Can Small Firms Act Like Big Firms

QUESTION FROM A CLIENT

Can a “small” firm function and be structured like a “large” firm? Are there any natural limitations based on personnel headcount?

OUR RESPONSE

One of my favorite mottos comes to mind: “Think big and keep it simple.” Yes, a small firm can operate as a larger firm with some obvious limitations explained later. First, let’s look at a few things small firms often lack that larger firms have mastered:  ambition to grow, management capability, resolve and commitment. Here are some examples of ways smaller firms can be structured like a larger firm:

1. A managing partner whose main client is the firm. This means that MPs reduce their client base so that the MP can focus properly on the firm. Many MPs are not willing to take this risk.
2. Partner accountability for their adherence to the firm’s core values.
3. The firm truly believes that the firm’s staff are more important than clients and they walk the talk.
4. Diversity of services; not just compliance. Specialization, niche marketing and consulting.
5. Partner income allocation system that reward intangibles as well as production metrics.
6. Partners are more leveraged – lower partner charge hours and higher staff-partner ratio. But they must have the staff to delegate work to, a huge challenge in this era of labor shortage.
7. Growth by mergers.
8. Prospecting larger clients.
9. Full-time professionals that manage the administrative aspects of the firm, such as COO, human resources, technology and marketing.

Smaller firms often earn a low grade on this report card. The way larger firms got to be large firms was a fastidious commitment to the above practices. We have researched the profitability of firms for various revenue sizes for 30 years in our annual Rosenberg Survey. The results are the same every year: The larger a firm’s revenue, the higher its profitability. Very linear.

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The limitations of small firms acting like large firms

You ask “is there a natural limitation in structure due to employee count?”  There are some formidable hurdles:

• Firms under $10M and especially under $5M can’t afford all of those administrative professionals performing at high levels.
• Having a low number of partners limits the variety of services that the firm can provide to clients.
• Partners often don’t have the time or expertise to develop consulting and specialties.
• Smaller firms have a more difficult time recruiting staff than larger firms. This obviously limits what smaller firms can do.

The good news

A small firm can’t be structured like a large firm overnight, but they can get started. If a firm wants to become a larger firm, there is no reason why items 1-7 above can’t get started today. Every one of the Top 100 CPA firms was a small firm at some point.

Good luck. I’ll expect to see your firm in the Top 100 in the coming years!