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The Inverted Pyramid

  • Written by Gary Adamson, CPA

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Inverted PyramidDoes This Look Like Your Firm? Chances are it does. This article will give you some ideas on how to deal with it. 

There is no question that the most profitable firms (defined as high-per-partner income) in our profession have figured out that leverage and a well managed pyramid is one of the key ingredients. Why is it then that so many firms, and I would suggest the majority, are struggling with just the opposite, an upside down or inverted pyramid where there are lots of partners and managers but few staff?

We didn’t get here overnight and I would suggest that few of us planned to be here. We wound up with our top-heavy firms due to a number of factors. Here are some of the primary culprits:

- Generational issues including the Baby Boomer Bubble, Generation Xers, Millennials, etc.

- Lack of a people plan with effective, consistent recruiting and staff development processes in our firms. We don’t have a process to see enough new faces and we let people hang around too long.

- Promoting non-partner-track people or sometimes marginal folks to higher positions because “we’re preserving staff continuity” and “it’s best for the client” when perhaps it is just the path of least resistance and/or we have no one else.

- Partner compensation plans that focus on chargeable time. Partners stay busy first. Managers are doing staff work and no one has incentive to push the work down.

- “It’s just easier to do it myself and besides I’m a lot more efficient at it”. 

If any of this sounds like you, here are some of the outcomes that are not desirable but pretty common. You have too few if any younger staff. You have a tough time keeping the ones you do have busy. Really talented staff, your “all stars”, leave because they don’t see any opportunity to advance in the firm. Managers and staff do the same work on the same clients year after year after year. You have a relatively expensive workforce and you have a difficult time getting paid at their billing rate for work that they have outgrown. Partners are full with compliance work and are not cultivating the high value consulting work. And, worst of all, you don’t have the talent at the right levels to succeed you as a partner in the firm.

Ouch! So, what do we do? First of all we need some time to work out of it. We didn’t get here overnight and we won’t fix it overnight either. Unfortunately, some firms are out of time and that is the reason the profession is seeing so much M&A activity. Hopefully that’s not you and you can start to make changes now, to work on the pyramid.

My advice is to begin the journey by prioritizing and tackling the following list in your firm:

- If you don’t have a staff recruiting and development plan for the firm, create one now. It should include the commitments that we are always hiring whether we need people or not, we have expectations for performance at each level in the firm and we expect our people to grow and advance. The national firms have done this so well for years. They see lots of new faces every year, they manage the turnover and the cream rises to the top.

- Tell your people the truth. You have managers who are never going to be a partner. Tell them. More than likely, they already know it.

- As important, if not more so, make sure that the rest of the team knows it too. We have staff looking up at the layer(s) of people above them thinking “there is no way that I can ever make it through or around all of them”. We can tell our “all stars” that they are special and that we will promote them, until we’re blue in the face. But talk is cheap and if they can’t see the path, they will leave.   

- Treat them differently; pay them differently. If you have all stars in your firm please don’t get sucked into making everyone look the same at a particular level. They are not.

- Make the tough decisions sooner. We tend to hang onto people hoping they will change or grow into what we are looking for. They rarely do and we fill up the firm with them.

- Decide how many spots we are willing to have in the firm at each staff level for “career” people. A career person is someone who is stuck in that spot and not moving up. A word of caution, this needs to be a small percentage of the staff and as we discussed above they need to be identified. Don’t clog up your ladder with career people and watch the all stars leave!

I know you’re thinking that this is just the old up or out policy. Not exactly, but I am suggesting a model that is a lot closer to up or out than where most firms have been. The difference is that you do make room for some career people.  Take a look again at the inverted pyramid at the beginning of this article. We need to change our approach.

- Every once in awhile initiate a push down of work at each level in your firm. I promise that you have partners doing manager level work, managers doing senior work and so on. People cling to the familiar and comfortable. So, shake it up and ask everyone to push down 100 or 200 hours. You’ll free up your high level people who are capable of creating new work, get more of the work done at the right level and give the younger staff some challenging work. 

- If you have a partner compensation model that is heavily weighted toward billable time, change it.

- Promote a work environment that embraces nontraditional staff and partners. Technology and remote connectivity have created opportunities to find great people to help the pyramid but there is a hesitation to run with it because it’s different. Get over it and innovate.

- Last but not least, grow! It will be very difficult to turn the pyramid without a solid growth strategy for the firm. We will not see the “easy” growth that we had in the prior decade for some time to come. So, we have to work harder to get it. Dynamic growing people want to be a part of a dynamic growing firm. 

 

Gary Adamson is the President of Adamson Advisory, specializing in practice management consulting for CPA firms. He is an Indiana University graduate and has extensive hands on experience as the recent managing partner of a top 200 CPA firm. He can be reached at (765) 488.0691 or This email address is being protected from spambots. You need JavaScript enabled to view it.. For more about Adamson Advisory, visit www.adamsonadvisory.com or follow the company at www.adamsonadvisory.com/blog.

 

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Partner Succession - It’s All About Client Transition and Retention

  • Written by Gary Adamson, CPA

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CPA firms are wrestling their way through partner retirements and the accompanying succession issues in numbers that the profession has never seen before. It’s the Baby Boomer Bubble, up close and personal. Our succession planning should focus on replacing that retiring partner’s contribution on several fronts. Depending on the role of the retiring partner in the firm we will experience varying levels of pain surrounding things like replacing significant knowledge or technical expertise, backfilling a block of hours to get the work done and shoring up voids left in firm leadership. These are all significant issues and deserve a plan of their own. But the biggie and the focus of this article is the transition of client relationships.

The premise that underlays this discussion is that most of the firms that I work with and somewhere around two thirds of all multi-partner firms out there have an unfunded partner buy out or “retirement” plan. That means that retirement payments over an extended period of time will (hopefully) come from the continued operations and profits of the firm. The currency that the firm will use to pay out that retiring partner is really the annuity revenue stream from the clients that they used to serve. A successful handoff and the retention of those clients is the only way that the unfunded plan has a chance to survive.

If you buy into the critical importance of client transition and retention, then we should expect that most firms have developed both a pretty good transition process and some well defined requirements for the retiring partners. Unfortunately, more often than not, that is not the case. The 2012 Succession Survey conducted by PCPS and the Succession Institute reported that 78% of firms do not have client transition expectations with financial penalties for retiring partners, if they are not completed.

If you are one of those firms in the 78% bucket, the balance of this article will give you some ideas on how to do a better job with client transition. Please pull out your partner agreements, dust them off and see if they even deal with this critical issue at all.

First make sure that you have a mandatory retirement date for partners. I dig into that topic a lot deeper in another article, but the point here is that there is a target date (age 65for instance) that we all know is coming that is controlled by the firm. There is no way to create an effective transition plan without everyone knowing when it is.

I recommend that the client transition process begin at least two years before the partner’s expected retirement date. The reason is that for the largest clients and/or the ones with the closest relationships to the partner, you really need at least two cycles for a successful handoff to the successor. In every partner’s book there are some easy ones and some very difficult ones. The easy ones may include 1040’s or small business clients or hopefully a number of accounts where another partner or senior manager is already very involved. The tougher ones are almost always where very close personal relationships and friendships have developed over the years. Here’s the critical point; it is usually more about the retiring partner letting go and facilitating the handoff than it is about the client accepting it. Just because the client has a new person to handle their account doesn’t mean that the friendship with the retiring partner ends.

The transition plan specific to the partner should be developed with the managing partner. Clients should be grouped into categories based on the expected ease of transition and specific steps determined for each group. For the easiest ones, it may be just a phone call from the partner talking about the upcoming retirement and who will now be handling them, others may be an introductory meeting, others will require a much more significant time commitment with shadowing in meetings and the year end process. You’ll know that you have been successful when the client is calling the new partner and the retiring partner has less and less to do. I really like to see the workload of the retiring partner almost gone during the last six months of the transition period. During the two year transition period there should be quarterly update meetings with the managing partner to review the completion of the plan. 

The previous discussion assumes that there is a qualified person at the right level with a fairly good personality match that can step into the relationship. Please make sure that a part of your plan is to free up the right people to be able to take the key relationships of the retiring partner. I see too often that the right partner in the firm to take that really large important relationship is already full. So, we try to give it to managers or the retiring partner hangs on to it or we come up with some other bad answer. It may not be intuitive that you need to create even more transition issues moving clients to make room, but to make sure that you have the best home for some key accounts, that is in fact what the firm needs to do.

Now, to the most controversial question. The trend by more and more firms is to build the client transition expectations into their partner agreements: i.e. a two-year notice and the completion of a written transition plan with the managing partner. If the retiring or departing partner fulfills the expectations then a successful transition of the clients is a lot more likely and there should be no penalty for any subsequent losses. However if the partner does not meet the firm’s transition expectations and clients depart within a relatively short period of time (say two years) then the partner suffers a reduction in retirement payments. This is not where the majority of firms are today but it is where they are going.

As the Baby Boomers march toward retirement the likelihood of multiple partner payouts within your firm increases. A well-executed client transition plan is the best protection for the firm and the best insurance a retiring partner has that they will receive those unfunded retirement payments down the road.   

 

Gary Adamson is the President of Adamson Advisory, specializing in practice management consulting for CPA firms. He is an Indiana University graduate and has extensive hands on experience as the recent managing partner of a top 200 CPA firm. He can be reached at 765-488-0691 or This email address is being protected from spambots. You need JavaScript enabled to view it.. For more about Adamson Advisory, visit www.adamsonadvisory.com or follow the company at www.adamsonadvisory.com/blog 

 

Gary Adamson is the President of Adamson Advisory, specializing in practice management consulting for CPA firms. He is an Indiana University graduate and has extensive hands on experience as the recent managing partner of a top 200 CPA firm. He can be reached at (765) 488.0691 or This email address is being protected from spambots. You need JavaScript enabled to view it.. For more about Adamson Advisory, visit www.adamsonadvisory.com or follow the company at www.adamsonadvisory.com/blog.

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Tax Humor: The Audit

  • Written by Gary Adamson, CPA

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They’re the 1% no one aspires to join: the small percentage of taxpayers who get audited by the IRS.

There is no such thing as a free lunch, if you're the Internal Revenue Service. The IRS is considering whether the free meals doled out to employees at tech companies and other Silicon Valley firms hungry for talent are a fringe benefit that should be taxed. Chris Roberts, NBC Bay AREA, 4-8-13

The IRS has learned the Willie Sutton Principle: When it comes to revenues, go to where the money is. New data from the IRS shows that tax filers with taxable incomes of $1 million or more were audited nearly 12 times more often than the population as a whole.  Robert Frank, CNBC, 4-4-13

Discussing IRS Asserted right to read your emails:

However, folks were outraged today to find out that the IRS, as part of the government, might use that authority to in fact read your email. The obvious gut reaction to such a digital prostate examination is the context of an audit. No one likes those. TNW.com, 4-10-13

"... the key question is: can we define 'income' in a fair and reasonably straightforward manner? Unfortunately we have not yet succeeded in doing so".  -Shirley Peterson, former IRS Commissioner, April 1993

Fully half of Americans would rather be mugged by street criminals than audited by the IRS, according to a recent survey reported in Harper’s magazine. We assume the other half have never been audited. (Survey source: Harper’s, April 1998)

The shorter the time to April 15, the longer the face of the taxpayer. -Unknown

No man’s property is safe while Congress is in session. -Mark Twain

A man was floating along in a balloon and had lost his bearings. Finally he spotted a man standing on a hilltop and shouted out: “Where am I.” The man on the hilltop responded: “You are in a balloon about 75 feet up.” The man in the balloon responded: “You must be a tax lawyer because what you told me is totally accurate and totally useless.” The tax lawyer on the hilltop responded: “You must be a tax accountant. You don’t know where you are or where you are going and now you are blaming the tax lawyer.”

The local bar was so sure that its bartender was the strongest man around that they offered a standing $1000 bet. The bartender would squeeze a lemon until all the juice ran into a glass, and hand the lemon to a patron. Anyone who could squeeze one more drop of juice out would win the money.

Many people had tried over time: weightlifters, strongmen, Olympians, but no one could do it. One day a scrawny little man came into the bar wearing thick glasses and a polyester suit, and said in a tiny squeaky voice “I’d like to try the bet.”  After the laughter had died down, the bartender said OK, grabbed a lemon, and squeezed away. Then he handed the wrinkled remains of the rind to the little man.

But the crowd’s laughter turned to total silence as the man clenched his fist around the lemon and six drops fell into the glass. As the crowd cheered, the bartender paid the $1000, and asked the little man, “What do you do for a living? Are you a lumberjack, a weightlifter, what?” The man replied, “I’m an IRS Agent.”

A man had fallen between the rails in a subway station. People were all crowding around trying to get him out before the train ran him over. They were all shouting.

“Give me your hand!” but the man would not reach up. A man elbowed his way through the crowd and leaned over the man. “Friend,” he asked, “what is your profession?” “I am a Revenue officer,” gasped the man. “In that case,” said the first man, “take my hand!”  The man immediately grasped the other man’s hand and was hauled to safety. He turned to the amazed bystanders and declared, “Never ask a tax man to GIVE you anything, you fools!”

I become confused when I hear the word "Service" used as follows:

- Internal Revenue 'Service'

- US Postal 'Service'

- Telephone 'Service'

- Cable TV 'Service'

- Civil 'Service'

- Federal, State, City, & public 'Service'

- Customer 'Service'

This is NOT what I thought 'Service' meant. But today, I overheard two farmers talking, and one of them said he had hired a bull to 'Service' a few cows. BAM!!! It all came into focus. Now I understand what all those agencies and companies are doing to us. You are now as enlightened as I.

Jonnelle Marte. MarketWatch.com, 4-10-13

Courtesy of Sharon Kreider, CPA

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Prosper

  • Written by Prosper

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Tax Humor: The IRS Motto

  • Written by Robert E. McKenzie

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IRS MOTTO: "We're not happy until you're not happy!"

“Ignore them and they’ll go away” is great advice for some of life’s annoyances. Unfortunately, it doesn’t apply to taxes. Martha C. White, Time.com  April 17, 2012.

A white business envelope with your name in the cellophane window and the return address of the IRS: Attention from the Internal Revenue Service can mean only one thing; they want your money. Jessica Steinberg, The Times of Israel, 5-6-12

Over the years and out of literally thousands of tax protestors who have been criminally prosecuted, a very small handful have won acquittals in their criminal trials, by convincing the jury that they were too stupid to understand that they had to pay taxes. Financial & Tax Fraud Education Associates, Inc

Cutting its (IRS) budget is like killing the goose that lays golden eggs -- or at least putting her in a smaller pen and feeding her less.  By Selena Maranjian, The Motley Fool 2-1-12

Here's a funny story relayed by Internal Revenue Service call center agents: Taxpayers sometimes call in to complain they have mistakenly received letters intended for someone named "Levy." Gadi Dechter, Government Executive, May 16, 2011

“The tax code, once you get to know it, embodies all the essence of [human] life: greed, politics, power, goodness, charity”  David Wallace  via NY Times Courtesy of Jessica Tovrov

"Thirty years of looking at forms, crosschecking forms, filling out the same memos on the same forms," is how David Foster Wallace describes the work of his IRS examiners in his posthumously published book, The Pale King.

Loud dramatic music like you’d hear on TV or at the movies — “DUN-DUN-DUN” — echoes in my head as I pull a letter from our mailbox; it’s from the Internal Revenue Service. I don’t know about you but when Uncle Sam’s money collectors drop a line in the middle of summer instead of around tax time I open the thing right up.  I mean, I don’t mind paying taxes. The USA is a big ol’ country and my hard-earned money helps with such groovy things as superhighways, thermonuclear devices to protect us from rogue nations and anti-revolution insurance. But I know I paid my taxes that year. Uncle Sam’s records said I’d only paid a few hundred dollars but my records showed that I’d paid a few thousand. Somewhere along the way, someone, and it wasn’t me, left off a digit. Grant McGee 8-13-10

          Q: How many IRS agents does it take to screw in a light bulb?

          A: Only one, but the light bulb really  gets screwed.

From Garrison Keillor’s Pretty Good Joke Book   Sent to me by R. Scott Shifley.

 

Robert E. McKenzie is an attorney at Arnstein & Lehr LLP.

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