It’s not easy to rightsize a small or midsized CPA firm, but many firm leaders can and must do a much better job when it comes to outplacing unproductive partners and managers.
Let’s dissect the problem and offer some guidance for improvement. Because so many managing partners struggle with outplacing unproductive partners and managers, it’s helpful to start with some benchmarks and take a hard look at productivity.
Firms doing at least $20 million in annual revenues are hitting these benchmarks today:
Fees per equity partner: $2,100,000
Earnings per equity partner: $635,000
Staff to equity partner ratio: 8:1
Average equity partner billable hours: 1,100
Average manager billable hours: 1,600
The numbers are different for smaller firms. For firms doing under $10 million, annual fees per equity partner are about $1,300,000, earnings per equity partner are just under $400,000, staff to equity ratios are about 5:1, and average equity partner and manager billable hours are 1,200 and 1,800, respectively.
So, if your firm isn’t consistently hitting the numbers in your appropriate “bracket,” does that mean you aren’t rightsized?
More than likely, yes.
There is no question that the most profitable CPA firms (those with the highest average equity partner earnings) have figured out that leverage and a well-managed partner/staff pyramid is one of the key ingredients for success. Many firms, however, struggle with just the opposite — an upside down partner/staff pyramid where there are too many partners and managers, too few staff and too little use of technology.
CPA firms didn’t get to an upside down pyramid overnight. Many wind up with top-heavy firms due to a number of factors including:
- Generational issues, including the baby boomer bubble (many partners between 55 and 65 years of age), Gen Xers and Millennials (who don’t aspire to partnership and prefer multiple employment moves throughout their careers).
- A lack of sufficient talent and consistent, effective recruiting and staff development processes. Many firms don’t have a process for bringing in quality recruits and generally let senior journeymen (professionals who are doing an adequate, but not an exceptional job, and have little, if any, prospects for advancement) stay on the payroll too long.
- Promoting non–partner-track people or marginal staff to higher positions because “we’re preserving staff continuity” and “it’s best for the client.” This typically occurs because it is the path of least resistance or if the firm lacks aggressive up-and-comers.
- Performance management and compensation plans for partners, and managers who focus too heavily on chargeable time and billing runs. Partners gravitate to manager work and managers gravitate to senior work.
- Partners and managers may say, “It’s just easier to do it myself and besides I’m a lot more efficient at it.” How many times have we heard these words from partners and managers?
Ouch! So, what do you do if you have an upside down partner/staff pyramid? First of all, you need some time to work out of this terrible spiral. You didn’t get there overnight, and you won’t fix it overnight, either. My advice is to begin the “fix” by prioritizing and dealing with the following issues:
If you don’t have a staff recruitment and development plan for your firm, create one. It should include the commitment to always be hiring, whether you need people at the moment or not. This allows you to continuously bring in new blood. But they must meet the firm’s expectations for performance, growth and advancement over a reasonable period of time. If they don’t, they will have to leave the firm. Manage the turnover and the cream will rise to the top.
Tell your people the truth. You have managers who are never going to be partners. You have non-equity partners who are never going to become equity partners. You have equity partners who have retired but still come to the office to collect a paycheck. Tell them it is probably time to move on. More than likely, they already know it, but inertia may have set in and they lack the motivation and energy to look for a new position or to truly retire. If you have attempted to counsel unproductive partners and managers over the years, but nothing significant has improved, it is time to outplace those professionals.
Make sure your best and brightest take note that you are taking action with regards to the inverted pyramid. There are people in your firm today who are looking up at the layer(s) of people above them and thinking, “There is no way that I can ever make it through or around them in an acceptable time frame.” You can tell your “all stars” they are special and you will promote them until you are blue in the face. But talk is cheap and if they can’t see the path, they will leave.
Demographics in firms today indicate that fewer people than ever want to be equity partners. That’s because many are looking for a better work/life balance.
Treat your “rising stars” differently; pay them differently. Don’t get sucked into making everyone at a particular level look the same. They are not.
Don’t clog up your ladder with a large percentage of career people while you watch the “rising stars” leave. Perhaps this can be viewed as an up-or-out policy. So be it! You have a business to run.
Every once in a while, initiate a “push-down” of work at each level in your firm. People cling to the familiar and comfortable. It also justifies their existence. So, shake it up and ask everyone to push down 200 or so hours. You’ll free up your high-level people who are capable of creating new work, get more of the work done at the right level and give the younger staff some challenging work.
If you have a partner performance management and compensation plan that is heavily weighted toward billable time and a billing run, change it to a plan that is directly linked to your firm’s strategy.
Promote a work environment that embraces nontraditional staff and partners. Technology and remote connectivity have created opportunities to find great people. Use these nontraditional methods to identify and employ such people.
Grow! It will be very difficult to change the upside down partner/staff pyramid without a solid growth strategy of 6 percent (organic) to 8 percent (with mergers/acquisitions) for your firm.
To sum up, the undesirable but fairly common outcomes of an upside down pyramid are many: You have too few younger staff. You have a tough time keeping the ones you have busy. Truly talented staff, your “all stars,” leave because they don’t see any opportunity to advance in your firm. Managers and staff do the same work with the same clients year after year. You have a costly labor load and you have a difficult time collecting an acceptable billing rate for work that they have outgrown. Partners are busy with compliance work and are not cultivating the high-value consulting work.
Even worse, they aren’t in the marketplace developing new originations. And, worst of all, you don’t have the talent at the right levels to succeed as future partners who will help perpetuate the firm.