Sunday, October 07, 2012

Why Fish, when you could Farm?

Last week, I had the opportunity to spend my time at a CPA managing partner conference. It was a great opportunity to meet with some managing partners and to gain an understanding of the major issues they are facing. As it turns out, CPA firms are very much like law firms in their organization and practices, so much so that their WIP and AR management issues are almost mirror images of each other. After two days of meetings, and round table discussions it dawned on me that the problems faced by law firms and CPA firms, are deeply rooted in their organizational structure.

As we all know, law firms are built of varying legal acumen of the practitioners. At the bottom rung are the students who must learn the ropes; higher up the tier are varying levels of senior associates. The top of the firm is made up of department heads, non-equity partners, equity partners and the managing partner. In the accounting world, the names are different but the structure is somewhat the same. As I can deduce, the role of the managing partner is basically to manage the firm based on direction of the various committees. Now, depending on the firm, the managing partner may have their own practice; which really doesn’t lend itself to ‘managing the firm’. Then one must question, what really requires ‘management’ in today’s firm?

In his book, Collecting your Fee, Ed Poll makes a very blunt statement that law firms are the product of their own actions. They have no one to blame but themselves for the slowness of collections of their bills. I believe Ed is very accurate in this conclusion, however, I must take it a step further. The managing partner of the professional service firm is solely responsible for all of the delinquencies associated with collections of outstanding receivables. The managing partner must face the reality that they and only they can make a change.

You must be wondering how such a bold statement can be made without some support. Support really isn’t needed, as the managing partner is responsible for the ‘management’ of the firm. So having garbage receivables and poor cash flow is directly their responsibility! I feel that the managing partner is either spread too thin or simply doesn’t have enough power in making a change. Therefore, the firm continues day-by-day, month-by-month and year upon year to have sloppy accounts receivable management practices.

If you take a moment to examine how law and accounting firms are built you will begin to see where the flaws exist. It is these core flaws in the structure that leads to an ineffective managing partner. These firms come about principally by mergers, acquisitions or organic growth. For the most part, M&A, activity has lead to large national and global firms. During these activities, small firms become bigger firms, which become bigger firms and so on. However, with each M&A activity different cultures are forced together. It is the failure of these, often heterogeneous cultures to meld that is the basis for all of the problems.

Following an M&A event, there is the existing culture and the new culture. Well both cultures have ‘always’ done things a certain way. Who is going to change now that they are a single firm? The problem is exacerbated when the new culture is in a different location. It is much more difficult to discern if the cultural differences is a necessity of the local economy, the firm exclusively or some combination of both, therein lies some of the challenges. Post M&A activity, often the cultures don’t gel and the firms now have the essence of two companies under one name. As the firm continues in its expansionary plans each successive M&A activity increases the number of cultures that continue to do things ‘their-way’, all the while; operating as a single entity.

On a macro-level there can be several cultures, by virtue of the M&A activity, but what about firms who have grown organically? Firms also fall victim to micro-cultures. In the organically grown firm and also the M&A grown firm, all the partners make up the ownership of the organization. To that end, they each believe in how they should manage their practice and how the firm as a whole should operate. After all, they do own a piece of ‘the pie’. The compensation of the partnership structure acts to create an information hording mentality, where each partner is more focused on his or her own practice, through billable hours and client intake, rather than on the overall well being of the organization.

It is the presence of these multitudinous cultures that makes the managing partner completely ineffective. Essentially the managing partner is faced with the task of managing (depending on the number of partners) his or her own peers; who like them, have a practice and must generate revenue. So the difficulty of the task to keep all the partners playing the same game is almost impossible. All of this is compounded with the many active committees in the firm, each pushing or pulling for their own political agenda.

An example of this came to light during a recent conversation I had with a colleague, I found that the managing partner has no control on his firm; it simply continued as it had for decades. My colleague is the managing partner of a national firm. His firm has grown principally by M&A activity and with 10 offices across the United States the culture is radically different between offices. In each of the offices there is an office managing partner, to whom all local partners report. However, the situation that I used to bring reality to light is in the firm’s practice of expert witness in accounting/financial litigation.

In the firm, one partner in the head office manages a practice of expert witnesses for white-collar crime litigation. This partner has agreements in place with insurance carriers for this type of work and all such work throughout the firm goes through this partner, except for their west coast office. This head office partner sets her own rate in which the insurance company sometimes fails to pay. She then seeks compensation from the insured. The reality of the failure of the firm to act consistently was a bit of a surprise to my colleague; however, he didn’t want to address the issue, simply because, the ‘cultures’ are different. As dinner progressed, I brought to light how the firm was basically acting as two different firms when it came to this practice group. At the end of the night I closed with, if a single practice group is so heterogeneous, what is going on between all office practice groups and within practice groups? To that, I received a blank stare. It is no wonder that they have AR issues in the various practices in the organization.

With firms’ blatant failure to ‘gel’ and have one codified practice throughout the organization, the managing 
partner becomes nothing more than the tour guide for a group of fishermen; someone who simply makes ‘suggestions’. Each partner simply fishes in the sea of revenue to get his or her own catch. Instead, firms could reap tremendous rewards through leadership, direction and focus. All the partners must be focused and operating under a single codified set of rules. Once that is achieved, the managing partner now becomes the leader of the firm’s destiny; a farmer. As a fisherman, each person takes his or her chances. As a farmer, the foundation is laid; the rules are in place, everyone is in lock step together, and the end result – a bountiful harvest. Sadly, in today’s practice most partners are casting their lines into the sea of revenue, when they could be harvesting from the fields of profitability!

Can’t Escape from …Bud !

From my earliest days in my finance career I have never been a proponent of the mind numbing laborious task of budgeting.  I guess I was never part of the typical accountant stereotype of accountants; ‘number jockeys’.  I guess my alienation from the stereotypical accountant was rooted in my education, it was devoid of budgeting.  It wasn’t that the process didn’t exist, it simply wasn’t taught.  I often wondered where this ‘strange’ habit of budgeting found its origins.

In the mid 1990’s there was a movement away from the horrifically painful process embraced by those crystal ball readers.  The new age model was based on projections, and rolling forecasts not prophesying about the future. The early adopters of these new finance tools became the evangelists of what was perceived as a better way of running businesses.  Their core motivation for the escape from budgets was ‘agility’, the ability to change corporate direction at the first glimmer of a new opportunity.

Through the 1990’s and into the new millennium this new paradigm never took on pandemic dissemination. In principle it sounded good but it was the ‘betamax’ of the finance world. This redheaded step child eventually found its demise as the new millennium brought unprecedented economic downturn. The budget was not replaced; it survived the holocaust of progressive thought.

Like any yin-yang duality, innovative thought has again made its resurgence and once again attacking those crystal ball gazers.  As it turns out, the rolling forecast of the 1990’s has arisen from the ashes and has gained tremendous momentum with the elite of progressive organizations.  None a better time when the global economic is seeing some thread of international competitive advantage; this time, only the most progressive organizations are demonstrating that ‘Bud don’t know Jack’, February 2012).

According to Professor Kenneth Merchant at the University of Southern California’s Marshall School of Business, there are at least 100 companies across the globe that have or are in the process of replacing the budgeting process for more agile and timely reporting. The anti-budgeting Czar, Steve Player, contends that the budgeting process is a huge waste of time and it is part of the ‘dumb’ stuff that finance does. The process of budgeting is riddled with faults from its very inception!  In the most conservative organization managers attempt to predict the future by building an illusion of the coming year.  On the more liberal side, executive management establishes a target, say 25% growth, and managers rub the genie’s lamp and magically produce the smoke that satisfies those requirements.  Like smoke, the budget never endures for the year much less a few weeks if any.  According to John Hrudicka, CFO of Elkay Manufacturing, “With a budget, you’re requiring the company to stick to plans with little or no appreciation of how the world has changed”. To take it a step further, how the world WILL change!

Player professes that budgets are based on assumptions that are ‘wrong’. Therefore budgets are nothing more than building an empire on quicksand. From a completely objective position the entire budgeting process is an expensive exercise in time wasting which ultimately strips management of accountability. When management creates budget they either become tied to easily achieved targets, stripping them of motivation of achieving greatness and the organization suffers from seizing opportunities to create real value. At the other extreme, ‘progressive’ organizations are driven by unattainable budgets goals developed completely with no regard to the ‘economic world’ end up demotivating or completely decimating their labor pool as the goals set are completely unachievable. 

In his book Winning, Jack Welch famously griped: “It [budgeting] sucks the energy, time, fun and big dreams out of an organization. It hides opportunity and stunts growth. It brings out the most unproductive behaviors in an organization, from sandbagging to settling for mediocrity”.

With all of the knowledge abound, knowing that budgets are obsolete the moment the toner dries the last line, why do organizations continue to worship at the budgetary alter. I guess the problem rests with stepping out of the comfort of ‘we’ve always done it this way’.  Pat Hensley, CFO of Holt CAT (a caterpillar dealership in Texas since 1933), puts it well with ‘A budget is like a cockroach-you think its dead, but then you have to spray more Raid on it’.

As in the 1990s, only those organizations that have the desire to achieve greatness have buried the budgetary beast and have revived target setting and action planning. To be truly progressive and adopt the agility to achieve greatness the organization must break free from the Alcatraz of Budgeting, because only the best will survive the new economic world order...