Growth: The difference between the disruptor and the disrupted
I was once asked, “Why is growth important?” My short answer was it comes down to perspective. Do you want your firm to be relevant and be a disruptor, or do you want your firm to be irrelevant and be disrupted? Without growth, your firm will certainly be the latter.
Let me explain by sharing my personal experience. During my 47 years in the accounting profession, I was with two firms, CohnReznick and Grant Thornton. As I reflect on them, they were clearly disruptors in their day.
In 2002, when I joined CohnReznick’s predecessor, J.H. Cohn, the firm had three offices. Revenues were $52 million and the firm was ranked No. 43 nationally. We were stuck in the middle like an Oscar Meyer sandwich, as we were considered a small firm that lacked market permission to handle sophisticated clients. When clients wanted to raise capital, the investment banking community would say, “Who is J.H. Cohn?”
The firm’s leadership had a number of big thinkers who weren’t afraid to take calculated risks (not ranch bets) and wanted to be a marketplace disruptor. We determined that the greatest opportunity for the firm was to become a much larger player. The economy was beginning to show signs of fatigue and we were concerned about our earnings. The profession, while doing well because of SOX (a short-lived earnings pop that gave CPA firms some pricing power), was beginning to come to the realization that robust revenues and profits (pre-financial crisis) were not sustainable. The Big Eight had dwindled to the Big Five (soon to become Four because of Arthur Andersen’s demise) and it was obvious the mid-market market was going to be underserved.
We wanted to be a Top 10 firm with more substantial clients, we wanted to attract better quality clients, and we wanted to make more money. So we set ourselves on a path that required four key ingredients:
- Advisory and consulting capabilities;
- Industry specialization and distinctive service characteristics;
- Mergers and acquisitions for geographic expansion; and,
- Brand recognition, including a national spokesperson.
Over the next 10 years, we:
- Grew our advisory and consulting practice to about 10 percent of firm revenues;
- Got very serious with industry specialization;
- Consummated 15 mergers and acquisitions; and,
- Retained Joe Torre, who has done a marvelous job in raising marketplace awareness.
Together with organic growth, the firm went to $250 million in revenues and was ranked No. 22 nationally. Most important, our bottom line began to get very healthy.
While we were proud of our accomplishments, we weren’t where we wanted to be: a Top 10 firm. We didn’t want to wait another 10 years to accomplish our goal, so we decided to explore a three-way merger that would disrupt the profession and leapfrog us over our competition. The three-firm deal eventually was reduced to two firms, and CohnReznick was born. Today, it’s ranked No. 11 nationally, and its revenues exceed $625 million, with more than 20 offices, including one in India. If you ask me if the firm would do it all over again, the answer is a resounding yes! The firm is on the path to creating a national brand, has begun to move the client base uptown and has begun to attract better quality laterals. Kudos to a disruptor!
Grant Thornton’s story was not much different except that, in its day, its disruption played out on much bigger stages — the U.S. and international markets. It had two key moves:
- To play internationally as one global brand (circa 1985); and,
- To capitalize on the unfortunate Arthur Andersen opportunity (circa 2001).
Leadership at Grant Thornton’s predecessor firm, Alexander Grant, saw a marketplace opportunity for an international network. The firm tried to do a merger with both Main Hurdman and Laventhol Horwath. Both firms had strong international associations and marquee clients. Unfortunately, the partners weren’t making market partner compensation. The firm believed it could build off a strong national brand with about 40 U.S. offices. The firm wanted more than an international association (Tansley Witt), which wasn’t driving much business. The firm wanted to be a major attest, tax and advisory firm that could serve public companies. It found a like-minded U.K. firm (Thornton Baker) in 1980 and changed its name to Grant Thornton in 1986.
Today, it’s ranked No. 6 nationally, the firm has 59 offices and revenues exceed $1.7 billion. Kudos to a disruptor!
There are eight steps to being a great firm:
1. A shared vision about the future and the strategies with accountability that will get the partners there;
2. A sound economic model that rewards performance;
3. First-class partners who understand how to build lasting relationships with clients and contacts;
4. A growth and business development culture that includes everyone with their capacity and skill set;
5. Attracting marquee clients;
6. The ability to demonstrate that it is different, that it brings value to all clients that adds to their success;
7. Smart mergers and lateral hires that add to its strengths, improve its weaknesses and expand its footprint; and,
8. Consistent and persistent leadership.
So why is growth important? It is important because:
- It creates investment dollars that are critically needed to plow back into the business.
- It helps attract quality lateral hires.
- It enables the firm to move “uptown” with the client base.
- It continues to increase partner compensation.
- And last, and certainly not least, growth is important because client perception is that bigger is better and, therefore, bigger is, in fact, better. That’s not to suggest that better isn’t better (better is always a good thing), but if you are not getting bigger, you will have a challenge as size sells and because clients and prospects respect big and, more importantly, buy big known brands. The supposition is that if you are big, you must have clients and credentials that are impressive.
Growth comes from six key ingredients. It comes from:
1. Building a truly unique firm. An example would be building a firm that becomes the mid-market resource for liquidity and capital markets consultation and access (which also feeds transaction advisory services).
2. Creating a firm that provides value beyond comparison. The key here is industry specialization that includes deliverables such as suggestions for EBITDA and working capital improvements.
3. Cross-selling, which is the low-hanging fruit. Hold annual client clinics to find pain points and how you can help.
4. Originating new work. Everyone has a role. Some are rainmakers, some are “mistmakers” and others play a support role.
5. Diversifying with advisory and consulting capabilities. These might include cybersecurity, due diligence, wealth management and bankruptcy/restructuring.
6. Pursuing mergers and acquisitions for geographic expansion.
Over the years, there have been a number of great CPA firms that were disruptors. Top of mind are Rothstein Kass (hedge funds) and Kenneth Leventhal (real estate). These firms thought outside of the box. They made a difference in the profession. Growth was an integral part of their success. While growth is easy to say, it is very difficult to achieve unless there is a commitment at the very top of the firm with goals and individual partner accountability.