This is the fourth in of a series of blogs on the subject of accounting firms and their operating models:
Centralized Model – Locally Integrated Model – Regionally Integrated Model – Nationally Integrated Model – Federated Model
The Nationally Integrated Model:
Firms that take this approach establish offices in major cities in each region of the country: Northeast, Mid-Atlantic, Southeast, Midwest, Southwest and Pacific West. A good example of this is where a New York firm establishes additional offices in Washington, DC; Atlanta; Chicago; Dallas and Los Angeles. In many cases, these offices will also have satellite offices –e.g. an Orange County office as a satellite of the Los Angeles office.
The advantages of the nationally integrated model:
This approach can make firms attractive to clients who have or intend to develop a strong national presence. As one managing partner recently told us: “We have a nice thing going as a Mid-Atlantic firm, but our clients are expanding geographically and asking about our growth plans. So, we also need to expand geographically. I guess this was inevitable once we expanded our focus from the middle market to larger clients.”
This model can be a powerful recruiting tool in two respects. First, there will be easy local access to many more universities. Second, the firm can offer candidates geographic mobility now and in the future. This can be important for two-earner families as well as other reasons such as the need to move close to an aging parent.
A nationally integrated firm will have broader access to larger channel partners, such as banks and law firms that also have a national footprint.
Firms that reach a certain size and geographic scope are harder to acquire and more likely to be the acquirer in M&A transactions.
It may position the firm to expand its client base into new industries – e.g. high tech, energy, aerospace, pharmaceuticals, and entertainment.
This approach may bring some counter-cyclical diversification inasmuch as economic weakness tends to impact different industries and geographies differently.
This method can allow for leveraging economies of scale for technology and support functions. These can be meaningful advantages.
There are also some key success factors that need to support the nationally integrated model:
It will take work to become “one firm” with a consistent culture. In fact, certain cultural differences will need to be embraced for the firm to be successful. To put it another way: what works in New York will not work the same way in Los Angeles or Texas. It’s important to appreciate these substantial differences and limit the “core” cultural values that you need to be universal. Some firms readily accept this change. Others struggle with how to make the new offices clones of the “flagship office.” We can’t overemphasize how critical it is to consider this issue before committing to a national expansion strategy.
It will take more work to make firm governance work properly. Each region of the country will need to be properly represented on the firm’s executive committee, and the members of the executive committee need to put the firm first, rather than thinking regionally. Often, when firms adopt this model, they consider using a nominating committee to appoint executive committee members to de-politicize firm governance.
Firms using this model feel different. Local and regional firms boast that their leadership teams know all of their partners , well. Under this model, that is unlikely to continue. So be prepared for leaders to rely on each other to represent their partners in leadership team meetings.
Working across multiple times zones can also present a challenge. Fewer in-person meetings are inevitable. Firms that take this approach generally have in-person executive committee meetings once per quarter.
Partner compensation, a sensitive issue in any firm, will need extra care. There are likely to be large cost-of-living difference in different regions and many firms reflect these in partner compensation levels. We can think of a few firms where partners in markets other than New York and California feel cheated because the New York and California partners are paid more both because they have more profitable practices and because of the cost of living.
There are good examples of successful firms that use the nationally integrated operating model. It has distinct advantages. It also takes work to manage and there are substantial risks unless key issues are recognized and addressed, both before moving to this model and as they arise over time.