The business environment is changing rapidly, and CPA firm leaders and their clients face the twin challenges of managing current operations while positioning themselves for future growth. We can achieve this balance by understanding and leveraging transactional and transformational growth.

As technology disruptions — particularly artificial intelligence — reshape markets, it’s impossible to overstate the importance of mastering these two types of growth.

This article takes a closer look at the significance of transactional and transformational growth, and how they impact cash flow, future investments, and the technological landscape.

In my opinion, too many mergers and acquisitions are focused on transactional rather than transformational growth. Focus on the top 20% of your firm’s client’s requirements to prioritize your growth strategies. Too often, firms focus on the bottom 80% rather than the top 20% of their clients. Focusing on the top 20% gives you a competitive advantage and allows you to continuously improve your service line offerings. This will increase the value and profitability of your firm in the long term.

Transactional versus transformational growth

“Transactional growth” refers to the incremental improvements and efficiencies gained through optimizing current processes and operations. This type of growth is essential for maintaining cash flow, ensuring profitability and achieving short-term goals. Examples include refining billing and collection practices, enhancing client service delivery and implementing cost-saving measures.

On the other hand, “transformational growth” involves radical changes that fundamentally alter how a business operates. It encompasses strategic initiatives aimed at long-term success, such as adopting new service lines and business models, entering new markets or leveraging disruptive technologies like AI. Transformational growth requires significant investment and a visionary mindset, but can yield substantial returns.

Both types of growth are essential, and balancing transactional and transformational growth is crucial. Here’s why:

1. Cash flow management

• Transactional growth. By focusing on optimizing current operations, firms can ensure steady cash flow. This includes efficient billing and collections, reducing overhead costs, and improving the client experience. These efforts contribute to a healthy bottom line, providing financial stability for day-to-day operations.
• Transformational growth. While it may strain short-term cash flow, investing in transformational initiatives can lead to significant long-term financial gains. These investments often involve upfront costs but position the firm for future growth and increased profitability.

2. Investment in the future

• Transactional growth. This provides the necessary resources to fund transformational initiatives. The efficiencies gained through transactional improvements free up capital to reinvest into transformative projects.
• Transformational growth. This ensures that the firm remains competitive in an evolving market. By embracing new technologies and innovative business models, firms can attract new clients, enter new markets and stay ahead of industry trends.

3. Technology disruption and changing markets

• Transactional growth. This helps firms adapt to technological changes by improving existing processes. For example, adopting new workflow software can streamline operations and improve service delivery. AI-powered tools for routine tasks like scheduling, data entry, reconciliations and basic tax return preparation improve efficiency and free up talent for higher-value activities.
• Transformational growth. This allows firms to leverage disruptive technologies like AI to fundamentally change their business models and develop compelling new service lines. AI can automate routine tasks, provide deep insights through data analysis and enhance decision-making capabilities, positioning firms for long-term success.

The Transformation Triangle

To effectively navigate both transactional and transformational growth, CPA firm leaders must focus on three critical areas: leadership, project management and process management — collectively known as “The Transformation Triangle.”

1. Leadership. Leadership is the cornerstone of both transactional and transformational growth. Effective leaders inspire their teams, drive strategic vision and create a culture of continuous improvement. They understand the importance of balancing short-term operational efficiencies with long-term strategic investments.

• Vision and strategy. Leaders must articulate a clear vision that balances transactional improvements with transformational goals. They should align this vision with the firm’s overall strategy and communicate it effectively to all stakeholders.
• Change management. Transformational growth often involves significant change, which can be challenging. Leaders must be adept at managing change, addressing resistance and fostering a culture that embraces innovation.

2. Project management. Project management is critical for executing both transactional and transformational initiatives. Effective project management ensures that initiatives are completed on time, within budget and to the desired quality standards. Project management differs from process management in that each project has an end date.

• Planning and execution. Detailed planning and execution are critical for transactional projects. This includes setting clear objectives, allocating resources and monitoring progress. You may need a more flexible approach for transformational projects, as these initiatives often involve uncertainty and require adaptability.
• Risk management. Both types of growth involve risks. Transactional projects may face risks related to process disruptions, while transformational projects may encounter strategic risks. Effective project management includes identifying, assessing and mitigating these risks.

3. Process management. Process management focuses on optimizing and innovating business processes. Continuous improvement is the primary goal. It is a journey, not an event, and it involves analyzing, improving and redesigning processes to achieve both transactional efficiencies and transformational breakthroughs.

• Process optimization. Process optimization involves identifying inefficiencies and implementing improvements for transactional growth. This can include automating routine tasks, streamlining workflows and eliminating bottlenecks.
• Process innovation. For transformational growth, process innovation involves rethinking how work is done. This can include adopting new technologies, redefining roles and responsibilities and exploring new business models.

Plan of action

To harness the power of both transactional and transformational growth, CPA firms and their clients can take the following practical steps:

1. Conduct a growth assessment. Evaluate current operations to identify areas for transactional improvements and potential opportunities for transformational growth. This assessment should include reviewing financial performance, market trends and technological advancements.
2. Develop a balanced growth strategy. Create a growth strategy that balances transactional and transformational initiatives. This strategy should align with the firm’s overall vision and include clear objectives, timelines and resource allocation.
3. Invest in leadership development. Develop leadership capabilities within the firm. This includes training leaders in change management, strategic thinking and innovation. Effective leadership is critical for driving both types of growth.
4. Implement robust project management practices. Adopt project management best practices to ensure the successful execution of growth initiatives. This includes defining project objectives, setting realistic timelines and managing risks.
5. Embrace technology. Leverage technology to drive both transactional and transformational growth. This includes adopting new tools and software to improve efficiency and exploring emerging technologies like AI to transform business models. Consider an innovation budget of 2-3% in addition to your transactional technology budget of 6-7% of revenue.
6. Foster a culture of continuous improvement. Create a culture that values continuous improvement and innovation. Encourage employees to identify opportunities for transactional improvements and support them in exploring transformational ideas.

Balancing transactional and transformational growth is essential for CPA firms and their clients to thrive in a rapidly changing business environment. Firms can achieve sustained success by focusing on cash flow management, investing in the future and embracing technology disruption.

Transformational growth, while riskier, can help your firm stay ahead of the curve, especially in the face of AI and other disruptive technologies. The Transformation Triangle — leadership, project management and process management — provides a framework for navigating these growth paths effectively. By developing a balanced growth strategy and fostering a culture of continuous improvement, CPA firms and their clients can survive and thrive in the face of technological disruption and changing markets.

Think, plan, grow!