This article was first published in the February 2014 UK edition of Accounting and Business magazine.
Whether it’s a partnership, LLP or corporate structure, a practice is managed by a group of partners/directors, usually led by a managing partner, but sometimes run by committee, with all the partners believing that they have an equal say in the decisions.
Few of these partners have any formal business management training, and the reality for many firms is that the controlling power lies in the hands of one or two individuals, with everyone else being expected to toe the line. Despite what might seem to be obvious disadvantages, this professional structure has served well for many years. However, at this point in the 21st century, is it the ideal business model for an accounting firm to follow?
The accountancy marketplace has changed dramatically and the increasingly aggressive commercial environment in which firms operate requires a much greater level of business management skills. The pressures are coming from all aspects of a firm’s business: fees, efficiency, productivity, brand awareness, and to some extent internationalism. This highlights the need for change in the organisation and above all for better and stronger people to lead it.
Many of the changes are client-driven. Personal and corporate clients now look for a diverse range of business management and development advice outside the tax and audit compliance services that are viewed as a necessary evil.
Diversification into new specialisms means the old portfolio style of management is no longer appropriate. Partners cannot be expected to master every specialist service their clients need, so a departmental setup is needed to give access to the whole range of skills in the firm. While lead partners still have control of their own clients they must be prepared to bring in specialists. This can only be effectively controlled and monitored within a departmental framework.
A further driver for change is that a substantial sector of the profession has simply outgrown the traditional management concept. At the top end of the scale are the large national and international firms which are now organised and run no differently from any other big corporation. At the other end are the small firms for which the traditional partnership structure is still valid.
In the middle lie medium-sized firms. Some of them are extremely successful, others are struggling; the gulf between the excellent and the mediocre is becoming ever wider. Unless there is a willingness to adopt modern management methods, coupled with a determination to change the way the firm has been doing things, the mid-size sector will shrink, and that will be detrimental to both the profession as a whole and the business world.
Multi-functional accounting firms face the strongest pressure to incorporate and make radical changes, mainly because they have reached the limits of partnership size and there will be growing conflicts of interest between their different sectors. Pressure for incorporation comes from a need for development capital, the need to invest in new offices and new facilities, particularly information and communications technology, which is now central to the success of every practice.
There is also the question of limited liability. There are risks attached to an equity partnership, with partners being individually responsible when things go wrong. As firms provide an increasing range of specialist services, the potential for problems arising also increases and limited liability or LLP status becomes more attractive. Reducing risk will also help firms to attract the high-calibre individuals they need to maintain and improve the range and quality of the services that they provide.
This will not suit every firm. Smaller practices may well find that, provided their quality of earnings is good, they will not need to incorporate as a way of raising development capital. Conversely, if profitability is poor the firm will not be attractive to outside shareholders looking for good returns.
With partner demographics as they are, filling the management void is one of the toughest tasks facing a firm. It is made harder because the likely candidates may not have identified that this is a situation they would ever wish to undertake. The managing partner role is not a part-time position, yet the perception is that it can be undertaken in addition to ‘normal’ client workload. The reality is different: generally speaking, an effective managing partner will spend no more than 30% of their time on client work.
Identifying a successor is an added problem. Frequently the new incumbent finds that the role is demanding and different from what they have been used to. They have to adapt and move out of their comfort zone and fundamentally take responsibility and exhibit authority and accountability, not to mention develop leadership in the practice and find and develop new partners.
Historically, promotion has been based on technical proficiency rather than commercial accomplishments, but the present day requirement is for new partners to be commercial, focused on client service, able to build sound relationships, capable of problem solving to produce positive outcomes, and be good communicators. Prospective partners should be coached or mentored in advance of their appointment to help them assign their time in the most appropriate way.
The alternative is to recruit through a lateral hire or merger, bringing the required skills into the firm through an individual capable of operating at a higher level from day one. This also overcomes the difficult issue of younger qualifieds who are averse to the risks of business ownership.
Looking at the top 100 and the independent firms in the regions, it is not difficult to identify firms that are not only well managed but also well led. Conversely, it is possible to see firms that are neither, firms that are going nowhere, unprofitable relative to their peer group and losing partners and key staff.
We live in difficult times. To survive requires taking a realistic view of the firm’s prospects – and then doing something about them. Present circumstances will fully challenge the skills of all managing partners, and what served the firm well in the past may not be suitable for the future.
Whoever has the role must be granted the authority to go with the responsibility; both facets are essential, one without the other is unacceptable.
In a world dominated by technicians a managing partner must be a ‘people person’ with good inter-personal skills. They must be able to influence the other partners, all of whom have strong individual authority and are not used to being told what to do. Yet each must be told and understand what their role is in the business and be encouraged to play to their strengths – a key factor if the firm is to prosper.
- Why do we do things this way?
- Why are we in this market?
- Why do we need this office?
- Why do we do this kind of work?
- Why do we have so many partners?
Andrew Jenner FCCA and Phil Shohet FCCA are directors, Kato Consultancy