By David C. Knoch, president and chief operating officer, 1st Global
Leadership matters. No one reading these two simple words would dispute their truth, but they may prompt questions: How much does it matter? What separates strong leadership from weak? What practices, in addition to leadership, create thriving businesses? The questions are endless.
Some time ago, 1st Global set out to find an answer to the question of how the impact of leadership shows up in results. These are the very basics of running a strong CPA/wealth management practice, even a strong CPA firm itself, that we all generally recognize are true. Our question was, “What results do best practices create, and how are these results different?”
“Don't measure yourself by what you have accomplished, but by what you should have accomplished with your ability.” – John Wooden
To answer these questions, it’s necessary to have a common benchmark, and collectively we’re privileged to have one in your core CPA practice. The revenues from your core business serve to level the playing field for all wealth management divisions. We know that $500,000 in production from your wealth management unit is a level of which to be proud, but what if one CPA firm generating this result was a $1,000,000 CPA practice and another was a $10,000,000 CPA practice? Would we look at those firms’ achievement of their potential differently? Coach Wooden’s quote is a reminder to all of us that our potential is the benchmark for achievement.
We set out to test the power of three core best practices: licensing of partners, compensation structures and firm leadership style. While compensation structures require more research, there is clarity around the results of our research that quantifies the power of best practices in the other two areas. And not only that, the data we collected actually begins to help us see the power of other best practices such as broadening the firm’s use of wealth management capabilities and more.
Calculating Value Extraction
Using core CPA firm revenue as a benchmark, we are able to calculate the “Wooden Factor” or what we more commonly refer to as “value extraction.” Simply, this is the amount of wealth management revenue generated divided by the amount of CPA firm revenue generated (not including wealth management). For our two example firms above, the first has a value extraction of 50 percent, while the second has a value extraction of 5 percent. The higher the number, the more the firm has accomplished, relative to its potential.
While licensing of partners had a clear and measurable impact on the value extraction of a firm, what interested us the most was the power of various decision-making styles. For purposes of this analysis, we’ll call this leadership, as it defines the degree to which a firm is likely to operate with a singular voice, but I would note that this quantitative approach removes any analysis of the quality of leadership.
In the survey, firms were asked to choose a decision-making style of their firm from the following choices: Leader Decides, Leader Decides with Input, Partner Group Decides with Managing Partner Vote Carrying the Most Weight, Partner Group Decides with Equal Vote, and Each Partner Makes their Own Decisions. The first three styles are generally seen as “unbalanced” styles as they appear to have someone in a role that can break ties, hold partners and staff accountable, and singularly set resources and execute a vision for the firm. The fourth style is seen as the contrasting “balanced” style. The fifth is listed as an acknowledgement of a possible style, but is so infrequently chosen, we’ve discarded it from the final analysis. Clearly, these five styles do not describe all possibilities, such as a smaller executive committee that makes decisions, but they are designed to highlight a range of styles.
Over 200 of our affiliated firms responded to the survey, with 72 percent reporting an “unbalanced” style and 28 percent reporting a balanced style. Removing sole practitioners reduced the number of firms showing an “unbalanced” style to 62 percent.
All Aboard the Northbound Train
The meaning behind this data is compelling. The firms that, through the structure of their decision-making style, speak with one clear voice about the direction of their practice tend to show a greater achievement of their potential than those who do not. Those of us who have witnessed each style know the truth that creates these numbers. When all the leaders of the business get on one page and choose to head one direction, the staff of that business has a tendency to do the same and great things happen. When one leader decides to do something different, clarity is lost and the firm struggles. A firm is either all on board or not on board at all; there is no in-between.
The choices of response are clear, with each action easy to implement in concept, but the reality of implementation is quite a bit tougher. If your firm has a balanced decision-making style, look around the room. Is there a clear leader among the partners? For the good of the firm, could you elect that person as managing partner, and give them the power to set the direction of the firm, break ties and hold partners accountable? If you choose this path, know that you will not be the first; this is a real strategy that has been implemented by firms faced with this data. The other path is for the partner group to resolve to act as one. The only thing separating the balanced firms from the results of the unbalanced firms is the decision by the leaders of that organization to not act as one. As a partner group, get everything on the table behind closed doors. But when the doors open, resolve to be – and stay – on the same page. Your firm will be better for it.
Leadership matters. While we all know in our hearts that this simple statement is true, the reality of its power is incredibly clear.
David C. Knoch is President and Chief Operating Officer at 1st Global, a research and consulting partner for high-achieving CPA firms offering wealth management. 1st Global provides CPA, tax and estate planning firms the education, technology, business-building framework and client solutions that make these firms leaders in their professions through dedicated professional client relationships built around wealth management.
1st Global Capital Corp. is a member of FINRA and SIPC and is headquartered at 12750 Merit Dr., Suite 1200 in Dallas, Texas, 75251; 214-294-5000. Investment advisory services offered through 1st Global Advisors, Inc., an SEC-Registered Investment Adviser. Additional information about 1st Global is available at www.1stGlobal.com