Current Challenges and Opportunities in the Eyes of Managing Partners at High-Performing Accounting Firms

We Asked, They Answered: What’s Keeping Managing Partners Up at Night?  How the COVID-19 pandemic can shape a stronger firm

Levenfeld Pearlstein is the law firm for accounting firms and the people who run them. Partner Russell Shapiro is a leader in advising on the legal and business aspects of accounting firm partnership agreements, mergers and acquisitions, and the enforcement of restrictive covenants. He has twice been recognized by Accounting Today magazine among the “Top 100 Most Influential People in Accounting.”

During the second quarter of 2020, I interviewed ten highly respected accounting firm managing partners and one prominent chief operating officer. They are all leaders in the industry and run high-performing firms with revenues ranging from $20 million to $300 million (with one exception).

Part of what I wanted to do was to capture what it feels like to be an accounting firm managing partner right now, and in order to do that, I asked for their unvarnished truths and best insights. It helps other business leaders who might be facing similar challenges to learn from each other – What’s working? What isn’t? What we can look forward to for the future in our field?

Rather than provide an interpretive narrative of my conversations , I thought it would be more authentic and impactful to convey the story in their own words, edited for clarity. This is followed by my key takeaways regarding what this means for the accounting firm world.   

 

Question: How is COVID-19 affecting certain aspects of your business (e.g., sales, costs, productivity, morale, culture)?

Answers:

• Compliance revenue is consistent thus far, but we anticipate reductions as clients request billing adjustments. We anticipate a “hold” on certain consulting and advisory projects and are reviewing our employee roster and identifying potential changes or upgrades. There have been no staff cuts at this time. Some staff may want to temporarily move to part-time due to family obligations. We are considering reductions in discretionary spending and office space. Productivity has declined, depending on practice area, employee remote working environment, professional level, and certain other circumstances. Morale is OK, and we recently had a series of town halls that created a sense of confidence that the firm is resilient and will be just fine regardless of how long this lasts. Our culture has remained solid, our partner group is unified, calm, and positive; we’re all pulling together.
• We had normal seasonal trimming of staff. Due diligence services are suffering. We’re spending more time in collection efforts. Our people want to get back to the office. Oil prices may also have an effect. It’s tough to keep up morale. Over 60 percent of our workforce wants to start coming back to the office. I think everyone will be back in the office on a full-time basis by July, though we may not rent as much real estate going forward.
• This will change how we look at office space. Productivity is somewhat reduced. There are short-run issues relating to some collections. Consulting projects are being pushed out. There are opportunities in outsourced accounting services. Due diligence services are being delayed and we’re not seeing new deals. Recurring revenue streams are doing fine. We did a normal seasonal reduction in force. The summer intern program will be reduced in scope. The start date of the incoming staff group is likely to be deferred. We’re doing a lot to keep up morale, such as encouraging video conferencing.
• Our revenue is down, and we’ve cut back overtime, terminated temporary help, and reduced partner draws. We’ve had no staff cuts, but cuts in events and deferral of capital expenditures. Our production is also down, and I believe this is because our workforce is working at home and has attendant childcare responsibilities. There is an opportunity for people to perform outside of their comfort zone, and people are stepping up.
• Productivity has been fine but we’re seeing signs of it starting to wane. Many people are more distracted working at home and fatigue is setting in. Production is off 10-15 percent in April. March invoicing was down. There are no collection issues as of yet, and no pay cuts or lay-offs – we will re-examine this after our PPP funds run out. Partner draws were reduced, and we kept our intern program. Some clients may forgo an audit for something less.
• There’s a 10-20 percent decline in utilization in late March and April. This is in part due to the tax deadline being moved out. Collections also off 20 percent in April. The tax partners are down the most. I think collections will pick up as PPP funds are received by clients. Litigation support is down; other consulting seems to be holding up, but we have concern as to whether there will be new projects. We want people to clear backlogs.  Our outsourced accounting services are doing well. There has been no reduction in staff or staff comp, and staff will be evaluated for performance. This will be determined over time as the view is that accounting firm services are a lagging indicator and that if there is a substantial economic downturn, it will manifest itself in reduced accounting services 6 to 12 months down the line. Thus, staffing needs will be re-evaluated each quarter. Partner draws have been modestly reduced. There’s been a substantial reduction in marketing-related costs and discussions about rethinking how to be productive with marketing going forward. Regular webinars seem to be successful. We’ve sent weekly MP messages to the firm.  Morale is holding up well, and we’re having regular check-in calls to check morale.
• Tax work is doing fine. Technology projects for clients are down. Overall, there has been a dampening of demand, but not to a high degree. Some bills have been delayed because tax work is not yet completed. Collections payments are slowing. Partner draws have been reduced. Our firm was staffed for growth and so a reduction in force was implemented. We believe that this will not be a V-shaped recovery. Looking ahead, this will reduce the need for office space. Work at home technology is fine, but some people are less productive due to family matters. We’ve sent frequent communications to keep up morale, which may have been impacted by the RIF.
• Sales are down. We’re giving some discounts. Some clients are having a tough time paying, especially the hotel and restaurant clients. Real estate clients are doing alright now, but there is concern as to the future. Productivity is down, this is in part due to client tax info coming in slower due to the extended tax filing deadline. Production and collection are down around 15 percent. Remote working has reduced productivity to a degree. As to morale, people were scared at first. Also, there was a group of people used to working in the office and not used to working remotely. Things have now settled down. There is a lot of effort being put into reaching out to people. No layoffs are planned even after the PPP funds are used, but there may be compensation reductions depending on the circumstances. Some internships have been canceled.
• We have to accept uncertainty. There is evolving normalcy. There has been a slowdown in payments. We’ve had no compensation or staff reductions. Productivity and realization are down due to remote working. Oil and gas are issues in our market. We’ve had deferral of payments to partners. Litigation support and accounting services are holding up well, as are compliance services. Some work is being deferred; some clients are questioning a need for an audit. Change is now easier to make. There is a sense of cabin fatigue setting in. Marketing is going digital.
• April was a decent month. Expecting an overall 5 to 12 percent decrease in revenue. We’ve reduced headcount. There is some degradation in morale, as measured by the tools we use. We’re allowing certain days off and flex schedules.
• Productivity seems to be holding up. Standard business development will be challenging. Potential clients are not looking to make a move. Possibilities to allow people to work anywhere are opening up. We will hire people who don’t live in the area and explore using hoteling offices. A concern is that our one family approach may slip away. It’s hard to build relationships in a remote work environment.

R. Shapiro Key Takeaways:   

1. Slowdown. Firms are seeing somewhat of a slow-down in demand, and there is a question of whether that demand will slow further. Collections are a focus area and there is worry that collections will be slow.
2. Cutbacks. Most firms have reduced draws to partners. Larger firms have been more aggressive in making staffing changes, positioned as normal cutbacks. Smaller firms have not done as much to reduce staff, likely because the smaller firms received PPP funds. New consulting projects are down – this is particularly the case with due diligence services.
3. Adaptations. There seems to be a loss of productivity due to employees having challenges at home with childcare. A lot of efforts are being expended to keep up morale, with an intense focus on communications. There’s a universal view that office space needs will be reduced going forward, and thinking around how marketing may change.

 

Question: As you think about the future of your firm, what are you most worried about?

Answers:

• Cash flow. There is a need to retain staff through an extended tax reporting period. We’re balancing resources with unknown work requirements. There may be a lot of “going concern” opinion issues.
• Effect on clients.
• Collections, where to get liquidity, and where to extend credit.
• Paying back our PPP loan, and striking the right balance between consulting and compliance services.
• Collections and cash flow. Deep and prolonged economic recession – this is not something we’re anticipating, it’s just a worry.
• Uncertainty about how long this will last, and how deep will it be. Our firm has had a growth orientation and it is hard to pitch new business in the current environment. It is harder to push through strategic initiatives, especially those that require monetary investment.
• Clients – some may not survive. Keeping people engaged and determining if they are having emotional issues.
• Cash flow, and keeping the employees of choice.
• People will revert to their old behaviors. How to create and maintain a new status quo is the challenge of the year. Maintaining client service levels is another concern.
• The emotional drag on certain people – we need to continue to build morale and engage and connect with people through this crisis. We’re focused on development, coaching, and mentoring people. We’re maintaining a strategic plan and overcoming resistance to invest in the future. Our partners are embracing change, and there’s acceptance of possible lean years.
• Collections. Do we have the training to manage a remote workforce? We are in a hard-hit area and are not expecting people to come back to the office any time soon.

R. Shapiro Key Takeaways: 

1. Cash. The biggest concern is cash collections and cash management, even more so than demand.
2. Strategy. MPs are also concerned about pushing their strategic priorities. There is concern about how long this will last and what that might mean. Will change last?

 

Question: As you think about the future of your firm, what are you most excited about?

Answers:

• Opportunities in acquiring talent, and outsourcing opportunities with existing clients. Adapting to a periodic remote working environment with shared offices. Emphasis on improved communication and client service to most important clients. A and B clients contacted regularly.
• Adoption of remote working. In particular, partners will be more accepting of staff working remotely. Forcing some to adapt to technology who were previously resistant. Client relationships being solidified. Forward-thinking will bring in new business. We’ll lean into recession by looking for talent and outsourcing to India. There is additional monitoring, which is giving a better handle on what people are working on. There is too much office space for what we think will be a long-term 25-50 percent increase in working from home time.
• Instilling the value of a long-term approach to the firm and fostering a nimbler partner group. This has allowed us to see that we can deal with change. We’re learning to make decisions quicker. I’m looking forward to going back to something new, with new thinking being possible.
• We have figured out how to work from home, and this will help with staffing opportunities. We will set people up at home with docking stations. There are more outsourced accounting opportunities as clients shed this function.
• That we will come out of this strong. I’m also most excited about helping to get clients back to where they need to be.
• How people have stepped up and led. There will be more accounting outsourcing opportunities. Supply chain disruption may lead to manufacturing coming back to the US. Acceleration of growth and acquisitions because our firm is a good place for others to land.
• Our firm was department oriented. This has brought about cross-department collaboration and has broken down silos.
• This has gotten people to embrace change particularly as it related to process and technology. It has forced change for some reluctant partners.
• We’re most excited to learn from this experience, and chronicling everything being done for future reference. I believe this will lead to new ways to manage. It will reinforce the value of core compliance services. It will lead to additional automation. Space needs will be viewed differently. There will be a middle ground in terms of space needs and remote working. This will lead to developing deeper relationships with clients.
• People willing to accept a faster pace of change.
• Better service firms like ours will come out ahead.

R. Shapiro Key Takeaways: 

1. Change at a faster pace. There will be an opportunity to reexamine how things were done in the past and to get buy-in to change them – and change them at a faster pace than ever before.
2. Broken down barriers. There will be more acceptance of working from home and less office space needs. There will be a lot of opportunity for outsourced accounting services. There will be opportunities to hire people and geography will no longer be the barrier it has been. Barriers have been broken down within firms themselves and fostered cross-department collaboration.
3. Making accounting new again. Firms are looking forward to being stronger, nimbler, quicker to lead, and quicker to make decisions. This could be an exciting opportunity for accounting to feel new and innovative again.

 

Question: What is your top priority in the next 6 to 12 months?

Answers:

• Managing through the crisis and transitioning back to normalcy. Maintaining quality control standards. Planning and scheduling through October 15th. Better project management, creating a constant flow of work throughout the year. Consistent client communication and discussions.
• Cash and balancing resources with unknown work requirements. Making decisions with less visibility. Being able to service clients.
• Keeping people productive and not having excess capacity. Cash collections. Credit risks. Generally, protecting the firm.
• Stabilizing under the new normal and building an organization that can handle disruption. Building capacity to be resilient.
• Managing prudently, including cash. Keeping strategic initiatives going. Balancing strategic priorities.
• Collections. Faster billing. Developing ideas on how to do things better. Developing ideas to help clients. Figuring out how to do business development differently.
• Maximizing revenue. Business development and leadership development. Changing the mindset of people at the firm.
• Embracing change at the firm, especially in the tech space, establishing new practice areas. Further automation. Focusing on the client experience.
• Adapting to the situation. Going back to the strategic priorities, including business development and expansion strategies.
• Cash. Productivity. Having the right talent in leadership positions, and pushing growth.

R. Shapiro Key Takeaways:

1. Cash management. In the next 6 to 12 months, the focus will be on cash management and protecting the firm.
2. Productivity. Keeping people productive and working on strategic priorities will be top priorities.
3. Capitalizing on change opportunities.

 

Question: How will your succession planning be impacted?

Answers:

• This is showing who the real leaders are. It has brought out things in people not seen before, both positive and negative. This will influence our decisions on who will become partners in the future.
• Not expecting any change (EC working fine).
• Do not see any impact.
• Will be able to see how the people next in line will learn. No change in plans at this time.
• No change. Have and will continue to focus on this.
• This time has made evident who aren’t the right people to lead.
• No change.
• No change in leadership succession. Potential for some partners to want to work past retirement age due to financial impact.
• Allowing us to identify future leaders. Opportunities are being created to allow people to step up.
• There will be fewer partners made this year.
• No change.

R. Shapiro Key Takeaways: 

1. No change. There has been no change to succession strategies.
2. Emerging leaders. This will allow firms to see how people respond and behave and indicate those who are future leaders – and those who are not.

 

Question: Do you view M&A the same or different than before?

Answers:

• No change here.
• Opportunities will be created as some firms will not survive because of technology deficiencies or lack of financial resources.
• Not part of the strategy.
• There will be opportunities. Some firms are anxious. We want to see how this year turns out for those firms and our firm before moving forward with additional acquisitions.
• Will make it easier to hire people.
• Don’t view differently. There will be more opportunities.
• The strategic drivers have not changed. There is an issue of how to evaluate the targets in light of recent events. For many deals, there may be a wait and see approach. Some firms will suffer and want an upstream merger.
• Firms are trying to stay connected with potential targets that they already know and see if they can get a bargain. Some smaller firms will want to hang it up.
• This will allow us to attract smaller firms that don’t have the back office that we have. More due diligence will have to be done to determine how potential targets may be impacted. Will their clients survive? There will be low-hanging fruit.
• This will make merging-up more attractive for some firms.

R. Shapiro Key Takeaway: 

M&A opportunities. There are likely to be additional opportunities in M&A as a result of the crisis. Smaller firms and less technologically advanced firms may be looking to merge-up; however, acquiring firms are reluctant to dive in at this time.  Acquirers seem to want more visibility before doing so. Additionally, it is difficult to initiate discussions between firms unless they already know each other, as principals of firms are used to meeting each other face-to-face during discussions.

 

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