Workplace Issues

Disruption Hits the Professional Services Sector

An aging workforce and new technology will create winners and losers among CPA firms and in other professional services fields.
Brian PeccarelliJuly 5, 2017
Disruption Hits the Professional Services Sector

America’s CPA firms reached a quiet, but important inflection point last year. For the first time ever, the number of partners over age 50 declined from the prior year. The total number of partners also decreased. Why should CFOs care? The shift has exposed a clear rift in the professional services space between firms that are positioning themselves for growth and those that are allowing themselves to go gentle into that good night.

While these data points may not feel like Earth-shattering news outside of the accounting industry, they will have a huge impact on the way businesses of all types are run in the coming decade and will dramatically shape the future of professional services.

It’s all part of the massive demographic shift commonly referred to as The Great Wealth Transfer, whereby the baby boom generation, which is now age 52 to 70, is starting to retire and pass along somewhere in the neighborhood of $30 trillion in assets to generation Xers and millennials. They’ll also be handing over the reins of the businesses that built those giant nest eggs.

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Suddenly, all of those research reports and webinars about how to work with the millennial generation are starting to make sense. Fact is, one of two things is going to happen to today’s leading professional services firms: 1) they will successfully manage this transition, putting the generation that never knew life without the Internet at the helm, or 2) they will ride out the remaining years of their legacies, content to cash-out and chase sunsets in Boca or Scottsdale.

Outside of re-arranging the ranks of leading firms and creating some good fodder for low-cost acquisition shopping, the firms in the second category won’t have a huge impact on the future of business. But those in the first category will change everything.

Early signs of how this transition will change the face of work in America have already started to emerge. Take those data points on trends in aging among CPA firms, for example. They come from an annual industry report card of sorts called the Rosenberg Survey, which compiles stats on everything from firm demographics to profitability.

What’s most interesting in the survey’s findings is that as the age and total number of CPA firm partners started to decline, profitability went up. In fact, for the most recent survey, average income per partner was $406,000, 3.6% higher than the previous year and the highest increase in profitability since 2007.

Perhaps that’s why Ernst & Young CEO Mark Weinberger has been publicly celebrating the fact that the median-age employee at his firm is just 29 years old. He has also dramatically altered the firm’s culture to appeal to the millennial generation’s value system, explaining: “I’ve changed our value proposition. In the old days it was: ‘You come. You stay with us. You work with us. You get a pension.’ Today we know our people are not likely to stay with us for their careers. They’re going to have five, six, seven jobs throughout their careers.”

But it’s not just lifestyle issues like flexible work schedules and more liberal attitudes toward job-hopping that are changing. Companies that are thriving the most throughout this transition period are those that have adopted the most technologically advanced approach to the businesses that once relied on “power by the hour” business models — dispatching armies of consultants to tackle labor-intensive jobs.

Big data, for example, is already transforming the audit function at the major accounting firms. While just two years ago the nascent idea of leveraging big data analytics to parse massive, disparate databases of information looking for red flags was at best a speculative pursuit, today, it is becoming mainstream. In fact, this past month the Institute of International Auditors released official guidance on how to help financial professionals incorporate big data into their workflows.

Likewise, the practical use of artificial intelligence is rapidly going mainstream as the next generation of tech-savvy professional services firm leaders begins to recognize the potential in being able to do more with less. From the highly publicized partnership between H&R Block and IBM Watson to the use of cognitive computing technology to process cross-jurisdictional tax information for multinationals, the idea of a robo-accountant is no longer the stuff of science fiction.

What does all of this mean for today’s CFOs and other business leaders? For one, it should be a call-to-action for those who are not currently gunning for growth by investing in professional development and technological advancement. The message is that they could easily be left behind. More importantly, however, business leaders should use this information as a litmus test for choosing who to invest in, which partners to work with, and how to evaluate existing leadership. Are they ahead of the curve, doubling down on what’s next in the commitment to break new barriers, or are they staying the course, content to coast on prior achievements?

Only one of them will still be here tomorrow.

Brian Peccarelli is president of the tax & accounting business of Thomson Reuters.

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