I get questions daily from CPAs asking if their firm should consider a merger or if it is possible for their firm to compete as an independent or local firm. My current answer is, "It depends!"

I question whether these mergers are properly motivated, or if they are motivated under the outdated "Push Economy," where scale has produced efficiency.

Is efficiency going to be the primary driving factor in today's rapidly emerging "Pull Economy?" The truth is that we probably won't know the answer for several years, but history and the current economy are providing some insight as to what the keys to a successful firm will be.

I believe that firms from $3 million to $30 million are faced with exceptionally difficult choices today as they develop their strategic plans. (I use these benchmarks because 90 percent of firms in the U.S. are below $3 million and the Top 100 firms break at approximately $30 million.)

There are many reasons that firms merge, but I find there are three primary reasons for firms to look at upward mergers:

1. Lack of succession;

2. Lack of leadership and talent; and,

3. Lack of technology.

The first two reasons have probably been the primary drivers of recent mergers, but technology is becoming increasingly important both culturally and from the fact that it is an enabler in moving from the Push to the Pull Economy. Push strategies are built upon one key assumption: the ability to accurately forecast demand in order to ensure that people can be pushed to the right places at the right time. The uncertainty and instability of the economy, along with increased global competition, have reduced firms' abilities to accurately forecast demand. Couple that with the fact that many firms are under-managed - and I make this statement due to the fact that recent metrics show that less than 50 percent of total time was charged and even less was billed and collected.

Pull is focused on the ability to access resources. Access involves the ability to find, learn about and connect with resources on an as-needed basis in order to address unanticipated needs. The firm's ability to change in order to meet client demands in the future will be far more important than size.



Firms should look outside of their walls for access to resources and knowledge. This comes at a time when many firms have become more inwardly focused in order to reduce expenses. They have reduced training budgets and travel that in the past resulted in increased knowledge and relationships.

It has often been stated that knowledge is power. I believe that access to that knowledge is the key to future success and that knowledge is changing at an increasing rate. There is core knowledge (know-what) that most CPAs focus on, and then there is tacit knowledge (know-how) on the edge. Most knowledge starts as tacit knowledge. This is the new knowledge that is occurring at the edge of the knowledge spectrum. Firms need to be able to access these innovative thinkers.

Knowledge on the edge (tacit) is produced by relationships and held by individuals, not firms. Firms typically have an inventory of core knowledge in their people, and especially with the partner group. Collaboration is critical and firms need access to this edge knowledge in order to survive.

In the past, there was comfort in the fact that core knowledge was adequate-stable, and what was happening at the edge was not that important or critical. We are now in an era where edges emerge and rise with astonishing speed. I believe that firms could be exceedingly more profitable if they just knew what their employees know. (This is why knowledge management systems are so important, and firms are finally starting to implement these systems.)



Back to the question.

Is it best for smaller firms to merge or remain independent? In order to stay relevant, we all must find ways to learn faster and often in areas that were once viewed as peripheral to our profession. Some might say this is industry knowledge, but it is far broader than just specialization. Push is no longer the dominant paradigm in our lives, businesses or educational systems.

Being larger is also no guarantee that you can continue to drive down costs and be more efficient. In fact, it may increase costs if deferred compensation and retirement benefits are too high. Large firms can be very successful if they support and organize talented individuals to get better faster by working together. The focus of the firm must shift from scalable efficiency to scalable learning and the ability to improve performance more rapidly by integrating more and more people (resources) beyond traditional firm boundaries. The good news is that small firms can also take this approach, and in many cases they are more nimble and quick to adjust, provided leadership has the vision and buy-in of owners and staff. This will require education at the tacit level.

Firms should be organized to provide platforms to help individuals achieve their full potential by connecting with others and addressing challenging performance needs. This will require management and accountability in order to ensure excellence and avoid mediocrity. Successful firms will serve the needs of individuals and focus on their unique abilities. In the past, the focus has too often been only on how the individual serves the needs of the firm.

If history is a predictor of the future, then many large firms will be challenged. I encourage you to look at the list of the Top 100 or even the Top 25 firms ten, 15 and 20 years ago and see how many are on that list today. The ability to change is critical to sustainability and relevance.

I am putting my money on those firms that are willing to invest in the five critical categories, regardless of size: leadership and management, development of people, development of clients, technology, and compensation. Development of people and access to resources should remain the top priority in all firms.

By doing so, firms will grow and profits will result.


Gary Boomer, CPA, is the president of Boomer Consulting, in Manhattan, Kan.

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