“Accounting Firms of the Future – How firms can survive and succeed” Tuesday February 8, 2011

“Accounting Firms of the Future – How firms can survive and succeed”

TuesdayFebruary 8, 2011

CEOKoltin Consulting

Group, Inc.Chicago, Illinois

1. Industry Update2. History Lesson 1013. The Interrelationship of Strategy, Governance and

Compensation as a firm grows4. Toughest Challenges as Firms Grow5. Lateral and Merged Partners6. Leadership7. Firm Profitability8. Using Partner Compensation to Improve the Firm’s

(and Partners’) Performance9. Various Changes Necessary in Traditional Partnership

Structures10. Necessary Changes to the Partner Agreement11. Mergers, Acquisitions and Divestitures12. Leaders as Change Agents13. Questions and Answers

Industry Update

Factor 2007 2008 2009 2010

Human Capital If only we could find the people.

Mass layoffs at the Big 4, targeted layoffs at other firms

More résumés? “Employer of Choice” now means ‘we’ have a choice!

Profitability We’d better brace for a tough 2008.

Many, many CPA firms realized record profits in 2008.

Sacred Cows go home!

No more “rabbits in the hat”

Growth The last 5 years have been the best for growth since I’ve been in the profession.

“The phones have stopped ringing – we need to get our partners back on the street.”

Did we just go full circle on the “commodity thing?”

Flat is up!

Multiple rounds of staff layoffs No salary increases Across-the-board salary reductions (possibly with

additional paid time off) Termination of partners Major cost-cutting initiatives Mandatory time off (PTO) during the summer months Pushing out start dates of new recruits and/or

reducing starting salaries/rescinding offers Better WIP/AR management/work stoppage and

payment plans

The Big Four and the “Middle The Big Four and the “Middle Market”Market”

◦ Price wars like we’ve never seen before It only takes one “jerk” to screw up the market

equilibrium Short- and long-term implications of pricing services

at 30% - 50% below standard rates My “price fixing” lunch experience last month in New

York! My crash course in “Big 4 pricing”! The pricing war will continue well beyond the end of

the recession

Guerilla Marketing Guerilla Marketing Strategies are Back!Strategies are Back!

RSM McGladrey/M&P Grant Thornton BDO Seidman CBIZ/MHM Crowe/Horwath BKD Moss Adams Plante Moran Baker Tilly VK EisnerAmper

Clifton Gunderson JH Cohn Marcum LLP UHY Advisors LAWCo Dixon Hughes Reznick Group Parente Beard Rothstein Kass Weiser Mazars

History Lesson 101

The Interrelationship of Strategy, Governance & Compensation as a Firm Grows

LIFE CYCLE 1

Revenue Up to $2 million

Governance Committee, if at all!

# of Partners 1 – 3

Biggest Worry

Making payroll!

Strategy “Anyone who can pay our bills is a worthy client.”

LIFE CYCLE 2

Revenue $2-$5 million

Governance Our compensation formula IS our governance.


Biggest Worry

How do I find time to work ON the business (vs. IN the business)?

Strategy Differentiation – “With us you’ll get a ‘hands-on’ working partner vs. the ‘bait and switch’ that larger firms try to use.”

LIFE CYCLE 3


Governance Managing partner elected (more administration than real management). Also, management is not valued as highly as client service or new business.


Biggest Worry Do we go out and invest in professional management or keep the partners doing “non-billable” things? How do we recruit, retain and grow younger talent?

Strategy “Let’s start to specialize and really focus on industry/functional niches.”

LIFE CYCLE 4


Governance Managing Partner position gaining traction and trying to develop A&A and Tax Department leadership.

# of Partners 8 – 40 (two-tiered partnerships more prevalent)

Biggest Worry Range of efforts results in compensation beginning to spread wider amongst the partner group/retirement issues/change to compensation system.

Strategy “Should we stay independent or merge up (or merge with an equal)?

LIFE CYCLE 5

Revenue $30 million+

Governance True CEO and high-level, professional management.

# of Partners Number based on revenue per partner. Typically between $1-$2 million revenue per partner.

Biggest Worry How do we create: real depth and industry/service-line specialization, one-firm concept, and integrate mergers?

Strategy “Should we expand geographically, be more aggressive in mergers and recruit lateral partners (free agents)?

Biggest Challenges as Firms Grow

Door #1

Ground Hog Day

No Pain – No Gain

Door #2

Major Reconstuctive

Surgery

Will look better, but at

what cost?

Door #3

Let’s Merge Up into Someone

Else’s Playbook

Interestingly, the results

from doors 2 & 3 are the same

Future Survival of the Firm

Future Survival of the Firm

Relationship v.

Service-based

Partner

Relationship v.

Service-based

Partner

Leadership Talent

Leadership Talent

First v.

Multi-Generation

Firm

First v.

Multi-Generation

Firm

Rainmaker “Lite”

Rainmaker “Lite”Size

of Firm

Size of

Firm

Cruisers v.

Dynamos

Cruisers v.

Dynamos

Types of Services (Type 1 v. Type 2)

Types of Services (Type 1 v. Type 2)

Market Share/Desire

to Expand Geographicall

y

Market Share/Desire

to Expand Geographicall

y

Number of Services Used◦ 1 service◦ 2 services◦ 3 services◦ 4 services◦ 5 services

Probable Retention Rate◦ 12%◦ 24%◦ 63%◦ 81%◦ 98%

Mandatory shift – from “renting” clients to actually “owning” them.

Leadership

Competitive Spirit Clutter Cohesiveness Candidness Crystal-Clear Vision Curious Contagious Enthusiasm Crazy! Change Agent Communication

1) What professional characteristics would you want to see in the next MP?

2) What personal characteristics would you want to see in the next MP?

3) As you reflect on the biggest challenges facing the firm over the next 5 years, what are they?

4) How should the MP’s performance be measured?

5) Do you envision the structure of the MP position potentially changing in any way?

6) Would this person be interested, have the backing of the other partners and give up their workload to make this position successful?

Five-year strategic plan “Heavy lifting” – major issues effecting firm Mergers and acquisitions Hiring of lateral partners to the firm Litigation and business risk Advisor to the Managing Partner Ideas for new product and service lines Ambassador to carry the “Firm” message to

other partners and associates

Tax Department Leader – Job Description

1) Empowered with overall responsibility to manage growth, profitability and overall resources of the Tax Department.

2) Recruitment of new tax talent to the firm.3) Mentoring and development of existing tax staff and partners.4) Responsible for leading new product/service department ideas for the

Tax Department.5) Oversight of tax training and technical issues as they relate to

members of the Tax Department.6) Oversight of utilization scheduling and realization of Tax Department

members.7) Establishment of tax members’ billing rates, as well as helping

establish fees on larger tax engagements.8) Meets monthly (or quarterly) with tax partners and managers to coach

and counsel them on individual performance.9) Responsible for overall client satisfaction (both internal and external

clients of the firm).10) Helps promote the cross selling of tax services firm-wide, and also

promotes cross selling of non-tax services within the Tax Department.

Leadership Management Administration

CEO/

COO

$$$ $$ $

Executive

Committee

$$$ $$ $

Dept.

Heads/PICs

$$$ $$ $

What value do you place on each of these areas?

How hard do you want to “push the gas pedal?”

What kind of management talent do you really have?

Firm Profitability

The Client

Client Acceptanc

e

Engagement Budget

Engagement

PlanningStaffing

& Scheduli

ngEngagement Management/

Utilization

Relationship Managemen

tSurprises/ Change Orders/ Revisions of Completion Date

Billing

Collections

Client Satisfacti

on

START

FINISH

Using Partner Compensation to Improve the Firm’s (and Partners’) Performance

Unified Firm* Strategy/Vision

Individual Partner Goals

Firm Governance/Accountability

Performance-Based Partner Compensation

*Includes Department, Office and Industry Team Goals

CLIENT

Originating Partner

(Aggressive Alvin)

Relationship Partner

(Loveable Larry)

Service Partner(Billable

Bob)

“Average partner compensation will increase, but for the average partner, it will probably stay the same.”

Daryl Ritchie, CEO of Meyers Norris Penny LLP

OLD SCHOOLOLD SCHOOL

What is your book of business?

How much new business did you bring in?

How many billable hours did you have?

How many years have you been a partner at the firm?

I was one of the firm founders.

NEW SCHOOLNEW SCHOOL

Who did you recruit to the firm last year?

On the upward evaluation, how many people identified you as the reason they are with the firm?

How many current and future partners would identify you as their “sponsor”?

How did you rate on the partner peer survey?

How did you rate on the client satisfaction survey?

Agree on worthDoesn’t always make senseValues can change annually

Occasionally have to over payIndividualized off-season trainingIndividual goals & measurements differ

Salary vs. risk dollars Open vs. closed compensation Formula approach vs. individual partner

goals-based approach

Various Changes Necessary in Traditional Partnership Structures

One tier ◦ equity only

Two tiers ◦ equity, income

Three tiers ◦ equity, limited equity, income

Four tiers ◦ equity, limited equity, income, principal

Five tiers ◦ equity, limited equity, income, principal, retired

Six tiers ◦ equity, limited equity, income, principal, retired, contract

Seven tiers ◦ equity, limited equity, income, principal, retired, contract,

special*

*has not ‘officially’ retired but, based on performance, one would think they ought to!

More activity in last 5 years than in last 20 years

National firm partners have successfully integrated into local, regional and middle-market national firms

Many merged-in partners have thrived and assumed leadership roles in new firms

Lateral and/or merged-in partners have become the #1 growth strategy of many Top 100 CPA firms!

Lateral (and in some cases, merged-in) partners are now welcome, even without books of business

Firms have changed their traditional partnership structure to better accommodate “outsiders”

As firms have become more specialized (niche focused) the demand for building and growing expertise has gone up – hence the birth of “free agent”

Rainmaking skills Leadership/management abilities Can assume someone else’s book of business Can help to leverage another partner’s book of

business Has a unique or specialty expertise that the

firm doesn’t have or wants to expand upon Firm is trying to fill in age, experience or

diversity gaps in certain places Ability to take partner book and cross sell other

services

Necessary Changes to Partnership Agreement

Non-solicitation provisions as they relate to:◦ Clients◦ Potential clients◦ Staff◦ Referral sources

Mandatory retirement◦ We have gone from age 65, to 62, to 60 to 58,

and now back up to 70! Liquidated damage provisions when

partners take clients◦ 100% vs. 150% vs. 200%?

Multiple of salary Ownership percentage (times revenue) Agreed upon fixed price None!

*Also needs to address length of payout, vesting, payment restrictions, non-compete provisions, etc.

Mergers and Acquisitions

M&A Frenzy of 2010 is continuing in 2011◦ 2010 was a record year for mergers and

acquisitions Top 100 firms continued their record pace

Locals are becoming Regionals, Regionals are becoming Mega-Regionals, Mega-Regionals are becoming Nationals, and Nationals are becoming Internationals

Firms in the $10-$30million fee range probably have the greatest challenges in the M&A area

Mergers in the under $10 million size range are “off the chart!”

1) Firms don’t merge – people do! Remember to “drill down” to everyone’s personal agendas

2) One size doesn’t fit all (cash for some, equity for others, a job for some!)

3) Pick one!a) Fact: The more people involved in the merger

discussion, the greater chances of it happening.b) Fiction: The more people involved in the merger

discussion, the lesser the chance of it happening.c) See #1

(Clue – Do whatever it takes to “get the train running”!)

4) Be careful what you wish for. Examples: Corporate v. Entrepreneurial Models “Troops on the ground” v. Flagship status How will life be different (if at all) on Monday

morning?5) Don’t sweat the small stuff!6) Don’t underestimate the psychological effect of

“giving up control.”7) Don’t forget to always understand the “other

firm’s” perspective on things.

Leaders as Change Agents

Sometimes people don’t want to change, but will say they do.

Sometimes people want to change, but can’t. Sometimes people want to change, but don’t

know how to change. Sometimes people can’t change due to

conflicting goals/demands. Sometimes people will change just enough to

get you off their back!

Sometimes people will change, but only if another person also changes.

Sometimes people will initially change, but are only doing it to ultimately prove you wrong.

Sometimes people will support the change, as long as they don’t actually have to change!

“Don’t forget that the value of information is not in what you know. It is in what you know that sometimes the other person doesn’t know that you know!”

To Contact Allan:625 N. Michigan Avenue, Suite 2100

Chicago, IL 60611312.245.1930 (phone) 312.245.1935 (fax)

[email protected]

Documents

“Accounting Firms of the Future – How firms can survive and succeed” Tuesday February 8, 2011