It’s not new news that we are in a state of disruption and investment due to the projected abundant future in our profession. Whether you are the CPA firm choosing to stay the course, looking for the right capital partner, or a private equity group or other entity, there’s so much to gain by understanding the cultural divide and the questions that might lead to a better path forward in whatever choice you make.
It all begins with radical candor around these cultural differences. And if you are the CPA firm choosing to stay the course, how do you modify your business model and strategic growth to compete with the new competition? Some of those answers lie within these observations.
Eye-opening awareness
Historically, our profession did not require all the ways of the corporate world. We were not even permitted to engage in promoting our services until the 1970s. I will defend our market by saying you don’t work on business challenges you don’t have! But the future will look much different, as we are at an inflection point.
It may appear that I am painting our entire profession with the same brush. Many upmarket CPA firms do look much like the corporate world. But as you work your way downmarket, the differences become more apparent.
1. Oversight and governance. Corporations, even privately held ones, more often than not answer to an outside board of directors that offers counsel and scrutiny, a structure unknown in all but the largest accounting firms. In others, the top of the firm might include an executive committee of partners who own and also work in the firm. Where the hierarchy of “bosses” in big business is generally revered and respected, the partner model looks more like the knights of the Round Table. Despite many plusses, the downside is often weak accountability. Another challenge is that many junior members aren’t entirely sure who they report to.
In corporations, everyone aspires to lead, with constant jockeying for position. Grooming is broad and deep. Our managing partners, by contrast, are often reluctant recruits. I often hear, tongue in cheek, that a partner left a meeting to take a break and upon returning had been elected managing partner! A partner’s success and standing are often tied to their individual book of business, not necessarily to their leadership potential. In comparison to the corporate world, CPA firms pay scant attention to preparing future leaders.
2. Competition. Corporate America is fiercely competitive. I was employed in one company that was a gloves-off shark tank where adults ate anything in their way! Accounting firms enjoy collegial relations with their competitors; managing partners meet regularly to share best practices and address mutual concerns. That approach influences a lot, including the way opportunities are developed and closed.
3. Regulation. Big business is a relatively free-market environment where exploration and innovation are valued. Accounting, however, is rooted in regulation and constrained by compliance. Creativity is not necessarily a desired attribute.
4. HR. Human resources in companies is generally a well-developed and respected business function. Corporations invest heavily in their employees’ happiness and growth, often reaping the loyalty benefits that result. On Planet CPA, HR remains woefully underdeveloped.
5. Strategic growth. In corporate settings, strategic growth is the mother’s milk of success; in CPA firms, intentional, future-oriented growth is often considered an extracurricular activity. A few natural rainmakers, especially as you go downmarket, will carry the heavy load of revenue generation. But since the majority of our revenues are annuity in many firms, broad-based growth initiatives are only needed when these rainmakers start retiring.
6. Financial analysis. This may shock those outside the profession who know us as bean counters, but the financial analysis that underpins strategic growth, so common in business, is woefully lacking in our firms. We simply haven’t needed the deep dive. What’s more, our practice management systems have not lent themselves to data analysis. As a result, we know little about our market shares, most profitable industries/service lines, average client and transaction sizes, etc. And we generally lack the expertise to figure it out.
Because our firms are highly regulated, the price is steep if mistakes are made. Technical training and professional excellence must be job one. Our “franchise” on audit gave us excellent market conditions so we could create value for clients, make a good living, and not duke it out in the market. And tax services are a natural, synergistic fit.
In our highly regulated environment, accuracy is critical. This imperative, along with a partnership governance structure, has led to an overall measured and deliberate pace. Clients stay with a firm long term, often for decades. The CPA mindset is long-term-relationship-driven. Private equity, by contrast, is faster-paced and more transaction-driven. I first experienced the stark difference when I noticed that prospective CPA clients spend an hour getting acquainted in our first meeting. My typical PE prospects give me 30 minutes. This is just one example of the pace and speed differences.
For private equity organizations crafting acquisition strategies, and for the firms they are eyeing, it’s essential to understand these distinctions — cultural differences to respect, business challenges to overcome, and the potential for 1+1 to equal 3 or even more!
With the courage to have candor about these potential cultural differences, I believe many organizations and firms will find more 3s at the end of the equation. What do you have to lose? There’s so much to be gained by understanding these potential speed bumps!
Joey Havens, CPA, contributed to this article.
