how and why firm organization structures evolve - 卡塔尔世界杯常规比赛时间

what firms of all sizes are doing.

by marc rosenberg
the rosenberg practice management library

“you are not required to complete the work of perfecting the world, but you are not exempt from contributing to it.” – rabbi tarfon (70 ce-135 ce)

when we started writing this post, we intended to include several traditional organization charts depicting how firms are structured at various sizes. but as we thought about it, we realized this may be a worthless exercise because (a) there are far too many different structures to list, and (b) the structures adopted by firms vary widely depending on the management philosophy of the firm’s partners.

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firms often operate for years without much structure, enjoying happiness and profitability. then, with the blink of an eye, the firm “hits the wall.” growth slows or stops. staff turn over. systems become inefficient and out of date. profits stagnate. when firms hit the wall varies widely, but it often is between $5 million and $15 million.

roberto goizueta, ceo of coca-cola in the 1980s and ’90s, described this perfectly:

“challenging the status quo when you have been successful is difficult. if you think you will be successful running your business in the next 10 years the way you did the last 10 years, you’re out of your mind. to succeed, we have to disturb the present.”

another scenario comes to mind. in chicago, there is a legendary restaurant chain called lettuce entertain you. they started 50 years ago with just one or two restaurants. today, they have dozens, mostly in chicago but elsewhere in the country as well. all eateries are excellent and very well managed.

one day, we learned that one of our favorite lettuce restaurants had closed. we asked the manager at another lettuce restaurant why. he said: “lettuce’s philosophy is that every restaurant must grow and position itself for future revenue increases. even though a restaurant may be profitable, if we don’t think it has further growth potential, we shut it down and replace it with a new dining spot that has a bright future.”

for a cpa firm, the “cure” for hitting the wall is adopting a proper management philosophy and structure whereby the firm is run like a real business, embracing these concepts:

a strong leader with sufficient authority and responsibility
voting on minor issues not required
a strategic plan with partner goals
a cohesive, integrated marketing strategy
a ceo/firm administrator to keep partners out of administration
proactive efforts to make the firm a great place to work
performance-based compensation
accountability

each of these areas represents a departure from the way most smaller firms operate. but these concepts can’t be adopted all at once; it takes a few years to gradually ease into them.

so, rather than litter this post with an infinite number of traditional organization chart diagrams, the following are addressed in the remainder:

how cpa firm governance structures change as the firm gets larger. a matrix showing how the philosophy of managing a firm changes as it grows from “small” to “large.”
cpa firm organization chart. a matrix depicting three different firm sizes, from small to large and the management positions that are commonly found in each.
alternative practice structures used by cpa firms today. there used to be just one, but today, there are several. this was precipitated when non-cpa firms began to acquire cpa firms, which must be at least 51 percent owned by cpas.
governance model for well-managed firms over $20 million. one size doesn’t fit all, but these are common practices.
why firms departmentalize. this section explains why firms create departments such as a&a and tax.

cpa firm governance structure: how it changes as firms get larger

	as firms get larger:
structural aspect of the firm	they tend to move away from:	and move toward:
style	partnership- decentralized decision-making; partners “involved”	corporate-centralized decision-making; authority vested in a few partners
formality	loosey-goosey; fewer policies and procedures; group of solos practicing under one roof; little accountability	tighter ship; more policies and procedures; the firm operates as a single unit, with partners adhering to the same core values
partner accountability	little	some
managing partner	really, the mp is more an admin partner with little responsibility for managing partners and profitability	more of a ceo, with responsibilities for managing partner performance and p&l
other key management positions	an office manager or low-level firm administrator	coo or high-level fa; also likely to have directors for marketing, hr and it
partner committees/ involvement in administration	common for partners to be heavily involved in firm admin; management by committee a common model	partners stay away from internal duties and do away with most committees
department heads for a&a, tax, niches, etc.	a little, but these positions are mainly ceremonial	more formal, with department heads serving as “corporate vps”
presence of non- equity partners	bar is lower for making equity partner; fewer non-equity partners in small firms	bar is higher for making equity partner; non-equity partners are very common as firms grow
partner meetings	scheduled monthly; attendance often not mandatory	quarterly or less; exec committee takes on a more solid role; attendance is mandatory
partner meeting agenda	focus on admin issues; lots of getting partners to weigh in on decisions	more strategic; few admin issues
partner retreats	haphazard at best; retreats often like partner meetings	convened every year; usually with an outside facilitator; retreats are strategic
how decisions are made	lots of votes	few votes; mp and the ec have lots of decision-making authority
executive committee	less common; may have a management committee	more common; functions like a corporate board
how income is allocated	more likely to see formulas, pay- equal, ownership percentage	dominated by compensation committees
system for bringing in a new partner	rarely anything consistent or in writing	highly structured and consistent
partner retirement	11% of small firms have no plan; few firms make it to the second generation to pay out	90% of firms have a formal plan; most likely to be a multiple of the compensation system
mandatory retirement	not very common	very common
role of strategic planning	few do it; few know how to do it; almost no success at execution	common; many firms driven by their strategic plan
partner goals	rare	more common and formal
partner agreement	likely to be 20 or more years old	more likely to be current

cpa firm organization chart

revenue; avg. ftes	$2-10 million; 30 ftes	$10-20 million; 70 ftes	over $20 million; 153 ftes
partners	partners manage the firm and make decisions together	· partners do less management · mp makes more decisions alone · partner meetings move from monthly to quarterly or less	· line partners totally out of management · partners focus on clients and staff. that’s it! · partners report to department heads · limited voting
managing partner	· one partner may have mp title but it’s more an admin position · firm administrator or office manager reports to mp	· starts leading · becomes more than a title · often still manages a large client base · reports to ec	· more of a ceo · much less billable work and client handling · relies on management team to manage partners · reports to ec
management committee	common for each partner to head up an admin area	disbands as professional administrators are hired	same
executive committee (board)	too small for ec	· functions as high-level counsel and overview of the firm and mp · most or all positions are elected	· functions as high-level counsel and oversight of the firm
departmen- talization	rarely; partners are usually generalists	· starts happening at larger end of range; tax usually first to departmentalize; audit follows suit · a few partners may still be generalists · some staff still may not be aligned with a department	· common for most partners to choose a&a or tax; few generalists · partners don’t sign both audits and tax returns · most staff aligned with a department
department heads	same as above	these positions are technically driven; the firm needs a go-to person for audit and tax	· becomes more like a corporate division vp · p&l respon- sibility may or may not be present
niche/industry leaders	usually n/a at this size	exists if the firm has a true, sizeable niche or industry specialty	niche leaders co- exist with department heads in a matrix-type organization chart
pics of branch offices	usually n/a at this size	some firms begin to have more than one office	if branch size is large enough, office pics are key members of the firm’s management team
coo/fa/office manager	office managers are most common; some will have the title fa	as firm size grows, less likely to have a fa and more likely to have a coo	· coo, or one of the partners may be the coo or admin partner · may have key reports such as marketing, hr and it directors
marketing	rarely formalized	· smaller end of the range may start with a marketing coordinator · position evolves to a marketing director · could report to mp or marketing partner	· most common for the firm to have a marketing director with a coordinator · many report directly to mp
sales/ business development manager	usually not applicable at this size	rare but growing	increasingly common
human resources	usually not formal; office manager or fa often does hr work	· common for hr to be part of fa’s job · may have an hr director reporting to coo/fa	· most have a high-level hr director on board · may report to coo or mp
it	usually not applicable at this size; often handled by a partner with strong it skills or outsourced	common for it to be part of fa’s job; may use outside it firms or hire a low-level it person internally; as the firm grows, an it director is added	· most have a high-level it director on board · most likely reports to coo

alternative practice structures

until the early 1990s, most firms were either a partnership or a corporation. regardless of which of these entities was selected in form, in substance, the firm was run like a partnership. today, cpa firms have many structures to choose from.

corporate vs. partnership governance. in old-school partnership governance models, the partners are involved in many decisions, votes are taken often and monthly partner meetings are common. the essence of the corporate model is that the firm should be run like a real business, keeping line partners out of firm governance so they can focus 100 percent on client and staff matters. a managing partner functions like a ceo, though this may not be a full-time job. the larger the firm, the more likely it uses the corporate vs. partnership model.
institutional capital. traditionally, cpa firms have not been capital-intensive. very few firms borrowed money. investments in the firm were primarily financed by reductions in partner distributions, tolerable because of the high earnings of the owners. with the exception of a small number of bank loans, primarily to finance the purchase of an office, office renovations or computer equipment, firms have not relied much on institutional capital as a cash flow resource. since roughly 2020, private equity firms began acquiring and investing in cpa firms. wealth management and other financial services companies have done the same. the cpa firm uses the new capital to finance the acquisition of smaller firms, to hire talent and to grow the firm.
private equity. since roughly 2020, pe firms have begun acquiring and investing in cpa firms. they see cpa firms as highly profitable, growing, stable companies. the pe firm pays a substantial amount of the firm’s market value up front to the partners instead of the traditional unfunded internal buyout plans used for decades, which pay out many years in the future. as of 2024, the vast majority of pe deals have been with top 100 firms. to accomplish these deals, the two entities adopt an alternative practice model or structure.
alternative practice structure. began in the 1990s with the consolidator era and is now a prominent part of pe deals. because a cpa firm must be at least 51 percent owned by cpas, the cpa firm is split into two entities – attest and non-attest. pe firms generally own most or all of the non-attest firm. the attest firm must be owned by cpas. the two entities operate as separate legal entities though they are heavily integrated from a management standpoint.
employee stock ownership plans (esops). helps cpa firms attract and retain employees by giving them an ownership position in the firm, enabling them to participate in the substantial, continuously increasing value of the firm. esops are designed so that employees’ motivations and interests are aligned with those of the company’s shareholders. employees receive shares in the firm that are redeemable based on the bylaws of the esop. under a leveraged esop, funds are borrowed to purchase the shares from selling owners, and the shares are released to plan participants as the esop pays down the debt.
non-cpa ownership. some non-cpas may be partners, and some cpas may be non-owners. the rise in consulting, often performed by non-cpas, has triggered a large part of this trend.
equity vs. non-equity partner. for decades, there was primarily one class of partner: equity partner. since roughly 2000, firms have increasingly used the non-equity partner position. this way, the firm keeps the bar high for who is made an equity partner. at the same time, valuable, longtime firm members who may not qualify for equity status get recognized with the title “partner” and are largely treated as partners, with major exceptions being voting, compensation and buyout. staff and the outside community only know that the non-equity partner is a partner, blissfully unaware that there is a distinction between the two categories. at many firms, non-equity partners have the same high-level client duties as equity partners. at many firms, the primary factor in distinguishing between the two positions is bringing in business or the ability to lead an organization.

governance model for the best larger firms

this model works for firms at $30 million or so on the low end into the top 100. clearly, the larger the firm, the more heavily they will look like a real corporation and do things with an increasing level of sophistication.

corporate vs. partnership concept

managing partners function as ceos, significantly reducing their client time.
the firm has a board (smaller firms call it the executive committee) vested with the authority to manage the firm’s business and affairs in concert with the managing partner. the board’s members have a fiduciary responsibility to act in the best interests of the firm.
centralized management.
the firm has a budget that is crafted with great care. measurement of actual vs. budget is continuously analyzed.
many firms have multiple offices.
an increasing number of firms are either national (offices located throughout the country) or moving toward this goal. these firms know no geographic borders.
smaller cpa firms almost always fail to become second-generation firms. large firms are built to last. they have an unlimited lifespan, because of the excellence of their management, growth and strong commitment to leadership development.
for generating capital, smaller firms rely almost entirely on distributing money to the partners that is less than the firm’s profits. larger firms often seek historically non-traditional ways of generating capital, such as private equity, investments from non-cpa firms and bank borrowing.
firms frequently own other businesses, either totally or partially. examples: technology, wealth management and various types of consulting such as m&a.
partners need to “get over” not being involved in everything, and relish it.
partners are not “tenured.” they perform every day to keep their jobs and maintain their compensation, just like corporate vps.

operate as one firm, not a group of solos

franchised work processes.
clients are clients of the firm, not of individual partners.
partners don’t buy and sell ownership in the firm to one another; transactions are always between the firm and the individual partner.
partners sincerely believe the firm will be more successful as a team than a group of solos – and their financial success shows it.
the wrong people get off the bus or at least they are isolated to minimize damage.
succession planning is a continuous process, not an event triggered by retirements.
the firm is a higher-priced/lower-volume practice vs. a lower-priced/higher-volume shop.

structure

never, ever managed by committee.
managing partner:

- main focus (almost never doing these things, but ensuring that they are attended to):
  - growth, both organic and external.
  - people, including leadership development.
  - vision – always thinking about where the firm needs to be tomorrow even though the firm is highly successful today.
  - holds partners accountable for their performance and behavior. promptly deals with partner issues of all kinds.
  - strategic planning.
  - succession planning that is so effective the firm has an unlimited lifespan.
  - practices the message of the movie field of dreams: “if you build it, they will come.” translated to cpa firms: if there is strong leadership and success in the six areas above, the profits will come.
- takes role seriously; a true ceo, though may not be a full-time job, especially at smaller sizes.
- has lots of authority and decision-making autonomy. very, very few decisions made by partner vote. some firms don’t ever vote on any-thing except as a legal requirement.
- they have very little or no client duties though they often are active in business development, especially for large prospects. whatever billable work the managing partner does, it is never spent on compliance work.
- managing partners lead and manage; they never do administration.

the firm has professional, full-time, credentialed people in some or all of the following positions:

- coo/firm administrator; works closely with the managing partner as a dynamic duo
- marketing director
- it director
- human resources director
- business development director

executive committee functions like a board; meetings are always high level, not admin.
department heads for a&a and tax; also for industry niches.
branch offices of size have pics. if the firm has many offices, one or more regional managing partners will be appointed.
often, firms have a partner in charge of identifying and merging in smaller firms. the larger the firm, the more likely it is that the firm will merge in consulting companies.
alternative practice structures – firms have moved away from the singular partnership structure (in substance, not form) to various other structures such as private equity, splitting the firm into attest/non-attest, esop, non-cpa ownership, etc.
partner compensation:

- income allocated by a compensation committee. factors include production, intangibles and goal achievement.
- almost all large firms have a closed comp system.

partner buyout at 75 percent to 100 percent of fees. paid over 10 or more years. retirees must comply with notice and client transition requirements to be eligible for their full buyout.
ownership has very little meaning.
staff training and leadership development are curriculum-based, not haphazard.
annual retreats with outside facilitator.

partner role

partners are drivers, not employees.
partners live and breathe core values; transgressions are never tolerated.
line partners (those who focus exclusively on client and staff matters with no official management position) operate at high levels. lots of delegation, even to other partners. their billable hours decrease over time; heavy client relationship duties for larger clients.
hoarding of clients is never allowed.
partners stay out of admin and let the admin people do it.
partners are, for the most part, active in business development. some firms may hold in high estimation non-business-getting partners in audit and tax.
partners have formal, written goals.
partners have performance appraisals.
the firm maintains a high bar for those admitted as equity partners.
the firm makes heavy use of the non-equity partner position. as firms grow, they often have more non-equity than equity partners.
partners are accountable for performance; no waivers, no entitle-ments; no jerks allowed.
the firm has mandatory retirement with some flexibility at the discretion of other partners.

services of the firm

diverse service portfolio to better meet client needs and exploit cross-selling opportunities.
consulting represents a meaningful percentage of the firm’s revenue and is growing faster than compliance services.
the partners understand that the future for consulting is bright while compliance may be limited because of technological advances.
specialization becomes increasingly commonplace.

why cpa firms departmentalize

there is no mystery here. doctors and lawyers have been specializing for decades. their businesses became so complicated and varied, the body of knowledge of each field so vast, that no one professional could possibly service all areas. historically, most cpa firms have been generalists, but this began to change many years ago as the profession became more sophisticated. with minor exceptions, it is no longer possible to be both an auditor and a tax professional.

here are reasons some firms departmentalize:

moving staff into a department helps the specializing partner’s need for support.
creating departments makes it easier for the firm to be consistent in how work is performed. the result is higher quality of work and greater efficiency.
to reduce liability exposure.
cpe requirements in a certain area can be so heavy that it is not feasible to get the necessary training in more than one area.
training becomes more effective because the focus is on one area.
technology is another driver; it’s hard to be proficient with both tax and audit software.
departmentalization lends itself to working like a firm because partners are more interdependent on one another, which fosters teamwork.
it helps with scheduling staff.
it enables firms to increase their billable utilization of staff.
by specializing, the firm can better position itself in the marketplace; cross-selling is easier.
it enables the firm to offer specific career paths to staff.
it helps the firm attract staff who wish to specialize at the outset.

posted on may 6, 2025

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