securing the future : succession planning basics
TRANSCRIPT
University of Mississippi University of Mississippi
eGrove eGrove
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
Follow this and additional works at: https://egrove.olemiss.edu/aicpa_guides
Part of the Accounting Commons, and the Taxation Commons
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
This Book is brought to you for free and open access by the American Institute of Certified Public Accountants (AICPA) Historical Collection at eGrove. It has been accepted for inclusion in Guides, Handbooks and Manuals by an authorized administrator of eGrove. For more information, please contact [email protected].
®
Am
er
icA
n in
st
itu
te
of
ce
rt
ifie
d P
ub
lic
Ac
co
un
tA
nt
s
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
®
Am
er
icA
n in
st
itu
te
of
ce
rt
ifie
d P
ub
lic
Ac
co
un
tA
nt
s
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.
1 2 3 4 5 6 7 8 9 0 CS 0
ISBN: 978-0-87051-854-6
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
00-Securing1-FM.indd 3 1/11/10 8:39:58 AM
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
00-Securing1-FM.indd 4 1/11/10 8:39:58 AM
v
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
00-Securing1-FM.indd 5 1/11/10 8:39:58 AM
00-Securing1-FM.indd 6 1/11/10 8:39:59 AM
vii
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
00-Securing1-FM.indd 7 1/11/10 8:39:59 AM
viii
Securing the Future: Succession Planning Basics
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
00-Securing1-FM.indd 8 1/11/10 8:39:59 AM
ix
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.
00-Securing1-FM.indd 9 1/11/10 8:40:00 AM
00-Securing1-FM.indd 10 1/11/10 8:40:00 AM
xi
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
00-Securing1-FM.indd 11 1/11/10 8:40:00 AM
xii
Securing the Future: Succession Planning Basics
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
00-Securing1-FM.indd 12 1/11/10 8:40:00 AM
Table of Contents
xiii
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
00-Securing1-FM.indd 13 1/11/10 8:40:00 AM
xiv
Securing the Future: Succession Planning Basics
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
00-Securing1-FM.indd 14 1/11/10 8:40:01 AM
Table of Contents
xv
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
00-Securing1-FM.indd 15 1/11/10 8:40:01 AM
00-Securing1-FM.indd 16 1/11/10 8:40:01 AM
1
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
00-Securing1-Intro.indd 1 1/8/10 1:35:12 PM
2
Securing the Future: Succession Planning Basics
•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
00-Securing1-Intro.indd 2 1/8/10 1:35:12 PM
Introduction
3
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
00-Securing1-Intro.indd 3 1/8/10 1:35:12 PM
4
Securing the Future: Succession Planning Basics
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.
00-Securing1-Intro.indd 4 1/8/10 1:35:13 PM
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
00-Securing1-Intro.indd 5 1/8/10 1:35:13 PM
6
Securing the Future: Succession Planning Basics
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
00-Securing1-Intro.indd 6 1/8/10 1:35:13 PM
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
00-Securing1-Intro.indd 7 1/8/10 1:35:14 PM
8
Securing the Future: Succession Planning Basics
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
00-Securing1-Intro.indd 8 1/8/10 1:35:14 PM
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
00-Securing1-Intro.indd 9 1/8/10 1:35:15 PM
10
Securing the Future: Succession Planning Basics
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.
00-Securing1-Intro.indd 10 1/8/10 1:35:15 PM
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
12
Securing the Future: Succession Planning Basics
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
01-Securing1-Chap01.indd 12 1/8/10 1:36:16 PM
Chapter 1: The Environment and Strategy: Managing Resources, Maximizing Reward
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
01-Securing1-Chap01.indd 13 1/8/10 1:36:16 PM
14
Securing the Future: Succession Planning Basics
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.
01-Securing1-Chap01.indd 14 1/8/10 1:36:17 PM
Chapter 1: The Environment and Strategy: Managing Resources, Maximizing Reward
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.
01-Securing1-Chap01.indd 15 1/8/10 1:36:17 PM
16
Securing the Future: Succession Planning Basics
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.
01-Securing1-Chap01.indd 16 1/8/10 1:36:17 PM
Chapter 1: The Environment and Strategy: Managing Resources, Maximizing Reward
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
01-Securing1-Chap01.indd 17 1/8/10 1:36:17 PM
18
Securing the Future: Succession Planning Basics
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%
01-Securing1-Chap01.indd 18 1/8/10 1:36:18 PM
Chapter 1: The Environment and Strategy: Managing Resources, Maximizing Reward
19
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
01-Securing1-Chap01.indd 19 1/8/10 1:36:19 PM
20
Securing the Future: Succession Planning Basics
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.
01-Securing1-Chap01.indd 20 1/8/10 1:36:19 PM
Chapter 1: The Environment and Strategy: Managing Resources, Maximizing Reward
21
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.
01-Securing1-Chap01.indd 21 1/8/10 1:36:20 PM
22
Securing the Future: Succession Planning Basics
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.
01-Securing1-Chap01.indd 22 1/8/10 1:36:20 PM
Chapter 1: The Environment and Strategy: Managing Resources, Maximizing Reward
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.
01-Securing1-Chap01.indd 23 1/8/10 1:36:21 PM
24
Securing the Future: Succession Planning Basics
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.
01-Securing1-Chap01.indd 24 1/8/10 1:36:21 PM
Chapter 1: The Environment and Strategy: Managing Resources, Maximizing Reward
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.
01-Securing1-Chap01.indd 25 1/8/10 1:36:21 PM
01-Securing1-Chap01.indd 26 1/8/10 1:36:22 PM
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?”
02-Securing1-Chap02.indd 27 1/8/10 1:37:09 PM
28
Securing the Future: Succession Planning Basics
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).
02-Securing1-Chap02.indd 28 1/8/10 1:37:09 PM
Chapter 2: Structure and Leadership: Establishing a Foundation and Consistency
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.
02-Securing1-Chap02.indd 29 1/8/10 1:37:09 PM
30
Securing the Future: Succession Planning Basics
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
02-Securing1-Chap02.indd 30 1/8/10 1:37:10 PM
Chapter 2: Structure and Leadership: Establishing a Foundation and Consistency
31
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.
02-Securing1-Chap02.indd 31 1/8/10 1:37:11 PM
32
Securing the Future: Succession Planning Basics
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,
02-Securing1-Chap02.indd 32 1/8/10 1:37:11 PM
Chapter 2: Structure and Leadership: Establishing a Foundation and Consistency
33
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).
02-Securing1-Chap02.indd 33 1/8/10 1:37:11 PM
34
Securing the Future: Succession Planning Basics
•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
02-Securing1-Chap02.indd 34 1/8/10 1:37:12 PM
Chapter 2: Structure and Leadership: Establishing a Foundation and Consistency
35
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.
02-Securing1-Chap02.indd 35 1/8/10 1:37:12 PM
36
Securing the Future: Succession Planning Basics
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.
02-Securing1-Chap02.indd 36 1/8/10 1:37:12 PM
Chapter 2: Structure and Leadership: Establishing a Foundation and Consistency
37
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.
02-Securing1-Chap02.indd 37 1/8/10 1:37:13 PM
38
Securing the Future: Succession Planning Basics
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%
02-Securing1-Chap02.indd 38 1/8/10 1:37:13 PM
Chapter 2: Structure and Leadership: Establishing a Foundation and Consistency
39
•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
02-Securing1-Chap02.indd 39 1/8/10 1:37:13 PM
40
Securing the Future: Succession Planning Basics
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
02-Securing1-Chap02.indd 40 1/8/10 1:37:13 PM
Chapter 2: Structure and Leadership: Establishing a Foundation and Consistency
41
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
02-Securing1-Chap02.indd 41 1/8/10 1:37:14 PM
42
Securing the Future: Succession Planning Basics
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.
02-Securing1-Chap02.indd 42 1/8/10 1:37:15 PM
Chapter 2: Structure and Leadership: Establishing a Foundation and Consistency
43
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:
02-Securing1-Chap02.indd 43 1/8/10 1:37:15 PM
44
Securing the Future: Succession Planning Basics
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.
02-Securing1-Chap02.indd 44 1/8/10 1:37:15 PM
Chapter 2: Structure and Leadership: Establishing a Foundation and Consistency
45
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
02-Securing1-Chap02.indd 45 1/8/10 1:37:15 PM
46
Securing the Future: Succession Planning Basics
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
02-Securing1-Chap02.indd 46 1/8/10 1:37:16 PM
Chapter 2: Structure and Leadership: Establishing a Foundation and Consistency
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
02-Securing1-Chap02.indd 47 1/8/10 1:37:16 PM
48
Securing the Future: Succession Planning Basics
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
02-Securing1-Chap02.indd 48 1/8/10 1:37:16 PM
Chapter 2: Structure and Leadership: Establishing a Foundation and Consistency
49
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:
02-Securing1-Chap02.indd 49 1/8/10 1:37:17 PM
50
Securing the Future: Succession Planning Basics
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.
02-Securing1-Chap02.indd 50 1/8/10 1:37:17 PM
Chapter 2: Structure and Leadership: Establishing a Foundation and Consistency
51
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
02-Securing1-Chap02.indd 51 1/8/10 1:37:17 PM
52
Securing the Future: Succession Planning Basics
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:
02-Securing1-Chap02.indd 52 1/8/10 1:37:18 PM
Chapter 2: Structure and Leadership: Establishing a Foundation and Consistency
53
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
02-Securing1-Chap02.indd 53 1/8/10 1:37:18 PM
54
Securing the Future: Succession Planning Basics
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
02-Securing1-Chap02.indd 54 1/8/10 1:37:18 PM
Chapter 2: Structure and Leadership: Establishing a Foundation and Consistency
55
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.
02-Securing1-Chap02.indd 55 1/8/10 1:37:18 PM
56
Securing the Future: Succession Planning Basics
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.
02-Securing1-Chap02.indd 56 1/8/10 1:37:19 PM
Chapter 2: Structure and Leadership: Establishing a Foundation and Consistency
57
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
02-Securing1-Chap02.indd 57 1/8/10 1:37:19 PM
58
Securing the Future: Succession Planning Basics
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.
02-Securing1-Chap02.indd 58 1/8/10 1:37:19 PM
Chapter 2: Structure and Leadership: Establishing a Foundation and Consistency
59
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,
02-Securing1-Chap02.indd 59 1/8/10 1:37:20 PM
60
Securing the Future: Succession Planning Basics
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.
02-Securing1-Chap02.indd 60 1/8/10 1:37:20 PM
61
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.
03-Securing1-Chap03.indd 61 1/8/10 1:38:18 PM
62
Securing the Future: Succession Planning Basics
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).
03-Securing1-Chap03.indd 62 1/8/10 1:38:18 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
63
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,
03-Securing1-Chap03.indd 63 1/8/10 1:38:18 PM
64
Securing the Future: Succession Planning Basics
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.
Key Point
03-Securing1-Chap03.indd 64 1/8/10 1:38:19 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
65
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
03-Securing1-Chap03.indd 65 1/8/10 1:38:19 PM
66
Securing the Future: Succession Planning Basics
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
03-Securing1-Chap03.indd 66 1/8/10 1:38:20 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
67
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
03-Securing1-Chap03.indd 67 1/8/10 1:38:21 PM
68
Securing the Future: Succession Planning Basics
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 your- self, “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
03-Securing1-Chap03.indd 68 1/8/10 1:38:21 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
69
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:
03-Securing1-Chap03.indd 69 1/8/10 1:38:21 PM
70
Securing the Future: Succession Planning Basics
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
03-Securing1-Chap03.indd 70 1/8/10 1:38:21 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
71
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
03-Securing1-Chap03.indd 71 1/8/10 1:38:22 PM
72
Securing the Future: Succession Planning Basics
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,
03-Securing1-Chap03.indd 72 1/8/10 1:38:22 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
73
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
03-Securing1-Chap03.indd 73 1/8/10 1:38:22 PM
74
Securing the Future: Succession Planning Basics
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.
03-Securing1-Chap03.indd 74 1/8/10 1:38:23 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
75
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
03-Securing1-Chap03.indd 75 1/8/10 1:38:23 PM
76
Securing the Future: Succession Planning Basics
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
03-Securing1-Chap03.indd 76 1/8/10 1:38:23 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
77
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
03-Securing1-Chap03.indd 77 1/8/10 1:38:24 PM
78
Securing the Future: Succession Planning Basics
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
03-Securing1-Chap03.indd 78 1/8/10 1:38:24 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
79
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.
Sample Scenario (Part 2 of 3)
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.
Sample Scenario (Part 3 of 3)
Onceagain,whatwouldyoudoifyouwereanowner?Inalmosteveryinstanceofthisscenario,managementaroundthecountryrespondsthatBobshouldreceive“noperfor-mancebonuses.”Thereasoningbehindtheresponsevaries,butincludedthefollowing: •Bobmissedhistargetsbytoogreatadelta. •ThedropinBob’sperformanceevokedanunwillingnesstobreaktherulesforthe
thirdyearinarow.
03-Securing1-Chap03.indd 79 1/8/10 1:38:25 PM
80
Securing the Future: Succession Planning Basics
•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
03-Securing1-Chap03.indd 80 1/8/10 1:38:25 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
81
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
03-Securing1-Chap03.indd 81 1/8/10 1:38:25 PM
82
Securing the Future: Succession Planning Basics
•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.
Key Point
03-Securing1-Chap03.indd 82 1/8/10 1:38:26 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
83
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
03-Securing1-Chap03.indd 83 1/8/10 1:38:26 PM
84
Securing the Future: Succession Planning Basics
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
03-Securing1-Chap03.indd 84 1/8/10 1:38:26 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
85
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.
03-Securing1-Chap03.indd 85 1/8/10 1:38:26 PM
86
Securing the Future: Succession Planning Basics
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.
03-Securing1-Chap03.indd 86 1/8/10 1:38:27 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
87
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.
03-Securing1-Chap03.indd 87 1/8/10 1:38:27 PM
88
Securing the Future: Succession Planning Basics
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
03-Securing1-Chap03.indd 88 1/8/10 1:38:28 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
89
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.
03-Securing1-Chap03.indd 89 1/8/10 1:38:28 PM
90
Securing the Future: Succession Planning Basics
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
03-Securing1-Chap03.indd 90 1/8/10 1:38:29 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
91
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.
03-Securing1-Chap03.indd 91 1/8/10 1:38:29 PM
92
Securing the Future: Succession Planning Basics
•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
03-Securing1-Chap03.indd 92 1/8/10 1:38:30 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
93
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.
03-Securing1-Chap03.indd 93 1/8/10 1:38:30 PM
94
Securing the Future: Succession Planning Basics
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.
03-Securing1-Chap03.indd 94 1/8/10 1:38:30 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
95
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.
03-Securing1-Chap03.indd 95 1/8/10 1:38:30 PM
96
Securing the Future: Succession Planning Basics
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
03-Securing1-Chap03.indd 96 1/8/10 1:38:31 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
97
•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
03-Securing1-Chap03.indd 97 1/8/10 1:38:31 PM
98
Securing the Future: Succession Planning Basics
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%
03-Securing1-Chap03.indd 98 1/8/10 1:38:31 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
99
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
03-Securing1-Chap03.indd 99 1/8/10 1:38:32 PM
100
Securing the Future: Succession Planning Basics
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
03-Securing1-Chap03.indd 100 1/8/10 1:38:32 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
101
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
03-Securing1-Chap03.indd 101 1/8/10 1:38:32 PM
102
Securing the Future: Succession Planning Basics
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).
Table 3-2: Billing Rate Analysis
Billing Rate Analysis
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)
03-Securing1-Chap03.indd 102 1/8/10 1:38:33 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
103
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
03-Securing1-Chap03.indd 103 1/8/10 1:38:33 PM
104
Securing the Future: Succession Planning Basics
Interestingly enough, theworst violations of this formula usually concernpart-timeemployees.Firmsoftenuncoversignificantimbalancesbetweenwhattheypaytheirtalentedexperiencedpart-timestaffandthereturninrevenuesproducedbythoseemployees.Mostofthetime,thebillingratesforthesepeoplearewaytoolow.Sometimes,itisbecausetheirrealizationhasfallentoaridiculouslevel.Regardless,anyvarianceofmorethanacouplethousanddollarsshouldbereconciled;asolutionshouldbeidentifiedandimplemented.
Finally,someofthesuggestionsthatthespreadprovidesforeachpositionaboveareoutlinedintable3-3.
Table 3-3: Billing Rate Analysis
Billing Rate Analysis
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
03-Securing1-Chap03.indd 104 1/8/10 1:38:33 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
105
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).
03-Securing1-Chap03.indd 105 1/8/10 1:38:34 PM
106
Securing the Future: Succession Planning Basics
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
03-Securing1-Chap03.indd 106 1/8/10 1:38:34 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
107
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.
03-Securing1-Chap03.indd 107 1/8/10 1:38:35 PM
108
Securing the Future: Succession Planning Basics
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
03-Securing1-Chap03.indd 108 1/8/10 1:38:35 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
109
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.
03-Securing1-Chap03.indd 109 1/8/10 1:38:35 PM
110
Securing the Future: Succession Planning Basics
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.
03-Securing1-Chap03.indd 110 1/8/10 1:38:36 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
111
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.
03-Securing1-Chap03.indd 111 1/8/10 1:38:36 PM
112
Securing the Future: Succession Planning Basics
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
03-Securing1-Chap03.indd 112 1/8/10 1:38:36 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
113
$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.
03-Securing1-Chap03.indd 113 1/8/10 1:38:37 PM
114
Securing the Future: Succession Planning Basics
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
03-Securing1-Chap03.indd 114 1/8/10 1:38:37 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
115
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.
03-Securing1-Chap03.indd 115 1/8/10 1:38:37 PM
116
Securing the Future: Succession Planning Basics
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
03-Securing1-Chap03.indd 116 1/8/10 1:38:38 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
117
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
03-Securing1-Chap03.indd 117 1/8/10 1:38:38 PM
118
Securing the Future: Succession Planning Basics
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.
03-Securing1-Chap03.indd 118 1/8/10 1:38:38 PM
Chapter 3: Management and Operations: Extending the Life and Culture of the Firm
119
•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
03-Securing1-Chap03.indd 119 1/8/10 1:38:38 PM
120
Securing the Future: Succession Planning Basics
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!”
Key Point
03-Securing1-Chap03.indd 120 1/8/10 1:38:39 PM
121
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
04-Securing1-Chap04.indd 121 1/8/10 1:39:58 PM
122
Securing the Future: Succession Planning Basics
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.
04-Securing1-Chap04.indd 122 1/8/10 1:39:58 PM
Chapter 4: Growth and Transition: Increasing the Value of the Firm
123
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).
Key Point
04-Securing1-Chap04.indd 123 1/8/10 1:39:59 PM
124
Securing the Future: Succession Planning Basics
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.
04-Securing1-Chap04.indd 124 1/8/10 1:39:59 PM
Chapter 4: Growth and Transition: Increasing the Value of the Firm
125
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.
Key Point
04-Securing1-Chap04.indd 125 1/8/10 1:39:59 PM
126
Securing the Future: Succession Planning Basics
•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.
04-Securing1-Chap04.indd 126 1/8/10 1:40:00 PM
Chapter 4: Growth and Transition: Increasing the Value of the Firm
127
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
04-Securing1-Chap04.indd 127 1/8/10 1:40:00 PM
128
Securing the Future: Succession Planning Basics
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.
Key Point
04-Securing1-Chap04.indd 128 1/8/10 1:40:00 PM
Chapter 4: Growth and Transition: Increasing the Value of the Firm
129
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
04-Securing1-Chap04.indd 129 1/8/10 1:40:01 PM
130
Securing the Future: Succession Planning Basics
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:
04-Securing1-Chap04.indd 130 1/8/10 1:40:01 PM
Chapter 4: Growth and Transition: Increasing the Value of the Firm
131
•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?”
04-Securing1-Chap04.indd 131 1/8/10 1:40:01 PM
132
Securing the Future: Succession Planning Basics
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.
Key Point
04-Securing1-Chap04.indd 132 1/8/10 1:40:02 PM
Chapter 4: Growth and Transition: Increasing the Value of the Firm
133
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.
04-Securing1-Chap04.indd 133 1/8/10 1:40:02 PM
134
Securing the Future: Succession Planning Basics
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.
04-Securing1-Chap04.indd 134 1/8/10 1:40:02 PM
Chapter 4: Growth and Transition: Increasing the Value of the Firm
135
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
04-Securing1-Chap04.indd 135 1/8/10 1:40:03 PM
136
Securing the Future: Succession Planning Basics
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.
04-Securing1-Chap04.indd 136 1/8/10 1:40:03 PM
Chapter 4: Growth and Transition: Increasing the Value of the Firm
137
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
04-Securing1-Chap04.indd 137 1/8/10 1:40:03 PM
138
Securing the Future: Succession Planning Basics
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).
04-Securing1-Chap04.indd 138 1/8/10 1:40:04 PM
Chapter 4: Growth and Transition: Increasing the Value of the Firm
139
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.
Key Point
04-Securing1-Chap04.indd 139 1/8/10 1:40:04 PM
140
Securing the Future: Succession Planning Basics
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
04-Securing1-Chap04.indd 140 1/8/10 1:40:04 PM
Chapter 4: Growth and Transition: Increasing the Value of the Firm
141
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.
04-Securing1-Chap04.indd 141 1/8/10 1:40:04 PM
142
Securing the Future: Succession Planning Basics
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.
Key Point
04-Securing1-Chap04.indd 142 1/8/10 1:40:05 PM
Chapter 4: Growth and Transition: Increasing the Value of the Firm
143
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
04-Securing1-Chap04.indd 143 1/8/10 1:40:05 PM
144
Securing the Future: Succession Planning Basics
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.
04-Securing1-Chap04.indd 144 1/8/10 1:40:05 PM
Chapter 4: Growth and Transition: Increasing the Value of the Firm
145
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.
04-Securing1-Chap04.indd 145 1/8/10 1:40:06 PM
146
Securing the Future: Succession Planning Basics
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
04-Securing1-Chap04.indd 146 1/8/10 1:40:06 PM
Chapter 4: Growth and Transition: Increasing the Value of the Firm
147
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.
04-Securing1-Chap04.indd 147 1/8/10 1:40:06 PM
148
Securing the Future: Succession Planning Basics
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:
04-Securing1-Chap04.indd 148 1/8/10 1:40:07 PM
Chapter 4: Growth and Transition: Increasing the Value of the Firm
149
•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
04-Securing1-Chap04.indd 149 1/8/10 1:40:07 PM
150
Securing the Future: Succession Planning Basics
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.
04-Securing1-Chap04.indd 150 1/8/10 1:40:07 PM
Chapter 4: Growth and Transition: Increasing the Value of the Firm
151
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.
04-Securing1-Chap04.indd 151 1/8/10 1:40:08 PM
152
Securing the Future: Succession Planning Basics
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.
04-Securing1-Chap04.indd 152 1/8/10 1:40:08 PM
153
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.
05-Securing1-Chap05.indd 153 1/8/10 1:40:54 PM
154
Securing the Future: Succession Planning Basics
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,
05-Securing1-Chap05.indd 154 1/8/10 1:40:55 PM
Chapter 5: Succession Strategies: Passing the Torch
155
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
05-Securing1-Chap05.indd 155 1/8/10 1:40:55 PM
156
Securing the Future: Succession Planning Basics
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?
05-Securing1-Chap05.indd 156 1/8/10 1:40:55 PM
Chapter 5: Succession Strategies: Passing the Torch
157
•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.
05-Securing1-Chap05.indd 157 1/8/10 1:40:55 PM
158
Securing the Future: Succession Planning Basics
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,
05-Securing1-Chap05.indd 158 1/8/10 1:40:56 PM
Chapter 5: Succession Strategies: Passing the Torch
159
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
05-Securing1-Chap05.indd 159 1/8/10 1:40:56 PM
160
Securing the Future: Succession Planning Basics
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.
05-Securing1-Chap05.indd 160 1/8/10 1:40:56 PM
Chapter 5: Succession Strategies: Passing the Torch
161
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.
05-Securing1-Chap05.indd 161 1/8/10 1:40:57 PM
162
Securing the Future: Succession Planning Basics
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.
05-Securing1-Chap05.indd 162 1/8/10 1:40:57 PM
Chapter 5: Succession Strategies: Passing the Torch
163
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
05-Securing1-Chap05.indd 163 1/8/10 1:40:58 PM
164
Securing the Future: Succession Planning Basics
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.
Key Point
05-Securing1-Chap05.indd 164 1/8/10 1:40:58 PM
Chapter 5: Succession Strategies: Passing the Torch
165
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
05-Securing1-Chap05.indd 165 1/8/10 1:40:59 PM
166
Securing the Future: Succession Planning Basics
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?
05-Securing1-Chap05.indd 166 1/8/10 1:40:59 PM
Chapter 5: Succession Strategies: Passing the Torch
167
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.
05-Securing1-Chap05.indd 167 1/8/10 1:40:59 PM
168
Securing the Future: Succession Planning Basics
•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
05-Securing1-Chap05.indd 168 1/8/10 1:41:00 PM
Chapter 5: Succession Strategies: Passing the Torch
169
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.
05-Securing1-Chap05.indd 169 1/8/10 1:41:00 PM
170
Securing the Future: Succession Planning Basics
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.
Key Point
05-Securing1-Chap05.indd 170 1/8/10 1:41:00 PM
Chapter 5: Succession Strategies: Passing the Torch
171
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.
05-Securing1-Chap05.indd 171 1/8/10 1:41:01 PM
172
Securing the Future: Succession Planning Basics
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
andimpersonal.
05-Securing1-Chap05.indd 172 1/8/10 1:41:01 PM
Chapter 5: Succession Strategies: Passing the Torch
173
•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
05-Securing1-Chap05.indd 173 1/8/10 1:41:01 PM
174
Securing the Future: Succession Planning Basics
•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.
05-Securing1-Chap05.indd 174 1/8/10 1:41:01 PM
Chapter 5: Succession Strategies: Passing the Torch
175
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
05-Securing1-Chap05.indd 175 1/8/10 1:41:02 PM
176
Securing the Future: Succession Planning Basics
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.
Key Point
05-Securing1-Chap05.indd 176 1/8/10 1:41:02 PM
Chapter 5: Succession Strategies: Passing the Torch
177
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.
05-Securing1-Chap05.indd 177 1/8/10 1:41:03 PM
178
Securing the Future: Succession Planning Basics
•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.
05-Securing1-Chap05.indd 178 1/8/10 1:41:03 PM
Chapter 5: Succession Strategies: Passing the Torch
179
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
05-Securing1-Chap05.indd 179 1/8/10 1:41:03 PM
180
Securing the Future: Succession Planning Basics
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
05-Securing1-Chap05.indd 180 1/8/10 1:41:04 PM
Chapter 5: Succession Strategies: Passing the Torch
181
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?
05-Securing1-Chap05.indd 181 1/8/10 1:41:04 PM
182
Securing the Future: Succession Planning Basics
•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.
05-Securing1-Chap05.indd 182 1/8/10 1:41:04 PM
Chapter 5: Succession Strategies: Passing the Torch
183
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.
05-Securing1-Chap05.indd 183 1/8/10 1:41:04 PM
184
Securing the Future: Succession Planning Basics
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
05-Securing1-Chap05.indd 184 1/8/10 1:41:05 PM
Chapter 5: Succession Strategies: Passing the Torch
185
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
05-Securing1-Chap05.indd 185 1/8/10 1:41:05 PM
186
Securing the Future: Succession Planning Basics
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
05-Securing1-Chap05.indd 186 1/8/10 1:41:06 PM
Chapter 5: Succession Strategies: Passing the Torch
187
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)
05-Securing1-Chap05.indd 187 1/8/10 1:41:06 PM
188
Securing the Future: Succession Planning Basics
•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.
05-Securing1-Chap05.indd 188 1/8/10 1:41:06 PM
Chapter 5: Succession Strategies: Passing the Torch
189
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
05-Securing1-Chap05.indd 189 1/8/10 1:41:06 PM
190
Securing the Future: Succession Planning Basics
•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.
05-Securing1-Chap05.indd 190 1/8/10 1:41:07 PM
Chapter 5: Succession Strategies: Passing the Torch
191
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
05-Securing1-Chap05.indd 191 1/8/10 1:41:07 PM
192
Securing the Future: Succession Planning Basics
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
05-Securing1-Chap05.indd 192 1/8/10 1:41:07 PM
Chapter 5: Succession Strategies: Passing the Torch
193
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.
05-Securing1-Chap05.indd 193 1/8/10 1:41:08 PM
194
Securing the Future: Succession Planning Basics
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
05-Securing1-Chap05.indd 194 1/8/10 1:41:08 PM
Chapter 5: Succession Strategies: Passing the Torch
195
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
05-Securing1-Chap05.indd 195 1/8/10 1:41:08 PM
196
Securing the Future: Succession Planning Basics
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.
05-Securing1-Chap05.indd 196 1/8/10 1:41:08 PM
Chapter 5: Succession Strategies: Passing the Torch
197
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
05-Securing1-Chap05.indd 197 1/8/10 1:41:09 PM
198
Securing the Future: Succession Planning Basics
followingeveryone’snavigationstrategy.Pickadirection,putsomeoneatthehelm,andhaveeveryoneelsegetoutoftheway.Itistimetoinvestintheconstructionofformalizedmethodology(SOPfoundation)sothatyoursuperstars’strengthsdonoteventuallydefinethefirm’sstructuralweaknesses.Ifyouwanttosuccessfullypassthetorch,startimplement-ingwhateverideasrangtrueforyouinthisbookwhileconstantlytryingtoreplacesuperstarideologywithanoperatorandinterchangeabilitymentality.
Iwishyouthebestofluckinyourfuturesuccession.Andregardlessofthepathyouchoose,ithasbeenmyhonorandaprivilegethatyouhaveallowedthisbooktobepartofyourprocess.
05-Securing1-Chap05.indd 198 1/8/10 1:41:09 PM