Accounting Office Management & Administration Report

As strong growth continues for CPA firms, managing partners are challenged to ensure that growth is managed well. While rapid expansion is affecting firms in similar ways, how each firm’s leaders tackle its impact will mean the difference between entering a successful new stage of business or having to sell the firm because of failure to address growth properly.

The issues that are most important to sustained and wise growth were outlined in a session at the Northstar Accounting Firm Leadership Forum in Indian Wells, CA: Staffing, leadership, and succession were at the top of the list for the six managing partners on the panel.

Growing pains. Unlike several years ago, CPA firms aren’t having a problem growing. In fact, one of the panelists joked that any CPAs who weren’t experiencing growth these days are probably in the wrong line of work.

Getting quality staff to handle the increased workload is no laughing matter for any firm, even for "larger mid-size" firms like the participants (all of the firms’ annual revenues were $30 million or higher).

Beyond the obvious monetary incentive for growth are others as well, noted Jeffrey Garrison, president and managing partner at Stonefield Josephson, Inc. (Santa Monica, CA). "Growth is key—but everyone is growing today," he said. CPA firms need to compete in an expanding market, sustain their growth, and focus it on target areas.

Garrison identified "five ws" of growth:

• Why: The number one reason to grow is to compete, he said.
• Who: "Take care of your people and bring in the best talent. Invest in your people—you’ll grow," he said. "You can’t do it by being cheap."
• What: Firms must make difficult decisions about clients and practice areas. His firm has cut about $8 million in billings in the past two and a half years to refocus growth efforts.
• When: Growth is now an all-the-time consideration. "Some of your partners may ask, ‘Why are we marketing when we have more work than we could shake a stick at?’" Garrison said. The current boom won’t last forever, he explained, especially in areas such as SEC and Sarbanes-Oxley work, where regulators appear poised to relax requirements and compliance will become more manageable. "The process of growth is forever."
• Where: Devote resources to areas you think the firm will support, he suggested. "Put profits back into the firm a little—it’s an investment." You will spend less to retain staff, for instance, than to recruit.

The importance of staff. Staffing—managing, hiring, retaining, maximizing it—was part of every panelist’s presentation. "With fast growth, firms can’t keep up with hiring and retention," observed Philip Holthouse, partner at Holthouse Carlin & Van Trigt LLP (Santa Monica, CA). The result: "We see a train wreck," when it comes to staffing, retention, and recruiting, he said.

The tough issues include quality of life, client service, and technical excellence. Holthouse fears that not having enough good staff affects the ability to implement basic client services such as fast response to client calls. He also worries about what could happen to technical quality when too few staff must handle far too much work.

Some ways his firm is coping include paring the client list, or "firing clients," which he believes many CPA firms are still too reluctant to do. It’s easy to get rid of the difficult clients, or those with "character flaws." More difficult to eliminate, Holthouse admits, are the clients who are price sensitive and who simply do not fit into your firm’s pricing structure anymore. It is helpful to be able to offer these clients smaller firms or solo practitioners as alternatives. However, he noted that some clients don’t take severing the relationship with a partner very well. In such cases, the partner could stay involved in an advisory capacity, or perhaps retain certain work, he suggested.

Another coping technique that has worked for Holthouse’s firm is its three offices, so staff can work at the one that is closest to home. In these days of lengthening and stressful commutes and soaring home purchase costs, that is an extremely attractive option for both staff and partners, he said. It also helps in recruiting to be able to dangle a shorter commute before prospects. It is interesting, he observed, that the Big Four in his area (the Los Angeles market) have been taking the opposite tack, by closing down smaller suburban satellite offices in favor of big city or downtown sites that may require several hours’ drive for a suburban CPA.

Finally, flexible schedules are becoming more expected, even though they can bring some challenges. Holthouse’s firm employs some part-timers and he notes, "It can be frustrating when something comes up when they aren’t there, but it’s better to have them part-time than not to have them at all."

While these strategies are working, his firm continues to grapple with the issue of culture and how it affects retention and future leadership development. Holthouse admits that the firm is a high-energy and often "chaotic" environment, which brings burnout for some, and drives away others who don’t like that atmosphere and don’t want to become owners. A strategy for developing those who don’t want the fast track, but who could make valuable contributions, is something he would like to see.

Rewards, plain and simple. Andrew Armanino, managing partner at Armanino McKenna LLP (San Ramon, CA), sees staffing challenges as well, thanks to the substantial growth opportunities that his firm has had in the past few years. "This should be nirvana" for the CPA profession, but the staffing challenges are the cloud on the growth horizon.

The firm is attacking this problem on several fronts, starting with the no-cost, simplest strategy of all: Saying thank you, and saying it as often as possible. "Sometimes we managing partners over-complicate things, but this one is simple," Armanino commented.

The firm has also taken steps to provide more concrete rewards via a system that provides gifts that are tied to length of service. After five years, people are eligible for a vacation with their families at Disneyland. Those with 15 years of service receive a cruise trip; 20-year veterans get a European trip; and the newest category, the 25-year award, is a trip to Australia. These gifts are very popular, he noted.

The partners also made a decision in the past year that they want to be leaders in compensation rates in their market. After the regular July 1 raises, a 15% to 20% raise was added two months later. Although Armanino admits that he and his partners recognize compensation is often not the most important factor in a staff person’s decision to depart, the firm wanted to try to eliminate it from consideration and help retain staff. The strategy is working; the firm’s turnover is about 11% while the national industry average is about 25% to 27%. Higher pay has also helped in recruiting, he said.

The firm has expanded recruiting to include more college campuses, and when it sends out interviewers, it emphasizes they are actual partners and staff, rather than professional recruiters who hire for the Big Four.

The firm also launched an in-house effort to bring in referral interviewees and hires. The 10-week program grouped the firm into teams, complete with colored shirts, and offered graduated rewards for bringing in referrals; for referrals who were interviewed; and for interviewees who became new hires at the firm. This has been a fun effort for all that has paid off in bringing in more prospective hires, Armanino said. "Step out of the box and be creative," to combat the strong competition for staff, he recommended. And, he added, "Talk to your own people and make sure they are happy."

Growing leaders. Leadership is a popular topic among CPA firm managing partners and other officers now, and for good reason: Firms are in great need of leaders who can help develop strategies for the current market, and to run the firm in the future.

Robert Bunting, partner and former chair of Moss Adams LLP (Seattle) and past chair of the AICPA, recalled that someone once told him, "As CEO of your firm, you need to focus completely on developing future leaders. Great people attract other great people." Managing partners should seek out and develop "level four" leaders, as identified in the book Good to Great by Jim Collins.

Moss Adams has taken this advice to heart, by identifying those with top leadership potential and then providing them more mentoring, formal development planning, and formal leadership training. The firm’s belief is that leaders are both born and made, and the partners have committed the resources into developing raw talent as an investment in the firm’s future.

This has made a huge difference, Bunting noted. These individuals act more like leaders once the firm identifies them as such. And those who have been identified as being just below that level are striving to move up. Although the firm also told staff who were not deemed leadership material that they were viewed that way, no one has left, he said.

For the high potentials, there is a five-step program of leadership development delivered at different levels: senior partnership, manager, second year of partnership, fourth year of partnership, and the new fifth level is a week at a Harvard or Stanford leadership training school.

It has been hard to find quality training close to home for staff and partners, Bunting said, noting that state societies can’t get enough participation to acquire funding for the programs. Why is it hard to get larger programs going for the profession? "Firms won’t invest in their own people," he stated. "Small firms in particular are always looking for a cheap solution. A lot of firms will pay $30,000 to $40,000 for a headhunter fee, but they won’t pay that to train someone they already have." He suggested pooling resources and working with firm associations to get the training that is needed to build leaders.

The succession challenge. Any discussion of leadership must entail consideration of succession planning and training. Jack Hinsche, managing partner at Windes and McClaughry Accountancy Corp. (Long Beach, CA), said that failing to tackle this issue is not the only problem facing the profession. Some firms are just too late in addressing it, which means the firm’s fate may be a merger or acquisition. This is a fine outcome if it is what the partners have chosen, but no one wants to be forced to it.

Few firms have a written succession plan in place, Hinsche observed, and many firms have only partly funded retirement plans for partners or no funding at all.

He suggested that succession plans contain these components:

• Leadership training.
• A plan to transition retiring partners and their clients to others in the firm.
• Firm governance.
• Preparation of individuals for leadership. There is much confusion about leadership; Hinsche’s stance is that much of leadership can be taught through training the best and brightest.
• Develop a written plan, with the focus on creating a vision for the firm.
• Start small with just two or three goals and relatively short time periods afforded to people to comply.
• Take the mystery out of the process. Get each partner to name at least two possible successors for each role they play in the firm—as partner in charge of a group or department, as administrative partner in charge of technology, and so forth. These scenarios should be developed for catastrophic situations such as death or incapacity, and for normal retirement.
• Work up a "laundry list" of what is important to your firm, including:

— Whether planned retirement dates should be mandatory or not;

— What the firm will do in the case of death or disability;

— Whether partners will retain equity in the firm upon retirement;

— How much notice of retirement must be given;

— How vesting schedules, benefits, pay out terms, capital, and interest will be handled; and

— What (or whether) post-retirement benefits will be made available to retired partners.

It is helpful to make individual partner succession plans a part of the annual partner evaluation, as Hinsche’s firm has done. His firm’s partners must identify a targeted retirement date which can be updated annually or more frequently. They must also provide plans for client transition, and name who will take over their tasks of leadership development of others and administration. The firm has a mandatory retirement age and notice minimums for partner retirement.

Key is having a written plan for individual owners and for the firm, Hinsche said—and making sure that it gets updated.