While the PCPS comes out annually with the top five issues facing accounting firms, I have found that the following 14 internal and external issues (see box on page 9) are now having the most impact (positive and negative) on the profitability and future of firms.While there is never a single solution to solve all problems, it is incumbent upon firms to address the following issues to determine the extent to which they have an impact on the firm.

Internal issues

* Lack of vision. Discovering a firm's vision is one of the hardest activities for partners to focus on. Most firms don't have a compelling vision that unites the firm and wins the hearts (i.e., passion) and minds of its owners and employees. Unfortunately, you can't build a strong structure without a solid foundation - that's your vision.

* Lack of leadership. Authentic leadership is lacking in most areas of corporate American, and the CPA profession is no different. Authentic leadership has, as Stephen Covey so aptly noted, four main duties: modeling - walking the talk; pathfinding - helping others to achieve goals and live the firm's mission, vision and values; aligning - developing enabling systems to support the firm's strategies; and empowering - creating conditions that enable everyone to contribute their maximum potential.

* Little or no succession planning. While there is a lot of emphasis on succession when it comes to the firm leader, there is a lot less on other key partners and personnel in the firm. And let's not forget about clients. The best way to resolve the succession planning issue in your firm is to tackle it now. A lot of the firms that I consult with think that a merger will be the answer to their succession planning problem. Seldom is this the case. Firms merge because it's part of their strategy, not because it's believed to be a solution to a problem.

* Poor execution of strategy. The good news is that firms are beginning to learn how to develop strategic plans; the bad news is that they are not doing a good job in implementing them. The majority of firms do an extremely poor job in taking their strategies to implementation.

* Lack of competencies. It is unfortunate that many partners today have never developed competencies in areas other than accounting or tax. Now, many of these partners are either "underskilled" or "de-skilled" in today's rapidly changing marketplace. Partners in this situation will need to re-tool themselves. Firms today must not only help their older partners, but also their younger partners to develop the competencies needed to serve today's sophisticated clients.

* Ineffective compensation systems. At The Growth Partnership, we are seeing a fundamental shift in compensation systems. Firms are now rewarding owners and employees for developing competencies and for living the firm's values (i.e., exhibiting the right behaviors), rather than on seniority, ownership percentage or simply objective measures.

* Outsourcing. There is a tremendous danger in outsourcing that has not gotten much attention in the general business or accounting press.

When firms begin to outsource core competencies, such as tax preparation, sooner or later those firms will lose that competency. Can you imagine your firm's future without having in-house people who know the tax law?

External issues

* Potential litigation exposure. While we hear about the multi-million-dollar settlements that the Big Four have made over the past several years, we hear a lot less about the litigious environment that the small and midsized accounting firm is facing.

Errors and omission insurance will be more difficult and more costly for all firms in the future. Smaller and midsized firms serve many clients today that have the capability to bring major law suits against them.

* Rise of regional superpowers. Over the last five years, several regional superpowers have appeared in various sections of the country. These firms will undoubtedly absorb some of the work that the Big Four are jettisoning, but many go after the larger clients of smaller firms.

In addition, competition for local staff will only increase as the super-regional firms continue to grow. There will continue to be a war for talent and starting salaries have only one way to go. Unless the smaller firm becomes more profitable, the extra dollars going to new staff can only come out of the partners' pockets.

* New competitive pressure. While prices in general are reduced by commoditization, pricing pressure is also increasing because of the increasing use of outsourcing to countries with lower labor costs. If two competing firms in a market had the same cost structure and they both prepared tax returns, their prices were usually similar.

Today, however, a new competitor could enter the market with a completely different cost structure due to offshore outsourcing.

* Shortage of staff and future partners. Recent studies show that there will be a continued shortage of accountants and accounting professors. It is predicted that there will not be a one-for-one replacement for each accountant who retires over the next 15 years. This has drastic consequences for succession planning, partner retirement and client service.

* Smarter clients with higher expectations. Knowledge is power, and our clients have access to more knowledge than before. They merely have to visit our Web site to learn about our services, our credentials. All this, and more, without ever having to speak with us. They can get basic answers to just about any tax issue, thanks to the power of the Internet.

* Buyers' market. Buyers are more selective today than ever before. The price of most firms is not going up. It takes several years to turn a firm around, so don't wait until you are ready to retire to get your firm ready for sale. Start now.

* Sandwiched between smaller and larger firms. It's more important than ever to decide what type of firm you want to be. The worst market position you could have would be too small to compete with the super-regional firm and too large to compete with the smaller firms in your market. One strategy is too become a boutique firm that specializes either in an industry or a service area.

Conclusion

Given the challenges facing firms today, now is not the time to be complacent. Successful firms will have the courage to face these issues, create strategies that give them a competitive advantage, and actually implement those strategies.

If you don't have the strength or courage to do this, then you might want to hang that "For Sale" sign on the door today.

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