a complimentary whitepaper for certified public accountants

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Developing your pyramid of support

A powerful structure for CPA practicesPyramids are among the earliest and most enduring structures used in human civilization. The works of ancient Egyptians and Aztecs in Mexico still stand, some thousands of years after their construction.

Pyramids have also endured in the world of public accounting practices. The pyramid has long served as the primary model for structuring a CPA practice. The base of the pyramid, which covers the largest area, represents the practice’s staff. Moving up and narrowing, the next level represents the senior staff, with specialized skill and some supervisory roles. The pyramid narrows even further for the next level, which includes the practice’s managers. The narrowest part of the pyramid, the very top, represents the equity partners who own the practice.

In recent years, however, the overall aging of the CPA profession and the nature of the work practices perform on behalf of their clients has distorted the familiar pyramid. In general terms, if your practice has been able to maintain that pyramid of support, it’s well-positioned for long-term success and viability. But if yours is among the practices that have experienced a change in proportions, trouble may be ahead. In this white paper, we’ll explore the nature of the pyramid and steps your practice can take to rebuild it.

Is the pyramid crumbling?The business world has seen dramatic changes in recent years, but the foundation of CPA practice management hasn’t followed suit. For more than a half a century, the yardstick for managing a practice has been Revenue = People Power x Efficiency x Hourly Rate. While that equation has worked, it does have significant limitations, including an emphasis on marginal dollars, which don’t always flow from

higher-value clients. In addition, it encourages practices to manage by leveraging people hours, which makes less sense in an era of technological advances and a shortage of new talent. 1

That said, if you view the most profitable practices as those with the highest income per partner, you’ll find a well-proportioned and well-managed pyramid at the heart of their operations. Conversely, many practices today are struggling with a pyramid that’s out of balance, having too small of a staff to support a large number of partners and managers. 2

The organization of these practices resembles an inverted pyramid. In this environment, partners find themselves doing work that’s more appropriate for managers, so they have less time to attend to practice development and managing the profitability of client engagements. Without the luxury of time to think strategically, these practices begin to demonstrate less creativity and innovation in serving the needs of the marketplace. 3

This situation has developed as technology and globalization combine with the effects of generational differences, impacting all the key areas in practices, including leadership, learning, technology, and the workplace itself. 4

Partners may not be as aware of these shifts as they should be, because they’re making plenty of money. They’re racking up more billable hours than ever, but much of it is work that should be handled at the manager level. In turn, managers are doing tasks that senior members of the practice would normally handle, instead of acquiring the skills they need to eventually grow into partners. As this happens, the pyramid becomes flatter and may even become inverted.

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Now add in the impacts of generational conflict. The manager tier is populated primarily by members of Generation X, which may have an inherent workstyle conflict with the partners, who are typically Baby Boomers, and the staff, most of whom fall into the Millennial category. Factor in the shortage of young CPAs and the different work styles Millennials bring, and more pressure is put on senior staff and managers. Finally, consider that Baby Boomer partners are retiring twice as quickly as GenX managers can replace them. 5

The result is practices that have become under-leveraged. Partners lack the time to delegate lower-level work so they can instead focus on business development, profitability, and ensuring professional growth among lower-level employees. A generation ago, a partner nearing retirement could count on having a manager who was a ready replacement. Now, even if a manager is available, he or she may not have the knowledge to step into a partnership. 6

It’s not just a near-term problem. As these practices struggle to address day-to-day client needs, succession planning falls by the wayside. In particular, far too many practices are failing to target and recruit professionals with the skills and personalities to grow into future leaders. 7

Examining your practice’s pyramidRebalancing and maximizing the efficiency of your pyramid demands an honest look at the practice’s current structure. First, you need to ask yourself if the organization is top-heavy, particularly if it seems to be supporting partners and managers who aren’t pulling their weight.

Examine the nature of your compensation structure to see if it discourages partners from delegating work to managers and senior staff. If the system penalizes delegation instead of rewarding it, there’s likely to be inadequate work for the right number of managers and seniors, too little profitability from engagements, and professionals at those levels may not be developing the skills and experience they need to move up the pyramid when the time comes.

A key aspect of partner accountability should be staff development. If the practice is going to be sustainable, the base of the pyramid must be large enough and busy enough to support those in the higher ranks. Recruitment should be focused on finding the right people to populate the lower levels, with professional development concentrated on identifying those most likely to advance and supporting their career journeys with the right training and mentorship. Partners should not be wasting their valuable time on low-level tasks that provide minimal profitability. If it appears that the practice is out of balance, the leadership must have the courage to make tough decisions regarding staffing and structure. 8

Steps to rebalance your pyramidRebalancing your practice’s pyramid is not a quick fix. It takes introspection, strategic thinking, and more than a little honesty. It can be an uncomfortable process, because everyone has become accustomed to the way things are. It will take some time to correct things, but keep in mind that it took years for the practice to reach its current state. 9

The most effective approach for restoring the proper balance to a practice pyramid involves five steps:

• Evaluate clients to ensure that the practice is structured to focus on serving the best and most profitable among them. It’s also good to make sure the clients have developed loyalty to the practice and not just the partner who leads their efforts.

Whitepaper: Developing your pyramid of support

“ Rebalancing your practice’s pyramid is not a quick fix. It takes introspection, strategic thinking, and more than a little honesty.”

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• Create a formal talent development plan that’s built upon the overall strategy for the practice.

• Develop a formal career path and plan for professional employees that includes tracks all the way to a partnership, and then communicate that plan to every employee. Make sure people understand what’s ahead for them. If managers aren’t going to be offered partnerships, they need to know that.

• Identify individuals who have the highest potential for leadership and put them on a fast track for professional growth. That’s especially important for managers you hope to move into partner-level positions.

• Spell out accountability for partners, including the role they’ll play in developing and mentoring staff.

By taking these steps, your practice will be able to shift more client work away from the top of the pyramid, while giving the leadership a formal structure through which they can oversee the development of future leaders. 10

Traditionally, practice leaders have been close-mouthed about their future plans and who they envision to one day take their roles. In today’s environment, that approach is less effective. People want to know that you have a plan and what role they’ll play in that plan. If you have big plans for certain team members, let them know and compensate them accordingly. If they don’t know of your plans, they may assume their future will be brighter elsewhere, and will be ready for the next call from a headhunter.

Just as important, you need to prune your pyramid. You may feel sorry for a particular individual and hope they’ll change or somehow develop into someone else, but that’s unlikely to happen. If they’re not performing at the level you need, replace them with someone who is. That’s not easy to do, but the longer you string them along, the more they’ll drag everyone else down.

Finally, take an honest look at your compensation model. Partners should be rewarded for vision, innovation, and strategic moves, not for racking up more billable hours. Encourage people in the upper levels of your pyramid to delegate more of their work to the next level down. You’ll need to adjust compensation, so they’re not penalized for pushing those hours to others. Reward innovation, too. If someone comes up with a nontraditional approach that improves client service and profitability, they should share in the benefits, because that incentivizes others to do the same. 11

Other considerationsAs you examine your pyramid of support and develop your plans, you’ll also need to give thought to the future of the profession. There are those who think the pyramid may be an outdated model. Allan Kotlin, for example, anticipates that as technology absorbs more of the work that entry-level accountants have traditionally performed, the pyramid may evolve to more of a diamond shape. He also envisions a significant rise in the number of non-equity partners, as fewer of today’s younger staff members view an equity partnership as their ultimate goal. 12

Whitepaper: Developing your pyramid of support

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Additionally, there may be shift away from the focus on selling billable hours to becoming more deliberate about leveraging a practice’s true asset, its intellectual capital. With the shift to a knowledge economy, a practice’s expertise offers more value to clients than its ability to simply perform work. Practice leaders may need to develop new metrics to measure their success and the contributions their employees make to that success. 13

As technology grows in importance, having fewer professionals who are willing to take on equity partnerships could lead to shortage of investment capital. Practices will be challenged to find new ways to fund what they need, such as turning to outside financing sources. 14

All of these changes and challenges are daunting and will require a significant amount of time to process and plan. In the long run, however, rebalancing your practice’s pyramid will provide all manner of healthy rewards. You’ll have a staff that’s more engaged and empowered, resulting in more efficiency and productivity. Partners will be encouraged to be more innovative, improving the value offered to clients, realizing more revenue, and giving the practice significant competitive advantages in a marketplace where clients have more options to choose from. 15

Funding your changesThe ideas described here are sound, but most will require some investment, and many practices either lack comfortable capital levels or are unwilling to tie up a large portion of their working capital. That makes outside funding a likely alternative, but where can a CPA practice turn?

Partners often assume their best approach is to turn to local banks and loan officers they’ve come to know. However, most traditional banks aren’t comfortable with the structure of businesses like CPA practices. Most are geared to making loans to businesses that have tangible assets such as inventory, equipment, and real estate.

An alternative to consider is a specialty lender that is already accustomed to working with the accounting profession. Such lenders understand how a business like yours operates and are familiar with the nature of your structure and revenues, so they can approach the underwriting with realistic expectations and an appreciation for the inherent risks.

Working with Oak Street Funding®

With a loan from Oak Street Funding, you can borrow against the future cash flows from your clients. It’s a solution other CPA practice owners have used to finance acquisitions, as well as other strategies for growth and competitiveness.

Oak Street can customize a loan for your needs and situation, up to $30 million, with terms up to ten years. The goal is to help you finance growth with minimal out-of-pocket cost by leveraging the power of your practice’s cash flow. Learn more or request a free quote at www.oakstreetfunding.com or 1-866-OAK FUND.

The strategic opportunities available to CPA practices are limitless. Access to affordable capital is the key to taking advantage of those opportunities, and Oak Street Funding has money to lend.

Whitepaper: Developing your pyramid of support

“ As technology grows in importance, having fewer professionals who are willing to take on equity partnerships could lead to shortage of investment capital.”

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About Oak Street FundingThe materials in this paper are for informational purposes only. They are not offered as and do not constitute an offer for a loan, professional or legal advice or legal opinion and should not be used as a substitute for obtaining professional or legal advice. The use of this paper, including sending an email, voice mail or any other communication to Oak Street, does not create a relationship of any kind between you and Oak Street.

Loans and lines of credit subject to approval. Rate may vary at any time. CA residents: Loans made pursuant to a Department of Business Oversight California Finance Lenders License (#6039829). Potential borrowers are responsible for their own due diligence on acquisitions.

1 RB Baker, Ronald J., “New model shuns time sheets, favors value creation,” Journal of Accountancy, November 2008.

2 GA Adamson, Gary, CPA, “The Inverted Pyramid,” adamsonadvisory.com, blog post, undated.

3 AA Accountants Advisory Group LLC, “Using Leverage and Balancing the Pyramid,” blog post, undated.

4 MA Hood, Tom, Maryland Assn of CPAs, “How to rebuild your pyramid,” blog post, August 29, 2014.

5 ibid.

6 Accountants Advisory Group LLC, op. cit.

7 AK Koltin, Allan D., “Why succession at accounting firms fails,” AccountingToday.com, August 21, 2017.

8 Accountants Advisory Group LLC, op. cit.

9 Adamson, Gary, CPA, op. cit.

10 Hood, Tom, op. cit.

11 Adamson, Gary, CPA,

12 Koltin, Allan, op. cit.

13 Baker, Ronald, op. cit.

14 Koltin, Allan, op. cit.

15 Accountants Advisory Group LLC, op. cit.

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