Performing a successful firm downsizing.

Many CPA firms today are facing or considering downsizing, restructuring or similar modifications because of changes in the business environment. Knowing about our experience may help such firms prepare for what's in store.

In 1989, our firm, Smith, Batcheider & Rugg (SB&R), had 22 partners, a staff of 180 and $8 million in revenue; by the end of 1993, SB&R had a leadership group of 5, a staff of 50 and $3 million in revenue. Along the way, we learned there are a number of major issues that must be considered as a CPA firm's leadership prepares itself for the economic realignments occurring in our marketplace. As a professional service firm addresses these issues, launching a program of analysis and realignment requires a delicate balance between the organization's needs and the personal interests of everyone involved.

This article discusses actions that can help firms avoid analysis paralysis. In his book on Downsizing, Robert M. Tomasko said the problem is "not the quality of [the] analysis but the tendency ... to substitute analysis for action."

A firm realignment should make a practice healthier and better able to compete in its local markets. Even firms that are not contemplating a downsizing can follow some of the steps recommended as part of a good practice management strategy.

KEEP COMMUNICATIONS OPEN

When major change is in the works, professional staff and associates must be made aware of management's plans. If they are forced to rely on the rumor mill, they will expend a great deal of productive energy ferreting out information that may not be valid. Management has to understand that once the leadership has settled on a reorganization, particularly a downsizing, the involvement of appropriate personnel at all levels is absolutely necessary for successful action. Firm leaders must discuss their strategy in advance, keep everyone advised and minimize surprises through decision sharing.

Concealing a decision to effect a managed contraction for too long will only result in bad feelings and alienate personnel who could have been helpful in the process. Early involvement of key people at all personnel levels means the right information is disseminated to all associates. Once a decision has been made to eliminate a service or close an office, the sooner all those affected can be informed, the easier it will be to implement the decision.

IDENTIFY THE SOURCES OF CASH As an organization shrinks, it may generate a temporary cash surplus. Using these funds properly is critical to a firm's continuing survival.

The client base has to be analyzed with cash generation in mind. For instance, bidding a job at less than standard rates may be an appropriate strategy for a larger operation, but as a firm contracts and overhead is adjusted, management knows that the relationships between variable and fixed costs will change. Policies such as having a client who pays full fees subsidize a less valuable client relationship must be evaluated continually. Valued clients who appreciate the firm's efforts, recognize how to use its professional skills properly and pay a premium for quality services should be cultivated. Clients who demand too much, complain about cost and devalue the firm's efforts should be reevaluated.

Management must assess the firm's cash sources. It must determine which clients are reliable, which are difficult to collect from and, even more important if the downsizing is caused by a general economic downturn, which ones will survive and which ones may not be in business tomorrow. Clearly, if firm resources are limited, smart CPAs will choose to work with proven winners.

REVIEW THE PERSONNEL COMPLEMENT

As a business shrinks, its personnel must become more versatile and flexible. The associates a firm chooses to retain should have the desire and skills to compete in the new employment environment. That means taking a careful look at associates' personal needs. People who were very happy when the firm was on a rising tide may become dissatisfied with new assignments, repetitious work and the organization's inability to fulfill expectations that were once valid.

In a recession, when clients struggle to maintain profitability, there may not be a lot of glamorous analysis to perform. If solid, basic compliance work is all a client needs, the firm must decide how to render this service in the most cost-effective way. Employees must believe their personal goals are compatible with the organization's. The firm's approach to a work assignment must respond to the individual's needs, and efforts have to be made to achieve harmony and congruity between personal expectations and the work experience available in a smaller organization. No matter how difficult the economic and psychological stress of shrinking a business, if organizational goals and employee needs are compatible, firms can and will have enjoyable and rewarding transformations.

ANALYZE THE GOVERNANCE STRUCTURE

As the size of a professional service firm shrinks, its formal decision-making process and governance structure must be modified. Management must create a new organizational structure. Efficiencies have to be achieved at the administrative level, and procedures that were followed in the past must be evaluated and discarded if necessary. As the organizational structure changes, there may be power shifts among associates. This process may be very difficult for people who are unwilling to give up power, whether perceived or real. It is imperative that firm owners be open and candid about their expectations for employee involvement in decision making and that the group decide on the most cost-effective way to make and implement necessary management choices. Firm leaders must expect and accept that some of the most cherished performers may resign and that their departure will cause economic changes and new threats to the firm's financial survival.

KEEP CLIENTS INFORMED

Clients want to be associated with successful professional service firms and may incorrectly perceive a correlation between a CPA firm's size and its credibility and level of client satisfaction. Size does not have to be proportional to client satisfaction and volume does not always mean success in a client relationship. Smaller can be better, but clients must be educated. Clients trust a firm's recommendations and seek solutions because its leaders understand their business. As firm leaders reshape the organization, clients are entitled to know how change will affect service delivery. It takes time, but valuable clients are understanding people who will appreciate the process if it's explained adequately. Clients want their CPA firms to be successful.

Firm management should assume nothing about clients' knowledge of and reactions to major changes. They should communicate their goals to the clients so that clients understand and accept the strategic decision to downsize and the benefits the client base will realize from these changes.

Addressing a client's personal need to know the firm's status and plans goes a long way to enhancing the relationship. In the business world, there is no greater bond than that created through the experience of sharing problems, conquering adversity and discussing the process in an open and candid manner. Firms must strike a balance: Owners won't want to reveal too much information, but those who value client relationships will be the first to deliver news (whether it is perceived as good or bad) openly and clearly.

Clients always will need CPA services but if they perceive that a firm is in economic turmoil, floundering from the loss of a major client or simply not in control of its own destiny, they most likely will seek alternate sources of professional advice. Successful firms exist only if they are able to meet and satisfy client expectations, so continued good service is imperative. However, a decision to downsize may cost firms certain client relationships for very legitimate reasons. In this age of specialization, it may not be practical to keep only one client in a major industry specialty. As the focus of the firm changes, resignation of longstanding client relationships may be both necessary and practical. Client resignations are one byproduct of a decision to reconfigure a CPA firm.

ADDRESS THE NEEDS OF OUTSIDERS

The business community must be told what is happening to the firm. The best approach is to get the message out early through press releases and client mailings so the public can understand the firm's actions. Terminating personnel, for example, can be seen as negative or positive, depending on how it is handled and presented to the public. In the long run, all decisions that enhance an organization's ability to continue to serve its client base are positive and beneficial--and firms should ensure that point is made.

Practitioners should consider which segments of the public to contact and what their needs will be. Attention has to be paid to key referral sources and influential members of the community. Bankers, for example, should be told what effect staff reductions will have on a firm's ability to serve its clientele. The financial community's perceptions can be instrumental in a firm's effort to attract and retain clients. Those who recommended the firm in the past need to know the effect of management decisions and do not want to be taken by surprise when changes are made. Continued support from the commercial banking community is a must for a firm's survival, not just because of the need to secure financing sources but also because such support is a positive referral source.

Another group that must be kept informed is the firm's creditors. Reorganizations have an effect on the cash cycle. When CPAs anticipate a change in payment terms, they should advise their suppliers and creditors in advance to maintain good relations. In most cases, creditors want to preserve customer relationships and generally will extend additional credit or modify payment terms when they are informed of new firm directions and goals.

Former firm members can be very helpful practice supporters and should be told about actions such as changes in future staff capacity. Former associates who understand the value of their experience as employees frequently repay the favor through a referral or some other beneficial act, so they are an important constituency.

Referral sources should be cultivated constantly, which includes keeping them informed of the firm's organizational plans. Next to clients, they are the people who are most important in enhancing a firm's effectiveness in attracting new clients. Telephone contact responsibilities for lawyers, bankers, referrals and other key community members should be assigned to ensure firm members communicate the right message.

MAINTAIN GOOD PRESS RELATIONS All firms should make the most of free publicity. At SB&R, we believe that no press is bad press. As the economy soured and the press attempted to inform the business community of the implications, we found that a candid discussion of our firm failures and successes was helpful. Even when our news releases generated negative stories on employee terminations and bad economic news, they led to new client opportunities.

We found that an effective public relations strategy was to assign press relations to a partner who had both the inclination and the skill to identify a "hook" for a good story. This way, the media got an interesting item and the firm's story was published in the best light possible. The key is to accept press attention as a wonderful opportunity to manage and distribute information--good or bad--in a positive light.

AN EXCITING CHALLENGE

Our firm had a long period of unparalleled growth but currently faces a reduction in potential new clients. The sooner other firms recognize and adjust to this new reality for themselves, the easier it will be to address the issues it raises.

Leading a professional service firm through an economic contraction is difficult. The challenge is an exciting one and requires a resourceful, innovative and responsive attitude. Transformation can be psychologically demanding, requiting extreme flexibility and application of new ideas in an open environment with an emphasis on communication. But it also can produce a healthier, better managed firm.

EXECUTIVE SUMMARY

* MANY CPA FIRMS are facing or considering downsizing, reStructuring or similar modifications because of changes in the business environment. A firm realignment should make a practice healthier and better able to compete in its local markets if the firm follows some steps that are part of a good practice management strategy.

* STRATEGIES FOR A HEALTHY reorganization include

1. Keeping communications open. All firm members should be informed of planned changes.

2. Identifying the sources of cash. Thoughtful cash management is crucial during a restructuring.

3. Reviewing the personnel complement. Retained staff members must be able to thrive in the new environment.

4. Analyzing the governance structure. Major changes mean new roles and decision-making authority for firm leaders.

5. Keeping clients informed. Candid reports on firm plans are important in maintaining good relationships.

6. Addressing the needs of outsiders. Firms should discuss changes with bankers, creditors, referral sources and others.

7. Maintaining good press relations. No news is bad news if the media are handled properly.

JOHN SCHIFFMAN, CPA, is the current chairman of Smith, Batcheider & Rugg, Lebanon, New Hampshire.