Partners - A Little Disagreement Can Improve Revenues

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Do you and your fellow partners agree on almost everything? If so, you could be damaging the bottom line and threatening the very existence of your mid-size CPA firm.

Believe it or not, too much consensus - where owners allow the majority to rule or in those rare instances when all owners really do agree - can harm your revenues and damage your ability to interact, plan, and run the firm cooperatively and profitably.

How Consensus Can Hurt

You may ask, "Aren't partners supposed to agree? What about the 'united we stand' concept? Is PR now advocating that owners disagree to run a profitable and efficient CPA firm?"

The answers are mixed. While some degree of consensus is healthy and required so that you can take care of business, concensus is best in moderation. Too much agreement can diminish partner profits and even cause the gradual demise of aging mid-size CPA firms.

How can this happen? CPA firm owners at consensus-driven firms tend to spend most of their professional and administrative hours generating and performing work, billing, collections, and cost control. With so much time spent just keeping up, such partners tend to lack time or the professional resources to pursue external revenue enhancements such as marketing, technology, premium rates, and top-drawer clients.

The aging of mid-size partnerships is also becoming a serious challenge to survival, and is made even worse by a continuing staffing crisis. Aging mid-size firms see their recruiting dropping off and see many of their most active and experienced CPAs at the senior, supervisor, and manager levels leaving. This reduction in staff size can lead to drastic and debilitating revenue losses when firms lose their leverage and the quality of their services drops.

Capital is another area in which damage can occur with aging mid-size firms: Although such firms fared well through the mid- to late 1990s, many of these firms used their capital to reward current partners, provide cash payments to retirees, pay the increasing costs of compensation and benefits now required to get and keep staff, and upgrade their technology.

The current slowing economy threatens a steadily rising stream of income, and mid-size firms are being caught in the middle: They are too small to have the comfortable cash flow or capital resources of the biggest firms and too large for the efficiencies of tiny firms. If these firms lose staff and thus their leverage, the resulting financial hole becomes more like a canyon, swallowing cash and profits for owners. The firms can no longer offer competitive salaries and benefits - factors that still attract scarce CPA firm staff, even if salaries and benefits become less crucial in the general hiring world. (For recent benchmarks on these problems, see the section below, "Disturbing Trends in the CPA Profession.")

Taking Charge

To stop such a slide - or the potential for a slide - your firm needs to be able to demonstrate its quality and professionalism as never before. These traits are a part of the well-run firm, but they are incompatible with owners who rubber-stamp decisions and prefer to stick to managing their own practice groups and partners.

Owners should examine the following problem areas to
enhance the true partnership basis of the firm:

  • A lack of accountability. A CPA firm that chooses individual autonomy over a single, directed authority or firm leader usually finds that its partners lack personal accountability. If nobody can tell others what to do, little gets done outside the individual practices of strong, diverse professionals.
  • The tyranny of the few. Decisions by consensus really are decisions by unanimity. Tyranny over minority partners is never a good operating model.
  • Analysis paralysis, or the technician's paradox. Partners may be intelligent, reliable, and skillful, but these same attributes may cause them to suffer "analysis paralysis" when they confront a difficult business or leadership decision. CPAs often are conservative and careful in decision making, yet being risk averse may not be the best way to succeed in business.

Why Partners in Mid-size CPA Firms Should "Agree to Disagree"

New leadership and governing models can help empower and revitalize mid-size CPA firms, and enable them to compete with larger firms.

Here's a current list of what attitudes should be out of favor among mid-size CPA firms that want to continue to prosper - and those attitudes that should be in favor:

Out: "A general practice is best because it appeals to a wide variety of clients."
In: The firm must continually invest in attributes that increase value to clients.

Out: "Technical partners and marketing partners."
In: All owners must create professional plans that outline their specific contributions to the firm.

Out: "Working hard will bring success."
In: Working smarter, especially with limited resources, should be the underlying drive. This model should include loosening your grip on the billable hour system and charging for the value of what you deliver.

Out: "Just do the work on your desk and more will follow."
In: Owners must be on the constant lookout for value-added services and client solutions.

Out: "Partners are entitled to work fewer hours than staff."
In: Remember, you are running a business, and corporate business owners should work very hard, even without the staff shortages that are piling more work onto CPA firm owners' desks.

Out: "What works for me will work for others."
In: The individual must relinquish autonomy to the power of a directed firm leadership. There's a balance between too much and too little freedom.

Out: "Smart people will do what's right and should be left alone to practice as they please."
In: The firm must promote and reward leadership, vision, and risk-taking.

What else can you do? For starters, you can play a role in resurrecting the life and revenues of your aging firm. Don't waste time squabbling over tiny details, such as staff vacation schedules and how the firm's brochure appears.

Here are much better ways for owners to spend their time and energy:

  1. Regularly identify and address essential issues concerning recruiting, marketing, and quality of staff, clients, and service.
  2. Demonstrate leadership in your own work through vision, accountability, and growth. Try to embrace change and risk. If you can't demonstrate leadership qualities, you can't expect such qualities in others.
  3. Absorb concepts from disciples of best leadership practices. Look to your clients, consultants, and colleagues for examples of what makes a successful business.
  4. Build an advisory board of change agents. Enlist a diverse group within your firm to help you - you don't need to do this job alone.
  5. Develop investment capital by setting specific revenue and profit goals. Invest the capital in recruiting, marketing, and firm differentiation. Then, re-tool unprofitable practice areas.
  6. Establish accountability by requiring each professional in your firm to design a career plan and each practice area to have a business plan.

Disturbing Trends in the CPA Profession

Although many firms have seen record revenues in recent years, the following warning signs come from the latest research by the Institute of Management & Administration, Inc. Data collected from 209 U.S. CPA firms in the 2001 CPA Firm Practice Management Survey reveal trends that owners should consider for their own firms. The survey, conducted late last fall, asked respondents for information about their firms over the prior 12 months, as well as their projections for the future:

  • Capital costs are higher. Double the percentage of respondents from a year ago (18% versus 9%) reported that capital requirements for owners are higher: The increase averaged 12% in a year with 12% growth in gross billings. Such gains may become a memory with the changes in the economy. How to pay for compensation, benefits, new services, and other costs is once again surfacing as a top concern.
  • Retirement costs are rising. While firms have been using an average of about 4% of their gross fees to pay retired partners, this year the percentage soared to 12% among survey respondents. The actual amount of payouts leaped an average of 37% in just one year. The hot economy cooled many firms' desires to address this issue - but it is one that never disappears. Plan to stop relying on cash for retirement payouts.
  • Firms are collecting fees faster - but only slightly. The average collection period is now just under 60 days, while a year ago it was just over 60 days. Monthly collections could be very helpful to your firm's cash flow and should be an important goal.

Firms are raising billing rates - but only a little. Although 78% of firms said they raised rates this year, the average hourly rate for CPA firm owners was unchanged from last year: $152. Firms are charging more for the time of non-CPA owners and non-equity owners: Their average hourly rates rose from $128 and $134 last year to $155 and $156, respectively, this year.

Copyright 2001, Partner's Report for CPA Firm Owners, Institute of Management & Administration, Inc. (IOMA), Reprinted with permission.

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