Unreasonable Partner Practices: Persuading Them to Change

This blog topic is one of the edgier ones:

• Perhaps it’s because deciding what is unreasonable depends upon one’s point of view. For example, some CPA firms provide wealth management services while others do not because they feel it is unethical or a conflict of interest.
• Perhaps it’s because it’s human nature to favor a self-serving method or philosophy despite it being glaringly unfair to the firm as a whole. For example, if a firm allocates partner income based on seniority and the most senior partner is the weakest performer, of course that person will prefer the status quo.

Persuading CPA firm partners to change their positions is not easy. But this is a big part of leadership.

Examples of unreasonable methods and philosophies:

Each of the issues below was experienced two or more times in our consulting work in recent years. We didn’t make them up.

1. Not giving the Managing Partner sufficient authority. The best practice model of firm governance is for the MP to function as the CEO. This doesn’t necessarily mean it’s a full-time job. But it does mean that (a) management by committee is no way to run a business and (b) line partners at successful firms focus on two things – taking great care of their clients and taking great care of their staff – and keeping them the heck out of firm management and administration.

Why do some firms resist giving the MP sufficient authority?

• • The partners aren’t willing to trust one person to make most day-to-day decisions. They feel like owners of the business, they have an inalienable right to have a say in anything they want, no matter how trivial. Also, they don’t want anyone “telling them what to do.”
  • The partners see the writing on the wall. With an MP who has lots of authority, the partners may fear that eventually, they will be held accountable for their performance and behavior. And to some partners, that is not a pleasant thought.

2. Not have the MP be a member of the Executive (EC) or Compensation Committees (CC). This is an offshoot of #1 above. If partners don’t expect the MP to drive the firm’s success and profitability and hold partners accountable for their performance and behavior, then the firm really has an admin partner, not a MP. Denying the MP a seat on the EC and EC makes it impossible for MPs to do their job.
3. No strategic planning or goal setting. Some partners reason that running a CPA firm is simple: “Go out and get business, perform the work, bill it and collect. That’s it. CPA firms are small businesses that don’t need much management”. These partners reason that strategic planning and goal setting are “big” company ideas that have no place in a small local firm.

We often ask firms if they do strategic planning. A common, disappointing response is: “We tried that three years ago and it didn’t work”. It didn’t work because they didn’t do it right, not because it was a bad idea.

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4. Humongous new partner buy-in. An old school (very old school) practice is to determine a new partner’s buy-in by multiplying an arbitrarily determined ownership percentage times the sum of the firm’s capital plus goodwill. This results in buy-ins ranging from $500K to $1M, untenable to most new partners. This has changed dramatically; today, 90% of all CPA firms, large and small, have fixed buy-ins between $100K and $200K.
5. Allocate income equally or based on ownership percentage. Both these methods are not performance-based. Without performance-based partner comp, the better performers have little incentive to achieve more and the weaker performers are content to coast because they are paid the same as the top performers. Not a good recipe for success. Underperforming partners who benefit from these methods will resist change because they fear their income will go down.
6. Allocate income based on a formula. Affectionately known as “eat what you kill” systems, formulas encourage “me” vs. “we” thinking and fail to recognize the importance of intangibles such as leadership, firm management, mentoring staff and other traits. But partners who hoard work, coast, fear accountability and lack trust in management will often fight the abandonment of formulas tooth and nail.
7. Not having a buyout plan or partner agreement. Partners know better but they procrastinate creating these documents for a host of reasons, two of which are discomfort with putting the obligations and commitments in writing and an inability to agree on agreement provisions. An amazing 20-30% of all firms don’t have a current (with the times) signed, written buyout (deferred compensation) plan or partner agreement.
8. Not requiring partners to bring in business or mentor staff. C’mon! What is a partner if they don’t drive revenue and develop people? What’s left? Doing billable work, 90% of which can be done by staff? Giving partners a pass on these critically important partner duties will sooner or later be detrimental to the firm.
9. Adopting a buyout plan based totally on book of business. Just like comp formulas, this is an “eat what you kill” philosophy. If partners’ buyouts are based solely on book of business, they will never delegate clients to others. And basing the buyout on book of business ignores the other things that partners do to build the value of the firm such as management, staff mentoring, service quality and teamwork.
10. Voting based on ownership percentage. This “unreasonable” provision mostly applies to firms with five or more partners. When firms vote based on ownership percentage, partners with low ownership percentages (like new partners) feel disenfranchised because their vote is almost meaningless. Disenfranchisement leads quickly to disillusionment and causes some partners to act like employees instead of owners.

What MPs and firm leaders can do:

1. Cite statistics to back up recommendations. CPAs love statistics and it can translate to credibility. Example: 90% of firms pay both capital and goodwill as parts of the buyout. Sources of data can be (a) surveys such as The Rosenberg Survey and (b) feedback from other MPs at MAP conferences and roundtable groups.
2. Poll or interview the partners. If there are eight partners and six say X and two say Y, this poll may cause the two outliers to compromise.
3. Give examples of how the unreasonable practice is harmful to the firm. Perhaps it (a) unfairly harms other partners or staff or (b) would turn off new partners or merger candidates. After citing these examples, resistance to change may abate.
4. Try to get them to understand the long-term impact of the unreasonable practice as well as the short-term. “Things may be OK today despite the unreasonable method, but this will change in the future when so-and-so happens.”
5. Bring in an outside CPA firm consultant. Partners have a tendency to stop listening to MPs over time. At a partner retreat facilitated several years ago, it was suggested to the group that they adopt a particular practice. Four of the five partners enthusiastically endorsed our suggestion but one partner angrily threw down his pen saying, “I’ve been telling you guys to do this for years and you wouldn’t listen. Now, this consultant, who we don’t know from Adam, makes the exact same suggestion and you act like it’s the greatest thing since sliced bread!”.

What are the unreasonable methods or philosophies held by partners at your firm? What can you as a leader at your firm do to remedy them?