Meet the ‘fat middle’ firm
You are probably familiar with the “pyramid model” as it is applied both in individual firms (particularly large ones) and in the public accounting profession as a whole: The personnel hierarchy is built on a broad base of inexperienced entry-level hires who provide mass labor for audits and tax preparation and bookkeeping, and whose numbers are gradually whittled down through attrition. Even as their skills increase, more and more of them leave public accounting — often to work in industry, but too often to work outside the field entirely — leaving narrower and narrower tiers of personnel until the penultimate culling of making the cut for partner. Those lucky and dedicated enough to become partners and firm leaders make up the pinnacle of the pyramid, and rest secure in a position based on that very broad base of labor.
That familiar model, which the profession has relied on for half a century or more, is on the verge of radical change.
With insufficient numbers of young accountants entering the profession, technology and outsourcing offering replacements for relatively unskilled labor, and the move for many firms to embrace higher-level advisory services, public accounting is looking at more of a “diamond model” — or, as it’s sometimes called, “the fat-middle firm.”
In this model, the broad base of entry-level staff is significantly reduced, with much of their work performed by technology or outsourced elsewhere. The personnel hierarchy then broadens from that narrow base to a “fat middle” of experienced professionals who can bring valuable advisory services to clients. The top tiers then narrow again to the usual cadres of firm partners, leadership and top executives.
This looks set to be the coming model for public accounting. Overall entry-level hiring has more or less stagnated among the largest firms — in fact, hiring of accounting graduates has decreased, but the Big Four and others are replacing them with grads whose skills lie in technology, data analysis, and other transformational areas. And technology is rapidly proving itself capable of performing much of the grunt work that new grads were needed for.
The shift to a “fat middle” makes sense — but it also raises some interesting questions. First, and perhaps most obviously, if the profession isn’t bringing in as many new accountants and raising them up through the ranks, where will all the experienced hires come from to fill up the middle? For years, public accounting has relied on the large firms, particularly the Big Four, to train up and then release new generations of accountants, but EY has already announced that it will hire two-thirds as many experienced professionals as entry-level staff in 2019. Simple math makes it clear that a smaller base of tyros can’t grow into a broader base of veterans; how will the difference be made up?
The answer to that may seem obvious: Many of them will come from outside accounting — and they’ll bring technology and other skills the profession is going to need. They and their skills and perspectives are welcome, but the question then arises of how narrow a base of new members the profession can stand on. No one envisions a real diamond model, where public accounting balances on a tiny point of new accountants; nonetheless, if too few of the new generations who are brought in every year are accountants, it risks changing the very tenor of the profession. What’s more, it risks a vicious circle where diminished hiring of accounting grads leads to fewer accounting majors — which leads to less hiring of accounting grads, and so on.
Any new model requires care and monitoring and a weather eye for unintended consequences, and the same applies to this new firm structure, at least until we can figure out whether it’s a diamond in the rough — or a punch in the gut.