Is your accounting firm at an inflection point?

Another busy season has passed. The profession continues to wrestle with labor issues, forcing firms to try to expand their capacity and find ways to sustain profitability or continue growth. The continued reduction in the supply of CPAs is simple math. Aging CPA Baby Boomers are retiring at a higher rate than new CPAs are being admitted. Add in the number of CPAs going to the private sector and it becomes clear that the labor problem is not going away. 

There are many ways to increase capacity. These include offshoring, raising fees, client upscaling, hiring remote staff and adding advisory services that do not need a CPA to deliver. Technology and the use of bots and artificial intelligence are promising capacity expansion options, but they are still evolving, and the cost may be outside of the average firm’s ability to implement on their own. 

Now examine ownership options. Outside investors continue to seek practices. Mergers and acquisitions of firms at all sizes are occurring and more are in discussions. There is so much M&A activity because internal succession plans are struggling at many firms. Other firms have no succession team, or the team fell apart because a key person left. 

Major succession flaws include the succession team not wanting to make the financial commitment, not agreeing with the value of the firm, or being unwilling to assume the buyout liability of exiting partners. A common hidden succession flaw is that the succession team has minimal selling skills or no referral network. 

Are you at an inflection point?

Do one or more of these capacity expansion or ownership items above exist inside your firm? Every firm has some inflection point consideration, hopefully just one. If your point(s) are not M&A-related, but succession is a concern, you may end up with an M&A consideration. The decisions your firm might be facing may not be unique to the accounting profession, but they are unique and real challenges for your firm to overcome, and the labor pool time clock is ticking. 

Foundational investments are drivers forcing inflection point decisions. Foundational investments are initiatives such as people development programs, offshoring, adding advisory, upgrading technology, implementing AI, and adding a COO, CFO, chief growth or chief human resource officer, or in-house recruiters. These require funding, dedicated time to implement, the leadership ability to manage these investments, and the patience to wait for these investments to pay off. 

Here’s where the inflection point gets complicated. Firms may have hit some type of point in the past but either tried and failed, or never had the time or money to resolve them. Often firms get confused about profit margins. The profit margins of the bigger firms are often lower than their smaller peers. This is a result of the foundational investments that larger firms need to make to maintain sustainable growth. Without them, firms remain flat. 

This brings the conversation back to the initial concept of your inflection point. It is possible you may not recognize that your firm is at one of these points. Some firms have tried offshoring and it either failed or was at best average, while others deeply embraced offshoring. Remote/hybrid workers continue to be on the rise and may be a tremendous solution, but there are still questions about productivity and cultural integration. Due to the labor turmoil, we are seeing firms question whether their succession plans are feasible and if they want to make the foundational investments needed to maintain or grow their firm. Those elements are fueling a majority of M&A activity in the market.

Will technology be the capacity expansion savior? How long will it be before AI enables firms to do more with less people, which will put the labor shortage back in balance? AI is evolving and, like any emerging technology, it will take time for it to refine, become mainstream, and eventually affordable. Firms may be able to absorb the cost of increased technology, but will they be able to implement and manage that technology? 

A simple exercise

Step back and look at your potential decision points. Try this simple exercise. This might seem old school but take out one sheet of paper. List the top five items you see as opportunities you wish you could either add to your firm or take to the next level. Then prioritize which items would have the deepest impact on the future of your firm. Repeat the process with the top five items causing the most pain and prioritize these items. This is your roadmap; it should represent your most critical steps moving forward.

Complete the exercise by putting three bullet points under each item. Those bullet points should be what it takes to accomplish each item on the list. These could be financial, leadership, operational changes, etc. This will enable you to dive deep into the next step. 

Stare down those 10 main points. Put aside the emotional elements that everyone has with their firm. Can you make these changes in a realistic timeframe with an investment that makes sense? Do you have the leadership to make this work? 

This is your inflection point. These items and each bullet point beneath them do not need to be immediately resolved. They just need to be actionable items that can become implementable solutions that you and your leadership team agree to commit to make work. 

If your one-page list is not achievable, you have a decision to make. The first is to revisit the list and the decision path that led you to the unachievable outcome. If the answer is still the same, then recalculate the cost it would take to make the investments in people, technology or other needs on that list. If the answer remains the same, then you might be at an impassable inflection point. 

This is not a negative outcome. You will have put yourself in the position of power because it is always better to see a challenge you are facing rather than to get hit by it because you could not see it. Your inflection point might be the breakthrough you need to make your firm stronger either internally or by affiliating with a different firm — a firm that eliminates or reduces the obstacles and that enables you to pursue the opportunities that were on your list.