Ineffective management is hazardous to your firm’s health

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Every year a number of small and mid-sized CPA firms either die on the vine, break up, or merge up if a well-run firm is willing to take them on.

Why do so many firms continue to spiral into a slow death? It’s because they are aware of the danger signals, but little, if anything, is done about them or because they are not paying attention to the warning signs, including the following:

  • “The inmates are running the asylum.” Disgruntled partners are doing their own thing. The staff see it and they begin to disrespect partners and are indifferent to firm protocols and policies.
  • The partnership agreement does not require tight corporate governance.
  • The partner compensation plan is not designed to handsomely reward high performance.
  • The firm is undercapitalized and too dependent on bank debt to pay monthly draws and year-end distributions.
  • There is poor quality control and risk management that creates a poor reputation, at best, or mounting litigation, at worst.
  • The firm is unable to attract and retain the next generation of partners.
  • There is no effective and realistic succession plan.
  • There are many ineffective or unproductive partners and, as a result, the firm metrics are out of whack.
  • Senior partners aren’t playing as a team. Instead of firm first, it is “every man/woman for himself/herself.”

Why do these things happen at a firm? Usually it’s because the firm management, particularly the managing partner, is unable to make the tough decisions and cut them off at the pass.

Does your firm have some of these symptoms? If yes, there still may be time for you to do something about it. It starts by evaluating the effectiveness of your managing partner because, without an effective managing partner, a firm runs the very real risk of failure.

At small and mid-sized firms, many leaders “grew up” in small firm environments and have little understanding, if any, of what it takes to operate a successful firm and what the managing partner’s objectives and job responsibility are.

So, let’s begin there. An effective managing partner has to set the tone at the top and, when necessary, make the tough decisions that are required to keep the firm viable. He/she has a very big impact on the firm’s culture, behavior and compensation of the partner group. Being a CPA firm leader requires a person to walk the talk, to lead by example, “to do as I do, not as I say.” It’s a very challenging and daunting responsibility. As a leader, every word a managing partner says, and every action taken, has a tremendous impact, not only among the partner ranks but also throughout the firm.

The following summarizes the key objectives and job responsibilities of a firm’s managing partner:

Key objectives

Be the shepherd, or orchestra leader or quarterback, if you prefer, of the partner group.

Create a one-firm, firm-first culture, implement firm procedures and policies, and instill best practices in areas such as communication, business growth, cost controls, etc.

Instill strong corporate governance.

Drive revenue and profitability.

Protect the firm from significant risk. This requires the managing partner to make sure staff and partners are appropriately trained and evaluated, adhere to firm policies and appropriately analyze risk from the perspective of client acceptance, as well as client continuation.

Strive for a one-firm, firm-first philosophy. This requires partners to think “our clients,” not “my clients.”

Be actively involved in the community by attending events, joining boards of directors of nonprofit entities, and being active leaders in these organizations.

Mentor future leaders. This requires constant communication with partners and staff, assisting partners in setting their goals and how they can improve themselves, as well as the firm, and evaluating those partners against goals that were agreed to in the year-end evaluation and goal-setting meetings at a minimum of twice a year.

Commit to growth through industry specialization by building expertise, effectively going after target clients, and providing value to existing clients.

Assure that partners and staff are providing world-class client service by having a pulse on the key clients and the services being provided. This includes taking an active role in client service and communication plans.

Communicate within the community, partners, staff and clients by maintaining a positive and enthusiastic outlook while dealing with both good and bad news effectively and in a timely manner.

Key job responsibilities

Design and develop a strategic plan, incorporating the firm’s strategic goals, and directing its development and implementation.

Oversee the short- and long-term financial condition while maintaining appropriate profitability.

Ensure that all partners and staff understand the firm’s financial goals and that day-to-day decisions are made consistent with these goals.

Lead all partner meetings, which should be held monthly.

Oversee industry practices by monitoring leaders and industry group performance. Build industry expertise where needed.

Assure compliance with firm policies regarding capital expenditures and operating expenses and oversee, monitor and control operating expenses consistent with firm policy.

Assure proper utilization of firm administrative management and information systems.

Function as the major spokesperson with major business organizations and publications.

Maintain relationships with leadership at other CPA firms (potential combination targets) and focus on providing services they cannot provide.

Resolve major client disputes consistent with the best interest of the firm. Obtain legal counsel on all significant disputes.

Implement and maintain effective client billing and collection policies and procedures consistent with firm policy.

Monitor client billing and collection results to assure compliance with firm billing, collecting and work in progress (WIP) policies and protocols.

Seek laterals who can beef up bench strength and diversification.

Monitor individual partner and manager fee realization versus plan and recommend actions to address negative variances.

Actively participate with partner goal setting and monitor progress throughout the year. The key objective is to provide for the long-term viability of the firm through the growth of new partners and the maturation of existing partners.

Oversee client transition and succession planning for retiring partners.

Foster partner involvement in firm social functions and support personnel recognized for outstanding service in the community.

Make sure that client accounts are handled in the most effective and efficient manner with the appropriate client service team.

Ineffective MPs

An effective managing partner is not the number one biller among the partners. It is someone who also isn’t the partner with the highest billable charge hours. While a successful managing partner usually carries a very small client load to stay grounded in client service and to remain credible with the partner group, billings and chargeable hours are truly a very small part of the job. A managing partner’s clients are the partners, giving them the opportunity to maximize their strengths while minimizing their weaknesses. A managing partner has to be readily available for big opportunities or problems and is someone who creates an environment of trust among the partners.

An effective managing partner also isn’t someone who comes from outside the existing partner ranks. That’s too risky, particularly if someone comes from outside the professional services firm environment. I don’t know of one situation where such a tactic has been successful at one of the Top 100 Firms. The “outsider” obviously doesn’t know the firm’s history or culture or the partners’ individual strengths and weaknesses. The “outsider” also isn’t attached to the firm’s vision and strategic plan. Please stay away.

Oftentimes, in the spirit of political correctness, it is not unusual for firms to select co-managing partners. It’s a safe decision that doesn’t offend quality partners who compete for the position. From time to time this kind of arrangement works, but oftentimes it doesn’t and is a step that should be taken with caution. Too often firms with co-managing partners are plagued with inaction or conflicting directions with little, if any, consistency on strategy. If co-managing partners can be avoided, take the bold step and the tough decision — select the right person for the job today and make sure you do the best to retain the other contenders for the position. Retention may not be easy to accomplish, so the best advice is to avoid a scenario like this completely. Be clear about the characteristics the firm is looking for in a managing partner and then go for it.

Part-time committees

Firms can’t operate by part-time committees. A firm needs to make decisions and move on. Sure, a firm needs oversight committees such as a management committee or an operations committee to provide oversight and direction to the day-to day operations. A firm also needs an executive committee for corporate governance, partner matters and strategy. But a firm can’t possibly prosper if the key leadership role is delegated to a part-time committee that reacts to situations when time permits. It’s a recipe for disaster. No one is steering the ship, thinking about strategy and the future while, at the same time, making sure the necessary blocking and tackling is being tended to. It’s important to make sure the firm is operating on all cylinders, delivering on its metrics and performing high-quality services.

Many firms select a new managing partner from their ranks at an age somewhere between 45 and 53. Candidates are usually excellent client relationship partners with substantial client service responsibilities. The thought of giving up a substantial portion, if not all, of the client relationships that have been developed over years of service is very scary to many.

For sure, there is a risk in being a managing partner. Candidates ask, “What happens if I’m not successful? In the spirit of trust, I lose most of my client responsibilities and begin to lose touch with my outside referral sources. I’ll have nowhere to go but to exit the firm when I’m no longer managing partner.”

This is a very real concern and many firms do not want to recognize the severity of it. Instead firms say, “Trust us.” While that’s easy to say, this trust can be misplaced. Firms should consider “protecting” the managing partner with an agreement spelling out compensation, severance and enhanced retirement to that ensure employment for two or three years after the person steps down as managing partner. While this is rarely done in today’s world, the lack of such an agreement could well be one reason a firm has difficulties in attracting an effective managing partner and, as a result, is unable to remain viable.

Firms need to be careful in selecting their managing partner. The goal should be to ensure a high probability of success. That’s not only good for the managing partner, it’s also good for the firm and for future managing partners.

Today, more than ever before, the managing partner is the quarterback in a firm. Don’t shortchange the importance of the role. Too many firms fail when the managing partner is ineffective. It’s usually the beginning of a slow and torturous death.

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Partnerships Practice management Practice structure Dom Esposito Partnership agreement