This is the fifth in 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 Federated Model:
Firms that take this approach establish federated relationships with other firms in different major US cities, typically located in different regions of the country from the founding firm. For example, a Chicago firm could establish federated relationships with firms in New York; Washington, DC; Atlanta; Miami; Dallas and Los Angeles. In some cases, member firms of the federation also have satellite offices – e.g. a Long Island office as a satellite of a New York City firm.
There are many possible variations of this model. At one extreme, all members of the federation are independent firms who go to market under a common brand, share resources and refer business to each other. At the other end of the spectrum, there is a national governing body that oversees the firm and there is at least some degree of profit-sharing among partners based on national profitability. Under all variations of the model, the members of the federation retain a high degree of autonomy respecting day-to-day governance, partner admissions, and culture.
Here are the advantages of the federated model:
This approach can make firms attractive to clients with a strong national presence. As a senior member of a firm using the federated model nationally, recently said to us: “this approach allows us to play bigger than we are. We’ve been part of a successful global consortium of firms for years. We decided to take the same approach in the US and it’s working well.”
The model is relatively easy to adopt because the member firms are able to retain their autonomy.
Member firm autonomy also makes firm governance easy because issues such as partner income allocation, leadership style, target culture and partner admission decisions can be made locally by the member firms.
This model can be a strong recruiting tool because it facilitates local access to many more universities. Also, if the federated firms collaborate on campus recruiting, this model can offer candidates the opportunity to choose among several practice offices, which can be a very powerful recruiting advantage.
The firm will have access to larger channel partners such as banks and law firms because it has a “presence” in more locations.
Firms that use this model successfully have a better chance of remaining independent by being “buyers” rather than “sellers.”
It may position the firm to expand its client base into new industries – e.g. high tech, energy, aerospace, pharmaceuticals and entertainment.
These are meaningful advantages.
There are also some key success factors that help firms use this model effectively:
To make this model worth adopting, the member firms will need to agree on a name for the federation and build a brand around the name. The separate cultures and reward metrics of the member firms can make it difficult to collaborate successfully on client opportunities. For this reason, firms that adopt this model often move to some type of partial revenue sharing after a trial period of a few years.
Partners from different offices are far less likely to know each other as well than if they were in a single firm. In response to this challenge, it is not unusual for firms using a federated model to hold annual partner meetings together so the partners can get to know each other better and share ideas, opportunities, and experiences.
Governance under this model requires careful planning. There are many aspects to this, but the key success principle is to achieve clarity about who has the right to make decisions when issues arise between to member firms.
Working under this model can make it difficult to share infrastructure investments, particularly initially. Ultimately, firms that succeed under this structure move to share services to leverage economies of scale. One area that will need particular attention is human resources. Conventional processes and technology will require a degree of content standardization across the federation and that may take time to gain the support of the member firms. A similar issue presents itself for financial processes and systems where common platforms are easy to achieve member firms may want to keep financial information.
There are good examples of successful firms that use the federated operating model. It has some distinct advantages, particularly ease of adoption. 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.