Small Firms Are Facing Big Issues
As wide-ranging cultural and technological changes sweep the accounting profession, it is often the small firm that feels those changes the most. Competing with the budgets, manpower, and often the technology advancements of larger firms, smaller firms are frequently required to reassess their strengths and weaknesses in a constantly shifting landscape. However, small firms still have their own unique abilities and advantages, and can continue to endure in the profession if they’re willing to shoulder a workload of necessary changes.
UNIQUE STRENGTHS, CONCERNS
Small firms face many of the same changes that their larger-sized siblings are undertaking, but they also have a set of unique issues that must be confronted if they wish to stay competitive in today’s marketplace.
Bill Carlino, managing director of national consulting services at Transition Advisors, believes that succession is the key issue facing small firms now. “Succession for smaller firms remains at a critical juncture, as many have not developed an internal ‘bench’ and therefore do not have the necessary pipeline to replace retiring partners and owners,” he said. “Studies have shown that roughly 70 percent of firms with 15 people or less have no formal or even informal succession plan in place. Less than 6 percent of sole practitioners have a practice continuation agreement.”
Sandra Johnson, who is president of the National Association of CPA Practitioners as well as managing partner of a small firm, Johnson, Kass & Greenberg CPAs, agreed that succession is too big an issue to ignore. “[It’s] definitely a problem,” she said. “People tend to put off even thinking about it or start planning it very late. Instead, you should be starting to think about it the day after you set up your own business. If we look at the profession 25 years ago, you could find firms to buy and CPAs willing to sell their practice. That’s very hard to do today.”
Carl Peterson, vice president of small firms at the American Institute of CPAs and a veteran of his own small firm in Minnesota, sees technology as a non-negotiable factor for small-firm survival. “For years, small firms invested in technology as a capital investment, whereas today they need to have the mindset that technology is simply an annual operating cost,” he said. “The firm may have recently gone to the cloud with hosted services or SaaS, but now, are you looking at enhanced mobile access for staff or clients? Maybe it will enhance your client relationship depending on the business or industry they are in. Firms have to constantly question the technology used by the firm and continually be willing to add-on or evolve with the opportunities provided by technology.”
Marc Rosenberg, president of The Rosenberg Associates and a nationally known consultant to CPA firms, recognized the challenge of getting new blood into a small firm, and advised making a big investment to keep them. “The people I work with … they want to work with other young people. Unfortunately, because decent talent [often] doesn’t work at small firms, the vast majority of their firms are nowhere near their 20s. That’s a real turn-off. If you’re fortunate enough for them to respond to your ad, you have to make a dedication and commitment to young people.”
ONWARD AND UPWARD
Change can be gradual in the accounting profession, but smaller firms must be even more willing to adapt if they wish to thrive tomorrow, especially when looking to retain talent in a smaller pool of candidates.
“Small firms have to change their attitude,” said Johnson. “[We] have the reputation of working like dogs and [are] happy to do it, but we’re not going to retain staff if we have them do the same. We need to offer them what they want and not be critical if they don’t think like we do. It’s honestly easy to do.”
Johnson also believes that small firms need to evolve their practices as a whole, to ultimately “move away from number-crunching. We’ve got these young entrepreneurs who do all their own bookkeeping [already]. In a way, we’re more valuable to them now because we’re telling them how to interpret those numbers and further their businesses.”
“Small firms need to be focused, building their areas of expertise, becoming specialists,” added Peterson. “That will set them apart from other firms that are more generalists. Building that expertise will help firms in recruiting, appealing to the passions of potential staff. When firms focus on specialty areas or develop expertise, it builds on the passion of everyone in the firm, which translates to not only success but career satisfaction. Perhaps more importantly, it translates into a firm culture that is very attractive to staff both for recruitment and retention.”
In addition to altering different aspects of their overall practice, small firms must be willing to make investments — both culturally and monetarily — in younger staff members in order to attract and retain success. “Smaller practices need to adhere to one key concept: flexibility,” said Carlino. “That means allowing staff to work remotely or even non-traditional hours. Make it an attractive place to work, meaning don’t run the office like it’s 1976 instead of 2016. There are too many career options for young talent out there and you won’t lure anyone with an antiquated-looking firm. Use the myriad social media tools available and create a Facebook and LinkedIn presence for the firm. Prior to interviewing, with the research tools currently available, trust me — Millennials will know more about your firm than many of your current employees.”
Marc Rosenberg recalled once working with a two-partner firm that struggled to find staff. Each partner earned over $500,000, though, and they decided that informing potential staff of their earnings would become part of their recruiting technique. “They’d say, ‘We would like to give you an opportunity, because we feel it’s mutually deserved, and as partners we made $500,000 last year. If you’d like a part of that, we’d like a part of you.’ How many large firms would use that as a recruiting ploy?” Rosenberg asked. “It’s hard enough to find young people who want to work for you, so if you do, pay them. Don’t let pay be the differentiator for them working for you or working for a bigger firm.”
IT’S HIP TO BE SMALL
While it may seem that the disadvantages currently outweigh the advantages of small firms, there are still unique strengths that only small firms can claim as their own.
“[The] biggest advantage is always the ability to make changes and implement them on a timely basis,” said Peterson. “Changes that can affect the bottom line immediately and create culture change. Small firms have the advantage of truly providing personal service without the client having multiple levels of staff involvement. Small-firm owners are able to maintain strong fees [and] provide a high level of personal service working with sophisticated clients. I think large-firm partners are always surprised at the high-net-worth, high-income clients of smaller firms.”
“It’s a way to connect more personally,” added Rosenberg. “When [a small firm] sells to prospective clients, they’re selling themselves instead of their firms. People from larger firms would say, ‘That’s not a good thing,’ but there are advantages to selling yourself, and sometimes it’s maybe easier to sell yourself to a prospective client.”
“Being smaller, they can be much quicker to react to market opportunities, as the partner ‘buy-in’ pool will be much smaller,” said Carlino. “Whether it’s a decision to go paperless, pursue a new client niche, or search for potential acquisitions, the decision process will invariably be much less protracted than at a larger practice. Their clients are usually more loyal, as the interaction is on a much greater personal level. With regard to their bottom line, they can also be more profitable than larger firms in terms of net income per partner and the need for less overhead and administration.”
A SMALL FIRM CAN SURVIVE
Today’s small firms might consider their position challenging, but with a little planning and a shift in attitude, they can much better prepare themselves for the future. Now, more than ever, being adept at change is a necessity for small firms, not a luxury.
“I think it’s really a mental issue; it’s changing [the small firm] mentality,” said Johnson. “Accepting change, accepting that’s there’s a new way of doing things today. Accepting the Millennials for who they are — you have to be willing to hire young employees and you have to be generous with money, time and perks.”
“First and foremost, embrace technology,” urged Carlino. “With the abundance of cloud applications, there’s no excuse for smaller practices not to keep abreast of the latest software and applications. Look for additional niches you can provide your clients. Begin developing your internal bench — don’t put off succession planning. Procrastination in this crucial area can only result in two scenarios: a hastily arranged merger with unfavorable terms, or locking the doors for good.”
“Most firms will realize firm technology needs to change,” echoed Peterson. “Clients are using technology in their business and personal lives way beyond the way clients use technology with their CPA. Small firms need to stay on top of technology; it has an immediate impact on firm culture, success and value. Technology is the backbone for operations but it also provides that infrastructure that will attract and retain staff.”
“Don’t operate with a small-firm mentality,” Rosenberg said. “One of the most common things you’ll see at small firms is smaller billing rates — there’s no reason for you to have a smaller billing rate. You don’t need to have the same billing rates as the Top 100 Firms, but don’t sell yourself short. Charge what you’re worth; charge for your value. Have a plan … an idea of where’d you like to be in five years that’s different than today. Back that up with action — show your people what your plan is. It’s a lot more exciting working for a company that’s going places.”