy.

Mypersonalexperiencehasshownthat,atatimeofmajorchange,e.g.,mergingintoanewfirm,thetargetfirmmembersarethemostopentoacceptingnewwaysofdoingbusi-ness.Aswithanychangeofthismagnitude,someonewilltesttheboundariesofconformitywiththosesystems.Itmustbeclearthat“resistanceisfutile.”Noncompliancebythosewithinfluencemustbeansweredwithswiftreprimandsorfiring.Asaresult,veryquickly,theremainingmembersofthetargetfirmwillembracetheprocessesoftheneworganization.Incontrast, if it isclearthattheanticipatedboundariesdonotexist,theresultingpowerstrugglesandorganizationalconfusionwill stiflethefirmforyears tocome.So, it isnotjustaboutwhichfirmisincontrol,butwhetherthatcontrollingfirmhasdecision-makingauthorityandSOPfoundation,includingmaintainingaccountabilityforadherencetothosesystems.

How Sellers Identify Purchasers Identifyingapurchasercanbeverydifficult,especiallyifatargetfirmwantstofindcan-didatesforacquisitionormerger.Targetfirmsdonotwantthelocalcommunitytoknowthattheyarelookingforexitstrategies.Thisinformationmighttriggercurrentclientstoleave themor competitors touse this information to sell against them.So,often, targetfirmsputthewordoutthattheyarelooking—butonlytoafewdiscreteconsultantsandveryclosefriendstodeterminewhetheranypossibilitiesexist.Usually,thisisaveryslowandineffectiveprocessbecauseitisdifficulttofindbuyersforsellerswhowanttoremainanonymous.

Firm AssociationsManytargetfirmsjoinnetworksorassociationstodevelopclosepersonalrelationshipswithpotential buyers and sellers. CPA firm associations are growing quickly as an excellentsourceofinformation,includingtools,checklists,guides,andothersuchsupport.Firmsalsousetheseorganizationstoaccessspecialtytalentandtoavail themselvesofbestpractices.Several largefirmscreate small-firmnetworks tomotivate referrals, toprovide technicalsupporttotheirnetworkfirms,developawaytoservesmallermarkets,andprovidesomeofthosefirmswithexitstrategies.

Personal ContactsPersonalcontactsarethemostcommonwaytofindafirm,orforafirmtobefound.Themost frequentlyexploited technique is forafirmthatwants tobuy, sell,ormergewithanotherfirmtopickupthephoneandscheduleameetingtotalk.Aswediscussedabove,thistransactionisnotjustaboutmoney,sothestartingpointistocontactthefirmsthatyoucometorespectinthemanyencountersyouhavehadwiththeirpersonnelovertheyears.


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CPAstatesocietiesfindthemselvesmakingafewintroductionsandhelpingfirmsopenadialogue.

Manytimes,theidentificationofthetargetfirmisbasedonaleadfirm’sstrategicobjec-tives,suchasopeningoraugmentinganofficeinaspecificlocation,oraddinganindustryornicheservicespecialty.Therefore,theleadfirmwillusethecontactstheyalreadyhavetolearnwhichfirmsbestfittheircriteria.Iflittleisknownaboutthefirmsinaspecificarea,variousstate-wideornationalcontactsmaybeapproachedforreferences,suggestions,andintroductions.

BrokersJustastherearebusinessbrokersinthecorporateworld,thereareCPAfirmconsultantsthatactasbrokersintheCPAcommunity.Normally,afirminformsaconsultantthattheyareintheacquisitionormergermarket.Thenextstepistypicallytoeitherpayaretainerorpayfortheconsultant’stimetobecomefamiliarwiththeleadfirm’soperation.Duringthisinitialphase,theconsultantusuallyperformsthefollowing: •Eitherhelpstheleadfirmdefineanacquisitionstrategyorbecomesfamiliarwith

onethathasalreadydeveloped. •Constructsalistofnegotiatingpoints(rangingfromthosethataredealbreakersto

thosewithextremeflexibility). •Determineswhatthecharacteristicsofthetargetfirmshouldlooklikeinorderto

developatargetfirmprofile. •Ascertainsthesizeofthemarkettosolicit(geographiclimitations,numbersoffirms). •Callscandidatesthatmightbeagoodfit;and/orputstogetheramarketingcampaign

tosolicitfirmsthatseemtomeettheprofileandinvitesthemtocallforaconfiden-tialscreeningdiscussion.

Thefeesforthisservicevary,withretainersthatstartatabout$5,000andgoupbasedontheamountofworkthatneedstobedoneupfront.Inaddition,apercentagefrom3to10percentiscommonlychargedatthecompletionoftheacquisitionormerger.Justasitiswithbusinessbrokers,thesmallerorlargerthedeal,themorethefeesarespecificallynegoti-ated.Forinstance,forasmallhalf-milliondollaracquisition,consultantswillshyawayfrompercentagesandsetfixedfees(maybewithatotalforalltheworkofabout$50,000).Ontheotherhand,leadfirmswillnegotiatefeeceilingsifpercentagesareexpectedtogenerateabout$300,000ormore.

Thedisadvantageofbringinginaconsultantiscost,buttheadvantagesarethatcon-sultants: •Arefamiliarwiththeindustryandcanquicklyruleoutfirmsoutsideoftheestab-

lishedprofile. •Cancreateanactiveandanonymousmarketingcampaigntoreachanumberof

firmsthatwouldhavebeenmissedthroughaninformalcontactnetwork. •Canprequalifythecandidatefirmsandthusminimizethenumberoffirst-round

reviewevaluations. •Actasmiddlemen,thuskeepingconversationswiththetargetfirmsmoreonpoint

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•Actasmiddlemen,thusmoreeasilywithholdingcertaininformation.Often,ifown-ersareconfrontedbytargetfirmsandaskedforsemiconfidentialinformation,theyprovidespecificswhereasconsultantswillprovideindustrygeneralizations.

•Canbegatekeepers,providinganotherlevelofprotectionagainsttire-kickersorfirmsthatareusingtheinvitationtodosomecompetitiveintelligencework.

•Canprovideanobjectiveviewofthetwofirmsinquestionandofferinsightsre-gardingpotentialclashesinculture,ownerexpectation,internalorganization,andsystems.

Allinall,thesoftcostsofcompletingthiskindoftransactioncanbeuptotwicethehardcosts.Consequently,involvinganoutsideconsultantcanimprovethechancesofsuc-cess,aswellastheseamlessnessoftheintegration,andmayactuallybethemostprudentuseofmoney.

Retirement Plans Asyouwouldguess,ifyoulookedover20differentCPAfirms’retirementplansandcalcu-lations,youwouldlikelycomeupwithalmostthatmanyvariations.Althoughmanyoftheplansmighthavecomponentsincommon,eachwouldbetailoredtosatisfythespecificper-sonalitiesofthefirm.Toillustrate,hereareafewdeviationsthatIhaverunintorecently: •Calculatedretirementpay(one-times-annual-firm-gross-revenuetimesownership

percentage)paidoutoveraperiodoftime(seventotenyears) •Totalfirmvalue(tangibleplusintangiblecapitaltimespercentageofownership) •Afixedpercentageofsalaryperyearforlife •Thebuyoutprice,frozenforexistingownersatpercentageofownershiptimesgross

revenuesatthetimeanewownerjoinsthefirm(Addedtothatamountisanyad-ditionalgrowthabovethefrozenrevenuestimesthenewlycalculatedownershippercentages.)

•Thetotaloftheindividual’scompensationforthethreepreviouscompletecalendaryears,plus80percentofthetotalWIPandaccountsreceivables(A/R)multipliedbytheirownershippercentage,paidoutover10years

•Cash-basiscapitalaccounts,paidoutimmediately(Thevalueoftheremainingown-ershipinterestisequaltothatowner’sshareofownershipprofittimesfirmrevenues,A/R,andWIPpaidoveraperiodof10yearswithoutinterest.)

•Highestearningsinthelast10yearstimes3,paidoutover10yearsplusthecapitalaccount,paidimmediately

•Fiftypercentoftheprioryear’sgrossbillingsplushardassets,includingA/RandWIP,timesthepercentageofownership(Paymentsarespreadoverfourtotenyearswithnointerest.)

•Excludingthehighandlowsalaryofthelastfiveyears,thetotalofthethreeremain-ingyears,paidoutover10years

•Theaccrualbasiscapitalaccountplus75percentoftheaverageofthelasttwoyears’grossfeestimesownershipinterest


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•One-thirdofaveragesalaryoverthelastfiveyearsforthefirst10yearsofretire-ment,then25percentofthatsalaryforthenextfiveyears

•Averageofthelastfiveyears’salaries,multipliedby65percentandpaidfor10yearsRegardlessoftheformulasusedtocalculatetheretirementbenefitamount,thedeter-

minationofwhen,whatpercentageofthatamountisowed,andhowmuchwillbereceivedperyearisusuallybasedonthreevariables:yearsofservicetothefirm,theageofowner,andaretirementpayoutmaximum.Thefirsttwoattributesarethehurdlesofwhensomeonebecomesentitledtotheseprivileges(vests),whensomeonecanretire,andthepercentageofbenefittheyareentitledto(partialtofull).Thethirdvariable,retirementpayoutmaximum,setsaceilingontheannualpaymentstoretirees(usuallyasapercentageofprofitsorgrossrevenues)toensurethatretirementobligationsdonotcripplethecashflowoftheorgani-zation.Alternatively,sometimesthislimitisaccomplishedthroughaformulawherebythetotalannualretirementbenefitisreducedifcertainminimumsalaryamountsfortheremain-ingownerscannotbemet.Regardless,ifoneofthesesituationsarises,theretirementbenefitisnotreducedpermanentlybecauseanyshortfalliseithermadeupinfutureperiodsorbyextendingthenumberofyearspaymentistobemade.

Thissectionwilldiscussthegoalsofretirementplans,updatingretirementplans,over-sellinginretirementplans,maximumretirementages,andarule-of-thumbvaluetestforretirement.

Retirement Plan Goals Thereisnoperfectretirementformulaforallfirms,andquitefrankly,thererarelyseemstobeaperfectformulaforthesamefirmacrossgenerationsofowners.Eachformulaisde-velopedaccordingtotheparticularsetofexpectationsofthecurrentgroupofowners.Asfirmsgrow,astheirbusinesschangestomirrorthemarketplace,andasnewownerscomeonboardwithdifferentpersonalandprofessionalgoals,theretirementplanshouldbeupdatedtoreflectevolvingneeds.Ataminimum,theretirementplanshouldalways: •Providetheretiringownerswithfinancialbenefitsthatrewardthemfortheiryears

ofqualityservicetothefirm. •Recognizetheretiringowners’contributiontotheoverallvalueofthefirm. •Motivatetheownerstoalwaysdotherightthingforthefirmbecauseifthefirm

benefits,sodothey. •Motivatetheownerstostaywiththefirmandworkharduntilretirement. •Encourageownerstoscheduletheirretirementsinaplannedandorderlywayto

minimizetheimpactonthefirmforthelossoftheirtalentandexpertise. •Motivateretiringownerstotransitiontheirclientsaswellasotherwisesupportthe

firmsothattheirdeparturewillbeasseamlessaspossible. •Demandthatwhenthattimecomes,ownersretiregracefullyandhonorably. •Requirethattheretiredownerscontinuetobeapositiveinfluenceinthecommu-

nitysupportingthefirm. •Compeltheretiredownerstoneverpubliclydisparagethefirm,emphasizingthat

theyareambassadorsofthefirmforlife.



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Retirement Plan UpdatingOften,slowly,andovertime,thebalanceislostbetweentheretirementformulaandthevalueofthefirm,orthebenefitsprovideddriftoutofsyncwiththeneedsofthefirm.

Consider a firm that has successfully retired two or three owners over the past 10 years, but about five other owners (say, 60 percent of the remaining owners) potentially all fall inside the same retirement window. The formula that worked well for the first few owners might fail with this next generation because the firm might be able to handle the financial burden of the retirements, but is unlikely to be able to handle the exponentially negative decline that will occur in owner competency, talent availability, and client account management responsibility.

Sample Scenario

Inthiscase,herearesomestepsthatmightensurethesmoothandsuccessfulsuccessionofthisnextgenerationofowners: •Revisetheretirementplantolimitearlyretirement. •AllowtheCEO/MPsometemporaryflexibilityinmandatoryretirementageifcon-

flictsoverscheduleddepartureexist. •Demandatleastthreeyears’noticeofretirement. •Requiretheretiringownerstostaggertheirdepartures(forexample,ownersmight

havetoallowaminimum12-monthwindowbetweendepartures.Obviously,oncethislargegroupofsimilarlyagedownershasbeenretired,thesemodi-

ficationstotheretirementplanshouldmostlikelyberevoked.Thepointisthatmanage-menthastorecognizethat importantpolicieshavetobeupdatedall thetimetoaddresspossiblefutureconflictsandprotecttheviabilityofthefirm.

Retirement Plan Potential DisconnectsAnothergoalisto,asmuchaspossible,disconnectvariouscompensationsystems.Considerthefollowing:

A firm with annual gross revenue of $3 million has four owners; one is 64, another is 59, the third is 58, and the youngest is 52. Their annual salaries are $350,000, $300,000, $300,000, and $275,000, respectively. The retirement formula pays retirees three times each owner’s highest salary earned during their last 10 years, paid out over 10 years. Assume that the salary averages are fairly constant. An arm’s-length firm wants to buy the above firm and retire all of the owners creating a 10-year obligation totaling $3,675,000, with a present value at 6-percent interest of around $2.7 million. The formula, in this situation, is within a reasonable tolerance.

Sample Scenario

However,saythisfirmhaswantedtosignificantlyalteritsownercompensationfor-mulastomotivateandrewardspecificbehaviorseachyear.Sevenyearsago,therewasa


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bigpushtocross-selladditionalservices.Asaresultofhisstellarperformance,theownerwhonormallymakesaround$275,000made$375,000thatyear.Fiveyearsago,thestra-tegicissueoffocuswastodevelopstaffandpushworkdown.Thatyear,anownerwhonormally makes $300,000 earned $425,000, and so on. Now, assume that by using the

10-yearhistory,theownershavehighsalaryyearsof$515,000,$440,000,$425,000,and$375,000.Thisgivesgrossretirementbenefitsof$5,265,000withapresentvalueofalmost$3.9million.Thisnumbercouldworkfortheyoungerownersifthefirm’sgrowthandprofitsconsistentlyincrease,butonealwayshastoconfirmthattheseformulasdonotgrosslyoversellthevalueofthefirm.Afirmis only worth so much, and if the junior own-ersbelievetheyarebeingchargedanunjustifiablemarkup,theywillrevoltandleavetofindafairerdeal elsewhere. And there is a growing likeli-hood of a “more than fair” deal being made tojuniorpartnersgiventhehybridstrategyinplaytomerge-innichesordepartmentsratherthanentirefirms.So,disconnectsbetweenafirm’sretirementplanformulaandvaluecaneasilyrunoffagreatdealofscarcetalent.

Retirement Plan Maximum Age Requirements Thereasonsomanyfirms,especiallylargerones,haveestablishedmaximumages(manda-toryretirement)forownerstocontinueservingintheirmanagementrolesisbecauseofpastprivilegeabuse.AswediscussedinChapter3,“ManagementandOperations:ExtendingtheLifeandCultureof theFirm,”mostownersgaintheadvantageofbenefitcreepthelongertheystaywiththefirm.Manyfirmswilldefendbenefitcreepasavaluedmechanismforprotectingtheirseniorownersfromburningoutsincetheyknowthatduringthelatteryearsoftheircareers,theywillbeabletomaintaingoodsalarieswhileslowingdown.Nev-ertheless,thisapproachcreatesasituationofhighpay,reducedexpectedintensityofeffort,salariesstronglyinfluencedbyyearsofserviceandownership,littleaccountabilityfordailyeffort,andvirtuallynodisincentivetomaintainingthestatusquo.ItisnowonderthatsomanyCPAsaremotivatedtomaintaintheiractivestatusaslongastheycan.Consequently,firmshavebeenforcedtoputinmandatoryretirementtoensurethatseniorowners,sodis-posed,havealimittothenumberofyearstheycaneffectively“retireinplace.”

The ProblemOwnerswhoretireinplaceimposeafinancialburdenonfirmsbutalsotriggereconomicandleadershipconflictsaswell.Forexample,themajorincentivesforaCPAbecominganownerareto: 1.Eventuallytakeovertheleadershipofthefirm. 2.Gainthesalaryadvantagesandadvancesrealizedthroughbenefitcreep.

Any time you tie multiple systems together (like annual compensa-tion and retirement benefits), you have to constantly monitor to avoid unfavorable outcomes, such as the following:

1. One system handcuffs the other (preventing the firm from mak-ing needed corrections).

2. One system is forcing the other system out of balance with reality (such as significantly overcharging firm value).

3. One or both systems fail to in-dependently support the firm’s objectives.

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3.Enjoyretirementbenefitsearnedpartiallythroughthegrowthofthefirmandpar-tiallythroughbenefitcreep.

Thesepremiumsmostlyaccruetotheyoungerownersasseniorownersretire.Unfor-tunately,thissystemcollapsesunderitsownweightifoneseniorownergroupchoosestoremainactiveanextra10yearsorso.Suchachoiceispredictable,giventhegraduallyrisingretirementagemandatedbySocialSecurityretirementdatesaswellasthefactthatpeoplearelivinglonger.Considerthissituation.

A firm has six owners. Two are 63, two are 55, and two are 46. The firm does not have mandatory retirement. The two senior owners own 50 percent of the firm combined. Neither plans to retire any time soon.

Sample Scenario

Letusassumethatbothseniorownerswanttoworkuntiltheyareatleast75.Theotherownerscannotforcethemoutbecausetheydonothavethevotesrequiredtodoso.Fastforward12years,toapointatwhichthemixofownershasbecometwoowners,aged75,twoaged67,andtwowhoare58.

First,asdiscussedearlier,ageneralruleisthatseniorownerswillbethemostconserva-tiveintheirapproachtorunningthefirm,inordertomaintainthestatusquo.Therefore,theoddsarereasonablethatthisfirmhasbeendyingaslowdeathforatleast10years.Theseniorownersarenotlikelytobeasactiveastheyoncewere.Additionally,theyareprob-ablynotaseffectiveatbringinginnewbusinessbecausetheirpersonalcontactsandnet-workshaveeitherretiredaroundthemorhaveturnedthecontroloftheirbusinessesovertoyoungermanagement.

Second,itisreasonabletopredictthatatleastoneorbothofthemiddleownersarecontemplating retirement.Given this situation, thefirm is lookingat thepossibility thattwo-thirdsof itsownerswillbe retiringwithina three- tofive-yearperiod,creatinganincredibleburdenonthetworemainingowners.

Third,throughoutallofthis,theyoungestownershavesufferedfinanciallybecauseofthehighsalariesbeingpaidtotheolderownersandthecontinuallyescalatingretirementbenefitthatnowallfouroftheolderownerswillsoonenjoy.Also,giventhattheyoungerownersarethemselveseach58yearsold,itisunlikelythattheywanttodramaticallyincreasetheirworkefforttoassumenewleadershiproles,ensurethatallclientsaretransitionedprop-erly,andmaintaintheretiringowners’debtservice.

Finally,thefirmhasalmostcertainlyhaddifficultlyrecruitingownersduringthisperiodbecausenoclearbenefitswouldaccruetothemexceptfortheprivilegeofpayingoffevery-oneelse.Therefusing-to-retireowners: •Ateupimportantsalarydollarsthatcouldbeshared. •Causedthestagnationofthefirmbyminimizingriskandmaintainingthestatusquo

untiltheirowndepartures. •Clungtotheirleadershiprolesinthefirm.


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•Guaranteedthemselvesamoregenerousretirementbenefitthroughthecontinuedgrowthofthefirm.

Inmanysituationsaroundthecountry,withoutmandatoryretirement inplace, it isdifficult forpotentialyoungowners toassess thevalueofbecominganowneraswellasdeterminewhentheyshouldbeabletoreapthebenefitsseniorityusuallybrings.Becauseofalltheissuesdiscussedabove,implementingmandatoryretirementbecomesanimportantcoginthewheelofafirm’slife.

The SolutionCanthedilemmadescribedintheprecedingbesolvedbyanymeansotherthanmandatoryretirement?Yes,thoughadifferentsolutionrequiresadifferentviewofretirementsystems.Giventhecurrentshortageoftalentinourprofession,onegoodideaistoallowownersthatcanpulltheirownweighttocontinuetowork,especiallyinfirmsthathavemandatoryretirementagesthatareverylow(55oreven60).Ifyouwanttomaintainthevalueandintegrityofthepremiumforbecominganowner,createanownercyclethroughSOPfoun-dation.Forexample,ratherthanforcingownersthatwanttoworktoleave,createpolicesthatrequireownersoveracertainageto: •Removethemselvesfromleadershipsothatthechangingoftheleadershipguardcan

occur. •Shiftfromanownership-basedsalarytoapay-for-performancesalarytofreeup

somepartofthefirm’slikelylargestsalariestobereapportionedtotheyoungerowners.

•Freezetheretirementbenefittowhichtheownerswillbeentitledtoreflectthevalueofthefirmatthatpointintimesothatvaluegainedbythenewleadershipcanbeusedtopaytheir[newleadership’s]retirement.Transitionthevastmajorityoftheclientmanagementresponsibilitytoyoungerownerssothatyoungerownerswillbeputinthepositionofmanagingthefirm’stopaccountsandlookingforadditionalwaystoservethem.

Thisismeanttogiveyouideas,withoutbeinganall-inclusivelistofstepstotakeinmaintaining thecurrentenvironmental shifts thatmandatoryretirement facilitates.Asal-ways,thekeyisbalance.Iftheretirementoptionistoorich,seniorownerswillretireearlyandjuniorownerswillwanttoalsoleavetoavoidtheburdenofoverpayingfortheretire-mentsofothers.Alternatively,ifthedealistoolean,ownerswillpostponeretirement,andhangonforaslongastheycaninordertoprovide“aproportionatevaluetotheirpay”thatwillmaketheirfinancialsituationwork.Regardlessofyourapproach,youhavetomaintainthepremiumforbecominganownerbyforcingtransitionsthoughwhatevermechanismsaremostappropriateforyourfirm.



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Retirement Plan Test on Value For this reason, whenever an owner is gettingreadytoretire,Idoaquickrule-of-thumbtesttoverifythattheretirementpolicystillmakessense.TheapproachIamabouttosharecertainlycanbeappliedmosteffectively to smallerfirms,but thetheoryshouldhavesomeresonanceforanysized

firm.Myquickrule-of-thumbtestofaretirementscenarioisasfollows.

Step 1. Multiplythefirm’sgrossrevenuebyonedollar.Step 2. Addbacktheowners’educatedguessastothecurrentmarketvalueof

theassets,theunbilledbillableWIP,andcollectableA/R.Step 3. Subtractfromthatamounttheoutstandingnotes,linesofcredit,and

accountspayable.Theresultismyrule-of-thumbvalueforexistingowners.

Step 4. Takethis“existingowners’rule-of-thumbvalueofthefirm”andsubtractthepresentvalueofalloutstandingretirementbenefitamountsdue,includingtheobligationtopaythenextretirementcandidate.Icallthisresulttheremainingvalueofthefirm.

Step 5. Next,multiplytheownershippercentageoftheremainingowners(ex-cludingthenextretirementcandidate)timestheexistingowners’rule-of-thumbvalueofthefirmtoarriveattheremaining equity in the firm.

Step 6. Compare the remaining value of the firm to the remaining equity inthefirm.Generallyspeaking,theremainingvalueofthefirmshouldbegreaterthanorequaltotheremainingequityinthefirmforthecurrentpolicytomakesense.Youcantakeasimilarapproachbyassumingtheimmediate retirement of all but the youngest owner and see how thenumbersaddup.Usually,this lattercalculationismoreskewed,whichisacceptableaslongasthegapisnottoobigandboththefirm’stopandbottomlinesareexpectedtocontinuetogrow.

Thefollowingscenariodemonstratesthisapproach:

It is important to balance the value of the ongoing firm with the cost of paying the retiring owners.

Key Point


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Paul is 60-percent owner of a $1.5-million firm. They currently have $200,000 collectable in A/R, $110,000 in unbilled, good WIP, and the market value of the firm’s assets is $90,000. Outstanding payables are around $50,000, with a line of credit of $200,000 and a long-term note of $175,000. Using my rule-of-thumb test, I would get the following result:

Step 1—$1.5 million in revenues × $1 dollar = $1,500,000

Step 2—Adjusted receivables + WIP + assets = 400,000

Step 3—Payables + notes + line of credit = 425,000

My rule-of-thumb value for existing owners: $1,475,000

Step 4—To reflect the soon to be retiring owner’s impact on value:Rule-of-thumb value for existing owners: $1,475,000Present value of the 10-year, $100,000 per year payout at 5% discounted rate 772,174Remaining value of the firm: $ 702,826

Step 5—To reflect the value of the firm that the remaining ownersshould be left with: Rule-of-thumb value for existing owners: $1,475,000Remaining owners’ ownership of the firm: 40%Remaining equity in the firm: $ 590,000

Since my simple calculation shows that the remaining value of the firm is greater than the remaining equity, then the owners remaining have more to gain by paying off the retiring owner than taking a drastic action, such as splitting up. However, if the retiring owner was to receive $125,000 a year for 10 years, this situation starts to become very marginal because the remaining value is less than the remaining equity.

To reflect the soon to be retiring owner’s impact on value:Rule-of-thumb value for existing owners: $1,475,000Present value of the 10-year, $125,000 per year payout at 5% discounted rate 965,217Remaining value of the firm: $ 509,783

Sample Scenario

Thegreater thenegativebalancebetween thefirm’s value and its equity, themorelikelyitbecomesthattheremainingownerswilleitherdemandadjustmentsorcreateulti-matumsforchange,suchasstartingtheirownfirmorleavingtojoinafirmwithamorerea-sonableplan.Nevertheless,thereareextenuatingcircumstancesthatcreatemoreflexibilityinthisformula.Thesemightinclude,ononeside,creatingveryfavorablepurchaseterms,maximumpayoutprotections,remainingownersalaryguarantees.Ontheotherhand,theformulacouldbeinfluencedbyprovisionstoreducetheretirementbenefitsforpoorlytran-sitionedclients,orbytakingintoaccounttheeffortsbyretiredownerstomaintainanactivepublicrelationsroleafterretirement,orserveinvisiblecommunityservicevolunteerroles.

Oneofthedangersofdiscussingasimpleruleofthumbsuchasmineisthatitisjustapointofdepartureintestingasituation.Youhavetoconsiderallfactorsbeforeyoucande-terminewhatisreallyfair.YouwillnotbesurprisedtolearnthatIalsohavearuleofthumb



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forwhatisfair,too.Usually,fair is a place wherebothsidesbelievetheyhavecompromisedmorethantheywish.Logically,itiseasyforeachofustoevaluatewhatwearegivinguportheeffortwehavetomake.Itisjustaseasyforustominimizewhattheothersideisgiv-ingupandoverlooktheefforttheyhavetomake.Remember,weliveourownlivesandwemerelyviewthelivesofothers.Theresultistheprobabilityofdrawingboundariesthatfavorourselves,whetherwemeantoornot.

Succession Plans Successionisnotanisolatedissue;developingasuccessionplanrequiresanexaminationoftheentirebusinessstrategy.Consequently,successioncanbecomeanimportantcatalystthatcompelsfirmstofinallymakechangesthatpreviouslynevergotbeyondbeingtopicsfordiscussionatplanningmeetings.

Succession,morethananyotherissue,canbethecatalystfortheownersinafirmtoreachaconsensus.Addressingsuccessioniscompellingbecausetheseniorownersunderstandthatthetimeisdrawingnearforthemtoletgoofthefirm’sreins,andyettheysimultane-ouslywanttoreducetheirriskofnonpaymentofretirementbenefits.Theyoungerownersarereadytotakeoverthefirm,butrecognizethattheylackimportantskillsandexperienceneededtoensureasuccessfultransition.Therefore,allpartiesinvolvedarealmostcertainlymoreopentochangethanatanytimeinthepast.Butmostimportant,giventheloomingtransitiontothenextgenerationofleaders,alltheownersarelikelywillingtogiveupsomeprivilegesandpowersinexchangeforthingsthatarebecomingmoreimportantinlightofthischangingenvironment.

Someofthemanyissuesthatareopenforchangeare: •Whoisgoingtotakeoverthefirm,andwhatskillsdotheyneedtodevelop? •Howcanthefirm’sdecision-makingprocessbeestablishedtoensureaviableand

enduringchainofcommand? •Whatprocessesareneededtoensuretheconsistencyofoperationsamongleadership

groups? •Whatsystemsshouldbeadoptedtorewardandpromotethebehaviorsthefirm

desires? •Howwilleveryoneinthefirmbeheldaccountableforhisorheractionsand

inactions? •Howdoweleveragebothourpeoplewithextraordinarybusinessdevelopment

capability,aswellasthosewithasimilarleveloftechnicalcompetence,tobeofmaximumbenefittothefirm?

•Whataretheroles,responsibilities,andexpectationsofowners,managers,andstaff? •Howcanthefirmmakethetransitionfromoperatinglikeagroupofindividualstoa

groupsupportingonefirm(i.e.,puttingthefirmfirst)? •Howcanthefirm’sclientsbetransitioned,whatistheorderofthetransition,and

whendowestartthetransitionprocess? •Whatandwhenshouldthefirmcommunicateaboutthetransitionplantoboth

employeesandclients?


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•Whatroles,responsibilities,andexpectationsaswellascorrespondingbenefitsandprivilegeshavebeenidentifiedfortheretiringowners?

Succession Plan StepsByaddressingeachoftheprecedingquestions,youhavetraveledalongwaydowntheroadtodevelopingyourfirm’ssuccessionplan.Indraftingtheplan,donotgetcaughtupwritinganovelwhenaseriesofoutlinenoteswillmostlikelydojustaswell: •Agreetotheconceptsofageneralplan.Everyoneneedstounderstandthatnoone

cangivefinalapprovaluntilthedetailsofeachissuehavebeenlaidoutbecause“thedevilisalwaysinthedetails.”Ontheotherhand,donotletthisbecomealoosecommitment;theownersneedtoconceptuallyagreethattheywillworkhardtofindawaytoembracethespiritofthegeneralplan.

•Foreachissuedeemedimportant,draftastrawmanplanthatoutlinesthedetailsoftheproposedimplementation.ThebestapproachistoempoweryourCEO/MPtodeveloptheplansforpresentation,modification,andapprovalbytheboard(orothersuchdesignatedgroup).

•Alwaysstartwithstrategy,notpersonality.Asmuchaspossible,createfoundationbylookingtoprocesses,technology,andsystems—nottoindividualswhowillwantcreatetheirownboundariesandinterpretations.Establishframeworksthatidentifyboundariestoworkwithin.Mostimportant,givetheresponsibilityforcriticalactivi-ties(technicalcompetence,pushingworkdown,marketing),totheentirefirm,nottojustanindividualortwo.

Succession,iftherightprocessesareinplace,isactuallyfairlysimple.Onepersonre-placesanother.Inmostfirms,however,theteamisbuiltaroundtheperson.Thismeansthatwhenakeyindividualleaves,theentireoperationneedstobereshuffled,anewpersonortwochosen,andastrategydevisedabouthowtorebuildateamthatwillleveragethetalentsandskillsofnewpersonnel.However,ifpositionsarefinelydefinedbyclearpowersandlimitations,andsupportedbyprocesses(naturalchecks,balances,andoversight),thenreplacementisnotabigdeal.

Succession Plan as a CatalystIntermsofaddingvaluetothefirm,successionshouldbetheimpetustoimplementpro-cessesandpracticesthatshouldhavebeeninplaceallalong,whichwillhavealong-termpositiveimpactonthefirm.Herearejustafewideasaddressedinpreviouschapters: 1.Startchargingclientsafairfeefortheworkbeingdone. 2.Expecteveryoneinthefirmtoperformandberewardedbyreachinganestablished

setofobjectivecriteria. 3.TakestepstoeitherconvertyourDclientstoCclients,orletthemgo. 4.Stopsupportingmarginallyprofitable,nonstrategicislandservices. 5.Refusetotakeworkthattheoreticallyprovidesincomeduringtheslowmonths. 6.Staffyourfirmfornormalratherthanpeakoperations,andusepart-timestaffto

helptofillthegaps,ratherthantheotherwayaround. 7.Donotallowpart-timestafftotakeonkeymanagementresponsibilities.Part-time

staffshouldrelieveworkoverloads,butnotbecomecentralcogsinthemachinery.



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8.Reversethepyramid,forceworkdown,andemphasizeclientmanagement. 9.Stopallowingownerstodomanager-levelworkbecauseitisaneasywayforthem

tostaybusy. 10.Startpayingmanagers(supervisorymanagers)todevelopandtraintheirpeople. 11.Eliminateormodifyanypolicyorprocedureforwhichthereisnowillingnessto

holdpeopleaccountable. 12.Adjustbillingratesandtotalbillingexpectationstogiveeveryoneanopportunityto

beofvaluetothefirm;todothis,consider,foreachindividual,thetypeofworkheorshedoes,hisorherlikelyrealization,andhisorherprobableutilization.

13.Passclientandbillingresponsibilitydowntomanagers,ataminimum,forallC clients,inordertofreeupownerstostayinfrontoftheirAandBclients.

Thisbaker’sdozensummarizesjustafewoftheideasfoundthroughoutthisbook.So,withtheintentto“fixwhathasbeenbrokenfortoolong,”listalltheissuesthatrangtrueaboutyourfirmwhenyoureadaboutthemandstartaddressingthemoneatatime.Thefewyearsleadinguptosuccessionisagreattimetocleanhouseandeliminatetheburdenofexcessbaggageforthefirm’snewleadership.

Succession Plan TransitionsAspromisedinthelastchapter,Ihaveincludedanine-stepapproachtotransitioningclientstoensurecontinuedloyaltyandretention.Itisverysimpleandstraightforward.Icanhearyouask,“Ifthisissoeasy,whydosofewfirmsdoitwell?”Firm-valuetransitionsaredonepoorlyinmostfirmsbecausethereisnosysteminplacetoforcetheseniorownerstodothemwell.Therefore,ownerscontinuedoingwhattheyhavealwaysdoneuntilitistimeforthemtogo,becausedoingsomaximizestheirinternalpower,compensation,andflexibility.

Transition StepsAllthereistoclienttransitionisthefollowing: 1.TheCEO/MPshouldbeinchargeofdevelopingthetransitionplan.Thisisnota

jobfortheboardunlessitneedstoprovidesomehigh-levelguidancetotheclientredistributionprocess.

2.Theretiringowner’scurrentcompensationandfutureretirementbenefitshouldbeconditionedonfollowingtheplan,withemphasisawayfrombillablehours,tooneof transition,businessdevelopment, communityvisibility, andmentoring.Sizablepenaltiestotheretirementbenefitshouldbeimposedforlackofcompliancewiththeplan.

3.Aminimumofaboutthreeyearsshouldbeallowedforthisprocess.Someownersmayneedfiveyearsbecauseofthesizeoftheirclientbase.

4.Alistofclientsthatneedtobetransitionedshouldbecreated. 5.Peopletakingoveraccountresponsibilityshouldbeidentifiedforeachaccount. 6.Acalendarshouldbecreatedthatdepictstheorderandtimingofinitialcontactsfor

eachclient. 7.Thelargestandmostimportantfirmclientsshouldbetransitionedfirst.Thisgives

theretiringownermoretimetosupportthetransitionbecauseheorsheisstillactiveinthefirm.


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8.Somefirms,regardingtheirlargestclients,createateamapproachtoservingthoseclientssopeoplebeingmovedinoroutoftheaccountseemstobelessabouttransi-tionandmoreaboutbetterclientservice.

9.SOPs are established that outline the allowable follow-up and involvement fromretiringownersoncetransitionbegins.Asanexample,afirmmightsetupaprocesssuchasthefollowing:

a.Inthefirstyearoftransition,anytimeservicereportingorfollow-upoccurswithatransitioningclient,theretiringownerwillnotconductthosediscus-sionswithoutthenewlyassignedaccountmanagerpresent.

b.Inthesecondyear,theretiringownermightdeferthepresentationofallser-vicestothenewclientmanger.

c. Inthethirdyear,theretiringownerwillfindexcusesnottobepresentatmostoftheclientmeetings.Inaddition,thatownerwillissueconstantreminderstohisorherfriendandclientthatthenewclientmanageristheonewhoknowswhatisgoingonandhasbeentakingcareofthem.

Asindicatedabove,whatmakestransitionproblematicisthefailuretodoit,notthattheprocessistoocomplex.

Althoughitshouldbeexpectedthatyourtopclients all know several other firms that wouldlovetoservethem,switchingfirmsisnotadeci-sionmadelightly.ClientsdevelopacomfortzoneinworkingwiththeirCPAs,especiallyknowingthat their financial situation and secrets will bekeptconfidentialbythefirm.Mostclientswillnotleaveifthenewlyassignedclientaccountmanager

isgivenacoupleofyearstobuildonthetrust,confidence,andconfidentialityoftheexistingrelationship.Thisassumes,ofcourse,thattheretiringownersdotheirpartanddeliberatelyfadeintothebackground.

Willalltransitionsbesuccessful?No!Wearetalkingaboutpeople,notobjects,whichexplainsmysuggestiontopenalizeseniorownerswhodonotfollowtheagreed-totransitionplan.Therewillalwaysbesomeclientcasualtieswhenkeypeopleleaveanorganization.Thepointisnottoobtainspecificresults,butfortheretiringownerstotakethoughtfulandlogicalprecautionarystepsthatwillmaximizeclientretention.Partoftheeconomicvaluethatoffsetstheretirementbenefitisthefirm’sabilitytocontinuetoservethoseowners’pastrelationships.Transitionplansareanimportantmechanismtoholdownersaccountable.

Transition Leadership Development Here is what I mean: Whether you are talkingaboutthenewleaders intraininginaCPAfirmor any business on the planet, essential life andbusiness lessonsare learned,mostoften, throughmistakes.Thisissueisoneofthebiggestproblemsencountered in succession of family businesses.

Transition is simply about giving clients more reasons to stay with a firm than to leave it when their long-standing relationship manag-er is retiring.

Key Point

Success in developing leadership requires understanding that “mis-takes need to be proportionately in line with position.”

Key Point



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Althoughsonsand/ordaughtersmayhaveworkedinthebusinesstheirwholelives,theyrarelymadeanimportantdecisionthatwasnotscrutinizedandapprovedfirstbyMomorDad.Thismeansthatincomingleadersmayhavealwayscarriedimpressivetitles,buttheyneverreallyhadthepowerorauthorityofthosepositions.MomandDadbelievedtheyweredoingthekidsafavorbybeingtheretocatchthembeforetheyfellontheirfaceandhurtthemselves.Therealityisthat,insteadofbuildingleaderswhoweredevelopingandcontinuallyrefiningtheirown“gutinstinct”aboutwhatmightworkorfail,thesenewlead-ersmerelyproposedideasthatwereconsideredbythoseinpower.Hereishowthescenariotypicallyplaysout:

Dad owns a manufacturing business. Daughter has worked in the business for 22 years. She has held positions in purchasing, accounting, administration, and manufacturing. She is now Vice President of Operations. Dad is a strong-willed, very controlling entrepreneur. He has run this business with an iron fist since he started it 25 years ago. He wanted to re-tire five years ago, but did not believe that his daughter was ready to take over, nor was he willing to risk his biggest asset by turning it over to her. Six months ago, Dad got very sick. The prognosis for full recovery is excellent, but his close encounter with death has changed his priorities. He now is ready to turn the business over to his daughter and walk away to pursue his new priorities.

Sample Scenario

Thisisaverycommonsituation,bothinbusinessesofallsizesaswellasCPAfirms.Justchangethespecificpeopleandtheirrelationshipstoeachotherandeveryonereadingthiscanthinkofsimilarsituations.MylatestreadingofsomestatisticsfromtheSmallBusinessAdministrationshowedthatmorethanhalfofsmallbusinessesfailinthefirstfiveyears,andthetransitioncanbeparticularlychallengingforbusinessesbeingpassedfromonegenera-tiontothenext.Mypersonalexperiencepointsto“mistakesproportionaltoposition”be-ingarootcauseforthislackofsuccess.

Consideringtheoutcomeofthestoryabove,onemightthink,“Thedaughterwilldofine…Dadwasholdingonlongaftershewasready.”Nevertheless,thekeytomyinter-pretationisthewords“strongwilled”and“withanironhand.”Ihavebeeninvolvedwithsimilarsituationsoverandover.Theoutcomeisthatalthoughthedaughterhasbeenactiveinthebusinessandisknowledgeableaboutallaspectsofit,shehasalmostneverbeenheldaccountable for thedecisions shemade.When shemadebaddecisions,Dad intervenedandkilledthem.Ifshemadegooddecisions,Dadimplementedthem.Butthedaughter,allalong,neverdevelopeda“gut”instinctthatwouldgiveheranearlywarningsignaboutwhenandwhysomethingwas likely togowrong.So,whenshewas inpurchasingandwantedtousemultipleshipperstoincreaseflexibility,sheneverhadtheexperienceofhav-ingtoaccountfortheaddedcostofdispersingthevolume,ortheaddeddifficultyoftrack-ingshipments,orthecustomerdissatisfactionresultingfromshippingerrors.Whenshewasinaccountingandwantedtointegrateallthesystemsthroughouttheorganization,shenevergottoseeforherselftheimprovedinformationandstreamliningofoperationsthatwould


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have resulted from this investment in technology. Nor did she observe, first-hand, thepoliticalnightmareofobtainingcompliancefromeachdepartment,aswouldhavebeenre-quiredunderfullyintegratedsystems.Icouldgoonandon,butthepointremainsthesame.Daughterneededtheexperienceofmaking$5,000and$10,000mistakesinpurchasingand$25,000to$50,000mistakesasheadofmanufacturing.DadorMommighthavebeenmak-ingthosesamemistakes,butshewasnot.Now,sheisthenewheadofthecompanywithno“gut”inplace,andinsteadofmakingmistakesthatwereproportionalwithherpositionyearsagoandlearningimportantlessonsfromthem,shenowwillbeeffectively“bettingthecompany”everytimeshehasanewidea.Typically,businessescantakenomorethanoneortwobig,high-levelmistakesbeforegoingunder.Ibelievethisiswhysomanybusinessesfailfromonegenerationtothenext.

Now,letmedrawananalogytosuccessioninaCPAfirm.Ifafirmisgoingtotransi-tiontonewleaders,thenewgroupshouldbegivenenoughropetohurtthemselvesandfailalongthewayundertheguidancebutnotthecontroloftheolderowners.Theirmistakeswillcostthefirmmoneyintheshortterm,butnotnearlyasmuchasthecoststhatwillresultifolderownerssimplyretireandwalkaway.So,inpreparingtoretire,olderownersshouldnotvetotheyoungerleaders’ideas.Eveniftheolderownersdislikeproposals,theyshouldallowthemtoproceedinsuchaswaythattheconsequencesareblunted.Forexample,as-sumethenewleadershipwantstoexpandintothreenewindustrynichesandopenanewoffice.Ratherthancarryingouttheseinitiativessimultaneously,whichisexactlywhatthenewleadershipwouldwanttodo,olderownersshouldapprovetheplansbutalsosetsomelimits.Thenewleadershipshouldbetoldtopicktheirbestalternative,developabusinessplanwithspecificannualhurdlesandinvestmentrequirements,andrunwithit.Theresult-ingexperiencewillallowthemtobeaccountablefortheiractions,yetlimitthefirm’sriskbynarrowingtheinvestment.Thenewleadershipwillhaveachanceto“learnwhattheydidnotknow.”Theexperienceofplanning,settingobjectives,identifyingcriteriafordis-continuance,anddefiningwhatsuccessshouldlooklike,willhelpthemdoabetterjobthenexttimearound.ThebestnewsofallisthatthisformalizedprocesswilllikelyalsobecomeanacceptedSOPfoundationbestpracticeforincubatingallfutureideas.

Icannottellyouhowmanytimesseniorowners,astheyapproachretirement,becomesoconservativethattheyforcethefirmtostagnate.Theirfavoriteresponsetoanyproposedchangeis,“Youcandowhateveryouwantoncewearegone,butaslongaswearehere,thingswillstaythesame.”Thisattitudeandposturedoesnothingbutfrustratetheincom-ingleaders,makingthemevenmoreimpatienttoact.Demandsforchangebecomepentup,tothepointthatoncetheseniorsaregone,toomanyprojectswillbeattemptedtoofastwithoutthepropercontrols.Thenewleadershipisthenindangeroffailingto: •Takeononlyoneortwoprojectsatatime. •Followaformalizedprocesstoproposenewprojects. •Monitorandreporthowthoseprojectsaremeetingexpectations. •Methodicallyimplementthem.

Although thedo-nothing strategymayhavehelped the seniorownersmanage theirriskwhiletheywerearound,theconservatismoftheiractionsandattitudesactuallyputsthefirmingreaterjeopardyaftertheirretirement.Thefirmwouldhavebeenfarbetteroffif



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theseniorownershadbeenwiseenoughtorecognizethattheyoungerownersweregoingtomakechangesassoonastheycould.Ratherthanfightthem,theseniorownersshouldhavecreatedprocesses,expectations,formalizedrequirements,andanapprovalprocessthatwouldformthefoundationforallfuturefirminvestmentproposals(niches,offices,technol-ogyupgrades).Thisway,riskcanbeminimized,adviceandcounselcanstillbegivenandaccepted,andthefirmcansustainwhatevermistakesaremade.Otherwise,thesameactionswillbeattemptedlater,outsideofaprocessundercircumstancesinwhichthenewleader-shipmaybeunwittingly“bettingthefirm”andtheseniorowners’retirementpayout.

Tosummarize:Putnewfirmleadersinpositionsinwhichtheycanandarepermittedtomakemistakesfromwhichtheycanlearnwhilecostingthefirmrelativelylittle.Donotwaituntiltheretiringownersleave—thenewleaders’mistakes,afterthatpoint,mightbelargeenoughtocostthefirmeverything.

Succession Plan Agreements Issues Recalltheearliersuggestionsthatanessentialfirststepistoredoyourowner,retirement,compensation, and other agreements, eliminate from them all of the formulas and specific requirements that are likely to change over time,andinsteadincorporatetheseaspoliciesinanSOPmanual.Thesepoliciesandformulascanthenbereviewedannuallyorbiannuallyonarotatingscheduletoensuretheirrelevance.

Agreements PointsBesides theheightened levelof issue scrutinyandoversight thatwilloccurasa resultofreworking theagreements, thereareadditional, specificagreementpoints that shouldbeaddressedrelativetoretirementandsuccession.Somebasicissueswouldinclude: •Whatistheretirementage,andisitmandatory? •Isearlyretirementallowedand,ifso,whatarethedifferencesinbenefits? •Whatactivitiescanaretiredownercontinuetoperformafterretirement?What

authorizationisrequiredforthoseactivitiestocontinue? •Howareretiredownerscompensatedfortheircontinuedactivities,ifany(e.g.,per-

centageofcollection,hourlyfee)? •Whoisliablefortheamountofoutstandingretirementpayouttothefirm(thefirm,

and/ortheownerspersonally)? •Whatrecourseorcurescanretiredownersinvokeiftheyarenotpaidinfull? •Whatvotingprivilegesdoretiredownershaveduringtheirpayoutperiod?Forex-

ample,cantheyblockmergersorsalesofthebusiness?Cantheyblockapartialsale,likethesaleofanicheservice?

•Ifamergeroracquisition(fullorpartial)occurs,willtheoutstandingretirementpayoutamountsbecomedueinfullimmediately?

•Isthereinsuranceonkeypeopleinthefirmthatwillpayofftheretirementobliga-tionstothosepeopleiftheydieorbecometotallydisabled?Willthiskey-personinsurancealsocoveroutstandingretirementobligationstootherretiredshareholders?

•Whatactscanforcetheterminationofanowner(e.g.,illegalactivities,misconductsuchasharassment,lackofperformance,bankruptcy)


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•Whatactscanforcetheretirementofanowner(e.g.,publicembarrassmentofthefirm,lackofperformance,ownerdisability,bankruptcy)

•Whatpercentageofvotesisrequiredtoremoveanowner? •Whatpercentageofvotesisrequiredtoforcetheretirementofanowner? •Whatistheclienttransitionplanforownersthreetofiveyearsawayfrom

retirement? •Ifanownerdoesnotcomplywiththedates,deadlines,andresponsibilitiesdefined

intheclienttransitionplan,whatimpactwillthathaveonthecalculationofhisorherretirementpayout?

•HowdouncollectibleA/RorWIPaffecttheresponsibleowners’compensation? •Howdoliabilitiesincurredafterretirementbasedonworkperformedbyaretired

owneraffecttheremainingandoutstandingretirementpayoutobligation? •Doyourequireallretiringownerstosignanoncompeteagreementwiththefirm

aspartoftheirretirementobligations?Assumingthefirmdoesrequiretheseagree-ments,andassumingaretiredownercontinuestoperformworkasaCPAafterretirementonhisorherown,therebycompetingwiththefirm,whatrecoursedoesthefirmhave?Canthisactvoidthefirm’srequirementtopayretirementpay,orreduceobligationsbytheamountofworkbeingperformed?

•Whatresponsibilitiesfortheirownconductdoretiredownershaveduringtheretirementpayoutperiod?Forexample,cantheretiredownerspubliclycriticizethefirm?CantheownersreferbusinesstocompetingCPAfirms?Cantheretiredownerperformegregiousactsofmisconductinthecommunity?Shouldtheretiredownersviolatetheirconductresponsibilities,whatrecoursecanthefirmtakeagainstthemduringthepayoutperiod?

•Whatisthemaximumretirementpayouttoallretiredownersthathastobepaidannuallyasapercentageofgrossornetincome?Ifanannualretirementpayoutamountisreducedbecausethecash-flowpercentageceilinghasbeenmet,howisthisresolved(e.g.,bymakingitupinthefollowingyearorextendingthepayoutperiod)?

•Doesownerdeathordisabilityacceleratethepaymentoftheretirementamount?Ifso,how?

•Iftheactiveowners’compensationfallsbelowaspecifiedamount,doesthataffecttheannualretirementpayoutrequirement?

•Isthereapreretirementperiod,suchasthreeyears,duringwhichtheretiringownersareremovedfromthefirmwidecompensationplanandputonaretiringowner’splantomotivatethemtocompletetheirpreretirementactivitiesandnotpunishthemfornotperformingthenormalownerrequirements?

Thesequestionsarenotmeanttobealistofalloftheissues,butrathercaptureanum-berofthemostcommonones.Inadditiontoaddressingthese,twootheragreementareasmightbenefitfromaddedexamination.Thefirstisanemploymentagreementforanyonewhohasregularcontactwithclientsandthesecondisaseveranceagreementthatoutlinesthecomplianceexpectedofterminatedemployeesorowners.



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Employment AgreementsLetusstartwiththeemploymentagreement.Throughworkingwithseveralofmyclientsandtheirattorneys,itbecameobviousthatthesuccessoftraditionalnoncompeteagreementsdependsonspecificcircumstances.Therefore,wedecidedtotakeadifferentapproachandconsiderthecircumstancesofthemodernworkforce,whichseemsespeciallyprudentforworkersinnonmetropolitansettingswhoseemploymentopportunitiesarelimitedoutsideaspecificmileradius(suchas25miles)fromtheirresidences.Ratherthanfocusingonthenoncompeteaspectofemploymentagreements,whichtendstomostlylinethepocketsoftheopposingattorneysandprovideslittletothefirms,wetooktheapproachofbeingreim-bursedforclientlossesincurred,which,duringsuccession,isevenmoreappropriate.

Foranyclientstakenbyapreviousemployee,wedecidedtochargemultiplesofthean-nualrevenueearned,whichdeclinedovertime(thehighestmultipleinthefirst12months,areductionofthemultipleinthesecond12months).Thiswasputinplacetoaccountforthetime,effort,training,expertise-building,andprivilegeofdirectclientcontactthathadbeeninvested inthisemployee.Moreover,becausethesepoliciesarebased inthefirm’sstandardemploymentagreement,wenotonlyareobligatingformeremployeestopaythefirmforanyclientsthatleavewiththem,wearealsoattemptingtoobligateanycompeti-tivefirmthathirestheseformeremployees.Inotherwords,ifacompetitorhiresaformeremployeewithin thedefinedgraceperiod,wewill sendthemnoticeof thatemployee’sexisting employment agreement and notify them of their implied agreement to assumecertainfinancialobligationsiftheyelecttohavetheirnewemployeesolicitclientsoftheirformeremployer.Giventhecurrentenvironment,inwhichfirmsarewooingawayentireteamsofspecializedemployeesfromcompetitors,thisclauseisimportantandnecessaryforthepurposeofsecuringthevalueofyourfirm.

Wealsotookthisapproachbecauseinmanysmallercommunities,insteadofgenerat-ingillwillanddisputesabouthowformeremployeesaremakingaliving,theintentistotreatthemasprofessionalcolleaguesandsimplychargethemforanyclientstakenduringaspecificperiodoftimeaftertheirdeparturefromthefirm.Itmayalsobethattheyhaveadutytodisclosethisagreementtoanycompetitortheyworkforduringthegraceperiod,sothattheirnewemployer’sfirstnoticeoftheagreementisnotaletterfromtheemployee’spreviousfirm.Thisemploymentagreement,properlydrafted,cansetthegroundrulesforanynewrelationshipsthatinvolvesprovidingservicestoclientsofpreviousemployers.

Severance AgreementsLetusdiscussseveranceagreements.Ibringthisupnowbecauseasyoustartimplementingstrategiesforsuccession,therewillprobablybeemployeeandownercasualties.Thesetypi-callyarethepeoplewhoimmediatelycomeunderscrutinywhennewperformancesystemsareimplemented,orthosewhorefusetobeheldaccountable,orwillnotacceptspecificallydefinedrolesandresponsibilities.So,makesureyouhaveanagreementinplacethatout-lineswhatisexpectedfromtheseemployeesinordertoreceivetheirfinalseverancechecks.Someofthestandardissuesthatareimportanttoaddressare: •Returnofpropertyandwhatspecificpropertythatincludes,tailoredforeach

employee


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•Notificationofwhensuchemployeewillgethisorherfinalcheck,includingtheunderstandingthattheamountstatedisthefullsettlementofthefirm’sobligation

•Thedateofterminationandbenefits,andaspecificationofthosebenefits,suchasCOBRA,thatwillremainavailable

•Awaiverofclaimsbyacceptingtheseverancesum,whichcouldincludeclaimsofharassmentordiscrimination.

•Explanationthatseveranceisnotanadmissionbythefirmofanyviolations •Assurancethattheemployeewillnotdisparagethefirmforaspecificperiodinany

way •Notificationoftheconfidentialityrequirementoftheagreement •Notificationthatanybreachoftheagreementwillbesettledthroughbindingarbi-

tration(andhowthatisspecificallyarranged)

CaveatObviously,itisessentialtoconsultwithyourfirm’sattorneyastowhatstrategiesareper-missibleinyourjurisdiction,aswellaswhatwillworkbestfortheparticularcircumstancesofyourfirm.

Additional Succession Plan Issues HerearesomeoftheremainingquestionsandresponseswehaveyettocoverinfullfromthePCPSSuccessionSurvey.Thesequestionswereonly askedof thosefirms thathavemultipleowners.

Howmanyownersplan to retire fromyourorganization in thenextfiveyears?Ofthosethatresponded,theanswerswere: •63percentofthefirmshadatleastonepersonretiringinfiveyears. •32percentofthefirmshadmorethantwoormorepeopleretiringinfiveyears.

Whatpercentageownershipof thefirmdoes eachgroup represent?Theownershippercentagesareasfollows: •Inmultiownerfirms,theaverageageofthemostseniorpartnerwas60andtheir

averageownershippercentagewas35percent. •Amongsoleproprietors,the65percentwere55orolder.

Other responsesmostly supporthypotheses Ihave coveredearlier in thisbook.Forexample,anumberofconclusionswouldbethat: •Agreatnumberofowner-levelCPAswillberetiringinthenext10years. •Alargenumberofseniorownershavenoideawhentheymightretire. •Anumberoffirmsdonothavemandatoryretirementages. •Therewillbeasignificantnumberoffirmleadershipchangesduringthenext

decade. •CPAownersarecontinuingtoworklonger. •Anumberoffirmshaveseniorownerswhoownasignificantportionoftheirfirms

andwhowillbelookingforlow-riskexitstrategies. •Well-managedfirmsthathavedecision-makingauthorityinplaceandarerunby

strongSOPfoundationwillbeinagreatpositiontoexponentiallygrowtheirbusi-nessesataverylowcostduringthenext10to15years.



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Forthefirmsinthelastitem,abanquetoffirmslookingforlow-riskexitstrategieswillliebeforethem.Additionally,firmsthatareagingwithoutaplannedexitstrategywillfindthatanumberoftheirclients,astheyseetheirCPAsretiringinplace,willlookforaviablefirmtowhichtotaketheirbusiness.

Succession Plan Potential Pitfalls Thisbookhasbeenaboutthetypicalpitfallsencounteredduringsuccessionandthesupportsystemsnecessarytoshoreupweaknesses.Nevertheless,itseemsappropriatetohighlightsomeofthemagaininthissectionofourfinalchapter.Thesepitfallsare:

Pitfall 1. Lackofdecision-makingauthorityPitfall 2. ControllingownerPitfall 3. ContinuingrolesofretiringownersPitfall 4. OperationalswingsPitfall 5. DesignatedrainmakerPitfall 6. TransitingCEO/MPPitfall 7. FragmentingthefirmPitfall 8. Lackofinterestinbecominganowner

Thefollowingsectionsdiscusstheseeightpotentialpitfalls.

Pitfall 1. Lack of Decision-Making AuthorityIstartwithlackofdecision-makingauthorityasoneofthemostprominentpitfalls.Deci-sion-makingauthorityeitherexistsbecausethefirmhasanownerwithacontrollinginterestinthefirm,orbecauseanestablishedorganizationalhierarchydelineatesthelinesbetweenboard(ownergroup)responsibilitiesandCEO/MPresponsibilities.Foranyorganization,creatingdecision-makingauthorityistheplacetostart.Withoutastronglevelofcommandandcontrol,alltheproceduresandagreementsintheworldwillnotmatterbecausethereisnoauthoritythatwillconsistentlyholdpeopleaccountable.

Pitfall 2. Controlling OwnerInterestinglyenough,anotherpitfallcomesasadirectresultofcommandandcontrol.Inthiscase,wearetalkingaboutthecontrollingownerandwhyheorsheoftenbecomesthefirm’sbiggestproblem.Thegoodnewsisthataccountabilitycanbeimplementedthroughoutthefirm(mostlikelyforeveryonebutthecontrollingowner,unlessheorsheisabenevolentdictatorandsubjectshim-orherselftothesamerulesaseveryoneelse).Unfortunately,whattoooftenhappensisthecontrollingownerswilltalkaboutretiring,butdonotwanttopinthemselvestoaspecificdate.Theywillmaintaincontroloftheirclientaccountsuntilalmostthelastdayofwork.Whentheyfinallyannouncetheirretirementdate,theseleaderswillnotwanttohangaroundfortoolongwithoutremainingincontrol.Becausetheywouldnotcommittoaspecificretirementdatewithplentyofadvancenotice,poorclienttransi-tionandclientbookmanagement result.This actuallyworks in thecontrollingowners’favor,however.Anumberofthemwillbeableto“double-dip,”sotospeak,andaugment


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theirretirementbenefitsbyeitherkeepingacertainnumberofclientsafterretirementand/orrequiringongoingfinancialpaymentstocompensatethemtomanagetheactivitiestheyshouldhavealreadyperformed.Inaddition,theseownerswillcommonlyaskforremunera-tion tocarryonfirmactivities (suchasmarketing)which theydidnot transition,or forwhichtheyfailedtocreatesystems.IneverycaseIhavebeeninvolvedwith,theinstantthatthesedealswerefinalizedandtheoperationalissuesresolved,theremainingownersmodi-fiedtheiragreementstoensurethatthefirmwouldneverbeputinthispositionagain.

Pitfall 3. Continuing Roles of Retiring Owners Anotherareaofabuseisfoundwithcontinuingrolesofretiringowners.AsIhavesaidbe-fore,retiredownersshouldnothaveanyclientmanagementresponsibilities.Firms’activeownersshouldmaintainallclientrelationships.Granted,retiredownerswillhavenumerouspersonalfriendshipswiththefirm’sclients,andthoseclientsmaystillcalltheretiredownerfirstwhenproblemsarise.Nevertheless,theretiredownerhasanobligationtorefrainfromhandlingtheissueand,instead,toimmediatelyputtheclientintouchwiththeownerwhocurrentlyholdsresponsibilityfortheaccount,thushelpingtostrengthenthenewrelation-ship.Aslongastheretiredownerisallowedtoactasanintermediary,fullclienttransitioncannotoccur.Allowingretiredownerstomanagefirmclientsguaranteesafuturediscon-nectbetweenthefirmandtheclientregardingservicesofferedanddelivered,fees,orsomeotherissues.Misunderstandingswillarisebecausetheretiredownerisnolongerprivytothefirm’sstrategyormanagementconversations.

Pitfall 4. Operational SwingsAnothercommonpitfall isextremependulumswings inthewaythefirmoperates.Themoreafirmoperatesonthepersonalwhimsoftheownersratherthanondefinedprocess,procedures,andpolicies,themorelikelyoperationswillshiftfromoneextremetoanotherasownershippercentagesarereshuffled.Forexample,aswingwillalmostcertainlyoccurifapowerfulcontrollingownerretires.Thefirmcommonlywillshiftfromthatofdictatortocommittee-runoperations.Althoughitispredictablethatbothoftheseextremeoperatingstyleswreckhavoconorganizations,assumingthedictatorhasreasonablebusinessacumen,thepresenceofdecision-makingauthoritywillalmostalwaysbebetterthanoperatingwith-outit.Anothercommonswingoccursaroundworkandlifebalance.Assumeaworkaholiccontrollingownergroup.Itishighlylikelythatoncepowershiftsawayfromthisgroup,theremainingownergroupwillwanttodoawaywiththepressure-cookerworkplaceandinstalla“lowstress,nopressure”environment.IknowIamgoingtotakesomeheatforsayingso,butbothoftheseextremesarepoorlong-termchoices.WorkaholicfirmstendtoburnouttheirCPAs,leadingtoaverypredictableend.Lowstress,nopressureenviron-mentstendtocreateapositiveworksettingfortheownersandemployees,butthesefirms,timeandagain,areshowntobepoorlymanagedbecausetheownersrefusetofocusenoughattentionondoingwhatisnecessarytosustainthelong-termvalueandviabilityofthefirm.Often,lowstress,nopressurefirmsriseinasecondorthirdgenerationofleadershipandslowlydeteriorateas individualpriorities supersede theneed toput thefirmfirst.Eitherextremeisapredictorthat,assoonasoldervotersareretired,thenewleadershipwillswing



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180degreesintheoppositedirection.Successfulsuccessionisaboutconsistency,notaboutsettingthefirmupforthesekindsofdramaticswings.

Canafirmbesuccessfulswingingfromoneextremeoperatingstyletoanother?Abso-lutely!Butrememberthediscussionaboveabout“keepingmistakesinproportiontoposi-tion?”Whenyoumovefromoneknownextremeoperatingmodetoanew,unknownone,thenewleadershipisinunchartedwatersabouthowtomakethiskindoforganizationruneffectively.Therefore,thelearningcurveismorelikelytoincludemistakesonthescaleof“bettingthebusiness.”Developingprocessesthroughouttheorganizationbecomesamajorsellingpointinthesensethatnewleadershipcantakeoverandsmoothlybegintofunctioninanenvironmentthathasbeensuccessfulandwillrequireonlyoccasionalminoraltera-tions.Suchenvironmentsofferamuchhigherlikelihoodofuninterruptedsuccess.

Pitfall 5. Designated RainmakerSurviving the departure of a firm’s designated rainmaker is another common stumblingblockinsuccession.Aswehavediscussedbefore,ownersareapttoplacetoomuchempha-sisonattractingnewbusinesswhen,inreality,agreatdealofgrowthcomesfromtheprovi-sionofadditionalservicestoexistingclients.Moreover,analysissuggeststhatnewclientsarethebyproductofanactiveclientandprofessionalreferralnetworkmorethananythingelse.AfirmwideSOPfoundationmarketingenginecoupledwithregularlyscheduledvisitstothefirm’stopclientsachievesresultsinthesedevelopmentalareasmuchmoreconsistentlythanrelianceonacoupleofsuperstars.Thisisnotnearlyasmuchaboutsellingasitisaboutensuringthateveryonewhoworksforyourfirmembracestheresponsibilitytoliveuptotheprofession’smantraofbeingclients’“mosttrustedadviser.”Youcannotbecomesuchanadviserifyouarenotgenuinelyinterestedinspendingtimewithyourclients,listeningtothem,andhelpingthemfindwhateverresourcestheyneedtoachievetheirpersonalandprofessionalgoalsandobjectives.

Pitfall 6. Transiting CEO/MPChoosingthebestpersonforthetoppositioninthefirmposesmanyhazards.MostfirmsconsidertheCEO/MPpositionawaytohonorseniorityorsatisfyanego.TheproblemisthatmanyCPAsarenotwellsuitedforthisjob.TheCEO/MPposition,inmyview,shouldbefilledbysomeonewhotakesasystemsapproachtorunningthefirm.Thisisapersonwhoenjoysachievingthedefinedmissionoftheorganization,wholikesworkingwithintheframeworkofabudget,whobelievesitisimportanttoconstantlycommunicatethroughout the firm, who defaults to implementing support processes, procedures, andtechnologytocreateconsistencyofoperations,andwhowakesupeverydaythinkingabouthowtomakethefirmrunmoreefficientlyandprofitably.AlthoughtheCEO/MPisalsoafaceinthecommunityandwillbeinvolvedinvariousnetworkingactivities,hisorherprimaryjobistoworkonthebusinessratherthanjustinit.Supposeanownerinyourfirmisagreatprojectmanager,lovesworkingwithclients,enjoysnetworking,andishappiestwhenchallengedbynewclientsituations.DonotmakethemistakeofmakinghimorheryourCEO/MP.Thefirmwillalwayscomesecond;thisperson’spassionisworkingwithclients,notmanagingthefirm.


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Inaddition,whenmakingthistransitioninpower,considerturningthisjobovertosomeonewhocoulddoitfor10yearsorso,assumingheorsheprovestobecompetentinthejob.Athree-tofour-yeartenureasaCEO/MPbarelygivesthisownerenoughtimetogethisorherhandsaroundthejobandimplementanythingsignificant.Forexample,goingpaperlessisaninitiativethathasbecomeacommonplaceundertakingforfirms.Experienceshowsthatittakesatleastthreeyearstofullyimplementtheefficienciesandnewwaysofmanagingprojectsthatgowithapaperlessenvironment,nottomentionbeingabletoassesstheeconomicpayoff.Initiativesinplanning,budgeting,operatingframework,reversingthepyramid,marketing,performancepay,andemployeemotivationareevenmorecomplex,giventheintricaciesofhowthesesystemsareintegratedandoverlapping.Consequently,youmustgiveyournewCEO/MPachancebygivinghimorherenoughtimetobeabletomakeadifference.Ifyouhavesomeonewhoisbestsuitedtotakeontheroleofbeingthefirm’sfacetothecommunitybutisnotagoodcandidatetobeCEO/MP,assignhimorheraprestigerolelikechairoftheboard.DonotundermineyourorganizationalhierarchybynamingthispersonasCEO/MPwhileassigningtherealoperationsdutiestochiefoperatingofficerorfirmadministrator.Whoeverismakingday-to-daydecisionsabouthowthefirmoperatesmustalsoholdtheappropriatetitle,ortherewillbechaosandconfusionamongthestaffaschangesarebeingimplemented.

Pitfall 7. Fragmenting the FirmAsignificantpitfallisthefragmentationofthefirmperpetuatedbythemodelthatallowsownerstotaketheposturethat,“Imanagemyownbookofbusiness.”Acorollaryofthismodelisan“eat-what-you-kill”outlookthatcanbeverysatisfyingandlucrativeforsomeindividuals, but it creates conflicts for firms undergoing growth, change, or succession.Simply,iftherearethreeowners,andtheyallgenerallymanagethesamesizedbookofbusi-ness,andeachmanageshisorherbooktoaboutthesameprofitratio,allwillbewell.Butinvariably,oneowner’sbookwillgrowfasterthananother’s.Conflictisimminentassoonastherearesubstantialdifferencesinthebooksizeswithinthefirmbecausethesedifferencesoftenprecipitatelargediscrepanciesbetweenpersonalincomeandvotingrights.

ThisbringsupaninsurmountableobstacleforanyCEO/MP.ThejobofCEO/MPistoprimarilymanagethefirm(grantingthattheamountoftimerequiredtodevotetothisobviouslyvariesbasedonthesizeofthefirm).ThefirsttaskforanewCEO/MPistogivehim-orherselfenoughtimetoworkonthefirmbytransitioningmuchofhisorhercli-entresponsibilitiestoothers.Note,however,thateveninlargefirms,itisagoodideafortheCEO/MPtodofrom250to500hoursofclientworkannually,whichwillensureacontinuingperspectiveontothedemandsclientsconstantlyplaceonmembersofthefirm.GiventheassumptionthattheCEO/MPneedstofreeuptimetodevotetothefirm,andgiventhatclientbooksizeisoftenaprimarysourceofpowerwithinfirms,whatprotectionsaretherestoftheownerswillingtoprovidetominimizetheCEO/MP’stransitioningrisk?Inotherwords,if,overthecourseofthenextfewyears,halformoreoftheCEO/MP’sclientsaretransitionedtootherowners,whatassurancedoestheCEO/MPhavethatdivest-ingclientresponsibilitieswillnothurthimorherinthelongrun,e.g.,atthepointinthefuturewhenanewCEO/MPischosen?Inmanyfirms,aprotectionperiodcoveringtotal



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compensationisgiven.Forexample,anassurancepackagemightbethatthesalaryofthestepping-downCEO/MPwillnotdeclinemorethan10percentayearfromthepreviousyearforthreeyearsinordertoprovideenoughtimeforthisownertoregainareasonableclientbase.Italsomightinclude,assumingthispersonisnotgoingtoretireintheverynearfuture,therighttohaveselectedclientstransitionedback,oranunderstandingthatnewclientswillbeassignedtohimorhersoastoachieveanequalredistributionamongtheowners.Toooften,however,owners put their CEO/MPs in a no-win situationbyaskingthemtomakemanagingthefirmtheirpriorityeventhoughitisclearthatclient-basemanagedistheonlytruesourceofpower.Unlessthisconflictisaddressed,youareensuringthattheCEO/MPwillonlyprovidelipservicetorunningoperationsanddoingwhatisbestforthefirm(planningforsuccession,increasingprofitability,developingSOPfoundation).Heorshe,drivenbyahealthysenseofself-interest,willcontinuetoconsidermanaginghisorherclientbasethetoppriority.

Pitfall 8. Lack of Interest in Becoming an OwnerSometimessuccessionisthwartedbecausequalifiedpeoplearenotinterestedinbecomingowners.Ifthisisoccurringinyourfirm,stepbackandtakeahardlookatthedealthatisbeingofferedtothesepeople.Inmanyfirms,newownersdonotmakemuchmoremoneythan theywere already earning.Nevertheless, theyhave tomeethigher expectations inperformance;theyhavetopersonallyassumetheriskofthefirm’sdebtsandliabilities;theyhavelittletonosayinthecompany;and,mostimportant,theyseethemselvesasindenturedservantspayingtheseniorowners’retirementobligations.Existingownerswhotaketheat-titudethat“It-was-good-enough-for-me-when-I-was-a-new-owner,”arenotrationalizingverywell.Youngerpeoplewhoquestionthedealmaybesmarterthanyouwerewhenyoujustacceptedit.Remember,too,thattheadage,“Trustme...itwillworkoutforyou,”issooverusedandabusedthatitdoesnotholdmuchwater.Andsometimes,theremaybere-allygoodreasonswhyownercandidatesarenotinterestedinbecomingowners.Itmightbethatthereisapotentiallawsuitpendingthatcouldbankruptthefirm.Itmightbethattherearenomandatoryretirementpoliciesinplacefortheseniorowners,meaningthatthenewownerscannotassesshowtheeconomicswillworkforthem.Inanyevent,often,whenIfindmanagersresistanttobecomingowners,itislessabouttheirwillingnesstoperformandmoreaboutaflaweddeal.Ifyouwanttobuildafirmthathasviabilitybeyondthecurrentgenerationofowners,andyouarehavingtroublegettingpeopletoparticipate,makesurethe“new-partner”dealisgoodenough.

Thisleadsmetothenextpotentialobstacle.Ownerstatusshouldnotbethepredictableresultofseniority.Inotherwords,yourpeopleshouldnotfeelthatiftheydonotbecomeowners,thereisnoplaceforthem.Peoplechoosedifferentprioritiesandaspirations,andbecominganowner,andtakingontheburdenofownerresponsibilities,maybeverylowonthelist.However,donotconfusenotwantingtobecomeanownerwithnotbelievingthatacareerisimportant.Inordertoretainyourkeyemployees,itisessentialtoexpresstothemthattheirexpertiseandcontributionisvalued.Thismeans,attimes,youmustdevisewaystokeepyourtopperformersengaged,includingprogramstorewardthem—andyoumustdothisbetterthanyourcompetitorsdo.Forexample,youdonotwantyoursuperstar


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seniormanager(s)toleaveinordertakeanonequitypositionelsewherethatincludessharinginthefirm’sprofitsorhavingaccesstoaspecial“time-off”rewardforpeoplewhosignifi-cantlyexceedtheirincentivetargets.Inotherwords,showyouremployeesthatbecominganownerisnottheonlymeasureoftheirvaluetothefirm,northeonlysourceofrewardsfortopperformers,northeonlywayforthemtoprovetheirloyaltytothefirm.

Conclusion Inconclusion,successionisaccomplishedbytakingthefollowingsteps: 1.Identifythefirm’sstrategy. 2.Empoweramanagementteam(CEO/MP,COOorfirmadministrator)toimple-

mentthechangesnecessarytoachievethedirectivesoftheboardofdirectors(deci-sion-makingauthority)withoutconstantmicromanagement.

3.EstablishfirmwideSOPfoundationsthatsupportyourstrategy(accountability,trainedandmotivatedemployees,reversingthepyramid,performancemanagement,servicesynergy,marketing, business development, client retention and loyalty).DevelopintegratedsystemsthatbuttressSOPprocesses,incorporatingperformancemeasure-mentandmonitoring(creatingconsistentlyfollowedprocessbyutilizingtechnology,policies,procedures).

4.Tie compensation to the achievement of key objectives (using either lead or lag measures).

Identifying the Firm StrategyThislistofstepsshouldnotbesurprising;theysummarizebasicconceptscoveredthrough-outthisbook,yetalsoareseldomaccomplishedbyfirms.Evenfirmsthatareconsideredexceptionallywellrunbyourprofessionactuallystruggletogettheirhandsaroundoneormoreoftheseareas.Usually,thereislackofclarity(item1,intheprecedinglist),follow-ingbyadefaultintomicromanaging(item2).Althoughyoucanputafewsystemsinplacetoaddressmostoftheissuesbelowownerwithouttakingthefirsttwosteps,youcannotholisticallyimplementanythingthroughoutthefirmorholdpeopleaccountableuntilthesefirsttwostepsarecomplete.

Whetheryouareasoleproprietororaseniorownerinalargefirm,youwanttodevel-opStep2aroundpolicy,responsibilities,powers,andlimitationsasmuchaspossible.Thishelpseveryone—evenasoleowner—toholdupamirrorandcontinuallyverifyhowtheorganizationwasdesignedtowork.Thisapproachpositionsthefirmasifitwasaseparatelifethatmustbeprotected,nurturedanddeveloped.Atsomepointinacompany’ssuccess,hierarchicaldecision-makingauthoritywillbeneededtoadvancethefirmtothenextlevel.Butwhywait?Ownersneedtowillinglytradeintheirindividualpowersandprivilegesforthegreatergoodoforganizationalprocessesandaccountability.Thosefirmsthatcanaccom-plishthisimportanttransformationwillpositionthemselvestobeabletoleappastothersinleveragingtheconsolidationthatwillbedrivenbysuccessioninthecomingdecade.



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ImplementationRegardlessofthesizeofthefirm,fromtwototwothousandemployees,everyoneofthefive steps listed above is the same. Issues likeoperatingbasedon strategy, adhering to abudget,accountability,reversingthepyramid,servicesynergy,marketing,businessdevel-opment,andclientretentionorloyalty,areequallyapplicable.Thedifferencecomesinthecomplexityofimplementationandthelevelofrequiredformalization.Whenasolepropri-etorcanlookbeyondtheincome-hitheorshesustainstodayinordertobuildinfrastructureeverywherepossible,thisoperatormodelapproachwillreturnlong-termefficiency,pro-ductivity,andprofitability.Moreover,intheend,thisinvestmentalsodrivesupthevalueofthefirmwhilemakingitaprimetargetforacquisitionormerger,eveninasoftmarket.

A Final WordThereisnoquestionthatsuccessionplanningisoneofthehottesttopicsoftheday.Every-oneislookingforasimpleplanthatwillshoreupfirmvalue.Thesuperstarsarelookingforacoupleofideastheycanputinplacebeforetheyretirethatwillpayhugedividends.Formanyofthesefirms,successionisbeinglookedatasifitweremerelyabuy/selltransaction,wherethecostofgoodssoldwerepiecesofinventoryratherthanhumanrelationships.Ob-viously,itisafarmorecomplicatedtransaction.

So,giventhislandscape,ifyouwanttopassyourfirm’storchwithoutgettingburned,becomeoneofthefewthatreallyappliestheconceptsinthisbook.Stoprelyingalmostexclusivelyonpeopletocarvetheirownuniquepaths,andstartbuildingroadsthatallem-ployeescaneasilyfollowtoeventuallymoveahead.Realizethatalthoughyourclientshaveavalueinthemarketplace,firmsgainingaccesstoadditionaltalentwilllikelybeofequalvalue.So,stoplookingatyourclientsasyouronlyassettosell,andinstead,lookatyourfirm,itsSOPfoundation,andthetalentedpeopleyoudevelopasassetsofequalorgreatervalue.Inthecomingyears,newbusinesswillbepervasivebecauseofthenumberofclientslookingfornewhomesastheirtrustedCPAsretire.Thosefirmsthatbuildaninfrastruc-turethatwillallowthemtoeasilyandseamlesslytakeonthispotentialabundanceofnewworkwillbemostlylimitedbytheirpeople.Therefore,itbecomesimperativetoestablishprocessesthatleveragepeople(theoperatormodel)inordertobeabletotrainthemmorequickly,interchangethemmoreoften,andmanagethemmoreeffectively.

Successionisaboutworking“onyourbusiness.”Successionisaboutfinallytakingthosestepsyouhaveknownyouneededtotakeforyears.Successionisaboutmaking“you”lessimportantbycreatingaself-runningoperationalenginethatcranksoutsatisfiedandloyalclientsasabyproductoftheconsistentlyhigh-qualityworkperformed.Successionisaboutdevelopingateamofstars,notdevelopingateamaroundsuperstars.Andmostimportant,successionisaboutleadership.Newleaderscannottakeoveriftheoldleaderswillnoteverletgo.

Takeagoodhardlookatwhyyourfirmhasbeensuccessfulandcontinuetolever-age the traits andcharacteristics that aregood.Butalso startbuildingbridges to traversethechasmsinstrategyandoperationsthathaveoccurredthroughconstantlyplacatingthefirm’ssuperstars.Itistimetorealizethatafirmcannotachievesignificantmomentumby


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followingeveryone’snavigationstrategy.Pickadirection,putsomeoneatthehelm,andhaveeveryoneelsegetoutoftheway.Itistimetoinvestintheconstructionofformalizedmethodology(SOPfoundation)sothatyoursuperstars’strengthsdonoteventuallydefinethefirm’sstructuralweaknesses.Ifyouwanttosuccessfullypassthetorch,startimplement-ingwhateverideasrangtrueforyouinthisbookwhileconstantlytryingtoreplacesuperstarideologywithanoperatorandinterchangeabilitymentality.

Iwishyouthebestofluckinyourfuturesuccession.Andregardlessofthepathyouchoose,ithasbeenmyhonorandaprivilegethatyouhaveallowedthisbooktobepartofyourprocess.


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Securing the future : succession planning basics