I was recently asked, “Why is growth important?”
My short answer was that it comes down to perspective: Would you rather be at the dinner table or on the dinner menu? Said differently, would you rather be the disruptor or the disrupted? Without growth (the disruptor), your firm will be unable to retain and attract high-quality people and high-quality clients. Eventually, your firm will get disrupted by dying or merging up.
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, that, as I reflect on them, were clearly disruptors back in the day.
In 2002 (when I joined 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 — a national firm. 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 firms pricing power) was coming to the realization that robust revenues and profits (pre-financial crisis) were not sustainable. The Giant Eight had dwindled to the Giant Five (soon to become Four because of Arthur Andersen’s demise) and it was obvious that the mid-market market was going to be underserved.
We wanted to be a Top Ten firm with more substantial clients, we wanted to attract better quality people and clients, and we wanted to make more money. So, we established a strategic plan that required four key ingredients:
- Advisory and consulting capabilities;
- Industry specialization and distinctive service characteristics;
- Mergers and acquisitions for geographic expansion and strategic service add-ons;
- 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;
- Retained Joe Torre, who did a marvelous job in raising our marketplace awareness.
Together with organic growth, the firm rose to $250 million in revenues and was ranked No. 22 nationally. We were picking up larger clients and attracting quality laterals. Most important, our bottom line began to get very healthy.
While we were proud of our accomplishments, we still hadn’t become a Top 10 firm. To accelerate our growth in one quantum leap, 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. 14 nationally, and its revenues are approaching $700 million with 19 offices. A Top 10 firm is now in sight. If you ask me if the firm would do it all over again, the answer is a resounding yes! The firm is well on the path to creating a national brand. It 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, back in the day, its disruption played out on much bigger stages — the U.S. and international markets. It had two key moves: play internationally as one global brand (circa 1985); and capitalize on the unfortunate Arthur Andersen opportunity (circa 2001).
The leadership at its 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. The firm found a like-minded U.K. firm to merge with: Thornton Baker.
Today, Grant Thornton is ranked No. 6 nationally. The firm has 56 offices and revenues approaching $2 billion. Kudos to a disruptor!
There are eight keys to becoming a disruptor:
- A shared vision about the future and the strategies with accountability that will get the partners there;
- A sound economic model that rewards performance;
- First-class partners who understand how to build lasting relationships with clients and contacts;
- A growth and business development culture that includes everyone with their capacity and skill set;
- Marquee clients;
- The ability to demonstrate that it is different, that it brings value to all clients and adds to their success;
- Smart mergers and lateral hires that add to its strength, improve its weaknesses and expand its footprint;
- Consistent and persistent leadership.
Disrupting comes from six key ingredients:
- Building a truly unique firm. An example would be building out a firm that becomes the mid-market resource for liquidity and capital markets consultation and access (which also feeds transaction advisory services).
- 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.
- Cross-selling, which is the low-hanging fruit. Hold annual client clinics to find pain points and how you can help.
- Pursuing mergers and acquisitions for geographic expansion and strategic service add-ons.
- Originating new work. Everyone has a role. Some are rainmakers, some are “mist makers,” and others play a supporting role.
- Diversifying with advisory and consulting capabilities such as outsourced CFO services, cybersecurity, transaction advisory, wealth management and bankruptcy/restructuring.
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 out of the box. They made a difference in the profession. Growth was an integral part of their success.
From disruption comes growth, which 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 impressive clients and credentials.
Finally, disrupting is difficult to achieve unless there is a commitment at the very top of the firm with goals and individual partner accountability.
