By Hank Bulmash, MBA, CA
"I've been asked to become the managing partner of our firm," said Albert Hawkins. He is 45 years old and has been a partner in his medium size firm for nearly 10 years."That sounds great," I said. "Y...
“I’ve been asked to become the managing partner of our firm,” said Albert Hawkins. He is 45 years old and has been a partner in his medium size firm for nearly 10 years.
“That sounds great,” I said. “You’ll do an excellent job.”
“The truth is that I don’t think of myself as a manager — I think of myself as an engineer. In fact like most of the engineers I respect, I’ve avoided management as much as possible.”
“It’s a problem in the profession,” I said. “In many professional firms highly competent practitioners have the greatest prestige. We tend to look down on professionals who are mostly sales or management oriented.”
“That may be true,” Albert said, “but it’s understandable. Management duties can be a thankless burden — and I’ll still have to produce my revenues and billable hours.”
“And if you’re too good at managing,” I said, “You may never escape.”
“True enough,” Albert laughed. “Our last president held the job for eight years.”
“You can look at managing as a skill set, like engineering,” I said. “Your firm will improve if understanding the skill set becomes a priority for the partners. All businesses have three major processes: people, operations and strategy. The people process is concerned with selecting the right people, developing them and retaining them. Operations is, of course, where you spend most of your time. It consists of sales, delivery of services and financing. The last process is strategy, and that’s where most businesses fall down.”
“No offence, Hank,” Albert said. “I know you think that strategy is important. But at our place, it’s been a complete waste of time. We hired a consultant to help us with the firm’s direction. We paid a great deal for a report that everyone more or less accepted. But it was time and money down the drain. For a while some people devoted energy to consciously build the firm. But nothing substantive ever got done. The inertia of doing things the old way was just too strong, I guess.”
“I don’t think so,” I said. “You’re a bunch of rational people. I think you made a rational decision. You did things the old way because you didn’t think working on a new plan was worth the effort.”
Albert nodded. “You’re right. In an informal way, we all came to the same conclusion.”
“You came to the realization that most professional firms arrive at — planning beyond a certain point doesn’t work. Unfortunately that’s the wrong inference because it’s based on a false premise.
“The premise,” I continued, “is that planning is a lot of work that doesn’t improve the end results. And the reason it’s wrong is because the numbers say so. Consider this. You are one of eight partners, and you own about 12% of the firm. You have about 20 years left in your working life. I recall when we talked about your retirement plans, you intended to work until the firm’s mandatory retirement age of 65. You figure that you need to save the funds for your retirement because the capital value of your interest in the firm will reflect only your work-in-process and receivables.”
“Correct,” said Albert. “We project that our revenues increase at about 6% per year. That means in 20 years the firm will have three times the revenues it has today. But the value of my interest will not increase by much because we’ll need new partners to run the added business.”
“There’s a logical flaw in that argument. Your real situation might be much better than you suppose. If the firm grows by 6% per year over the next 20 years, the value of its goodwill cannot increase by much. The reason is that 6% growth will likely reflect a combination of 3% real growth and 3% inflation. Since 3% real growth is the normal expected growth of the economy as a whole, your firm would only be growing in line with its market. Since the firm will only be treading water, buyers for your shares will not pay much more than the capital value of the firm. But if the firm were growing more rapidly, the goodwill growth over 20 years could be explosive. For example, growth at 10% would make your firm worth six times today’s value in 20 years. Growth at 15% would make it worth 14 times the value.”
“It would likely mean,” I continued “that you could be more selective in your choice of people, so you could have better partners who each have more value in the business. If your partners believed that their interests could be three or four times more valuable by developing a real management plan, they would do it. If they felt they could sell their interests for, say, $600,000 instead of $150,000, don’t you think they’d be willing to allocate some energy to the program.”
“Sure — but there are two big problems. First, you would have to get them to believe, and that won’t be easy. Second, you’d have to show them who would buy their interests for $600,000. Our partnership candidates don’t have that kind of money.”
“Both important issues. But first determine what company attributes lead to goodwill value, and then we can develop a business plan to develop those attributes. When we can show that the attributes are achievable, we’ll work on ways to select and develop the right people to take advantage of that goodwill.
Hank Bulmash is a principal of Bulmash Cullemore, chartered accountants of Toronto