Shrinking your firm to make it stronger and more profitable for the future

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Many firm leaders do not truly appreciate that CPA firms are in the business of public accounting and consulting to generate handsome profits and an attractive ROI for the equity partner group.

That’s right! Public accounting and consulting is a business. Unfortunately, while they may be solid client relationship professionals, many in senior management have difficulty effectively leading and managing their businesses to a bright future that enables their firms to perpetuate themselves for the next generation.

At some firms, leaders get consumed with growth, growth, growth and are distracted with moving up the firm rankings in their desire for recognition from their peer group. Sounds crazy, but it’s true. At some other firms, leaders are hungry for net cash flow at almost any cost and take on a lot of growth without acceptable net profits (cash compensation) for the equity partners. How many times have you heard, “We would rather have a dollar of revenue versus no revenue. After all, that dollar of revenue doesn’t really cost us much, if anything.” Again, it sounds crazy, but it’s true.

Over the years, I have found that many CPA firms place too much emphasis on robust top-line growth and not enough on quality profitable growth, clients and people that can help perpetuate the firm. This scenario usually results in a poor bottom line and below market partner compensation. A persistent emphasis on growth, with no improvement in the quality of clients, people and partner compensation, sooner or later becomes a recipe for disaster. Nevertheless, year after year, we see these same firms continue down the same path. That path eventually threatens their firms’ viability. As Albert Einstein supposedly said, “Insanity is doing the same thing over and over again and expecting different results.”

Why does this occur and what are the implications?

Our perspective is that CPA firm leaders oftentimes get married to a bad idea (“we need growth and more growth”) and when that growth doesn’t produce the desired results (quality clients, quality people, more compensation for the equity partners), it becomes too difficult to admit a mistake has been made. One of the hardest things CEOs have to do is acknowledge that a strategy they have championed (such as “we must grow faster; we must accelerate growth”) has not worked. Some leaders simply put their heads in the sand and hope that things will reverse course, but hope is not a strategy. The tough truth is that when we make a mistake, we need to own it. That’s easier said than done, but when there is inaction and little if any corrective measures in these situations, things begin to unravel and get ugly.

Sure, critical mass is important, but growth at any cost is a fool’s game. It’s not sustainable. It also creates some unhealthy behavior among the partner group and eventually among managers and staff. Poor partner morale becomes infectious. Silos within the firm are created. The mentality becomes this is “my” client, as opposed to this is “our” or “the firm’s” client. The best people with employment options, particularly if they provide tax services, decide to leave the firm. Little by little, the valuable asset of a CPA firm gets diminished to a point where there is no option but to sell the firm as “damaged goods” at a distressed price.

Many in the firm, including smart financial technicians who know how to read a healthy balance sheet and a robust income statement, often wonder why their leaders don’t take corrective measures and change course before it is too late.

If you are one of the leaders who have overemphasized growth, growth, growth at almost any cost, I implore you to wake up and do something about your sinking ship before it’s too late. The tough reality is that you probably have to shrink your firm at a measured and digestible pace, outplace unprofitable clients, and let go of marginal professionals who don’t possess the skill sets you desire for your future.

I know this is tough medicine and has significant repercussions. For example, partners might be OK conceptually with shrinking the firm’s revenue base and letting some professionals go under these circumstances, but they will resist shedding some of “their” clients, even though the realization is unacceptably low, and letting go of some of the people who work on “their” clients. How many times have you heard, “Oh, we can’t outplace John and Mary because ‘my’ clients love them”? Sure “your” clients love them! It’s because the service is terrific and the fees are ridiculously low.

Shrinking a firm is perhaps the only viable option in the long run when it’s obvious the firm is sinking and remedial action is required, but it’s not a step I recommend lightly. However, once you take the necessary corrective actions to shrink the firm, you will start to see the foundation strengthen, partner compensation improve and a brighter future emerge. There’s also an added benefit. Your best and brightest people gain respect for you and start to help you transform the culture to a “firm first” culture with a view that these are “our” clients and the “firm’s” staff. It’s contagious. It’s all good!

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