“Accounting Firms of the Future –
How firms can survive and succeed”
Tuesday
February 8, 2011
CEO
Koltin Consulting
Group, Inc.
Chicago, Illinois
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Industry Update
History Lesson 101
The Interrelationship of Strategy, Governance and
Compensation as a firm grows
Toughest Challenges as Firms Grow
Lateral and Merged Partners
Leadership
Firm Profitability
Using Partner Compensation to Improve the Firm’s (and
Partners’) Performance
Various Changes Necessary in Traditional Partnership
Structures
Necessary Changes to the Partner Agreement
Mergers, Acquisitions and Divestitures
Leaders as Change Agents
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 Sacred Cows go
firms realized
home!
record profits in
2008.
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.”
Flat is up!
Did we just go
full circle on the
“commodity
thing?”
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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
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 Strategies are
Back!
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RSM McGladrey/M&P
Grant Thornton
BDO Seidman
CBIZ/MHM
Crowe/Horwath
BKD
Moss Adams
Plante Moran
Baker Tilly VK
EisnerAmper
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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
Strategy
Compensation
Governance
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.
# of Partners
2–6
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
Revenue
$5-$10 million
Governance
Managing partner elected (more
administration than real management).
Also, management is not valued as
highly as client service or new business.
# of Partners
4 – 12
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
Revenue
$10-$30 million
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
Door #2
Door #3
Ground Hog Day
Major
Reconstuctive
Surgery
Let’s Merge Up
into Someone
Else’s Playbook
No Pain – No
Gain
Will look
better, but at
what cost?
Interestingly,
the results from
doors 2 & 3 are
the same
Cruisers
v.
Dynamos
Types of
Services
(Type 1 v.
Type 2)
Market
Share/Desire
to Expand
Geographically
Relationship
v.
Servicebased
Partner
Future
Survival of
the Firm
Size
of
Firm
Leadership
Talent
First
v.
MultiGeneration
Firm
Rainmaker
“Lite”
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Number of Services Used
◦ 1 service
◦ 2 services
◦ 3 services
◦ 4 services
◦ 5 services
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Probable Retention Rate
◦ 12%
◦ 24%
◦ 63%
◦ 81%
◦ 98%
Mandatory shift – from “renting” clients to actually “owning” them.
Leadership
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Competitive Spirit
Clutter
Cohesiveness
Candidness
Crystal-Clear Vision
Curious
Contagious Enthusiasm
Crazy!
Change Agent
Communication
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6)
What professional characteristics would you want to see in the
next MP?
What personal characteristics would you want to see in the
next MP?
As you reflect on the biggest challenges facing the firm over
the next 5 years, what are they?
How should the MP’s performance be measured?
Do you envision the structure of the MP position potentially
changing in any way?
Would this person be interested, have the backing of the other
partners and give up their workload to make this position
successful?
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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
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Empowered with overall responsibility to manage growth, profitability
and overall resources of the Tax Department.
Recruitment of new tax talent to the firm.
Mentoring and development of existing tax staff and partners.
Responsible for leading new product/service department ideas for the
Tax Department.
Oversight of tax training and technical issues as they relate to members
of the Tax Department.
Oversight of utilization scheduling and realization of Tax Department
members.
Establishment of tax members’ billing rates, as well as helping establish
fees on larger tax engagements.
Meets monthly (or quarterly) with tax partners and managers to coach
and counsel them on individual performance.
Responsible for overall client satisfaction (both internal and external
clients of the firm).
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
Engagement
Budget
START
FINISH
Engagement
Planning
Staffing &
Scheduling
Client
Acceptance
Engagement
Management/
Utilization
The
Client
Client
Satisfaction
Collections
Relationship
Management
Billing
Surprises/
Change Orders/
Revisions of
Completion Date
Using Partner
Compensation to
Improve the Firm’s
(and Partners’)
Performance
Unified
Firm*
Strategy/
Vision
Individual
Partner
Goals
Firm
Governance/
Accountability
*Includes Department, Office and Industry Team
Goals
PerformanceBased Partner
Compensation
Is Your Firm a Book-of-Business
Firm?
Originating
Partner
(Aggressive Alvin)
CLIENT
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 SCHOOL
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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 SCHOOL
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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 worth
Doesn’t always make sense
Values can change annually
Occasionally have to over pay
Individualized off-season training
Individual goals & measurements
differ
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Salary vs. risk dollars
Open vs. closed compensation
Formula approach vs. individual partner
goals-based approach
Various Changes
Necessary in
Traditional Partnership
Structures
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One tier
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Two tiers
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Three tiers
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Four tiers
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Five tiers
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Six tiers
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Seven tiers
◦ equity only
◦ equity, income
◦ equity, limited equity, income
◦ equity, limited equity, income, principal
◦ equity, limited equity, income, principal, retired
◦ equity, limited equity, income, principal, retired, contract
◦ equity, limited equity, income, principal, retired, contract,
special*
*has not ‘officially’ retired but, based on
performance, one would think they ought to!
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More activity in last 5 years than in last 20
years
National firm partners have successfully
integrated into local, regional and middlemarket 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!
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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”
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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
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Non-solicitation provisions as they relate to:
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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!
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Liquidated damage provisions when partners
take clients
◦ 100% vs. 150% vs. 200%?
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Multiple of salary
Ownership percentage (times revenue)
Agreed upon fixed price
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None!
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*Also needs to address length of payout, vesting,
payment restrictions, non-compete provisions, etc.
Mergers and
Acquisitions
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M&A Frenzy of 2010 is continuing in 2011
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2010 was a record year for mergers and
acquisitions
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Top 100 firms continued their record pace
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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!”
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Firms don’t merge – people do! Remember to
“drill down” to everyone’s personal agendas
One size doesn’t fit all (cash for some, equity for
others, a job for some!)
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)
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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?
Don’t sweat the small stuff!
Don’t underestimate the psychological effect of
“giving up control.”
Don’t forget to always understand the “other
firm’s” perspective on things.
Leaders as
Change Agents
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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!
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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 60611
312.245.1930 (phone) 312.245.1935 (fax)
[email protected]
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