Why Management Is the #1 Key to the Firm’s Success

Do you want to get by, or be the best possible?

By Marc Rosenberg
The Role of the Managing Partner

There are three critically important words in the title of this post:

  • Management
  • #1 key
  • Success

MORE: Herding Cats: Advice for Managing Partners
GoProCPA.comExclusively for PRO Members. Log in here or upgrade to PRO today.

This post drills down on each of these words to help drive home our central theme: why management is the single most important factor in a CPA firm’s success. It matters even more than bringing in business, more than having great clients and staff, more than doing quality work.

What We Mean by Management

Let’s get off to a good start by briefly summarizing what management is.

Management of a CPA firm encompasses both management and leadership and includes:

  1. Being visionary. Always thinking about what the firm should be tomorrow. Never being satisfied with the status quo. Ever.
  2. Making the vision a reality.
  3. Clarifying the roles of all firm personnel, including partners. Helping them succeed. Showing them how they fit in.
  4. Holding firm personnel, especially partners, accountable for their behavior and performance.
  5. Getting results through other people.
  6. Getting people to follow.
  7. Establishing an effective organization structure. The managing partner cannot possibly do everything and shouldn’t even try to do everything. Management embraces delegation, not doing, especially by partners. Effective CPA firm management adopts the corporate, not the partnership, style.

Now we’re ready to move on.

What Is Success?

This post title is about managing the firm to be successful. Let’s examine what it means to be a successful CPA firm.

Success means different things to different people. Contrary to what many firms practice and believe, success is not solely defined by profits.

Most people define success at a CPA firm by these major features:

Growth. With CPA firms, when you stagnate, you die. Just as blood provides essential nutrients to the body, growth does the same for a CPA firm. Growth invigorates the firm and makes people excited to come to work. All firms lose revenue every year, and it needs to be replaced just to stay even. Growth provides personnel with learning opportunities and work diversity. The nature of CPA firm profitability is such that top-line growth falls directly to the bottom line. When growth is flat or declining, the firm becomes dull, complacent and less profitable, all of which leads to unhappy, unproductive people.

Great people. Contrary to the nerdy technical image that many people have about CPAs, operating a CPA firm is a people business. Progressive firms truly believe their staff are just as important as their clients and prove it every day by their actions. Clearly, firms that have ambitious, passionate, engaged, highly competent staff will enjoy success in all areas of firm operations, which always has a positive impact on profitability.

Great clients that firms can grow with are those who pay their bills, stay with the firm for a long time and are raving cheerleaders who refer others to the firm. All clients are not created equal. Firms prefer clients that are larger and more business-oriented than 1040-oriented, and need higher-level expertise rather than generic services.

Productivity. Personnel spend their time wisely because they know time is the scarcest of all resources. Productive use of time is not just about billable hours. The effective use of nonbillable time is also important, especially for partners. Efficient systems and work processes are in place to enhance productivity. Solid training is provided to firm personnel, not just in technical areas, but in soft skills as well.

Solid management and governance structure. The firm has effective leaders and an effective organization structure that is appropriate for its size. This structure may include positions such as the managing partner; COO; firm administrator; directors of marketing, IT and human resources; an executive committee or board; department heads; team leaders; and office PICs. This area also includes policies, procedures, work processes, systems and the like.

Quality work and world-class service. These attributes super-please clients and cause them to keep coming back. These traits enable firms to satisfy clients’ needs while upholding the highest degree of professional competence and ethics.

A strong culture and set of core values. These values are not merely in people’s heads but are in writing so that it is crystal clear what they are. Everyone is on the same page. Personnel work well as a team.

Profits. I saved this one for last because when all the items above are firing on all cylinders, profits will come. Certainly profitability isn’t the end-all, but its impact on happiness and the firm’s sustainability is indisputable.

Is Management Really the #1 Key to Success?

So far, we’ve defined management and summarized what success means. Now it’s time to put it all together and discuss why management is the #1 key to success.

There are 44,000 CPA firms in the U.S. An elite group of firms comprise the Top 100. #100 increases in revenue size every year, but let’s call it $40 million to $50 million. These firms enjoy dramatically higher growth and profitability than the other 43,900 firms. The average income per equity partner of the Top 100, excluding the Big 4, averages $600,000 to $1 million. The average of multipartner firms below the Top 100 is roughly $450,000. That’s quite a difference.

Why the big gap? I will argue that the differentiator is strong, effective management and leadership. I’m quite sure I’ll get no objections from the Top 100 managing partners and leading CPA industry consultants. The reason for this is simple: Strong management makes all the other factors that comprise success happen.

How Strong Managing Partners Make All the Success Factors Happen

Managing partners have a strong hand in the areas below.

Revenue growth and business development. The managing partner, together with a marketing director, ensures that the firm

  • Has a marketing plan.
  • Has partners who are active in business development, including it as one of their goals and establishing a strong link between business development and compensation.
  • Provides continuous training in business development.
  • Establishes lucrative financial incentives for all personnel to identify leads and close new clients.
  • Encourages partners to focus on a CPA firm’s best source of new business: its existing clients.
  • Oversees a partner compensation system that puts relatively little weight on billable hours and replaces it with hours spent developing new business and mentoring staff.
  • Provides a diverse portfolio of client services to satisfy clients’ expanding needs.
  • Establishes specialties and niches.
  • Pursues mergers as a major contributor to revenue growth.

Staff. The managing partner personally ensures that the firm walks the talk when it says that staff are as important as clients. Examples of how managing partners do this:

  • Helping to recruit star performers at other firms.
  • Providing university-style, curriculum-based training.
  • Linking compensation for partners strongly to the extent to which they help staff learn and grow.
  • Mentoring.
  • Developing leaders.

Technology. Managing partners don’t have to be IT gurus. But there are things they personally do to ensure that the firm is using technology fully to make their firms as efficient as possible, provide superior service to clients and improve profitability:

  • Hire an IT director who is a strategic thinker with management skills in addition to strong technology skills. This person should be an integral part of the management team and a deep thinker, not just the stereotypical, uncommunicative techie.
  • Network with managing partners of other firms to stay in touch with what they are doing in the technology area.
  • Meet regularly with the firm’s outside IT consultant. Note: Regardless of how effective your internal IT director is, all firms should regularly consult with outside IT consultants who work exclusively with CPA firms to get their input on the state of the firm’s technology.
  • Deliver cutting-edge technology to the firm and its personnel.

Quality work. Managing partners must do whatever it takes to ensure that work performed by the firm is always at a high level, consistent with the profession’s ethics. This must be non-negotiable. Quality control procedures, including training in key areas, should be in place. Managing partners make it clear that deliberate and continual noncompliance with these quality control processes is grounds for dismissal.

World-class service. Like performing quality work, providing clients with world-class service is not a standard any successful firm can opt out of. Retaining clients and growing their services are the best ways to demonstrate such service.

If managing partners look at their jobs as personally making sure that the firm excels at all these areas, you can see how their hands-on attention and followthrough make management the biggest contributor to the firm’s success.

Can Firms That Lack Strong Management Be Successful?

I knew you would ask this. I must be honest and say that it is possible. But how long can it be sustained? This is less clear.

Owning and operating a CPA firm is often a very lucrative business. (I wish partners in firms would spend more time sharing this fact with their staff, whom they wrongly accuse of not wanting to be partners.)

Even if a firm lacks effective management, it is still possible to earn good money if a high percentage of the partners have advanced skills bringing in business and the technical and client service skills to super-please their clients. But please understand this: These firms are in the minority.

There are two common scenarios where firms lack effective management:

  1. The case where a firm chooses not to invest in management. At these firms, partners feel that they are perfectly capable of running the firm as a group. They tend to be skeptics about the benefits of management; they feel that there isn’t much that a managing partner can do to impact the firm. They aren’t comfortable maintaining the relatively high income level of a partner who sheds billable hours and clients to free up time to manage. They don’t trust one person to be in charge, and they certainly aren’t willing to vest enough authority in the managing partner so he or she can do the job. Partners at these firms believe in the partnership style of governance and are big proponents of democracy. They scoff at the notion that management is the most important success factor.

As firms pass the $10-$15 million revenue mark, they find that the partnership philosophy is less and less viable.

  1. I often sing the virtues of having an effective managing partner. As a practical matter, many firms (more small ones than large ones) simply don’t have a partner with the skills to be an effective managing partner. If truth be told, a sizable percentage of all firms under $10-$15 million don’t have such a person.

Firms like this have a hard time crossing the $10-$15 million threshold unless they are effectively managed.

The question to ask is not “Can a firm be successful without strong management?” (It is possible but rare.)

The correct question is “Can the firm be MORE successful if it has strong management?” The answer is a resounding “yes.”

Leave a Reply