Moving From The Success To Continuation Modes Of Operation Part 1

Now that we have introduced the 4 modes of operation (survival, safety net, succession and continuation) and then reviewed a case study regarding the same in my last column, I wanted to share a recent experience discussing this. Several weeks ago, I introduced the concept we have been covering in our last few articles in a workshop I conducted. As part of program, we included a breakout on the case study we covered in the last column. Every group, without exception knew exactly what to do. Why? I think it was partly because they were evaluating a scenario other than their own. Sometimes, we are too close to our own situations to see the forest through the trees.

Here is a summary of issues they raised as to why the case study firm of Cingoranelli and Reeb is not set up to move from the Success to the Continuation mode of operations.

• Governance – CR has established power in people not positions
• People Development – CR doesn’t develop successors; they don’t develop to close skills gaps; they operate on the crème rising to the top with the rest being marginal. CR has more emphasis in making yourself better, faster and stronger than rewarding people for the development of those who report to you.
• Interchangeability – CR doesn’t develop jobs/roles so that it is easy for new people to fill vacancies. The organization is built to leverage the specific skills and talents of the existing key people (with the firm constantly being optimized for near term efficiency rather than long term effectiveness)
• Accountability – CR doesn’t establish many rules or hold people accountable because systems and processes are developed to reward the hunters for their versatility and are made to bend so that hunters are not restricted in any way
• Compensation – The plan is not developed to change with strategy, but rather to reward the hunters for current and past personal achievement, with a heavy emphasis on the continual payment for past effort.

We then covered a few additional general points about crossing the chasm between the two modes:

• It is common for retiring founding fathers to leave a cadre of partners at various stages of capability with voting rights misappropriated, in the wrong hands to assure a successful future, and talent gaps too big to overcome.
• The failure in successful transition to the next generation isn’t nearly as much about the inability of the incoming leaders as much as it is about the processes, systems, and
  governance to which this leadership group accedes.
• Organizations customized to leverage the specific individual talents and control of the departing founding fathers are not positioned to continue, but rather to sell.

At this point, the discussion shifted to the question, “Given everything CR needs to do, what are the first steps you would take to try to address their situation?”

First, we would recommend working on governance … identifying roles, responsibilities, limitations and powers of key roles and decision making groups within the firm (this is no surprise to those who have been reading my columns for a while). The next step would be to look at ownership to make sure that we are not sloppily leaving too great of voting-power in the hands of the people remaining least skilled to lead. To ensure that this doesn’t happen, we often have to go through a process to reallocate future ownership interest. This step is often required anytime a large block of ownership is about to transition to the remaining partners (5% rarely triggers this, but 30% or more usually does from our perspective). With this much stock or ownership interest about the change hands, it is common that a few people will inherit a powerful voting situation, either with enough votes to drive the firm, or more common, create a negative voting block to constantly put the firm in a stalemate position where nobody can move. This is far more tolerable if that voting block is held by your best leaders. But often, without some reallocation process, those partners that are not considered the “future of the firm” will end up with these large blocks of ownership.

This reallocation of ownership is not about creating a new generation operating in the “Success” mode, even though it might. It is more about making sure the firm doesn’t take a huge step backward. At a minimum, you want the remaining partner group to have their voting rights distributed in a way that allows the stronger partners a chance to lead rather than be in a situation dominated by the weaker partners. This reallocation process will be sensitive, create hurt feelings and stimulate conflict. But the question you have to ask is whether irritating some of the weaker partners and potentially running them off by bringing this issue to a head now is a fair trade-off for irritating your strongest partners later and running them off when they realize the new governance model -- after the current senior partners leave -- will be too dysfunctional to operate within. Or another way to put it is … if you don’t adjust voting rights to give your best future leaders a chance to lead, then the departing senior partners, in an effort to protect their retirement benefit, will most likely do whatever they can to sell or merge the firm out from under the remaining partners. So really, implementing this adjustment process can actually be fairer to all of the remaining partners, strongest and weakest, because the firm has a better chance of being transitioned to the next generation rather than being split up, sold or merged.

So, you ask, where do we go from here? We think one of the best steps forward, but a difficult one to take, is to assess the skills and capabilities of your current partners – not just the one that will be left standing after the next round of retirement, but all of them. By the way, the exercise of assessing current partners/owners isn’t meant to be a witch hunt for the weakest link, but rather an effort to make all the leaders of the firm better, faster and stronger. It is also one of the techniques we use to verify who the future leaders in the firm currently are and establish a personal roadmap for each partner as to what he or she needs to do to step up and improve. And the reason we like getting this feedback on all of the partners is because often, and we mean very often, the existing senior partners have an exaggerated perspective of their leadership ability. So by involving everyone in the leadership evaluation process, we can start from a level playing field as to where we all stand and build from there.

One of the tools we use is our proprietary survey instrument customized for CPA firms. Our anonymous 360 degree assessment encompasses both leadership competence and leadership character, and covers them in the context of leadership skills needed for the future. This is a 72 question survey instrument encompasses 12 broad categories of “What a Leader does” and “Who as Leader is.”

Now let me make this clear … there are numerous instruments you can use. There are plenty of options like ours that are based on primary and secondary research regarding the behaviors of effective leaders. Or, if you would rather go with a very basic approach, you can use a simple informal questionnaire where you ask for anonymous upward and horizontal evaluations from staff and peers. Regardless of the option you choose, any feedback process is better than nothing and at a minimum, should improve the performance of partners/owners. Unfortunately,“nothing” describes the most common feedback method embraced. The theory … the best we can determine is … “either we don’t want to know how we are perceived or we don’t care how we are perceived.”

Quite frankly, unless you really want to get better faster and stronger as an owner group, we would advise against implementing 360 feedback processes. The reason … “You will NOT like the results.” This process is very humbling because no one really gets the feedback they expect,including yours truly. Our firm just went through this process again recently and it is hard to take criticism, even what you know is constructive criticism. What we really want is to hear or read is that everything we do is great and that if pressed, only a few minor flaws exist in the way we interact with people and conduct ourselves. For the record, there has not been a case that we are aware of where this kind of flawless picture was painted.

We do not recommend the assessment process as just a one-time effort. 360 degree leadership evaluations should be used as part of the annual partner compensation system (setting and assessing personal improvement in important areas of performance). And in the case of this column, leadership assessments can provide objective insight into who the firm (both partners and staff) believes are its future leaders as well as perspective as to who is currently pulling more than their share of the wagon-load.

Besides tools like this, we use many other techniques to determine who the firm values. For example, reviewing compensation history and analyzing trends provides perspective on who the firm values. Asking all of the partners to anonymously rate the other partners as to who is delivering value to the firm is often insightful (anonymous to the other partners, not to us). There are just a few things we do to try to determine a fair reallocation of ownership.

One other note – any time we ask for input from other partners like we have described above, we also look for dysfunctional alliances. Way too often, as firms grow larger, partners form coalitions to support each other. Coalitions will likely show up in a service niche or when weaker partners align to protect themselves. These alliances are less about what is good for the firm and more about gaining power as a group. Anytime we see these types of voting groups or empire building behavior, we are reminded of the importance of addressing this dysfunction quickly and reallocating ownership in a way to stop this very damaging leadership behavior.

With all of this in mind, good luck in establishing voting rights with the remaining owners that makes sense for the future of your firm. It is a painful, sensitive, conflict riddled process, but an effort we believe you owe to your existing partners to leave them in a position to thrive beyond your retirement. Don’t just ignore this issue and force your firm to sell or merge for its only change of continuation.