Management succession - plan now or pay later. (succession planning in accounting firms) (Cover Story)by Goldstein, Michael
What is your firm or business doing to plan for management succession? Who is going to make the choice: a committee, the founder, the rainmaker? Is succession adequately covered in your partnership agreement and your business plan? If you are an individual practitioner, do you have a practice continuation plan (PCP)? Will there be persons trained in management to choose from?
Managing a CPA firm of any size requires leadership and management skills. The primary purpose of leadership is to produce change, and charting the course of that change is an essential ingredient of an effective firm manager. Leadership and management skills include the ability to avoid chaos while coping with the complexities of change, as well as directing day to day operations. In CPA firms, a good manager brings stability and uniformity to such fundamental principles as quality and profitability of services.
Much has been said and written about management succession related to public and private commercial enterprises, as well as family owned businesses. There are many outstanding business schools dedicated to producing leaders and solving management problems. But are CPA firms in tune with the rest of the business establishment? What are CPA firms doing to ensure that current management will be replaced by persons able to meet future challenges in a rapidly changing environment? From sole practitioners to the largest CPA firms, management succession man. be a firm's most important strategic issue.
THE NEED FOR IMPROVED
The management failure rate in industry, is significant where formal and on-the-job management training is addressed much more seriously than in professional firms. Industry studies show 10% of all CEOs are removed for not performing to expectations (5% in their first three years). This begs the question of the effectiveness of the remaining 90%; many that escape dismissal may still be plain vanilla or mediocre.
Among CPA firms, the number that has allowed political compromise to result in poor management succession will never be known. Senior management in many professional firms is left in place until it fades away; there is a stronger reluctance to hang out dirty laundry, than in industry. With smaller firms, change usually follows death, disability retirement, or revolution. Considering most CPA firms, large and small, appear to have a somewhat cavalier attitude toward formal management development, I believe that the overall management failure rate in CPA firms must be greater than in industry.
A NEW BALL GAME WITH NEW
While there have been many successful CPA firms, and they must have been doing something right, it's now a new ball game. The profession is faced with a whole new set of rules and a new officiating crew. What worked in the past will not work in the future. Over the past decade or so, we have seen gentlemen's professional rules regarding client solicitation replaced by aggressive and assertive marketing and advertising. This has been accompanied by an alarming increase in competitive pricing (lowballing), requiring a lot more attention in the increasing difficult arena of business operations versus the familiar, comfortable arena of clients' professional problems. The damaging effects of heavy emphasis on marketing and lowballing have been exacerbated by the emerging aggressive activity of the plaintiffs' bar in pursuing the negligent accountant.
Expanded Scope of Services
The competitive wars have given rise to an extraordinary increase in the scope of services being offered by CPA firms. Many firms have armed themselves to the teeth with increased services to keep the big bad wolves, or even some of the smaller wolves, from their clients' doors. Management now has to be able to cope with the problems of an ever- increasing number of new services and products (once a dirt-y. word for CPAs). Some of these require fresh business and management skills.
Some firms have countered the movement towards increasing services across the board by specializing in designated industries or services. Even specialization has its downside when a firm's choice of industry or practice area tumbles a la the investment community, tax shelters, or real estate.
Succession and Survival
It has taken a while to recognize these changes, but they are now a way of life. The war is on and the blood is flowing; CPA firms have failed and are failing. Quality professional management must accompany quality professional services. in fighting the war of survival, strategies must be established to ensure the continuity of the firm. While possessing some form of competitive advantage may bring momentary success, the disruption or distraction caused by an inadequate and/or difficult management succession can be fatal. The decision, therefore, of who will succeed present management becomes even more important, perhaps even the most important decision, in the life of a firm. There is no single right answer for all firms.
Trained Management Doesn't
Grow On Trees
In all CPA firms, management selection is closely tied to ownership. Rare is the firm that seriously considers bringing in new or successor management from the outside or, for that matter, even hiring management trainees who have nothing to offer the firm except better prospective management.
Among smaller firms, the sole proprietor or founding partner usually wears most of the hats and calls the shots. In larger firms, management emerges or is selected from within the ranks of the partners. In either situation, career or professional management people probably won't be available because they aren't being brought in or developed. Preparing for management succession requires a dedication to self-truth and a long-term investment of time and money.
When the time for transition arrives, either planned or unexpected, only then will many firms start to search for a hidden jewel. Depending on existing management levels, the search will most likely produce a successor from one of the next-down management ranks. In some situations, the search is perfunctory because the political forces have been aligned for some time and are lying in wait. The chosen one will probably have received some leadership and management training on the job and from in-house courses. Both of these are good sources, but afford little exposure to, or real involvement in, how it's done elsewhere or how it may be done better.
In smaller firms, a new leader may be picked from client service partners and highly trained technicians. The client service and technical support partners have undoubtedly been shielded from the business aspects of the practice so that they could devote themselves to their apparent strengths and earn big bucks for the firm today, with little regard for tomorrow. The departing, or perhaps already departed, management probably also represents the largest rainmaking capacity in the firm. If per-chance, outgoing management is not the only rainmaker, any remaining rainmaker will be the heir. Why? Because rainmakers control large amounts of business, usually have large egos, and like most other people, enjoy the financial rewards customarily reserved for management. Leadership and management abilities, assuming that they haven't been demonstrated by the rainmaker, are not issues to be considered when ego, more than even money, gets in the way.
PLANNING WILL HELP
Regardless of firm size, the primary goal when planning for future management is continuation of a growing profitable professional practice following the retirement or demise of present management. The possibilities for long-term internal conflict during and after a transition are inherent in the process because everyone in the firm wants to protect his or her position. Succession methodology should be included in the firm's partnership agreement, business plan, and policies, both written and unwritten, to minimize any disruptions.
From day one, new management must be able to take charge and not skip a beat, showing profits sufficient to satisfy the active and provide for the departed, including both retired and deceased. Without proper planning and preparation, a change in management (especially when unexpected) can be a genuine dilemma and perhaps even fatal to the firm.
The prime reason for a partnership agreement is to provide for a civilized resolution of conflict and survival of the firm. Survival requires continuous leadership, management, and governance.
The Mechanics Of How
Some CPA firms, similar to industry, are structured to select new management at the equivalent of the board-of-director's level. The board is elected by the general partnership or owners. Some firms elect leaders by a direct vote of the general partnership. In either scenario, the vote may be weighted by equity, some other formula, or may even be one person, one vote.
Some partnership agreements simply reflect the will of the founder or 1, dominant partner or partner group. In such cases, terms for succession are often chiseled in stone with little recourse left to the remaining or surviving so-called partners. For example, a partnership agreement could refer to a predetermined management succession naming specific individuals and what they will do, when, and in which circumstances. Even in most smaller firms, this arrangement can be too restrictive. It should refer to some structure or form of firm governance that supports the election of successor management based on voting rights of the partners at the time of transition.
If for some reason, a specific successor and the time for change are stipulated in the partnership agreement (frozen in place for implementation in the future), then serious consideration must be given by all parties before putting pen to paper. This approach is generally appropriate, for the most part, only in an agreement covering a PCP for a sole proprietorship. This same technique might also work in an agreement for a two- or three-person partnership where a mergee wants assurance that he or she will be the successor when the present management retires or dies, with no questions asked. Normally, one would not want to commit to a long-term arrangement that does not provide for improving leadership, short of partnership dissolution, in a changing environment. Based on certain of the management selection criteria discussed later in the article, parties to the agreement have to determine up front if they can live with stipulations created, perhaps years in advance of the actual transition.
It is not my intention to give short shrift to the importance of succession structure in a partnership agreement, but rather to emphasize that a poorly written agreement that effectively perpetuates management in place, without consideration to future changing environmental needs, may endanger the survival of the firm. A poorly conceived agreement could more easily be fatal to a firm than having no agreement at all.
Timing of Management
In some firms, management succession still begins with the death, disability, or retirement of 7be Boss. In most firms, changes in management usually occur after a fixed term or if necessary, at the will of the partners. The partnership agreement should clearly state the time for choosing new management or, if appropriate, re-electing present management.
Another timing issue that should be addressed is the question of retirement from management and the firm, not necessarily simultaneously. Intended retirement dates should be replaced with mandatory dates, or there may be diminished incentive on the part of current management to develop and train successors.
YOUR FIRM'S BUSINESS PLAN?
In any organization, whether for profit or not-for-profit, no matter how small or large, it is necessary to have a clear vision of where you are going-goals, strategies, and action plans. This strategic plan is an important consideration in succession management. Do you want to be first? Do you want to be best? The difference between these two questions is not subtle, especially when dealing with firm size, professional quality, industry expertise, and client service. Do you want to increase your scope of services and be more things to more people? Do you want to specialize? Do you have specific quality control concerns? Should your marketing be either more aggressive or more assertive? What are your compensation goals? These represent only a few of the strategic questions that must be addressed when choosing a successor. While business plans are not chiseled in stone-some aren't even written on paper-it would be appropriate to look for continuity in these matters, as well as other company philosophies and goals, when selecting successor management.
Even though an individual practitioner does not have partners to fall back on for succession, he or she must certainly have a vision of where the practice should be going and the necessary business plan for getting there. This plan should take into account the development and training of a key employee, or perhaps a future partner. As an alternative, the individual practitioner could establish a PCP with another firm. Regardless of which path he or she chooses, the individual practitioner must provide for successor management or face the possibility that the value of the practice will be severely diminished or perhaps even totally lost in the event of untimely disability or death.
SUPPORT FOR FIRM POLICIES
All firms have policies that have been designed or have evolved related to management of the firm. Frequently, policies are understood and unwritten. They are meant to support the firm's management philosophy and be supportive to the business plan and any partnership agreement. Are your firm's policies appropriately communicated to all constituents and understood by those being managed as well as present and future management? Do your firm's policies give management authority to lead, manage and be accountable? If the answers to the questions aren't clearly affirmative, successor management's ability to lead and manage will be impaired from the start.
Succession depends on the availability of competent successors and frequently also hinges on the attributes or qualities displayed by present or retiring management-including the ability to make decisions (not found in abundance among professionals). Consider the following two examples of problem situations.
Founders often start their own practices because they are put off by bureaucracy in larger firms. In their own firms, founders can do what they want without anyone else's approval and can move quickly, unhampered by forms and committees. instead of a bureaucrat, we may now have an autocrat whose unhampered and quick moves are accomplished with disregard for subordinates, including those he calls partners. This failing, incidentally, is not restricted to founders; it can be found in any size firm, where some partners and managers (hopefully not those selected to lead) issue orders versus giving guidance on how to get the job done. Issuing orders does not create an environment that brings out the best in partners and staff. This attitude on the part of the Boss almost always results in a complete absence of qualified people when management succession becomes a necessity.
The founder, until now the firm's only leader and probably the rainmaker, often wants to believe that he or she is developing successor management. It is not unusual for a founder to favor a successor who is not as aggressive as he or she is, but who compensates for the founder's other weaknesses. The founder may choose a technician to fill the gap in his or her own makeup and create the illusion of developing new management. The prospective successor will be expected to learn by observation and perhaps the assignment of perfunctory administrative duties, distinguishing him or her from others in the firm. Little time is given to formal training and there is no real on-the-job training to hone his or her management skills. After all, the present time of tomorrow's management is much too valuable earning today's dollars.
Sometimes the future success of the firm is no match for the need of the founder to stay in control. The founder might have to overcome that fear that eventually haunts many: death. By ignoring the need for succession planning, he or she gains the illusion of immortality.
There is another equally troublesome self-indulgence: nobody exists who can do the job as well. This type of firm management creates the perception that any, discussion of succession will be considered an unfriendly act subject to retaliation.
After a founder's disability or death, the unfortunate scenarios above usually result in a mad scramble for leadership with a concurrent disintegration of the practice. if the founder does recognize that he or she is not replaceable by anybody currently associated with the firm, serious consideration should be given to participating with another firm or firms in a PCP. PCPs provide for operating a practice in the event of temporary disability and buyout in the case of death. They don't necessarily provide improved successor management but they will certainly help preserve the value of a continuing practice. A I recently witnessed the significant loss in value of an individual's practice because he only started to negotiate for the sale of his practice when he became terminally ill. Although the ultimate purchasing firm was very cooperative and empathetic, time was lost in negotiations with other firms and some clients left; they were not so empathetic when it came to diminished service. If a PCP had been in place, service could have continued without missing a beat. The estate, the new firm, and the clients would have all benefitted.
Firm size notwithstanding, team management (shared management, joint management) is a euphemism for "we couldn't make a decision on whom to make boss." This kind of arrangement generally arises out of frustration and compromise where clear-cut leadership isn't apparent, doesn't exist because it hasn't been properly planned, or for a not-so-good motive, such as politics or ego. This is complex and unwieldy management. Without someone in charge calling the plays, the management team of two or more will usually end up in either of two postures-with each scrambling for the top position, or with each deferring to the others (playing Alphonse and Gaston, "you first"). This type of management ultimately goes no place other than toward chaos. We have all seen major firms do the team management number; the team has generally had a short run. As to smaller firms, I witnessed the Alphonse and Gaston act following the merger of two three-partner firms that seemed to be perfectly matched in every way-clients, revenue, profits, staff, etc. it seemed that the two senior partners couldn't do enough to accommodate one another. They did so much accommodating, in fact, that they began to hate one another. Chaos and disaster were on their way when another merger presented itself along with the required leadership.
Do not confuse team management with teamwork. Teamwork is what is supposed to happen throughout a firm, but with someone leading. it doesn't happen by itself. Firms, like armies, must operate with a commander-in-chief.
WHAT DO YOU LOOK FOR IN
A LEADER AND HOW DO YOU
In addition to leadership and management skills, what qualities do you look for when selecting future management? While the likelihood is rather remote for finding or even developing a leader, manager, rainmaker, and multi-skilled technician in one CPA, there are attainable leadership and management attributes. Let's direct our attention to some of those attributes and to the needs of the person or persons we eventually want to lead and manage our firm.
For the prospective leader to have even been noticed, he or she must have demonstrated basic qualities such as intelligence, appropriate technical skills, ability to communicate, drive, being a team player, capability of developing future strategies, and the ability to create an environment where a free flow of ideas can take place. He or she must also have a strong self-image, self-confidence, be emotionally mature, and above all, to have demonstrated good judgment and common sense.
The candidate must be dedicated and not just pay lip service to quality and ethics. At times, everyone has had to walk away from questionable situations; does he or she have what it takes to do so? Beware of the person who places more or even equal stress on being first or the largest, rather than being the best.
To recognize and analyze problems and to be able to look ahead and plan are essential qualities to being a leader/ manager. He or she must be able to define goals and manage long-term strategic issues while coping with a changing environment. Your prospective leader and strategist, however, must be able to understand what is actually happening in the professional and business environment without being influenced by his or her own prejudices. The prospective leader must be able-and hopefully has already demonstrated the ability-to make decisions without being diverted by situations affecting his or her own personal career. In other words, does the firm always come first?
One attribute that seems to be more important today than in the past is the leadership talent for developing a firm culture and organizational loyalties. In the past, everyone connected with a CPA firm understood what that particular firm stood for. Association with the firm was closer, and partnership was considered a lifetime proposition. Not so anymore. Management today must work much harder to establish a recognizable and acceptable firm culture and organizational loyalty. Firms possessing these characteristics will be a giant step ahead, but they can be brought about only by exceptional leadership.
Fulfilling The Need
In developing new management talent, it would be great if everyone could start out with technically trained individuals who also have had graduate training in management at one of the top business schools. With the exception of a few firms, that is not going to happen. Most firms must provide their own ongoing management training to future leaders. Managing those career paths is just as important as academic preparation. Let us look at some of the paths available to accommodate the training and preparation of successor managements in a changing environment.
Graduate level education in management is available at most colleges and universities. Recognizing the increased need, a number of state CPA societies and other professional organizations are expanding their courses and seminars on topics specifically related to managing CPA firms. Formal education, however, is only part of the-cost of preparing for management succession.
On-the-job training (OJT) is a necessary training element, but only if it is done according to plan. Depending on the level of the trainee, OJT should encompass rotation through various facets of management-and I don't mean becoming an administrative helper to The Boss. Many of the most successful leaders were given the opportunity to learn from their successes and failures early in their careers. Also depending on their level in the firm, prospective' successors should be allowed to demonstrate their ability by being involved in defining some of the firm's goals and managing at least one of the firm's long range strategic issues. As part of its business plan, the firm may be addressing a number of strategic issues including, for example, technological change, growth, and human resource development. The candidate, in addition to his or her current assignment, should be given the time, resources, and responsibility to address and lead the firm with regard to at least one strategic issue.
The current Boss must learn to be a mentor. Here is some critical advice for The Boss: Set time aside for open discussions. You can do this without losing control and without interfering in the work of a potential successor. Step back, take a hard look at results, and do performance appraisals truthfully. Evaluate results without concern for being loved for your responses, or by being prejudiced in favor because your style is being emulated by your protege.
Many problems inherent in management succession and their solutions depend on the qualities and attitudes of current or retiring management. Are bona fide preparations being made, or is it just lip service? Are the partnership agreement, company policies, and business plan understood by all the constituents? Has the sole proprietor consummated a PCP understood by his or her employees so that they are reassured about their future? Are the best candidates being prepared? Is there going to be a horse race of candidates reporting to the current managing partner? Is the final choice being made in a way that minimizes disruption and games playing?
NOW IS THE TIME
Problems related to management succession are not solved easily. Who leads a firm may very well be the single most important piece of planning a firm can do. The profession is changing and will continue to change. Ultimately, CPA firms, particularly the larger ones, will have to develop management tracks resembling their professional practice or industry specialization tracks. This will be necessary to train management able to compete in an environment of professional service conglomerates beset with all the problems of highly competitive commercial enterprises in addition to the growing bodies of technical knowledge and regulations.
Regardless of what lies ahead for CPAs in public practice, the one thing that is certain is that demands on management are growing. Now is the time for small and large firms to plan for management succession.
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