Reimagining professional services

Background

I have spent more than a decade trying to transform the way professional services are delivered; and have been fascinated by how this industry, which is so good at giving advice to clients, is so bad at following it! The industry is now at a crossroads due to a confluence of factors, and needs to fundamentally rethink its operating model.?

I share below my thoughts on the headwinds and the way forward for professional services firms (PSFs). I lay particular emphasis on public accounting firms (PAFs), especially mid-sized ones in the West; but the issues and recommendations are applicable globally for consulting, law firms etc.

Current State - Industry Challenges

1. Talent pipeline

PAFs face a dire shortage of CPAs. WSJ reports a 17% drop in employed accountants since 2019. Not enough young professionals are entering the industry to compensate for the wave of retiring Boomers.?

This points to an underlying structural issue. The work and life expectations of Gen Z are at odds with a profession that is obsessed with utilization targets and ‘busy’ seasons; and relies on an antiquated apprenticeship model. Today’s kids are looking for flexibility and meaning; and are not excited by the prospect of slogging for 15 years to ‘make Partner’ (which they see merely as a license to slog for 15 more years!)

2. Margin pressure

PSFs face rising labor costs, due to the talent shortage and general inflationary trends. They also face significant pricing pressure, driven by commoditization and competition (including from insourcing). Frenetic PE activity in this industry is amplifying this pressure.?

3. Tech disruption

Digital disruption has been a boon and a bane for this industry. While firms have been quick to capitalize on the opportunity to help clients through their digital transformation, they have been slow to adopt digital technologies for their own transformation.?

One reason is a short-term investment horizon inherent to the partnership model, which is ill-equipped to deal with the increasing capital intensity of the business. Another is the lack of a digital DNA in an industry that has treated IT mostly as an afterthought. This has increased the threat of tech-savvy, PE-backed, ‘non-native’ competitors.

Future State - Guiding principles

1. Embrace the power of Digital?

I recommend that PSFs adopt an automation first approach as they reimagine their delivery model. What can be done by a bot, should be! This will free up time for employees to focus on more interesting and value-adding work.

PSFs will also need to build a digital DNA to future-proof themselves. This will require casting a wider hiring net in terms of geography and skill-sets. They will also need to tap into a broader tech ecosystem (including startups) for innovation.?

PSFs will also have to modernize back/mid-office systems, something they have been loath to do. This can reduce frustration for employees, who are used to the UI/UX of TikTok and Instagram, yet have to deal with a clunky time entry system designed in the Paleolithic age!

2. Leverage Global Delivery

Given the talent constraints and cost pressures, PSFs will need to look beyond the shores for resources. This will require an ‘industrialization’ of service delivery, which is challenging for many firms that still operate in cottage industry mode.

PSFs can benefit from a ‘Right-shore’ delivery model that utilizes multiple geographies based on talent availability and nature of work, while managing risk. MNCs like HP and GE have been doing this for ~25 years, and the Big 4 for ~15 years, so this is not a radical new idea. What’s new though is the opportunity to create Centers of Excellence (CoEs) for specialized/emerging skills like analytics and AI. Also, thanks to creative asset-light/subscription models, both the gestation period and minimum viable scale for global centers have gone down dramatically in recent years.

3. Reinvent Employee & Client Experience

The success mantra for PSFs is simple - happy employees lead to happy clients, who in turn deliver profitable growth.

To get this right, PSFs need to be intentional about building a strong culture and fostering employee engagement, considering a hybrid work environment. Many firm leaders are wishing for a magical reversion to the pre-covid era or considering mandates to get people into the office. Instead, they will need to create curated team building, learning, and volunteering experiences that help employees grow professionally and personally; and make them want to come to the office.

PSFs also have a long way to go from a DEI perspective. The percentage of women and minorities, especially at manager and above levels, while increasing, is still pitiful. For e.g., while women CPAs outnumber men at entry levels in PAFs, they make up only around 20% of partners. PSFs need to fundamentally rethink the hiring and retention model to make their demographics resemble their clients’; and benefit from the creative power of diversity.

PSFs will also need to design flexible career paths to appeal to Gen Z. Instead of the traditional ‘up or out’ model, PSFs need to think of careers as journeys on a highway with employees entering at different points, driving varying distances at different speeds, and exiting at different points. The focus needs to be on making each person’s journey rewarding and productive.?

PSFs also need to redesign learning. In an era of advancing AI, they should help employees future-proof themselves by tapping into their uniquely human strengths. This means moving away from the almost exclusive focus on core technical skills to a greater emphasis on foundational soft skills and tech/data skills; and leveraging AI for customized learning paths.

PSFs will also have to differentiate themselves on client experience. Paradoxically, leveraging technology and industrializing core delivery will actually enable PSFs to do this better - by creating more ‘wow’ moments for clients through value-added services and personalization.

A glimpse into the future: Audit case study, Circa 2030?

Visualize this scenario. XYZ, a US-based PAF with a mid-market focus, has managed to reimagine itself, embracing digital, adopting a global delivery model, and reinventing the employee/client experience. What would this look and feel like?

XYZ’s cloud-based audit platform automatically ingests the client’s entire General Ledger and other relevant documents (PBCs in the jargon) and runs scripts created by a Digital & Analytics CoE in India to test the entire population. A predictive AI model developed by XYZ Labs (an incubator run by the firm that works with startups across Bangalore, Berlin, Tel Aviv, and San Francisco) highlights a suspicious pattern of transactions. Forensic audit specialists from the US, India, Poland, and Philippines dig deeper to uncover procurement fraud (I can even envisage a ‘Minority Report’ type scenario where the algorithm predicts fraud before it happens, based on a pattern of behavior). In parallel, an AI Insights engine developed by XYZ Labs highlights opportunities for performance improvement, creating a potential consulting opportunity.

XYZ’s clients are delighted with the efficiency, speed, responsiveness, and value-add. Its employees are more engaged due to the challenging work, global experience, and opportunity to develop future-ready skills. The firm has become a professional services partner of choice and an employer of choice; and enjoys market-leading growth and profitability.

Getting there

A transformation like XYZ’s would not be easy. It requires bold leadership that guides the organization through uncharted waters, and overcomes strong resistance to change. This is particularly challenging in PAFs, which have an ingrained culture of risk aversion and ‘professional skepticism’. But the alternative is much worse - obsolescence!