By James J. Caruso, CPA, CGMA
Management styles in public accounting firms are quite different from other businesses. Entrenched behaviors at CPA firms – particularly in small firms, but also in some larger ones – conflict with the good management practices in a “corporate” setting in most other industries. Here are a few areas of difference that small firms may want to review.
Leaders must delegate. In other words, they must do their work through other people. In a LinkedIn piece, Jack Welch, former chairman and CEO of General Electric, noted that it is not a leader’s action as an individual that matters; what matters is supporting and nurturing a team, and deriving success from the success of the team. However, the typical small CPA firm culture fails to recognize or develop this type of leadership. Traditional metrics that focus on individual performance – billable hours, revenue generation, size of “book of business,” etc. – reward doers and managers, not leaders that build and nurture teams. Similarly, the incentive to build a personal brand and imminence in the marketplace encourages partners to keep themselves in the limelight with speaking and writing opportunities rather than sharing these opportunities with others. On paper, CPA firms may invest heavily in professional education, but outside of formal training programs most incentives and metrics lead to a focus on tasks, output, and busyness to the detriment of time spent developing talent.
Leaders should focus on culture, vision, and strategy, but partners at smaller CPA firms spend far more time working in the business instead of on the business. This can result in ill-defined strategy. Smaller firms often take whatever business they can get, without regard to strategic positioning and the accompanying trade-offs. Examples of this conflict include aiming to be a “low-cost provider,” but still customizing every engagement to client whims; or pitching a “Ritz-Carlton” type of client experience, but holding employees to metrics that deter them from delivering high-touch services. CPA firms’ traditional emphasis on individual contributions, measured by billable hours, revenue generation, service delivery, and technical proficiency differs from the management skills valued in a corporate setting, such as strategic and tactical development and planning. Even the managing partner of a smaller firm is typically pressured by his or her other partners to retain a book of business to avoid becoming “overhead,” instead of being given the freedom to focus exclusively on culture, vision, and strategy – which would lead to revenue and earnings growth for all partners.
Sales and Marketing
Generating new business is a critical success factor to become a partner and to succeed at that level. Yet, many CPA firms do not look for the necessary attributes when recruiting, nor try to develop them until later in a professional’s progression. Smaller CPA firms also tend to confuse sales, business development, and marketing, failing to appropriately establish any of these functions with proper leadership structures or integrate them with each other and with overall firm strategy. Here, too, individual incentives lead to dysfunction, as professionals scramble to take responsibility for new business leads. Poorly conceived lines of accountability within matrix management structures at CPA firms can fail to support growth initiatives. For example, conflicts arise when revenue-generating groups need approval of sales and marketing expenditures from a cost center leader who has the incentive to minimize selling, general, and administrative expenses.
CPA firms – both small and large – too often use measures that are, at best, convoluted, and, at worst, may lead to poor decisions. Why use proxy metrics such as “realization” (percentage of “standard” hourly rates received) instead of margin (net revenue less direct costs) like every other business? Hourly billing rates for lower-level staff typically reflect much higher markups than for senior staff, managers, and partners. Therefore, a lower realization for a junior accountant may actually generate more margin than a higher realization for a manager or partner. Yet, many firms hold all engagements to the same realization target, ignoring the mix of resources and ultimate margin on an individual engagement. Some firms focus on average hourly billing rates, setting one overall target and always trying to increase it, failing to consider that leveraging a greater mix of lower-level staff decreases the average hourly billing rate even as it actually increases margin. Adherence to realization and average hourly billing rate targets may lead to turning away business that may generate incremental margin dollars during a seasonally slow time of year. Another issue, even at large firms, is holding every practice area to the same financial metrics. Would the same thing happen in retail? For example, does Home Depot expect margins in its garden department and its kitchen-and-bath department to be the same? Of course not. Similarly, firms fail to look holistically across their business portfolios. Is it not potentially worth taking on an engagement at lower rates, or to offer a certain service as a loss-leader, if it generates business in other areas? Larger CPA firms are in some ways guiltier of focusing on the wrong metrics because those leaders manage from afar, exclusively “by the numbers,” and ignore the intangibles that are used to evaluate leaders in corporate environments.
CPA firms specialize in the rigor of checklists and compliance, leaving little space for creativity, which is further constrained by the unrelenting emphasis on billable hours and engagement economics. There is little or no “R&D” in smaller CPA firms. Even some large firms, victims of the institutionalized culture of time-tracking, have their professionals segregate innovation efforts from chargeable time, when the reality is that knowledge work should always have elements of both, without having to be bifurcated in a time entry system.
Why, instead of “price,” do CPA firms always refer to “fees,” suggesting that there is a penalty for doing business with them? The custom of quoting ranges or, worse, open-ended amounts for “time-and-materials” engagements is also off-putting. Imagine going to the grocery store and not knowing the final price until you check out at the register. The whole concept of billable hours can be perverse. I am far from the first to rail against the system. (See the work of VeraSage Institute’s Ronald J. Baker and many others; also check out VeraSage.com.) Billing by the hour measures effort, not value; it punishes efficiency and rewards inefficiency. If CPA firms continue to view time as their primary currency, what will happen as artificial intelligence and robotics take over accounting tasks? On a fixed-fee engagement, the opposite happens – speed becomes priority, leading to the risk of error, eliminating time to think and innovate, and discouraging collaboration. CPA firms should establish dedicated, professionalized pricing functions. Perhaps airlines are a good model. Although they are probably nobody’s favorite industry, they do have something to teach CPA firms about optimizing price based on real-time response to market demand and resource capacity.
The traditional CPA firm management style is often antithetical to leadership and management best practices found in corporate environments. If leaders in public accounting are willing to rethink entrenched practices, and adopt a more corporate management style, they will be on their way to running their firms more like businesses rather than as collectives of professionals. Smaller CPA firm leaders will finally be able to work on their businesses instead of in them.
James J. Caruso, CPA, CGMA, is CFO of Simplura Health Group and a former partner in both a Philadelphia regional CPA firm and a national firm. He can be reached at email@example.com.
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