Jennifer Wilson of ConvergenceCoaching cross-examines the potential impact of private equity on firm culture, on the next generation of accountants, and on the profession as a whole.
Transcript:
Dan Hood (00:03):
Welcome to On the Air with Accounting Today. I'm editor-in-Chief Dan Hood. In the many, many, many discussions about private equity and accounting, the focus is often on what PE brings to the table, which is mainly buckets and buckets of cash to fuel merger strategies and technology investments and partner retirements and so on. What's less discussed is the potential downside of PE's foray into the profession and the questions in general that it's introduction to accounting raise. So here to talk about all that is Jennifer Wilson, she's founder at consultancy ConvergenceCoaching. Jen, thanks for joining us.
Jennifer Wilson (00:33):
Thanks for having me, Dan. Glad to be here.
Dan Hood (00:36):
Yeah, this is a big thing, a big trend that's going on in the profession and as we say, there's a lot of questions that I'm not sure that everyone is raising when they might, so we're happy to have you here to help us explore some of them. Maybe we could start by, and this is a big question I know. How do you see private equity impacting firm culture?
Jennifer Wilson (00:55):
Well, so private equity sits on sort of a three-legged stool, and I guess it's important that we just discuss my understanding from all the studying and reading I've been doing. They come in, they invest in an organization, they believe they can run it better, they think they're going to grow the top line considerably, increase profits, make the story even better, and then sell it to somebody in three to seven years. And their strategy is kind of a three-legged stool. They are going to grow significantly. So top line growth, well in excess or above standard growth, which might be about 8% these days. So they're going to push hard to grow both organically and inorganically. They're going to spread in that they want to spread geographically or they want to spread into other services and they want to reduce cost if they can, they would term it increase efficiency and increase technology and efficiency, which sounds good, but it also entails how can we squeeze as much cost out of this thing as possible?
(02:12):
And so how do I see it impacting firm culture? And this isn't just like theoretic, it's there are enough backed firms today that we're hearing these very real impacts to firm culture. When you're really driving hard and trying to buy a number of different firms, maybe different CPA firms in different cities, maybe expansions into cities we already have or geographies maybe completely different services like we're going to go into wealth management or we're going to go into investment banking, or we're going to have a law firm added or a marketing firm or an IT firm or whatever we're spreading. When you have that sort rapid acquisition and intention to integrate and you do many a year, it's very difficult to acculturate those organizations and sort of blending a lot of families. It's kind of hard if you've ever watched any shows about blended families and how hard it is to get the siblings to get along and to really find a rhythm together and feel like a team.
(03:24):
That's what happens when you make all these acquisitions and you don't really have a complete integration. You don't have time to integrate. You just run to the next one. And so we're seeing that affect culture. It's like a bunch of disparate different businesses under one roof that may not really know each other, trust each other. They're not comfortable referring business. They might not share resources that comfortably, so that can impact obviously culture. I'm concerned about senior leaders that are really getting the bulk of the buckets and buckets of cash. I think you said for these buy-ins or investments that are being made or buyouts, however you want to look at it, that those folks to some degree or another have sort of taken their chips off the table. Some of them may be pretty close to the end of their work period thinking about transitioning out, and that can create a short timers that is not necessarily as enrolling or motivating for others.
(04:31):
I think there's a decent amount of dissatisfaction among senior managers, directors and non-equity or income partners who didn't vote to make this thing happen. They didn't get a say, let's say, and they feel a little bit, I don't know, sold out. Perhaps they thought they were going to someday son or daughter, this will all be yours. You too can own this firm that that's been kind of taken away. And so that sort of chip that's appeared on their shoulder could impact really how it feels to work at the place for all the rest of the people and clients, I think to some degree.
Dan Hood (05:13):
I just want to jump in real quick because I'm curious, because there's a degree to, it's a lot of the things you describe, and this is, I guess my question is, is it a question of degree or a question of quality in the sense of some of those issues? There have been firms that have been doing rapid acquisitions without PE. There have been firms where the oldest generation of partner have, even if they then literally take the cash off the table, have sort of been like, no, no, there will be no changes for the next five years until I retire, kind of thing. There has been some of that beforehand. Is this new or is it just exacerbated by the speed and the scale at which PE is moving?
Jennifer Wilson (05:48):
I think it's not new. Some of it is, I guess it's new. How many people are affected by it?
(05:55):
It was more isolated. Certainly just the velocity and the volume that's happening is really what's impacting more souls in the profession than we have seen in my whole career inside public accounting, which is pretty long at this point for sure. This happened in some organizations, Dan, and people could migrate away from it. They were like, I don't like what's happened at my firm. I'm out of here presently, both due to a spongy economy, kind of an uncertain potential recessionary economy without any declaration of such. I think people are afraid to leave their jobs, but they're also afraid to jump from the frying pan into the fire. They're afraid I could bail from this thing, but what if the firm I go to turns around and transacts? And so I think that there's more of a feeling of like, oh my gosh, I'm stuck in this thing right now and that's never good.
(06:57):
If you don't like where you are and you're not leaving it, that can't be good for culture. That was the question that you asked. Well, how does it affect culture? There's other things like most private equity organizations, they're investing money in a firm like this because they think that they can get a return for their investors and they plan to get that return by transacting. They have to turn around and sell this thing to somebody else, another banker, or go public or do something to raise those funds to be able to write the checks back to their investors or make those deposits back. So essentially when you're working inside one of these organizations that is bank owned or private equity owned, you are facing a for sale sign in your future. There is some sort of uncertainty hanging there. Now, any sort of strong business person might say there's uncertainty all the time and any kind of business ownership, any sort of structure, you have uncertainty.
(07:59):
But I think that there is this feeling of wonder who we'll transact with, wonder what that looks like, wonder when it'll happen and it creates this kind of new uncertainty. And then the only other thing that I would think of culturally that we're seeing right now or hearing about is this strong emphasis on growth, which has folks who may not have a lot of experience in public accounting coming in and really pressing manager and up, let's say for sales activities and to enter leads into the CRM and what activities are you doing that have generated leads and what business have you closed? It's great to have an emphasis on growth. It's great to teach our people how to make rain. It's great to build a business development culture. There's nothing that we would ever say to anybody that was a bad thing, but there are ways to do it that can be motivating and ways to do it that can feel like, wait a minute, I think my job just flipped into a sales job and that's not who I am.
(09:00):
And it hasn't been part of the culture At ConvergenceCoaching, we hardly use the word selling because it's so off-putting in our profession, we call it business development to try to soften it up. Well, that's not being softened up inside these firms. And the other thing is there's this strong emphasis on increasing revenue. So we're hearing about some of these firms getting edicts that they're going to increase partner charge hours a couple hundred hours a year and things like that. And we don't think that's good for the culture. It doesn't create a culture of leverage. It creates a culture of too much work at the top of the pyramid in terms of chargeable work and not enough work pushed down. And so there's a lot of different possible impacts to culture. And I know I haven't made it sound very good by listing all those things, but they're real risks as firms enter this kind of arrangement.
Dan Hood (10:02):
Right? And to be straight up, we've seen, we did some recent research with firms that had taken on PE money and definitely there's people in a lot of firms who are very unhappy with how it turned out. Now, I've heard people who do your just regular m and a deals say the staff are like teenagers no matter what you do. Some of them are going to be unhappy with it, but there's also, if you make all the changes, you make some of that disaffection or discontent is going to be real and it's going to be based on a thoughtful approach of saying, Hey, this was the workplace I used to have. This is the way it is now. How happy am I with this new arrangement? So at the very least, we know that some people are unhappy with it. And the risks, those seem, I don't want to say like an obvious set of risks, but when you lay them out, you're like, yeah, those are all the things you would expect to be racist, but people aren't talking about them as much.
(10:58):
Like I said, the focus is really on those big, big buckets of cash. We talked about some of the risks to the individual firms and things, and you should say, these are not guaranteed to happen. There may be great firms out there that really help for accounting firms reach and grow, but it's something to bear in mind at all times when you bring in a different ownership that isn't aligned necessarily aligned to the priorities of the accounting profession. And I think I want to take, that's where I want to go next is talk a little bit about not just the individual firm, but the accounting profession as a whole. Because I think for many people their reaction is to say, well, they just don't understand accounting. There are many ways in which accounting is unique. There are many ways in which it thinks it's unique and it's not really that unique, but there are actually many ways in which it really is unique and has a role to play in the economy and in its communities that is a little different or in some cases a lot different from a lot of the things that other do.
(11:53):
I think a lot of accountants cringe when they hear PE firms say, 'Yeah, we're bringing the same model we brought to veterinary practices and HVAC repair companies, so we're just going to apply that in accounting.' And everyone starts to go, 'Oh, no, that's not us.' Nothing wrong with HVAC or vets, but they're, they're not accountants. So we can talk a little bit about that, the potential risks to the culture of the accounting profession as a whole sort of beyond just the individual firm.
Jennifer Wilson (12:16):
Yeah, I love all of that, Dan. That just backdrop there. And I love this profession and I have built my whole career in it. And one of the reasons I love it is because of what I'll call the overarching culture, which I don't think we've written about much or talked about much. I hadn't really thought about it much until I started to see some changes in it that worried me. And I'm going to say that when I kind of tried to figure out what's bugging me about all this change in culture of our profession, I started doing some reading about different forms of capitalism. And I think that our accounting profession, without any of us sort of writing it down or joining hands or taking an oath per se, we have had an agreed upon culture in accounting of what they call conscious capitalism. And conscious capitalism is essentially kind of a strong foundation where there are four winners, four winning groups let's say.
(13:26):
And one of the winning groups is clients. We are in accounting and we want clients, whether they're our internal client in finance or whether they're our external client in a public accounting firm, we want to add value to them. We want to make a difference for them. We want to maximize their success. We're trying to figure out how to minimize their risks, give them peace of mind and all kinds of things. Clients win. That's what we're trying for. And I don't think anybody would argue that we want our clients to win. We want talent to win. When we invest in our talent, we develop them. We want to create positive cultures, we want them to have a sense of belonging. We want to help them realize their hopes and dreams and really build something successful out of their career in accounting. So talent, we invest in talent.
(14:15):
That's the second element. Third, we invest in our communities wherever we are. We invest back in the profession. There's so much volunteerism in the profession, but we also are local volunteers. There's so much community service work that we do and firm days of service and all these things that we have been investing in our communities and we want those to win. And then the fourth winner is the shareholder. We want shareholders to win. We want them to make money. We want the value of the asset that they've invested in to grow. We want them to be able to leave and retire with some sort of buyout or retirement. So we were looking for all four to win, and that's what I love about this profession. But when we have these folks coming in that are really committed to grow and increase profits and turn around and transact and sell it and return the money to the shareholders, and that is the business they're in, they are in the business of doing that, of getting that ROI for shareholders.
(15:22):
We are starting to see our culture as a profession start to get a little fragmented, not sort of all in agreement on conscious capitalism, but instead traditional capitalism where it's shareholder value at all costs or shareholder value matters first and most. And that creates short time decision making, not long time, long range decision decision-making. And I think it puts us at risk. So I think that's important, and I'll give you a couple of examples. One is I mentioned earlier, one of the cultural shifts is a real hard emphasis on top line growth. Get out there and generate leads, right? So I'm out in the community and I'm giving back and I'm speaking at local conferences or I'm sitting on a committee for the state society or whatever it is, and I'm in give back mode. We are hearing that some of these PE firms or their growth leaders that they're placing are saying, Hey, we want you to get off those committees unless you can show us leads they're generating that are producing revenue.
(16:25):
We don't get why you're investing there in that local community with your peers. You ought to be out there in the market going to industry conferences to go get clients. And it's kind of a shortsighted way of being, not giving back. But also there are finance professionals, CFOs, controllers at these CPA events and I'm sure that firms are helping their investors figure that out to say, Hey man, we still have to give back. But that's an example. There's a little bit of a concern related, I don't know if this is a culture question or what it is, but I think it is culture, Dan. I tell people sometimes, and it sounds a little bit like a poor me or something, but I spent a good 15 months with the National Pipeline Advisory Group, investing our hearts and souls, this 22-stakeholder group and figuring out how to attract more people to a career in accounting, have them go on to become licensed as CPAs, and really wanting to attract people and figure out what the impediments were and how we could overcome them.
(17:34):
Well, one of the things some of these organizations are doing after they invest and they create these alternative practice structures is that they're going out and saying, 'Hey, for those of you in the alternative practice structure, we want you to put your CPA in the drawer, but we don't want to have it on LinkedIn. We don't want it on your business cards. Get it out of your email signatures. We don't want to be governed by state board rules or whatever it is, whatever their purpose is for doing that.' We have had a culture in the accounting profession of really being proud of our CPA license, really feeling like it was an important part of the value story. To me, that is a big cultural shift if we're going to tell a lot of CPAs that it's not that important or valuable anymore. And I know one of the arguments that I've heard is, well, this [alternative practice structure] has been around for years and years and years, and a lot of bigger firms have already been saying this to their CPAs in these consulting or advisory areas. Put it away. So it's not that big a deal, but to me, again, this is a volume deal. This is affecting a lot more people and it's affecting a lot more of the local firms who are rolling up into these entities. And I think we're just going to start seeing it as a deemphasis of the CPA license. I hope that's not true. I mean, it goes against everything, I believe to say that everything I wish I guess, but I am worried about it. I think it's a risk,
Dan Hood (19:07):
Right. Well, and we already know that there's nowhere near enough CPAs coming through. Anything we do, we don't want to do anything to discourage it at any point for any level. You talked about risks. We talked a little bit about the culture of the risks to culture. Are there any other risks you see out there in terms of operating and accounting business related risks or quality related risks?
Jennifer Wilson (19:29):
Well, sort of rationalized or unreconciled, I don't know what the right word is. I growth really rapid growth always comes with risk that you would have the potential of having more work than you have capacity, more yeses than we have the people to deliver with quality. The desire to sort of squeeze cost in some of these entities is causing them to create some layers of bureaucracy and requisitions to get replacements for staffing. And we're hearing that there's some groups that are feeling understaffed or resources. There's a lot of proving I have to prove what I need. And in the past, a lot of accounting firms felt like, Hey, CAS is growing at this rapid rate. We're not going to make them prove that they need another headcount, especially because someone quit. So when you start squeezing capacity and cranking top line growth, you always risk, I think potential quality.
(20:36):
I also, I feel like because of all this growth and all this expansion, we probably need to double down in these firms on QR and QC and really make sure that there's spending there, that we're investing in those resources, but those resources don't generate revenue and they are probably seen as costly and cost. And so that would just be a caution that I would say I would hope that the firms would really make that happen. I think it's a big investments needed if you're going to have that kind of growth and especially growth into other services and making sure that we're following the standards that we need to. And then I think that there are some risks to clients, clients feeling like, especially clients who might've had come into their industry before and they might not have that positive of a view of it or concern that their accounting firm has taken on this PE money.
(21:39):
Even though the audit practice is separate, they may not be comfortable having PE have their data or conduct their audit. And so we're hearing about a decent amount of client movement and potential for independent firms to pick up both clients and talent as a result of this. And I do think there's also just, and I know everybody knows this, but we've got to be careful to manage independence issues more careful. We are always supposed to be careful, but maybe there needs to be an even greater scrutiny and care to protect our profession and our reputation for integrity and independence.
Dan Hood (22:24):
These are all great questions, reasonable questions that should be thought about. And I think there's more, and there's some areas I'd like to dive into a little more, but first we're going to take a quick break.
Alright, and we're back. We're talking with Jennifer Wilson of ConvergenceCoaching about potential concerns, potential risks involved with private equities, entry into accounting, how it's impacting firms, how it's impacting the profession, client's talent. We talked a little bit about talent, we touched on some of their concerns about it. I'd like to dive a little bit more into that, into some of those concerns, particularly concerns about the long-term future of the profession. Is this going to be around, is this firm going to be around? Is this profession going to be around? And then maybe some other elements of that. What do you think of that in terms of that long-term issue? Are we seeing young accountants sort of saying, wow, this profession doesn't have the long-term potential that I thought it did?
Jennifer Wilson (23:20):
Well, I'm not seeing that yet. I think we're in a weird bubble or whatever. We're in maybe the honeymoon phase of the emergence of PE here. I'm not saying honeymoon as in everyone's happy, but honeymoon as in everyone's hopeful that things will sort of settle down and there will be new norms. And so people are giving it a chance. I think there's big opportunity for independent firms. I think there's huge opportunity for those who want to go out and start their own firm. And I think we have seen this happen again and again in our profession where some sort of consolidation or change starts to happen or big moves occur, and then there's this emergence of startup firms and the growth of the local firm. And I do think that young people could see the potential of that. I also think that some may be attracted to this PE model.
(24:20):
They may hope that the flip happens and that they might own a certificate even if it's not a priority certificate that could give them money. So I think most are sort of wait and see. I think if something's making super young people, middle schoolers, high schoolers, early college people wonder, I think it's probably a whole conversation around AI that makes them wonder. And we're doing our very best to make sure that everybody that we talk to knows that AI is certainly going to be a massive evolution revolution for all businesses in our country, but similar to the microcomputer and probably not a real threat to opportunity, but instead a real enabler to opportunity. But I don't know that the PE thing makes people think the profession's not going to make it. I do think they wonder, do I want to work in this kind of environment or with this kind of messaging and this kind of culture and can I find something else?
Dan Hood (25:26):
Right? But as you say, given the economy and concerns about that, not a lot of people are feeling comfortable striking out on their own, even from a firm origination point of view from formation. Are they comfortable saying, this is the time I really want to be going out on my own, hanging out my shingle?
Jennifer Wilson (25:43):
No, I think people are sitting tight and in fact, if you read any of the talent organizations that follow talent, Gallup and Berson and the like, they're all talking about job hugging where people are hugging their jobs instead of hopping from their jobs. There's only a couple of industries that really have significant movement in its healthcare, of course, where there's strong demand and also a lot of PE impacts where people are trying to relocate, but also quick serve restaurants and that kind of stuff. They're the ones that have turnover pretty much all the other professions and organizations are experiencing job hugging, which by the way gives us a false sense of security. It makes business firm owners think, well, my people must be happy they're not quitting and our retention rates are so much better than they were two years ago. Look at that. We're winning. And I tell all the firm leaders, I don't care what your ownership structure is, we're in an interesting bubble mostly caused by this economic softness or s sponginess and people are sitting tight. That doesn't necessarily mean we're winning on the talent front. And it also doesn't mean take your foot off the talent gas pedal. Some firms are like, maybe we don't have to fund some of these programs anymore. Maybe the employer has the power back.
Dan Hood (27:11):
Well, yeah, there's a lot of things that are going into masking those signals, right? Job hugging its way up, uncertainty about the economy, but things like the success of programs of automation and of outsourcing that firms were ramping up over the last five to eight years, they're starting to bear fruit. It doesn't mean that you've solved the talent problem, it just means that you've alleviated some of the short-term pain of it and the long-term problem is still remains recruiting. Your intention is still something everybody needs to focus on very, very, very, very seriously.
Jennifer Wilson (27:42):
For sure, there isn't any question and culture's a big piece of that. The culture of the profession, the culture of the firm, what it feels like to work here. We had an entire pillar, if you will, of the pipeline strategy, have a better story to tell about what it is like to work at your place. And everybody needs to read that regardless of your ownership structure that chapter and say, are we doing these things? And if we're not, how can we get there? And that's a long game, not a short game, and PE is playing a short game. The other thing I neglected to mention, Dan, I just thought of it and it's that I'm super concerned that valuations are too high. That we've had sort of almost a bidding war to buy firms or to invest in firms and a little bit of a frenzy take place with the PE firms just anxious to get into this hot market.
(28:43):
And I'm concerned that that's ratcheted up valuations in a place that it's going to be difficult for PE to grow the thing enough and squeeze enough profit to get the ROI. They have to get off of what could be an inflated purchase price that they started. And I am concerned that that could lead us to some awkward places where PE can't execute a flip, and then what do they do? And maybe they sell it back. If you read what's happened in other industries, there could be a sell back to owners and that might be fine, but there is a potential for bankruptcy, there is a potential for going out of business. So anyway, that's another thing that kind of keeps me up at night is I think that we were negotiating buyouts for next gen talent down and PE came in and cranked up, cranked them up. And so we're wondering about that.
Dan Hood (29:53):
Let me just, I'm not going to go quite so far as the saying, I'm going to play devil's advocate, but there are some of the things we've talked about is potential risks to the profession in some areas. And I'm thinking particularly you brought up the valuation question, it made me think of all them many ways in which to a certain degree, I think accounting firms, there's been a lot of negative pressure on the value of accounting firms because of all the baby boomers who are potentially ready to retire and so on and has that sort of depressed values. And similarly, we know that accounting firms we're routinely told that accounting firms don't charge anywhere near enough for their clients. The value they have that they offer is so great, but they're not realizing even a small percentage of it because they're not charging their clients appropriately and they're not managing their client rosters smartly. We know there are issues of accountability and efficiency in firms that there's a great deal of room for growth just by better management, put it that way. And I know you're inside firms all the time trying to get firms to be better managed on a whole bunch of fronts, but just basic business wise, is one part of that. How much room is there for PE to come in and ratchet things up without doing any damage? Or is there, or lemme put it to a different way, is there room for that?
Jennifer Wilson (31:07):
Well, we know firms can run better, so there's no possible way that I could ever say anything else in that there's no perfect firm, and we know that there's a lot of room in a lot of firms. They don't have a unified leadership team. They're pulling in different directions. They don't have ideal target clients to find. There's a whole bunch of things. They're not providing advisory services to the level that they could. They're not being more for clients. They're doing a lot of compliance. If they are doing advisory coaching or consulting, they're not monetizing it.
(31:44):
There's so many places we could improve. So yeah, the right partnership, the right leadership, yes, there's a potential to run a better firm. And I'm not going to say that outsiders can't do that. I do think you can't do that without talent at the center because talent is all that matters related to making those transitions. I mean, you have to develop people, you really have to develop and shift mindsets. We're going to have to do it anyway because AI is going to take so much of the simple compliance and technical work, but it's a long game, Dan. It's not a light switch and it's not one done by cranking up client fees without careful management of that. And I am all for fee increases. I'm all for adding value and charging more and realizing value and getting away from billing off whip and all that stuff.
(32:41):
I mean, we couldn't be bigger fans, but I do think that it's going to be a stretch for the folks that haven't been in the profession to come in and sort of dictate and use their traditional strategies for turnaround on firms. And there is this little secret, and I know they know this, and they probably encountered it pretty good in the physician practices, which is one of the reasons that's had very mixed results. And that's partners aren't that easy to get to change. They have a thing called I'm a partner and I don't want to have to, and all that stuff. Now of course, when you take their chips off the table and you turn 'em into employees and you tell 'em they have to, then maybe you get better compliance perhaps, and you tie any future toit and those kinds of things. But it's just not as easy as I think these guys think it's going to be. And that's the part that gives me pause.
Dan Hood (33:44):
The solutions are really more, the solutions that are needed are really more long term and PEs general focus is more short term. Right? I mean, famously that acknowledging, I don't think any PE group would deny that, but it's just whether they would say, oh yeah, our short-term solutions won't necessarily work in a set of problems that need long-term solutions. That's the other question.
Jennifer Wilson (34:04):
Yeah. Well, it'll be interesting and
(34:08):
Don't, we're not wishing any of this trouble, but we're earring about it and studying other professions and what's happened and hoping that we can avoid some of those really hard things. I mean, in healthcare, there are all kinds of studies about the impact of PE to healthcare and adverse patient outcomes are up in backed entities and burnout and turnover and a lack of motivation is up for talent. It's not happy stories to be read about. And I think the healthcare industry is as close a parallel. You mentioned HVAC and one guy told me, 'Hey, car washes, they crush car washes. They make car washes so much better.' And I was like, 'Hey, man, I don't have a relationship with my car wash guy.' And I just think the closest parallel is healthcare and read about it. I've got all sorts of resources, by the way, happy to supply them to anybody who wants to read some of these very, very current and very relevant and very authoritative studies that have been done so you could better understand what's happening in that industry, which I believe is something we should be thinking about in accounting.
Dan Hood (35:31):
Yeah, I mean, it's the first step to avoiding these sorts of problems, to be aware that they might happen and to see how they've happened elsewhere, but also to ask the right questions in accounting. I think this has done a great job of raising a lot of those questions. Jen Wilson of the ConvergenceCoaching, thank you so much for joining us.
Jennifer Wilson (35:46):
Thank you, Dan. Glad to be here.
Dan Hood (35:48):
And thank you all for listening. This episode of On the Air was produced by Accounting Today with audio production by Adnan Khan. Review us on your favorite podcast platform and see the rest of our content on accounting today.com. Thanks again to our guest, and thank you for listening.