EXECUTIVE SUMMARY

FOR ALL BUSINESSES, THE NUMBER of strategic relationships has been growing 25% per year since 1985. A FIRM'S FIRST STEP TOWARD a strategic alliance is to decide what capabilities it wants to add. Then it should decide what it wants to achieve: Does the firm wish to increase revenues, strengthen a specialty or expand its geographic reach? THE MOST SUCCESSFUL ALLIANCES have member firms that are about the same size, whether they have two or 20 partners, sources say. Like-size entities focus better on their aims and experience less friction. TO BETTER MINIMIZE RISKS, a CPA considering an alliance should analyze the characteristics of both entities, including conflict resolution practices. It is important to put expectations in writing and include an escape plan. A business attorney should draft the agreement. THE STRATEGIC RELATIONSHIP PARTNERS should train each other’s staff about their product mix and distribute handouts that describe the additional services and give contact information. ALLIANCE PARTNERS-IN-CHARGE SHOULD MEET personally once a quarter to discuss how well the arrangement is living up to expectations and to make adjustments if needed. IT'S EASIER TO GUARD AGAINST the theft of explicit knowledge that’s protected by copyright, trademark or patent law. A CPA should be cautious about which core business elements to share with alliance partners. If in doubt leave it out.

IRV GAMAL is president and CEO of Insight Systems Group, a California-based management consulting firm. His practice is part of a strategic alliance. His e-mail address is igam3724@aol.com.

hat if your firm could obtain the competitive benefits of a merger without giving anything up? It can—through strategic relationships. Under the umbrella of alliances, associations or consortia, CPA firms have long pooled complementary skill sets to refer clients to other practitioners and professionals. Using such networks, CPAs can limit their financial and administrative burden yet fulfill more client needs while saving time, effort and some costs as well. In contrast, adding capabilities through mergers and/or acquisitions comes at a high price, brings unwanted baggage and has a failure rate of about 50%.

Bottom line: In surveys, clients say they want their CPAs to provide them easier access to a wide range of financial services. Here’s information on choosing the right alliance partner for your firm so you can give them just that.

The three basic forms of strategic relationships are multidisciplinary practices (MDPs), virtual specialty corporations (VSCs) and independent alliance associations. Some CPAs consider MDPs an attractive way to offer conjoined CPA and legal services, but the law firm-CPA multiprofessional model was voted down by the American Bar Association last year and it is on the back burner for now.

VSCs are the newest form of CPA associations. VSCs limit membership by expertise and focus on improving member firms’ profitability through creating a brand for them. VSC participants offer similar services and use the association to extend their reach into new geographical areas. One example of a VSC is Los Angeles-based Financial Consulting Group (FCG), which specializes in business valuation and litigation services. The primarily CPA group has grown from 34 to 68 member firms in the past two years, encompasses more than 30 states and generates upwards of $45 million in annual revenue from those two services alone. FCG COO Eva Lang says members benefit from referrals as well as working cooperatively on large ventures. A member can post a query on FCG’s electronic bulletin board and expect a qualified response within 48 hours.

Independent alliance associations are a formal to informal mix of CPAs and/or other professionals that cross-refer clients or solve other service problems for them. They can be as small as a couple of firms in a localized area or as large as the Chicago-based Leading Edge Alliance. That organization limits membership to high-volume firms. It offers accounting and consulting services from more than 250 offices in upwards of 60 countries and is a resource for multidisciplinary and CPA expertise providing members with

A network of practice management knowledge.

Best practices research and information.

Strategies for developing and marketing high-quality products and services.

An international network for multinational engagements.

ESTABLISH YOUR ALLIANCE GOALS
Before a managing partner or search committee even looks for a potential strategic relationship partner, the first step should be to decide what additional capabilities the firm needs. CPA clients most commonly ask for help with investment advisory services, financial planning, legal assistance, e-business (electronic data exchange, Web hosting), human resources support, internal audit, electronic security systems, specialized tax services (international, industry specific), strategic and succession planning and organizational development.

Analyze what your firm is trying to achieve through an alliance: Is it trying to increase revenues, improve client service, strengthen a specialty niche, ensure that resources are allocated judiciously, expand its geographic reach—or all of these? On occasion a sole practitioner can use an alliance to begin to develop an exit strategy for retirement as well.

Choose short- and long-term goals along with practical criteria for judging their success. Some objectives will show results right away, and some will take longer. For example, in an alliance involving regional partners with supplementary skills and the same core businesses, a short-term measure might be the number of referrals they make to one another. Success in that area might show up in a few weeks, while meeting a dollar-amount target might take many months. Knowing how you want your firm to benefit will help you develop a sound strategic partnership. (For more on how to organize a firmwide practice-development plan, see “Strategic Planners Lead the Pack,” JofA, Dec.01, page 26.)

A COMPATIBLE CULTURE IS KEY
The most successful alliances have member firms that are about the same size, whether they have two or 20 partners, sources say. Like-size entities focus better on their aims and experience less friction.

Take the time to assess a candidate carefully over a series of discussions. Besides looking for firms with a solid reputation and a strong client base, evaluate the people you’ll be working with. Discuss your firm’s financial and growth objectives with the potential partner as well as compatibility issues such as information access, reporting practices, business cultures and communication styles. For example, a two-firm alliance I know of didn’t make it past a year because one partner was able to make decisions quickly but the other one dithered.

To better minimize risks to your organization,

Request a peer review report. Find out what grades other firms give the candidate.

Visit a potential strategic relationship partner. Go see the office and meet the partners and staff. Try to ferret out hidden agendas such as undue interest in trade secrets, particular clients or special protocols. Meet the partners a few times where they are more likely to let their guard down, at dinner or a sports event, for example. Are you comfortable with these folks? Rely on your gut instincts to answer this.

Perform a thorough cultural analysis. Analyze the characteristics of both entities. A young firm will have a different culture from that of a more mature firm, for example. Use tests that compare the values, traditions, communication patterns, growth goals and conflict practices of your firm with those of the potential ally (see “Matchmaker, Matchmaker…” below). You may want to use a management consultant to perform this analysis.

Assess conflict resolution styles. Conflicts are inevitable. An alliance’s success or failure often depends on how well the firms’ leaders resolve differences. Ask potential partners how they’d handle a hypothetical problem. Inquire about potential partners at state society and business association meetings. Check the firm’s history to see if there are any lapses that trouble you. Consult public records to see whether the partners have sued anyone or have been sued. If so, find out why and what the results have been.

Describe the terms of your relationship in an agreement. To lessen the chance that misunderstandings will crop up in the future, put your expectations in writing. Will the allied firms get fees for referrals? If so, describe the preconditions and procedures for paying fees as well as for client and information sharing. If there is a time frame for meeting goals such as revenue enhancement or niche development, the agreement should carefully document it. Consult a business attorney to draft the agreement.

Sign a prenup. It’s important to identify whose clients are whose and to protect the core competencies, trade secrets and proprietary information that give a firm its competitive advantage. Use the agreement to protect these and other assets that have been exhaustively earned over time.

Formulate an exit strategy. Talk through an escape plan if expectations aren’t met and include it in the agreement. Describe how you will divide any shared assets. These could be clients, property acquired during the partnership or combined office services, for example.

IMPLEMENTING THE ALLIANCE
Everyone should be involved in making the strategic relationship work. To stretch your employees’ thinking to include the new services a partner offers,

Cross-train your people. Educate your staff about the expanded capabilities the alliance offers. Bring in the partner’s people to train yours about their product mix. Similarly, describe your products, services and procedures to their staff. Distribute handouts that list the additional services, with brief descriptions if needed, and give contact information.

Create marketing incentives. An organization doesn’t get what it wants, it gets what it rewards. Encourage staff to cross-sell, make referrals and help develop markets. Ask your staff what rewards they want for measurable increments of performance. Don’t assume you know.

Give staff a menu of marketing activities. Encourage participation at all levels. Partners can speak at clubs, professional organizations or conferences. Staff members can write articles, develop a class or best practices workshop. Everyone can network by attending luncheons or asking a colleague to lunch to share ideas. (For more on a successful firmwide marketing model, see “Teaming Up for the Bottom Line,” JofA, Jan.02, page 43.)

Take regular temperature readings. Don’t take anything for granted. Many organizations conduct customer surveys to find out how well they’re meeting their customers’ needs and annual employee surveys to gauge how their people feel about them. Alliance partners-in-charge should meet personally once a quarter to discuss how well the arrangement is living up to expectations and to make adjustments if needed.

Intellectual property protection is more problematic for tacit knowledge, which consists of skills, information and experience so embedded in an entity and its staff that it’s virtually an institutional reflex. Because tacit knowledge is amorphous and more challenging to grasp, it’s harder to transfer and difficult—though not impossible—to steal.

In a strategic alliance, as with any relationship, trust is earned over time. At the outset, be cautious about sharing core elements of your business such as a database or developing a common computer system. Bear in mind that business is always in flux, and if it enters a down period or the alliance partner falters, a partnership that started well can go bad. With proprietary information, if in doubt leave it out.

A LAST WORD
CPA firms and other businesses that use strategic relationships have a proven track record of building revenue and a market presence at lower cost than by entering into a permanent partnership. Nevertheless, one down side is that there’s always a chance a partner will become a competitor. Even after a firm’s most conscientious efforts to cover all the bases, sometimes another firm steals vital information and then disbands the alliance. If that’s a concern, put it in perspective: Until you actually work with other firms, you won’t know how well such an alliance will serve you—and at worst you’ve just shared best practices.