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Survival of the Fittest

Joanne S. Barry, CAE

Good times are here again. At least, it looks like “good times,” according to the recent release of the 2016 Rosenberg Survey, one of the most respected and widely read national accounting practice management surveys in the country. A closer inspection of the results, however, reveals a more nuanced outlook.

Looking at the Trends

Rosenberg is reporting that CPA firms with revenues of $2 million and over enjoyed a rate of 8.1% growth in firm revenue in 2015, a rate not seen since 2008, during the depths of the last recession. As Rosenberg notes, this is a rate of growth “we typically see in good times.” In New York State, that growth translates to an income per partner of $533,006, among the highest in the nation. However, year-over-year fee growth was 5.3%, down from 7.1% in the prior year. Something else is at work here. First off, a sizable chunk—2.3%—of revenue growth was due to firm mergers. Revenue growth tells one story, but growth doesn't mean profitability.

The survey found that CPA firm profitability exceeded the prior year by 3.6%. What drove it? A sizeable increase—between 7 and 14%—in staff-to-partner ratios at firms of all sizes, unprecedented in any of the past 17 previous surveys. Staff head counts remained relatively constant, but what shocked the Rosenberg folks—and that's the word they used in the survey, “shocked”—was the drop in the number of equity partners, between 2 and 9%. The number of partners over the age of 50 also declined from the prior year. These metrics may signal that the cumulative number of partner retirements may have reached an historic high.

Another contributor to profitability was a decrease in partner income as a percentage of revenues, which, Rosenberg reminded readers, doesn't mean that firms were less profitable, just that the new equity partners made less than their predecessors. Finally, firms increased their billing rates in 2015, larger firms by about half a percentage point and smaller firms by about 2%, according to Rosenberg. Firms in the $10 million to $20 million range actually reduced their billing rates.

Firm Management

Ask a managing partner what keeps him up at night—and yes, it's mostly a “he” in the managing partner role; Rosenberg tracks gender stats and found that the number of female partners declined last year, from an already unhealthy rate of 17.5% to 16.5%—and he'll tell you it's staff shortages. The challenge comprises retaining and mentoring staff: “Obsolete practices include partners being too billable, firms failing to truly treat staff as important as clients, not enough embracing of technology, too many hours and not enough profits, and not enough flexibility in where and when staff work.” Sound familiar?

One consultant reported that she was seeing more firms draft “Vision Plans,” making investments in leadership, developing rainmakers, and recruiting and managing talent. Partners are finally recognizing the value represented by their staff and taking on functions that used to be left to human resources. But those are the firms with partners who get it, who have a survival instinct.

To those firms whose leaders continue to keep their heads buried in the sand, I'll leave you with the following words from Jeff Pawlow, president of the Growth Partnership, which produces and publishes the Rosenberg Survey: “Evolve or die. Survival of the fittest. Which side of the divide does your firm fall on? If you have to ask, you're already in trouble.”

A more in-depth exploration of the Growth Partnership's 2016 Rosenberg Survey results will be published in the December CPA Journal.

Joanne S. Barry, CAE. Publisher, The CPA Journal Executive Director & CEO, NYSSCPA.

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