The first step for a CPA firm looking to improve its succession plan is to make sure that it actually has one.
They're all too often absent at accounting firms. "Most firms don't have any plan," maintained Robert Fligel, president of New York-based CPA growth and succession consultancy RF Resources. "Even to do a memo would be a major accomplishment."
Statistics bear that out, as just 35 percent of multi-owner firms and 9 percent of sole proprietors had a written succession plan in place, according to the most recent succession survey conducted by the PCPS Section of the American Institute of CPAs.
In a 2010 WealthStar Alliance survey of accounting firm partners, 94 percent of respondents said succession planning was important or very important, but just 31 percent reported having a succession plan in place.
The survey also found that 55 percent of firms plan to make a transition in management or ownership within five years, and 87 percent expect to in the next 10, making the issue especially urgent.
Starting small is not a bad idea, as Tim Michel, principal of Akron, Ohio-based Michel Consulting Group, learned when he was a managing partner at New Philadelphia, Ohio-headquartered Rea & Associates - as long as you start early.
He polled the partners to determine when they thought they would retire, and found "a significant percentage" was planning to leave in the next three to five years.
According to Michel, this would be the time to put the wheels in motion. "The more time you take, the better," he said. "Some firms have in their agreement that you have to give notification within one to two years of retirement. But that's not enough time to transition a relationship [with the retiree's clients]."
Instead, Michel recommends a five-year transition period to properly acquaint clients with partner successors.
An even earlier concern should be fully developing and defining every role in the company - especially those at the top, according to Bill Reeb, chief executive officer at the Succession Institute in Austin, Texas. "Firms confuse the line of the board of directors and managing partners - they blend those way too much," he said. "They need to embed the necessary power into the governance process. By separating those [roles], they can create clarity that is duplicable with future generations."
Partners should be able to look at seven to eight people to fill their position, and assess whether those candidates would be successful, Reeb said. If not, the roles are not defined enough, and should be less tied to unique leader personalities.
"The problem with succession is that many very successful firms are built around specific people and their talents," he said. "When it comes time for them to retire, finding someone with that same combination of vast talents is almost impossible. The shift from the characteristics of the first managing partner to the characteristics of a second managing partner is almost like starting a business over, like selling a business and hoping it survives."
Talent and skill level alone are not enough for most employees to climb the hierarchy into
a high-potential position.
"People rarely fail because they don't have the talent," said Gary Hourihan, chairman of consulting firm Korn/Ferry International's Leadership and Talent Consulting Group in Irvine, Calif. "They tend to fail because they don't have the key behavioral characteristics and they don't fit in with the culture."
Management should promote the positive elements of this culture in order to retain future leaders long before the grooming process begins.
"What happens in our profession is that we have not self-advocated in the best fashion," maintained Philip Whitman, president of Whitman Business Advisors in New York. "We haven't shed the glamorous light on our profession that really exists."
Up-and-coming leaders need to know where they stand, and what they can expect - and they need to hear it from a credible source. "The lack of communication can be dangerous," warned RF Resources' Fligel. "You look at partners in their 60s, and if they don't tell you something, you're going to think the worst."
"The environment for younger staff is to see busy, crazy partners running around, and they say, this is not something I want to sign up for," added Whitman. "They get off the merry-go-round a little too soon."
Those staff who do remain on board should be able to "solve complex problems and make decisions quickly enough," said Hourihan. "Research suggests that as you move up the hierarchy that becomes more and more important."
These behavioral elements are a critical part of the overall succession plan.
"You should evaluate the senior management team and pit successors against those characteristics," Hourihan added. "It allows you to see where you have holes in the succession plan process."
Retaining high-potential staff should always involve annual reviews and proper compensation. "The annual expectation [for future leaders] should be supported by roles and responsibilities," said Reeb. "This needs to be backed up with compensation that you stick to that rewards those people who are accomplishing the firm's strategy and punishing those people who decide to go rogue."
Ron Ashkenas, a senior partner at management-focused Schaffer Consulting in New York, agreed that keeping potential successors means cutting those on your staff who underperform. "You need serious performance management that takes the bottom performers out every year," Ashkenas said. "People don't want to stay in a firm side by side with someone that doesn't work very hard but gets the same performance rating and sticks around."
It is critical, then, to engage younger staff, first to retain them, and then to prepare them for a leadership trajectory.
The firm's succession plan should accomplish this when set up in a cascade formation, said Ashkenas, with every manager responsible for the development of those below them, and partners making reviews at every level a priority from the top down.
"For every partner, part of the job is knowing they have a successor," Fligel said. "They should all be grooming somebody."
This model will also "push work down, get younger people involved with clients and get them to take important leadership roles with the clients," said Michel, who used this strategy at Rea & Associates. "It's more of a team approach, pushing the work down, giving responsibility, and it brought them along quicker so they felt more comfortable and capable working with the clients."
Part of this team concept requires employees to work against their ingrained career philosophy. "The problem is, most people know how to develop themselves," said Reeb. "That strength comes from decades of making themselves better, faster and stronger than everyone else."
Leaders should direct this energy into mentor relationships, continued Reeb. "If you learn to make five other people better every year, you have an incredible ability to grow and expand and be more profitable," he said. "But it is a different culture to do that. The stronger the individual, the weaker the firm - but it doesn't have to be that way."
Instead, leadership development should be a priority, and it should be understood that it's worth the obvious risks.
"The best mark of a really good leader is that his or her people are highly desired by others," said Ashkenas. "A lot of times, leaders don't want their people to be snatched up by other people, but it is a mark of accomplishment to develop them to make them attractive."
Attractive potential leaders recruited externally, through a merger or acquisition, should be just as highly developed - especially in the early stages.
"Firms should pay more attention to the people, the talent side of an acquisition, and more on the due-diligence phase," said Hourihan. "Lots of companies should go in, look at characteristics of the management of the two companies, where the friction points will be, and get them on the table up front." This will most likely include "vastly different compensation programs," he added.
When partner succession is altogether trumped by a merger or acquisition leadership change, there "can be mass defections," said Hourihan. A successful blending of cultures should be stressed.
In the wake of all the recent transactional movements between firms, a clear succession plan is only more valuable. It begins with ignoring emotional aspects and outlining a clear plan.
"It's human nature; we don't want to deal with mortality because it's a very daunting thing," said Fligel. "But there's a fantastic sense of relief when you do these things. And you should think about your clients - you don't want to leave them in a lurch."
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