This blog report highlights some of the key points shared from the platform and discussion groups.
I spoke at a managing partner conference with some of the leading firms in the United States. There were many interesting conversations during the conference, one of which was about non-equity partners. As the managing partners all shared details of their firm structures it was evident that with the flattening of many firms’ bottom lines and the increase in salary and technology costs a feature for most firms’ it was evident that firms management were appointing an increasing number of non-equity owners. This is deemed a key structural change in the [profitable] growth and development of accounting firms.
As the founder of four businesses my job titles have been managing partner or managing director. But in my early days in business I had no formal management training as a business manager. As a chartered accountant that wasn’t and still isn’t part of the training necessary to qualify. As a consultant I have worked with some very successful managing partners and some who only wished the burden of responsibility was not theirs. I believe that the success of the firm is largely determined by the effectiveness of the managing partner and his or her ability to lead and manage.
Working with non-accountants
Firm administrators, marketing directors, HR directors and non-accounting qualified team members tend to be recognised with a job title such as ‘principal’ or ‘director’ giving them the opportunity to sit around the owner-table as firm leaders. This allows accounting firms to invest in these essential team members and derive value from their business acumen and firm contributions. A major reason for adopting this approach is the growing trend for accounting firms to adopt a more corporate structure thus enabling them to emphasise the importance of specialist business operations in their practices. Under this approach many firms style their firm administrators as chief operating officers who work alongside the managing partner.
An observation about your role
Managing partner role: How do you invest your time? While your billable time might well be less than others, you have acquired some other clients and they are your partners. It’s your responsibility, like a sports coach, to train them and help them maintain peak performance. Spend an hour or two every month making them think, plan and talk about their marketing activities. Discuss with them how they can improve and gain more influence with staff and clients.
Plan to visit larger clients to help show partners how to interact with their clients better. Most managing partners I have spoken to confirm they are able to not only achieve this but in so doing these meetings also help to secure new instructions.
Are you thinking of introducing non-equity partners?
Firm owners traditionally balance the requirement for capital to be introduced with the desire to add owners. However, the increasing costs associated with running an accounting firm as well as ever-changing regulation and economic
fortunes promote an alternative or possibly a trial run for those seeking firm ownership. Consequently many firms now have non-equity partners, some of who have been advised that this is the highest level they are going to attain in the firm. This approach enables firms to have ‘partners’ who are well-rewarded but do not qualify for a profit share other than maybe participating in a bonus pool. This satisfies the firm’s need to retain those with excellent technical skills while not further diluting equity ownership. This option also exists for those partners that need or want to work fewer hours or perhaps do not wish to assume the full risk of equity partnership.
In order to pursue this approach, firm owners must establish the basis of entry for the non-equity partner. This will involve agreeing the benchmark for technical, management and administrative skills, the ability to be a
good people person and a good communicator that could lead to development of new business. It is also key to let the prospective non-equity partner know the envisaged timescale.
Remuneration is bound to be a significant area of interest. So you need to determine the basis for remunerating non-equity partners. This should include a base salary and some basis for sharing in a bonus pool – perhaps based on productivity or business added. Here you will have to look at the remuneration structure for managers and junior partners as I reckon that you would wish to enable the non-equity partner to achieve an income somewhere between these levels.
Now let’s look at the tiered approach which is an option to consider when admitting new equity partners. You may wish to adopt an approach that limits the profit share of the new equity partner in order to avoid diminishing the profit share for the remaining owners. You can achieve this in two ways:
Firstly – create a new classification of senior equity partners, which distinguishes the senior from the junior equity partners, or
Alternatively, establish a tiered profit sharing system with the first tier available for allocating to all equity partners – this is often based on some percentage of the average profits over the last three to five years. The second tier is an amount shared only by those who are senior partners. Then there is the third tier, which is available for the equity partners to allocate as a bonus pool for distribution based on some of these criteria. Alternatively it could be based on income percentages, performance or capital. However, in many firms the senior partners accept a levelling of their profit entitlements as they recognise the rising expectations and needs of those coming up through the ranks.
Now in everything I have shared I have omitted any reference to the owner scorecard or points system, which is used by many larger firms, and given the time we have already devoted to the subject I will leave that for another time.
Other options not considered in any depth include:
• A straight formula system. Where income is allocated by an algebraic formula that gives weight to various factors, especially time on, billing and realisation.
Seniority and ownership percentage are usually integral components of the formula.
• Partner pool. The Sistine Chapel system as it is known. I mention this briefly but for clarification this is a system whereby all partners record what they
think each partner should earn, and the ballots are averaged.
• Remuneration committee. Which is also known as the Board system. A small group of approved partners determine how the profits are split.
• Managing partner determines. Which is known as the Dictator system. The managing partner makes the decision as to how profits are split.
• All the partners determine. Let everyone have their say and good luck to those firms engaging with this approach.
At the time I sold my publishing business and while negotiating my new employment contract I introduced into the negotiations a request for a sabbatical. I had worked full-on building businesses for over 25 years and wanted a break. I still had the passion to drive the business forward but as the buck no longer stopped with me I thought there were a few other things I wanted to do. It was eventually agreed that I could have an extra 30 days time out and so, like it or not, that is what I had to accept as my sabbatical.
Firm leaders need to allow partners to recharge and refresh their skills, and enjoy a different taste of life. Many firms build in automatic entitlement to a sabbatical, as they know that mounting workloads and maybe the time to enhance expertise are just some of the very valid reasons behind the sabbatical. Firms wish to keep their key people working for them – however, they recognise that many have ambitions they wish to realise and rather than lose them they accommodate this need. Many firms allow three to six months away after a certain period of working in the firm, typically 15 to 20 years. In other cases firms allow an unpaid sabbatical after maybe five years. In fact during tough times firms have used sabbaticals to trim their team, enabling them to reduce costs and retain expertise.
When it comes to remuneration entitlement during the sabbatical there are a number of options. In some firms the partner draw remains unchanged while bonuses are restricted according to the time spent on sabbatical. Some firms provide partial pay while others none. Benefits generally continue during a sabbatical regardless of the approach to pay.
The approach amongst the partners was so very different. I have endeavoured to cover the points raised across the two days. There is no doubt that profit sharing was – and I guess always will be – a very hot topic. One managing partner reported that his partners told him that he wasn’t doing his job properly if the firm’s profits did not increase year on year. One message was very clear and that was the equal profit sharing went out with the Ark!