"An issue that many firms face is not having Partners execute governance documents and one reason is trusting that the process will work regarding paying out the unfunded deferred compensation retirement obligation. Sometimes younger Partners have a fear that the retirement "obligations" are unmanageable and Senior Partners fear that younger Partners do not have the ability to lead the firm. There is definitely a gap in understanding the dynamics of the succession process. In my opinion, education is the key; however, after twenty years consulting with firms, many times it comes down to proverbial trust.
R. J. Gallagher & Associates, Inc. can assist your firm in travelling the pathway to finalize the salient documents, create working succession plans and build safeguards to achieve desired results."
BOB GALLAGHER ON SUCCESSION ISSUES
The Big Trend
Firms are continuing to merge to address their succession issues especially when the average age of the Partner Team is over fifty and there is a lack of strong second team to lead the firm in the future. Despite attempts to remain independent, several firms must view the merger route as their only option.
The Unconventional Wisdom
If firms would like to remain independent, they will need to allocate more dollars to train and develop their future leaders. Firms will also need to hire a Director of Learning to assist the process as well as create career paths for Equity, Income and Contract Partners.
The Misplaced Assumption
For years many CPA Firms have made payments to retired Partners from operations in accordance with the terms of an unfunded Retirement Plan. As long as the firm developed new Partners and there was successful transition of the retired Partners' client base, the process has generally been successful. However, today we are in a much more knowledge-based profession where specialties are more the norm. What happens when the Partner who developed a litigation and business valuation practice retires? What happens when the Tax Partner who has many creative ideas to assist clients with tax issues decides to retire? Unfortunately, in many cases, there will be a reduction in the Firm's revenue since most of the business activity was centered around one individual. Who will provide such services in the future needs to be addressed by each Partner in their annual performance plan. Large firms have built a team of specialists; however medium-sized firms (ranging from $2 Million to $5 Million) are very vulnerable and may need to revisit their Governance Agreements and change some of the provisions.
The Watch List
The Big Four commissioned the consulting firm, CRA (Charles River Associates) to conduct a survey of the top companies to determine the potential reduction in Section 404 Work in 2006. The report stated that there would be an overall reduction of 40%. With this decrease, Big Four firms may reduce their workforce which would be definitely good news for second tier and other firms who need experienced professionals to assist them with their succession issues.
The Big Four will no doubt go after higher-end middle-market clients and build their other consulting services; however, it will be interesting to see how this will play out in a few years and whether there will be some relief in filling the void of experienced professionals in the marketplace.
Bold Prediction
With KPMG's problems and Grant Thornton's American unit now included in the Parlamat litigation, I am concerned about the landscape of our profession. Larger firms have made organizational changes to be insulated from catastrophic litigation. However, I don't believe that the "structure" has been tested in the courts. It is far reaching but AT&T was once split into several business. Could the Big Four or top three firms be broken up? No one ever thought that Andersen would go out of business. Andersen was under the impression they had a wonderful succession plan. It will be interesting to watch how this plays out. From a succession viewpoint, some larger firms may have some unexpected surprises.
Dated April 5, 2006
The Succession Plan includes:
Trust of Partners
Vision of the Firm - The need to decide if you will remain an independent firm
Governance Documents - Operating or Shareholder Agreements, Employment Agreements,
Deferred Compensation Agreements, Grandfather Clauses when necessary
Developing Future Leaders Program
Developing a Formal Succession Plan
Developing a Partner Admission Policy
Plan to Fund Retirement
Concern Over Unfunded Plan - Younger Partners
Merger Alternatives
Please click here for Bob Gallagher's
Succession Questionnaire: Vision = Planning = Succession = Independence
Succession Planning - Passing the Baton
Every firm has a lifespan or "life" - just as its computer equipment and its clients have a life within the firm. Yes, even clients. Not only does the personnel within the framework of a firm have a life, but so does the base on which the firm is built - its clients. Failure to acknowledge the life of each client leads to "failure" itself.
In today's environment, CPA's function as the M.D.s of their clients' fiscal health. Using this perspective, imagine a doctor relying only on existing patients! Over the course of 20 years, the practice would dwindle considerably. In order to sustain the practice, the doctor must continuously obtain additional clients.
CPA firms should not function any differently. A client will not be a client indefinitely. A number of clients will be lost due to normal business reasons. Therefore, it is of paramount importance that firms invest in new clients and also protect the "current client annuity" by implementing a formal partner/client succession policy to guarantee firm continuity in the future.
Surprisingly, many firms have an absence of "formal plans" for succession. Also, as some partners retire, it is necessary that the firm implement a succession plan for retiring partners. Again, this subject is important because, today, client services can be described as "building relationships." As a result, the "future annuity" is precarious unless there is an excellent succession plan for a retiring or withdrawing partner. With several business in their second and third generation, it also is important to plan for the future servicing of the client. An older partner may have a great rapport with the founder of the company. However, the second generation eventually will take over. The younger CEO may not have anything in common with the older partner. Therefore, the client is runner-up unless someone from the firm builds a relationship with the younger president and has an excellent communication stream. Therefore, whether a partner or a president of a company retires, succession planning must be a part of every firm's strategic plan.
Included in a "partner and client succession issues and plan" are two documents necessary for a smooth transition. Retiring partners should complete the first document three years prior to their retirement date. The second document should be completed for each client that is identified as "vulnerable" due to lack of succession planning.
Without such documents, there is a greater possibility that sufficient attention will not be paid to the existing client base represented by the retiring partner. Additionally, such a review further illustrates the necessity for the firm to attract and invest in new clients. Louis Pasteur once said, "chance favors the prepared mind." This comment certainly is appropriate for this topic.
During a period of partner transition, time is the best ally any firm possesses. For the most beneficial results, a firm should allow at least three years for the process to be effective.
Specify that the retiring partner notify the other partners three years prior to the expected retirement date. At this time, the retiring partner should suggest prospective successors capable of sustaining the existing client relationships. Do not rule out the possibility of bringing new talent into the firm if necessary. The managing partner should approve candidates.
From this point on, focus on the transition. The "protégé" should be introduced to the clients at planned meetings. Then, he or she should attend client meetings regularly with the retiring partner by the second year into the plan.
Prepare the protégé by informing him or her of recent engagements, history of relationships, business descriptions, etc. Discussions must be held between the retiring partner and the protégé concerning the client relationship - for everything from the client's needs to any existing problem areas.
As the newly assigned partner proceeds through the grooming process, the protégé and the managing partner should handle all day-to-day communications. Finally, the protégé is ready to handle every aspect of the client relationship while the retiring partner assumes a supervisory position.
Obviously, the sooner one can transition the accounts, the better for the firm. Today, many businesses are in their second and third generation. Thus, it is extremely important that younger partners are maintaining a relationship with those who will become the future leaders of the organization. These transition issues should be part of every firm's plan for the future.
If firms protect their annuities and invest in clients of the future, they certainly will extend their lives. However, today we find that several firms are married to statistics and they do not invest in the clients of the future. (Remember those initial clients with nominal billings that now represent a significant portion of your practice?) We also have to take into consideration that CPA practices that are changing from a compliance-to consultative-type practice obviously present additional problems because each year an individual partner has to replace his book of business for consultative-type work. Thus, if the individual with the expertise does not build a team with the firm to carry on the services once the individual retires or leaves the firm, the annuity will not be available to provide retirement payments.
Our profession is changing so dramatically that all firms must consider these issues in the development of their strategic plans. Yes - clients have a life and a firm has a life. As a doctor provides a check-up so a patient hopefully can live longer, CPA firms must continually perform their check-ups to lengthen their firms' existence.
In summary, if firms implement formal client succession plans, and invest in new clients, they should be able to secure future success. However, the best panacea is to realize that our profession is so competitive that survival in the millenium will be limited to those firms that constantly reevaluate their growth strategies.
Succession - Building the Team of the Future
Every firm has a life! When patients visit their doctors for their annual physical, they receive their report card and listen to their doctors prescribe medication or provide other salient advice to improve their health.
Likewise, CPA firms have to consistently monitor the health and well being of their firms. The longevity and health of a firm depends on many factors; however, the most important is the continued development of outstanding professionals to build a team for their future. An equation for firm health and success is illustrated in Chart 1.
Chart I
MP + MP + MP = MP
Managing People + Managing Productivity + Managing Performance = Managing Profitability
Each CPA firm must decide on its "Purpose." For example, one may wish to be a sole practitioner, make a good living and have no interest in "building a large firm." Another group of partners may decide that they would like to become a "regional firm" and control their destiny. And yet another group of partners may decide that they would like to grow their firm to a certain volume and then merge with another firm. However, regardless of a firm's purpose and vision, the key to extending its life is to recruit, develop and retain an outstanding team of professionals.
When a firm addresses the succession topic, there are two primary issues; replacing the firm founder and/or the managing partner and reassigning the client base to other partners. Whether the firm is identifying the future leader or the new partner assigned to serve the client, succession is all about developing the future team. The ingredients to building a successful team include the area shown in Chart 2.
Your firm's culture must stress the development of outstanding professionals, and actions must support every aspect of the developmental process. While it is true that larger firms have the resources to accomplish these objectives, smaller firms should also budget investment dollars for enhancing the development of their teams.
Chart 2
The Ingredients to Building a Successful Team
- An Effective Human Resource Management Program
- An Effective Orientation Program
- A Coaching and Mentoring Program
- A Staff Training Curriculum
- A Management Development and Leadership Curriculum
- Create a Leadership and Marketing Library
- A Program for Partners and Managers to Enhance Their Emotional Intelligence and Become More Effective Leaders
- Embracing the Attributes to Climb the Steps to Partnership
The opportunities for CPA firms are tremendous, but the shortage of skilled professionals is still acute and likely to continue to be so for the next several years. Positions in finance and industry will also tug at the available supply of CPAs. It is essential, therefore, that CPA firms retain skilled staff members.
We all know the feeling when outstanding professionals with years of experience walk into our office and close the door behind them. We are fairly certain we know what they are going to say. They have been offered another position, either with another CPA firm or in the industry, at a substantial increase in salary. It is an all-too-familiar story.
The concept of loyalty is also not what it used to be, either. Young people have seen their parents made redundant by companies at which they have spent their entire careers. Many, consequently, decide that being loyal to a firm is not worth it if opportunities seem better elsewhere. Some of the reasons staff members give for leaving public accounting to go into industry are poor supervision and training they have received, long hours because of inadequate staffing, unfulfilling assignments, a desire to receive recognition for a job well done and a need generally to work in a more positive environment.
However, those professionals with two to five years experience who are happy with their progress in their current position will generally not be in the market for a new position.
Work has always been pushed down to lower levels as more senior people leave a firm, but the demands made on staff with less than three years experience are greater now than ever before. Now, we expect three-year professionals who are still struggling to become technically competent to realize 1,700 chargeable hours, manage engagements and other staff and market services. Therefore, each firm needs to allocate additional training time for the less-experienced professionals to learn how to manage people and engagements.
Chart 3
Generally Why People Stay
- Job Satisfaction
- Challenging Work
- Effectively Building Relationships with Clients
- Freedom and Autonomy
- Continued Profesional Development
- Open and Flexible Climate
- Satisfactory Relationship with Boss
- Recognition for Success
Generally Why People Leave
- Job Frustration
- Non-Challenging Work
- Micro-Managed with Clients
- Less Freedom; Supervised, Little Autonomy
- Lack of Profesional Development
- Lack of Flexiblity in Work Climate
- Poor Relationship with Boss
- Lack of Recognition
By their third year, staff accountants generally are ready for new challenges. Through regular mentoring sessions, you can find out if people are happy, if they are learning and working with outstanding professionals, as well as if they want to continue to stay with the firm.
Effective efforts at staff retention would include programs to improve professional training and productivity, and give greater advancement opportunities to staff members. One way to keep professionals in public accounting, and in your firm, is to implement a self-development program, one aspect of which should involve staff enrollment in Dale Carnegie courses and joining Toastmaster Clubs to help build self-esteem and improve public speaking skills. Also, time management programs and technology training can help engagement efficiency and let staff know that the firm is keeping up with the latest technological hardware and software.
You might also consider staffing alternatives such as internship programs and hiring paraprofessionals and part-time employees to absorb some of the duties presently being handled by full-time professionals.
Some other practices that can help in retaining staff are implementing career-path programs, setting up training and educational game plans and reviewing the job environment and quality of work life in the firm. Open communication is a must, and each firm should have periodic retreat days so that salient issues can be discussed.
Each firm will need to increase their training budget to provide for management and leadership development training for their supervisors and partners.
If your firm is to achieve desired results, you must receive the cooperation of staff. You should be willing to change the environment in which people work and bring staff into the decision-making process as much as possible. One way to motivate young staff members is to discuss the many positive aspects of the profession.
CPAs must become better managers of people. This will necessitate developing leadership and communication skills. It will also require compassion, the ability to listen and conveyance of appreciation. Today, individuals want to enhance their emotional intelligence skills. There are five components of emotional intelligence. The first two components are self-awareness and self-regulation, which are applicable to the individual. The last three components are empathy, motivation and social skills, which are applicable to working with other professionals. Dr. Daniel Goleman authored a book titled EMOTIONAL INTELLIGENCE and is an authority on the subject. I would highly recommend that all partners and managers start to read about emotional intelligence and how they can improve their leadership skills. In many respects, obtaining upward evaluations and feedback from peers, staff and the managing partner through a 360-degree-feedback profile would be extremely helpful at the start of the process to improve one's emotional intelligence.
When I asked the participants in a Leadership Development Program who was the leader of their firm, they frequently mention their managing partner. The correct answer is that they are all leaders of their firm. Today, many firms have niche leaders, department head leaders, partner-in-charge of offices, etc.; therefore, partners and managers need to continue to improve their leadership skills as they continue to assume more responsibility.
The Millennium - Responsibilities of a CPA Firm Leader
Twenty years ago, a partner in a CPA firm was providing audit, tax or consulting advice and was required to bill and collect. Today, a partner has 12 responsibilities, which are outlined in Exhibit 1 (which you can find at the bottom of the RJG's Corner section of our website).
The key to performing these responsibilities is to be able to delegate; thus, the need of developing the future leaders.
Enhance the Firm's Orientation Program
Many CPA firms can improve their orientation programs. For example, before new staff members join your firm, send them a copy of David Maister's fabulous book, TRUE PROFESSIONALISM, and have them read six or seven designated chapters. During the orientation programs, there should be a one-hour discussion about the content of the chapters. The CPA is still one of the three greatest professions of our time and new recruits need to understand that they are entering a profession and must read outside the office about various technical and business matters. Every six months, they should be assigned to read another book such as THE 7 HABITS OF HIGHLY EFFECTIVE PEOPLE, by Stephen Covey, and have a discussion with their advisor/mentor about the key points of the book. Exhibit 3 (which you can find in the Recommended Reading List section of our website) contains a reading list that can be used as a resource in providing reading assignments to the professional staff.
Creating a Mentor Program
Another area that needs to be reviewed is a firm's mentor programs. I have visited firms that have had excellent results with their mentor programs as well as those with mixed results. The key is to have a commitment from all mentors that they will perform their responsibilities.
Someone recently said that their firm doesn't need a formal mentor program as they are mentoring their professionals on a daily basis. My comment was, "You are coaching people on a daily basis just like the coach of any sports team." However, you are truly mentoring when you are having discussions regarding their career path and long-term objectives. A monthly luncheon meeting should be held outside the office to discuss the professional's career path and other issues salient to the continuing success of the individual.
Business is a Broadway play and we are on stage every minute of every day. Although we don't receive a standing ovation, you must motivate, coach and mentor the professional staff on a daily basis. Clients stay with the firm because of several factors, but the overriding one is that through your service, you demonstrate that you care. This hallmark word is also the key to retaining outstanding staff.
In his book, MENTORING PROCESS FOR CPAS, Dr. Rex Gatto outlined the benefits to a mentor program outlined in Chart 4.
Training Curriculum
A firm should have a training curriculum for each level; for example, a training grid for years one to five, which will include sessions on the following subjects:
- Technical - Audit
- Technical - Tax
- Technology - Software
- Marketing - Building Your Network
- Business Development
- Reading Program
- Process Efficiency
Chart 4
Mentor Benefits
- Enhance communication skills
- Develop sensitivity toward work and interpersonal skills
- Rethink, feel and re-experience the workplace as you did earlier in your careers
- Develop employee; not just evaluate
- Support the work in a development manner
- Develop rapport with a less experienced employee to address family and work issues
Firm Benefits
- Improve profitability
- Reap earlier contributions by employees to the firm
- Reduce turnover of effective employees
- Set up win/win situations
- Satisfy Clients
- Strengthen culture
- Pass core values from generation to generation
- Achieve cohesiveness
- Develop future leaders
- Achieve consistency
- Strengthen the firm as mentors develop and enhance their skills
Management Development and Leadership Curriculum
A Management Development and Leadership Curriculum should be developed for professionals with six to ten years of experience and would include the following subjects:
- Technical - Tax - Audit
- Increasing Emotional Intelligence
- Practice Management - Key Performance Indicators
- Business Development-Sales
- Enhancing Management Skills
- Effective Coaching and Mentoring Skills
- Reading Program
- Enhancing Presentation and Public Speaking Skills
Enhancing Presentations and Public Speaking Skills
In his autobiography, Lee Iacocca stated that one of the main reasons that he was successful in the business world was because he attended the Dale Carnegie program and enhanced his public speaking skills. I have always felt that one of the best ways to build individuals' self-esteem is to have them enhance their public speaking and presentation skills. We are onstage presenting reports and information to clients and presentations to prospective clients. With video conferencing, everyone will be onstage on a daily basis; thus, it should be part of the manager and leadership curriculum to include sessions on enhancing presentations and public speaking skills.
Leadership Marketing Library
Each firm should create a marketing and leadership library and a list of recommended books, such as the one in Exhibit 3. Additionally, audiotapes of selected books should also be maintained in the library. The designated librarian would have specific responsibilities to disseminate information about new periodicals and books that have been added to the library. I also recommend that the firm subscribe to the HARVARD BUSINESS REVIEW series and also visit their Web site, Harvard Business Online, for updated information.
Exhibit 4
Attributes for Future Partners
- Integrity
- Investment in the future
- Shared values
- Trust
- Competence
- Marketing contribution
- Community involvement
- Staff development, coaching and mentoring
- Identifying experienced talent
- Strategic contributions
- Communication skills
- Contributions to management
- We operate as one, not as a group of sole practitioners
- Administration portions of practice
- Achieving pieces of strategic goals
- Risk taker
- Cross-serving clients
- Develop niche and brand
- Respect within the firm, staff and community
- Innovative
- Contributions to firm culture
- Leadership position in the community
- Business maturity
- Confidentiality regarding firm issues
- Economic contribution
- Self-development improvement
- Willingness to learn-not satisfied with status quo
Climbing the Steps to Partnership
In Exhibit 4, the chart outlines the attributes that need to be acquired as one moves up the ladder. Many times an individual who is a supervisor or manager is unaware of the criteria, attributes and other elements of the firm's Partner Admission Policy. It is important that such professionals be informed as to the steps that need to be climbed to achieve their dreams of being a partner in the firm.
What are the attributes that you are looking for in a future partner and what are the financial arrangements? Each firm should consider developing a partner admission policy establishing the criteria and reviewing the document with managers and senior managers.
Exhibit 5
Climbing the Steps to Partnership
Leadership Development and Reading Program - Continuing Leadership Training
The Key to Success
Ownership/Partnership
Refocus Your Vision and Goals
Converting Referrals to Clients
The Best Tribute for Client Service
Marketing Self
Will Materialize When You Market the Firm
Marketing the Firm
Being Visible in Community and Proactive with Clients
"Dig Your Well Before You're Thirsty" by Harvey McKay
Building Your Valuable Network
Business is Business
Managing Engagements and Fulfilling Practice Management Responsibilities
"Business Is a Broadway Play"
You Are On Stage Every Minute & Must Serve as an Excellent Mentor
Helping to Create and Excellent Work Environment
Enhancing Communication Skills
Public Speaking Should be Fun to Do
Managing & Motivating People
Acquiring "Emotional Intelligence" Key to Becoming an Effective Leader
Self-Awareness, Self-Regulation, Motivation, Empathy & Social Skills
Technical Proficiency - Work Ethic - Adhere to Firm Culture
Without These Attributes, the Climb is Difficult
Conclusion
During the past 25 years, I have had the privilege of presenting various Management Marketing, and Leadership Development Workshops to over 1,500 managers and new partners. It has been a refreshing experience to spend time with outstanding professionals. The participants always have a tremendous thirst for knowledge and have a strong desire to succeed. It is incumbent on CPA firms to continue to invest in their professionals so that the succession process will be extremely painless and allow for the firm to age gracefully.
As I mention at the end of each workshop, the participants' mission is to develop outstanding people and to provide outstanding client service. These two attributes will always be the hallmark for continued success and firm longevity.
Upstream Academy is about real-world solutions, proven tools and processes that will take you, your firm, or those you serve to the next level.
Please click here for a PDF brochure on Upstream Academy's services and here for information on their "Succession Boot Camp" seminar.
R.J. GALLAGHER & ASSOCIATES, INC.
Management, Marketing & Educational Consultants
Chatham Tower, Suite 1-L 112 Washington Place
Pittsburgh, PA 15219-3504
412/281-8559 - 412/281-2115 FAX
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