SUCCESSION MANAGEMENT: Its Not Just about the Managing Partner

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SUCCESSION MANAGEMENTIts Not Just about the
Managing Partner
MOORE STEPHENS NORTH AMERICA, INC.

• Dom Cingoranelli, CPA, CMC
• Exec. V-P, Consulting Services
• Succession Institute LLC

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Driving Forces That Will AffectYour Succession
Planning
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The Environment

• Demographic Forces
• Legislative/Regulatory Forces
• Technology Forces
• Marketplace Forces
• CPA Firm Practice Forces

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1. Demographic Forces

• Aging population
• Birth rate trends
• Boomers, Gen X, Gen Y/Millenials
• Gender trends
• Retirement trends

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Age of AICPA Membership as of 3/31/06
1. Demographic Forces
Over 38 of AICPA members are 51 years old or
older
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Increase in of Women Entering our Profession
Women make up 53 of AICPA members 30 years old
and younger, but only 30 of members 31 years old
and older
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Demographic Shift/Predictions

• Firms will have to become more accommodating to
  attract a growing part time labor pool
• Owners/managers need to improve supervisory
  skills
• There will be an oversupply of CPA firms for
  sale this will create some lucrative deals for
  younger people

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Demographic Shift/Predictions

• Today, there are 38,500 firms with 10 partners or
  less majority have lt2MM in revenues
• 15 years from now, there will be less than half
  that number
• Consolidation of firms could result in several
  hundred new, large players
• Limits to the roll-ups, though, driven by size of
  businesses the firms serve
• There will continue to be a place for all sizes
  of firms, there will just be fewer of them.

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2. Legislative and Regulatory Forces

• The ultimate change driver
• Current legislative environment has actually
  worked for the profession
• Concerns about keeping up with constant tax,
  auditing and accounting changes
• Need for specialization and subspecialization
• As costs of services rise due to increased
  standards and requirements, the marketplace may
  choose other alternatives (such as bank
  monitoring services)

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3. Technology Forces

• Internet and the gateway to knowledge
• ASPs and accounting packages in general
• Paperless office
• Wheres the real value in what CPAs do?

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4. Marketplace Forces

• Approaching Saturation Point
• One firms new client is likely to be another
  firms lost client
• Next big wave of clients will come from those
  firms who cant staff up to take care of their
  clients, and go to those who have managed
  succession properly
• Target client profile
• Firm culture
• Loyalty -- Satisfaction of Needs -- Wall of
  Service

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4. Marketplace Forces

• Firm offeringsindependence vs. management
  advocacy
• Inadvisability of doing one-off projects
• Your clients face succession crises of their own
• Your relationship with them could be at risk
• Trend Two Milking the Cash Cow
• Many firms are acting as if we donthave much
  market opportunity left,so we need to minimize
  ourinvestment. This is predominantlyfrom firms
  that have seniorpartners believing that the next
  firm can make the necessary investments

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CPA Firm Practice Forces (2008 Survey Said)

• Growth
• Expecting around 8-9/year
• Operations
• Information Technology 44 are spending 5 or
  more of net revenues
• Training 59 are spending less than 2 of net
  revenues

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CPA Firm Practice Forces (2008 Survey Responses)

• 52 of the oldest owners are 60 or older
• 25 of the second oldest owners are 60 or older

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CPA Firm Practice Forces (2008 Survey Responses)
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CPA Firm Practice Forces (Survey Said)
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Do you feel lucky? Well, DO you?
Because without adequate succession planning, in
the broadest sense, youll need to be really
lucky..
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Succession Management

• Requires
• Shared strategy
• Accountability
• SOP (Standard Operating Procedures) foundation
• Governance
• Culture focused on developing others

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Succession Management

• It is LESS about the legal agreements, and
  MORE about your overall business strategy!

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Your Business Strategy Involves
What
Who
Goals What are the vision and
measurable outcomes? Product market strategy
What services, products, and
where? Where should we
devote our resources and
why? Competitive strategy What gives us
sustainable advantages? Wha
t do we bring to the game? How well do our
capabilities fit our
position?
How
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Strategy Drives Succession Management

• Without a shared strategy,
• you may be the sailboat without a direction

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Accountability

• Unless you can hold everyone accountable, you
  wont achieve your strategy
• Accountability applies particularly to the top
  and middle layers of people in your firm
• (For the most part, lower level employees are
  held accountable in many or most firms, but the
  partners and managers march to different
  drummers)
• Partners CANT be throwing anchors off the back
  of the sailboat once youve committed to a
  strategy and overall direction

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SOP Foundation

• SOP Standard Operating Procedure
• SOPs drive accountability for the firm
• SOPs allow everyone to stay on the same page and
  understand what they can and cant do

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SOP Foundation

• Formalize and standardize your processes
• Roles and responsibilities
• Voting interests
• Admission of partners
• Selection of managing partner
• Acceptance of new clients
• Transitioning clients at retirement
• Retirement payout calculation and terms
• Etc.

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Governance

• You need governance to enforce SOPs and
  ultimately hold individuals personally
  accountable
• Whos in charge?
• What will you do if a partner doesnt go along
  with your plans?
• Its not just for everyone else

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Culture Focused on Developing Others

• If you or your partner truly believe that no one
  there can step up to take over for you if you
  leave.
• Then you or he or she are the problem
• Its not about how good you are, but how good
  your people are

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Superstar Model Vs.Operator Model
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Superstar Model

• Extraordinary People
• Natural Leader
• Strong Personalities
• Only the Strong Survive
• Entrepreneurial mindset- creating, changing,
  inventing, experimenting, risk taking

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Operator Model

• Extraordinary Processes
• Strong Infrastructure
• More processes, support methodology
• Career management pathing
• Consistency, controls, setting standards,
  compliance, improvement, low risk

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Critical Success Factor

• The Stronger the Partnerusuallythe Weaker the
  firm

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Superstar Model vs. Operator Model

• Superstar
• Tend to look for others like them
• Build empires/fiefdoms
• At some point, infighting occurs
• Managing partner tends to focus on building
  consensus
• Partners put up with it because of the money
  theyre making

• Operator
• All partners are held accountable
• As such, they give up some freedom
• Requires investment in infrastructure, marketing,
  etc.
• Looking to the long-term
• Strong firm is not the same as a strong partner

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Basic Principles of Operator Model

• Developing Leadership
• Creating viable enduring chain of command
• Operating like a business, rather than a group of
  individual owners

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Basic Principles of Operator Model

• Transitioning of clients occurs anytime firm
  decides a client could be better served by other
  resources
• Developing systems to reward desired behavior
• Developing staffing model that leverages
  realization utilization

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Succession is a Catalyst for Change

• Superstar and Operator models tend to follow
  different paths when creating operational
  structure.
• Regardless of approach, planning has to be the
  catalyst to develop any support infrastructure.
• With planning, comes change.
• Any change, without clearly communicated
  long-range purpose and direction, creates
  unnecessary stress, confusion, and frustration.

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Enablers Required for Change
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Enablers Required for Change

• DecisionMakingAuthority
• StandardOperatingProcedure(SOP) foundation.

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Enabler One Decision Making Authority

• Force accepted change through mandate?
• Voting Control
• Organizational infrastructure (roles,
  responsibilities, organizational chart)
• Distributed individual authority, powers and
  limitations
• Board of Directors-establish strategic direction
• (through budgets, policies and firm objectives)
• Management Team/CEO-implement plan
• Equal versus Variable Ownership
• CPAs love to micromanage

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Enabler One Decision Making Authority
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Enabler Two SOP Foundation

• SOP Foundation is put in to place to
• Focuses on improving the capability of the team
  first, not the superstars first
• Raise the minimum standards for performance
• Generate consistency
• Training, development, mentoring, coaching (the
  idea is that anyone can be plugged into the
  system and they will become more valuable because
  of the processes that will help them evolve
  faster)

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SOP Example Balancing of Clients

• The MP/CEO needs to have the authority to balance
  resources and shift clients around within the
  firm
• Ensure top clients are being adequately served
• Clients are aware of services that might be of
  interest
• Minimize the book of business gaps between
• Large books
• Small books

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Book of Business Obstacles

• Gap in Book Size should be minimized
• Small Book
• Very little leverage (600-750k typically).
  Partner does a great deal of the technical work
• Lower Realization
• Little staff development and inconsistent
  utilization
• Not enough time spent developing client
  relationships

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Book of Business Obstacles

• Gap in Book Size should be minimized
• Small Book
• No excess capacity to take on more work (cant
  grow if everyone is maxed out/often add new
  partners when shouldnt)
• Over-served clients (teaches small clients their
  work is worthy of a partner doing it creates
  transition problems)
• Few firms will want to buy theseover-served
  books or when they do,they will do so at a deep
  discount

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Book of Business Obstacles

• Large Book partners tend to delegate the project
  management and spend more time developing client
  relationships across all services
• Large Book
• Tend to abuse delegation.
• Typically delegate project management to junior
  partners
• These partners tend to hoard client management
  (stifles firm growth and puts the client
  relationship at risk)

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Book of Business Obstacles

• Large Book partners tend to delegate the project
  management and spend more time developing client
  relationships across all services
• Large Book
• Younger partners often relegated to the role of
  manager
• Because junior partners fill the role of manager,
  real seniors and managers are poorly developed
• Younger partners get criticized for not acting
  like a partner when it is the senior partners
  that set them up and perpetuate the system

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Book Management

• The Firm must Focus on Closing the Gap between
  Partners Books.
• This means Partner Compensation Has to be
  Addressed for this to Happen
• You Need to Believe that, Purely because of
  Demographics, it is time to Start Building a
  Business Infrastructure that Will Support
  Partners Being Able to Manage a Doubled Book Size
  in the next 5 Years and Being Able Manage a
  Tripled Book Size in 10.
• You Need to Address What a Partners Roles and
  Responsibilities are

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SOP to Reverse The Upside Down Pyramid
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Problems caused by Upside Down Pyramid for Staff

• Partners doing Manager Work, etc.
• A large talent gap between Partner and Everyone
  else
• Under-trained Managers and Staff
• Poor profitability the wrong people are doing
  the work
• Marginal clients that should be firedand
  managers and staff know it but they spend time
  doingthe work anyway
• This culminates inmanagers and staff
• Not feeling like they make a difference
• Not feeling like they do important work
• Not feeling connected to the clients

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Enabler Two SOP Foundation
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No Mans Land- Once Youre There.
Without an effective business model, its
contentious,
and you WILL be working through various conflicts
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In Conclusion

• What do you want your firm, your practice, your
  life to look like 3-5 years from now?
• What do you need to start doing now?
• What do you need to stop doing now?
• What if you continue with the status quo?

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The greatest danger for most of us is not that
our aim is too high and we miss it, but that it
is too low and we reach it. - Michelangelo
Consider This
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Thank You For Your Time!
Dom Cingoranelli, CPA, CMC Exec. V-P, Consulting
Services Succession Institute LLC 1163 N Wheeler
Lane Avondale, CO 81022 dom_at_successioninstitute.co
m Phone [phone], X 104 Mobile
719.337.8481