Dinosaurs…and CPA firms?
My wife and I took the kids to Dinosaur Valley State Park yesterday; a site famous for its fossilized dinosaur tracks – many requiring a wade into the river to see. Standing in these footprints, one can't help but marvel at the sheer scale of these extinct creatures – animals that dwarfed today's largest reptiles by 100x and outweighed a modern Boeing 777 aircraft.
Driving home, I reflected on how dinosaurs' inability to adapt to their environment, and I couldn't help but think of the similarities in how fast the public accounting landscape is evolving and the challenges that firms face today. These challenges are widespread, but the traditional professional services model – the ‘dinosaur operating model’ – is ill equipped to solve them.
Low Attrition & Utilization Challenges
I recently conducted a strategy workshop with a mid-market CPA firm whose utilization was 55% over the prior 12 months – at the staff, senior, and manager levels. Unfortunately, this isn’t an isolated case. Many firms that I’ve talked to, from Top 10 players to 100-person shops, are facing utilization rates that are 15-20% lower than a typical year.
Public accounting firms are struggling with the pendulum swinging from the Great Resignation to the ‘Great Stay’, with historically low attrition over the past year now being combined with significant economic volatility and continued private equity (PE) activity across the industry.
As CPA firms approach the end of this year’s busy season, they now face crucial decisions on their firm strategy.
Navigating the Storm: Economic and Political Volatility
Firm leaders are grappling with market uncertainty, including economic volatility, political/regulatory changes, and heightened PE and M&A activity in public accounting.
The S&P 500 has dropped by more than 10% since its record high last month, potential vast regulatory changes are being considered, and cuts to federal contract revenue worth ~$2B for top professional services firms were announced before being paused for review. What was previously expected to be a boom year for M&A activity – with over $2 trillion in global dry powder ready to be deployed – is now uncertain.
Adding to the complexity, heightened M&A and Private Equity activity is transforming the public accounting industry. In the past year, we've seen a surge in consolidation and investment activity – mergers, acquisitions, and PE investment announcements happening on what feels like a daily basis. Notable transactions include the mergers of multiple Top 50 firms and continued PE acquisitions of both large and small firms. This trend is reshaping the competitive landscape, with mid-sized firms increasingly becoming acquisition targets for larger players and PE groups seeking to capitalize on the sector's potential for technological transformation and operational efficiencies.
The Root Cause: The ‘Dinosaur Operating Model’
Like dinosaurs unable to adapt, the traditional operating model of public accounting and advisory firms is far too rigid for today's environment. However, many firms that I talk to struggle initially to envision anything but the status quo.
For example, the COO of the firm I mentioned at the start of this article initially couldn’t envision a firm that ran at 85-90% utilization because of their ingrained operating model. His ‘light bulb moment’ came when we visualized before-and-after scenarios for his firm, exploring the inefficiencies caused by peaks and troughs in demand. He then quickly realized that their current strategy – based on a rigid number of FTEs – always exceeded demand, even at peak levels. In other words, he needed to make his supply curve as flexible as his demand curve to create a reimagined, more agile workforce model.
Additionally, reviewing staff utilization across service lines revealed opportunities to improve delivery quality. Currently, the bench is used at all costs, even when skillsets don’t align with the work. An agile workforce could ensure the right skills are available at the right time. Employee Benefit Plan (EBP) audits exemplify this. While standardized, the work is often delivered by inexperienced resources using unstandardized processes and a patchwork of EBP audit technologies, putting delivery quality and firm reputation at risk.
The COO and CFO Imperative: Leading the Charge for Change
For firms that want to become more agile, the transformation often starts in the office of the COO and CFO, who are uniquely positioned to envision a reimagined operating model and financial ambition. By embracing agility and innovation, firms can unlock significant efficiency gains (boosting utilization by 20-30%) and improve work quality by reducing burnout, reducing inefficiency, and deploying the right skills.
From Vision to Reality: Building the Agile Firm
How do you actually do it? The mid-market firm that I recently met with – and others like them – are leveraging a structured approach that treats this as a strategic internal change initiative, starting with:
1. Defining Profitability Goals: Establish clear, measurable profitability goals for the next three years based on a realistic assessment of your current state versus your desired future state.
2. Charting Your Course: Determine the pace and extent of the transformation. How far are you willing to go in embracing agility, and how quickly do you want to get there? This will depend on your firm's culture, risk tolerance, and competitive landscape.
3. Setting 12-Month Value Realization Goals: Break down your three-year vision into actionable 12-month milestones with specific value realization goals for each quarter to track progress and make necessary adjustments.
4. Creating an Operational/Implementation Plan: Develop a detailed plan outlining the specific steps required to achieve your goals, including technology investments, process changes, talent management, and communication strategies.
A More Profitable and Sustainable Future
Accounting firms are understandably risk-averse, often waiting for change to be forced upon them. However, leading firms are proactive in adapting to today’s environment, avoiding what I call ‘scoreboard watching’ - they reshape their firms instead of waiting for the world to change.
The potential gains from embracing agility are substantial. The mid-market firm I mentioned now has a value creation playbook to gain ~$300k profit uplift per partner, totaling around $12 million per annum. Firms that successfully reimagine their operating models can expect a $200-400k profit uplift per partner, driven by increased utilization, reduced costs, and improved client satisfaction.
Beyond the financial benefits, embracing agility avoids the ‘dinosaur operating model’ trap, they become more dynamic and mitigate economic volatility by expanding and contracting their supply curve to closely mirror their demand curve. This model creates more sustainable and fulfilling work environments that attract and retain top talent, who are interested in vibrant firms with lucrative career trajectories and strong leadership development.
Baxter McConnell
CGO
