how partners fail

and why: the metrics every cpa needs to know.

by domenick j. esposito
8 steps to great

“status quo, you know, is latin for the mess we’re in.”

– ronald reagan

you have heard it many times before. worse yet, you are living it today.

more on strategic planning: ineffective management is hazardous to your firm’s health | why do we accept poor new business results? | the link between strategy and winning on value | focus on an enhanced client experience | 22 things leaders must do | 21 questions to help unlock accelerated growth | m&a candidates: valuations and vetting
exclusively for pro members. log in here or 2022世界杯足球排名 today.

today, many small and midsized cpa firms are being challenged by slow organic growth coupled with:

an unprecedented pace of technological change
very intense margin pressure
too many competitors
a shortage of qualified talent (particularly in the tax area)

wow! it certainly isn’t the good old days before the financial crisis (circa 2002 through 2006) when the giant four firms were the greatest referral sources for mid-market firms and sox created significant demand for services. pricing power was at an all-time high. many firms were figuratively printing money and were afraid to answer the phone because they would have to turn away new business as production and utilization exceeded 100 percent of capacity.

as if that weren’t enough, firms also are trying to put their arms around evolving business and operating models – changing from a traditional accounting firm model and partner/staff pyramid to a professional services firm model, which mandates a flatter organization. it has become very obvious that management consulting and advisory services are where a cpa firm’s growth and margins are today as mid-market clients continue to outsource non-core, but nevertheless, critical business processes in an attempt to improve ebitda and working capital.

on top of all this, soon firms will be facing competition from disruptors such as google and microsoft as they buy market share by slicing and dicing real-time financial data that also deliver value-add from immense databases that benchmark best practices in a quest for enhanced market valuations.

how are firms addressing these challenges?

many of the giant four and the next six are embracing artificial intelligence and are aggressively trying to grow both organically and through mergers and acquisitions. i applaud those efforts particularly as firms such as cbiz, crowe, bkd, and cla rapidly transform themselves into professional services firms by making big bets on additional advisory and consulting capabilities and services. at the same time, the giant four and the next six are continually evaluating partners and, when necessary, counseling out unproductive partners.

many small and midsized cpa firms are slowly transforming their firms into professional services firms. kudos! and the aicpa is launching an artificial intelligence effort to help small and midsized cpa firms compete. again, kudos! i applaud that effort. on the other hand, these firms are very slow (if they are acting at all) in counseling out unproductive partners.

small and midsized firms need to take a hard look at their partner numbers (what they are versus what they should be) and decide if it is time to pull the trigger on unproductive partners. it’s long overdue at many firms.

to that end, i would like to share some financial guidelines that are commonly used by both the giant four and the next six. now, i am not in any way suggesting that these are the guidelines that small and midsized firms should adopt. not at all. instead, i believe it is probably beneficial for small and midsized cpa firms to have an insight into what’s going on at the larger sustainable brands, so they can benchmark against them as they struggle with the decision to pull the trigger on unproductive partners or not:

best practices indicate that partner to staff leverage should move to 5 to 1, perhaps 7 to 1, depending on geography and service mix.
when evaluating nonequity partners, the key question that is addressed is, “does the enterprise value of the nonequity partner contribute toward perpetuating and growing the firm’s business, maintaining technical excellence and driving client and staff retention?” beyond this threshold question, a nonequity partner needs to demonstrate a track record of performance in a number of practice areas, not the least of which is business development. the mandate, for those nonequity partners other than those in quality control, is to annually originate a combination of new business and cross-selling in the minimum amount of $150,000. if these criteria aren’t met, an underperforming partner is coached with the understanding that if improvements aren’t achieved, he/she will be counseled out of the firm. to provide a soft landing, many firms permit departing partners to leave with a small number of clients who have been serviced in the past.
when evaluating equity partners, the key question that is addressed is, “does the enterprise value of the equity partner significantly contribute toward perpetuating and growing the firm’s business, maintaining and enhancing technical excellence and driving client and staff retention, and has this value been demonstrated by a track record of steady and increasingly improved performance?” most of the larger firms have “stretch” revenue and earnings guidelines (ratcheted up annually) in determining their desired number of equity partners. something similar to what is presented below is currently being used at these firms:

revenue per audit/tax equity partner: $2 million

earnings per audit/tax equity partner: $600,000

revenue per consulting equity partner: $3 million

earnings per consulting equity partner: $1.3 million

these guidelines are just that – guidelines, not bright lines. if they aren’t met, firms put up a red flag and decide what they need to do about it.

in addition to the financial guidelines, the mandate, with the exception of those partners tasked with quality control, at many of the larger firms is that an existing equity partner must demonstrate a track record of creating new business originations and by achieving actual results, net of losses, in the minimum amount of $250,000 each and every year. further, there needs to be evidence that the partner is consistently cross-selling new products and services to existing clients.

again, if these criteria aren’t met, an underperforming partner is coached with the understanding that if improvements aren’t achieved, he/she will be counseled out of the firm. to provide a soft landing, many firms permit departing partners leave with a small number of clients who have been serviced in the past.

i am very aware that this analysis might appear foreign to some firms and perhaps very harsh to many others. please understand, i am not looking to offend any firms. rather i hope to open eyes to the realities of our business. if your firm isn’t actively addressing underperforming partners, i suggest that you are looking at the world through rose-colored glasses. in addition to being over-partnered, your firm probably is facing a number of undesirable outcomes including:

too few, if any, younger staff and the inability to keep those you have busy
“all stars” leave the firm as they don’t see an opportunity to advance
staff are stuck on repetitive, boring client assignments with little, if any, on-the-job training
costly labor loads resulting in unacceptable margins
partners doing compliance work, not consulting, and not developing new business
inadequate talent at the right levels – necessary to develop future partners who can perpetuate the firm

all of these outcomes can be effectively dealt with if you do a gut check, understand your reality and your probable future, and deal with it with proper prudence. i know it’s tough out there, but things are not going to get better if you put your head in the sand.

we have a great profession (yes profession; not industry) built upon the cornerstones of trust and integrity. let’s capitalize on the “market permission” we enjoy and the franchises we have developed. let’s grow our firms in a way we can be proud of. remember, hope is not a strategy. a strategy is a strategy.

posted on november 2, 2018

dom esposito

about the author

domenick j. esposito was the ceo of grant thornton, vice-chair of bdo, and national growth director at cohnreznick.

he is the author of "8 steps to great: the eight essential strategies driving success at the world's largest cpa firms. and how to apply the lessons at firms of all sizes," published by 卡塔尔世界杯常规比赛时间.

a life in public accounting

in 2016, esposito, then a former ceo of bdo, moved from a 46-year career in public accounting into the next phase of his professional life – consulting to cpa firms, launching a boutique advisory firm, esposito ceo2ceo, that provides advice to ceos, managing partners and other senior partners of cpa firms focused on the mid-market throughout the u.s.

with the launch, esposito authored “8 steps to great," a guide for ceos, managing partners, and other senior partners on how to move their firm to the next level.

cohnreznick national growth director

esposito was one of the most qualified individuals in the country to advise cpa firms on growth and profitability. through 2015, he was national practice & growth director and an executive board member of cohnreznick, llp, a mid-market sustainable brand and the tenth-largest cpa firm in the united states. he oversaw cohnreznick’s go-to-market industry specialization and consulting and advisory service lines. he was also intimately involved in the firm’s mergers and acquisitions and strategic and tactical activities for its public company and capital markets initiatives. dom joined the predecessor firm of j.h. cohn in 2002 as the chief operating officer and executive board member.

dom was also an independent director of ethan allen interiors inc. for several years (through 2014), dom was a member of the nasdaq listing and qualifications committee to the organization’s board of directors. he formerly served as the leader of the new york state society of cpas committee for large and medium-sized firms practice management. he also was an adjunct accounting professor at c.w. post/long island university.

bdo and grant thornton

through october 2002, dom was vice chairman at bdo, a mid-market sustainable brand and the seventh-largest international accounting and consulting firm in the u.s., with almost 50 offices and 3,400 employees. during his brief time with bdo, he was responsible for the alliance distribution network (at the time consisting of over 80 cpa firms, 10 law firms, and 25 consulting firms). he was also responsible for attracting and servicing a number of clients.

from 1979 through 2001, dom was with grant thornton, another mid-market sustainable brand and the sixth-largest international accounting and consulting firm in the u.s., with over 50 offices and 4,500 employees. he joined grant as an audit manager, became a partner in 1981, led the long island office from 1984 to 1986, became assistant managing partner of the new york office in 1986, and from 1988 to 1999, led the new york office. in 1999, esposito became a regional managing partner and for two years, through 2001, was the firm’s chief executive officer.

cpa, partner, mba, leader, influencer, media celebrity

between 1996 and 1998, and while he was ceo, esposito was on the partner board and was also on the board of grant thornton international – the worldwide umbrella organization. in these capacities, he developed strong experience in strategic thinking and execution, international relationships, corporate governance, partnership matters, branding, expense control, client relationships, and new business development.

as ceo, he took grant thornton to record earnings, consummated the largest line-of-business sale in the firm’s history, developed a major joint venture with axa financial, and made the largest practice acquisition in the firm’s history. from 1969 to 1979, esposito was with price waterhouse (now pwc), servicing ibm when he was promoted to manager in 1976.

dom was a cpa, has been quoted in national and local media, and has appeared on radio and cable tv.

esposito also testified before the securities and exchange commission.

he received his m.b.a. from st. john’s university and his b.s. from ferris state university. accountingtoday, one of the leading trade journals for the accounting profession, named esposito one of the most influential people in the profession for two consecutive years.

he passed away in 2021 at the age of 74.

click here for more by dom esposito