Episode 122:

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Hello everyone, and welcome to The Upstream Leader. My name’s Jeremy Clopton. I am excited to have a conversation with our producer again today, Justin Grant. Welcome back.

Hi, Jeremy. Good to be here.

I’m excited for our conversation because it kind of builds on several of the episodes that we’ve had here lately around who do firms want to be, what are the hard things that you’re not doing. And all of those conversations I realize are predicated on the assumption, we’ve got a phenomenal profession, and there is a lot of opportunity and there are a lot of great things happening. The conversation that I want to have today is really based around something that came up at one of our conferences. Recently at that conference, one of our participants said, you know, based on everything that I hear, everything that I see, it seems that the profession is in a state of decline, that there’s all of this stuff happening to it, that we can’t get people, and maybe it won’t exist, and all of this just almost fear-based approach to what’s going on in the profession. And I remember we paused for a second when the question was asked and said, you know what? I don’t think that’s how I view the profession. I view that we have a ton of opportunity ahead of us, and there’s a lot of amazing things happening in the profession. And I’m curious, to get us started here, Justin, you produced a few other shows in the profession. What’s your take? What are you seeing?

I agree with you completely. The profession is not in decline, it’s not dying. I think anyone would agree it is undergoing a pretty rapid change. It’s in a process of redistribution. And what I mean by that is it’s shedding the low value work more and more, the opportunities that are out there, they’re shifting where they are. People generally, but as we like to say, accountants particularly, are sensitive to changes like that. So the fear that’s out there, that’s driving the algorithms, that’s capitalizing on that tension, but that tension is not due to collapse, it’s due to transition. I think that’s very clear. And it seems like we’re on the same page with that.

And that transition when I view it, is a really good transition.

Yes.

You mentioned shedding some of that low value work. That means we’re getting rid of the things—and maybe getting rid of is too strong because there’s still a lot of it, and I think firms are still trying to figure out what’s the right balance—but it’s getting rid of the commoditized things that we do, the services, the things that are viewed as, how do I get it cheapest and fastest, rather than where do I get extra value from my accountant or my firm? I think inherently when a profession reaches a level of maturity, that it starts to reduce the amount of commoditization in order to maximize value, that’s a really healthy point of professional maturity for an industry because it forces you to be really clear about what you’re doing and what you bring to the table.

Yeah, and see, if you measure the profession with the metrics that have always been used, or maybe not always, but for a long time, like compliance volume, or like billable hours, you might be led to believe it’s declining, that it’s collapsing. But there’s this concept, it’s called Goodhart’s Law. Have you heard of Goodhart’s Law?

I’ve not.

Okay. So it basically says once a measure or a metric becomes a target, then it ceases to be good or useful. Now, thankfully, I don’t think a lot of firms out there, at least ones that listen to this show, are still measuring their success by the amount of raw compliance work they’re churning through, or how many billable hours their employees are logging or anything like that, realization rates. Sure, so many firms, almost all of them, measured everything they did around things like that and optimized to those things once upon a time. And so what that did, because of Goodhart’s Law, is that it unintentionally trained everybody to prioritize just raw activity over actually doing effective, useful work.

Now, we’re seeing this transition away from approaches like that, so firms, a lot of times they don’t measure billable hours as a success metric, they don’t push for max volumes—what they’re looking at is outcomes. They’re looking at the impact that the firm and the people in it are having on their clients, those are the right kind of metrics for the modern age, not the ones that would be telling us, look, we have a pipeline problem, we don’t have enough people to do all the work, blah, blah, blah, blah, blah. And ironically, right as that narrative has started to come to the forefront is when automation has been making leaps and bounds and making that narrative obsolete.

Well, and we saw the pipeline problem, we invested in a solution for it, and accounting enrollments are actually increasing.

Yes. And so that’s great too.

So we’ve got more people coming back to the profession and we have automation.

Exactly.

And I want to point out this Goodhart’s Law, that is absolute gold because so often—this is a bit of a tangent from the overall topic here, we wonder why people work to the clock when we say they have to hit a certain number of hours, here’s the minimum—why do they hit that? It’s exactly that.

Yes.

Now the measure has become the target, it ceases to be effective. I absolutely love that. I’m going to have to go down a rabbit hole at this point and probably go deeper into that. But anyway, back to the topic at hand, that is just very illuminating and I hope that those of you that are listening, if I’ve ever had a conversation with you about why do people work to the clock, you’re having the light bulb going off as well and thinking, “Oh, there’s some gold here.” And we’ll come back to mine that gold later.

But as you said, we’re having automation, that’s helping alleviate the pipeline problems. We have outsourcing, we’re recognizing we don’t have to have accountants do all of the things we’ve traditionally had accountants do, that we can have a diversified workforce that can do all of these things. A lot of people are viewing that as, oh, this is horrible. We have automation that’s going to take jobs. I don’t believe it’s going to take jobs. But I’m also not writing a headline to try to get you to click on it, because if I was, I would say that it was going to take jobs. My general belief is it’s going to reduce the tasks that you have to do that you never wanted to do to start with. And I’ve believed that about technology for a long time. That’s what technology is always supposed to have done. What it’s going to do is it’s going to free you up to do the things that you are uniquely positioned to do, and that should be exciting to everyone, because now all of a sudden, rather than dreading certain days because, oh, I have to go through the slog of this or that, or the other mundane task, now every day becomes a day in expertise where you are critically thinking you are problem solving, decision making, advising, adding value, and being a resource rather than feeling like you’re manufacturing a widget and just calling it a consulting report, an audit report, or a tax return. To me, that’s an exciting place to be.

It is. And building on what you were just saying about that headline of “the collapse is imminent,” the fear behind it: It’s not like the pipeline problem is a new idea. I mean, it probably goes back as a concept at least two decades, if not three, like with Enron and Sarbanes-Oxley coming off of that, even the 150 hour rule, if you want to go back even further, so.

QuickBooks.

Yeah!

That was going to render us obsolete at one point.

Exactly. Lotus 1-2-3 was going to render accountants obsolete at one point.

That is a classic reference!

But point being: Ironically, as I kind of alluded to earlier, it was right as like COVID was starting and the Great Resignation that the pipeline problem, like the temperature of it in the consciousness was just going to absolute maximum. That’s almost perfectly in line with AI and other automation tools exploding, and in the last couple years, as you said, we’re seeing enrollments back up again. So like, the story’s over. As far as I’m concerned, there’s nothing left to worry about at this point. There is no pipeline problem in the sense that people are looking at it through that old, outdated lens we talked about. That’s the only way in which it exists now. Everything else is trending upwards.

Absolutely. And as we become more advisory in nature, the pipeline expands. It’s not just I have to have accounting majors. Accounting majors, finance majors, business majors, marketing majors, math majors. I mean, there’s so many different degrees. Construction management, if your firm has expertise in construction. Nursing, if you have healthcare expertise. There are so many diversified backgrounds and educational paths. And I know somebody’s probably thinking, oh, but Jeremy, we’re the public accounting industry. Yeah, we do have to have accountants. I’m not saying we get rid of all accountants, but I am saying that as we become more advisory in nature and we have more of the automation and more of the outsourcing, it doesn’t reduce our need for people. It expands our need for diversified perspectives so that we can become even better as being resources for our clients. That’s a great place to be in as a profession.

And arguably that’s why I think private equity is interested in our profession, not because they see a bunch of waves of retirement with poor exit strategies and a lack of interest to invest in technology. I get it, that may be the selling point. They’re a great exit strategy, they’re going to come in and give you all this money for people in technology. I don’t think that’s where I see the most success happening there. When I’m talking with firms that have looked at private equity or have taken private equity, it’s not because they have a problem. It’s because they want to achieve their goals faster. Again, it’s actually because there’s substantial opportunity, not because it’s a profession in decay. And that’s a totally different narrative than I think a lot of people are perceiving: M & A activity, private equity investments, some of the other venture capital style investments that are out there. You don’t see that in a profession that’s decaying and getting ready to go away. You see that in a profession that is just poised to explode with even more opportunity and success.

Yeah. Private equity and venture capital, they see accounting for what it is, which is the glue that binds and brings all these different spheres of economic activity together. And I think we’re also seeing their interest increasing in relatively smaller firms because of that. Smaller firms have the advantage that they can change their approach quicker, they can form more natural and kind of organic relationships with their clients, closer relationships, and they can specialize and niche down with a lot more flexibility than bigger firms can. And those are the strengths that they build on. So they see that and they see, okay, well here’s how we, like you said, bring the medical field into part of the focus of what we’re doing. It’s through firms that have those connections, that have those diverse kinds of expertise and people in them. And what’s the other benefit of that kind of specialization? That you can then price based on the value, and the value of expertise like that is significantly higher than a generalized one. And you’re definitely not pricing on hours—or you better not be.

Yeah, no, we’re squarely out of the commodities market at that point. The more that you can niche down, the more that it is about the value you provide and what it’s worth to the client rather than what was your cost to produce. Of course, there are a lot of people with interest in our profession. That doesn’t mean—I should clarify—that doesn’t mean you’ve got to take private equity or that you have to go through M & A. That’s also the reason that it’s a great time for independent accounting firms, ’cause you can double down on who you want to be and go take advantage of the opportunities in this market. It is such an exciting time in that regard as well, because once you have clarity, people are relying more and more on their accountants. I mean, they are their go-to first call. We have a business issue, we call you. Not because we have a business issue and we think an audit is gonna solve it, but because you understand us, you understand our industry, you understand the implications.

And I get it, some folks are really thinking, okay, but if we have automation in all of these different things, how do we get people ready to do that? We just have to change how we approach it. Again, that goes back to the very first thing you said: There’s a lot of change. We’re not necessarily always as pro-change as we should be. I would argue we’re actually a profession pretty darn good at change though. Now we just have to change some of the more difficult things that are going to upend the status quo just a little bit. When we take away what we’ve traditionally used to train people, for instance, the years of repetition, now we have to figure out, all right, how do we teach what and why without first going through years of the how. It’s not inherently a bad thing. It’s a great opportunity. It means now we have the opportunity to figure out how do we make sure that our people are the most valuable thing that we have as the profession?

Well, and that’s it. So it doesn’t even start from how we train. It starts from how we hire and who we hire, and what their strengths are. If I had to sum all that up, I guess I would say the profession is moving from the processing of information to the interpretation of information.

Yeah. I love that.

And the firms that embrace that shift they won’t look at the landscape and say it’s collapsing. They’ll say, I’m seeing more opportunity than I’ve ever seen before.

Yeah. Well, and it’s so much more about insights at this point, rather than information. I don’t need more information. I can go back, let’s see, goodness, it’s probably 15 years ago? It was 14 or 15 years ago, I was teaching a course and it was about analytics. And I remember somebody coming up to me and mind you, this is a decade and a half ago, saying, “Hey, I’ve got a dashboard, but nobody uses it. Can I show it to you?” Well, I mean, you tell a data guy, you’re going to show him a dashboard. I’m like, absolutely. And it was a really big Fortune 500 company that everybody would recognize, and I’m like, yes, please. I would love to see this dashboard. It was fraud risk related. I’m like, this is going to be awesome. And he pulled it up and I’m like, cool, which one are we looking at? And he goes, “No, this is the dashboard.” I’m like, there’s 47 tabs.

Yeah, there you go.

I said, that’s a lot of great information. I said, I can tell you without looking at any of it, what you’re missing is insight. I need to know why I should care and then what I should do. And that’s where I think—I don’t even want to say “I think”—I very strongly believe that’s where our profession is at, is we are moving from information to insights. That’s the move from compliance driven work to advisory driven work. Don’t tell me my data, tell me why I should care, and what I should do about it. What an exciting time. With all the tools that we have available from a technological perspective, we can get more insights than ever before and at a faster rate than ever before, but our expertise is still necessary to do something with it.

Right. And that’s the key.

Yeah. It is. I mean, I get it. There are a lot of indicators out there, perhaps that there are problems in the profession. I think the one that caught my attention most recently, somebody had shared that if you’re under the traditional—I’m not going to get the headline word for word—but it was something to the effect of if your firm has the traditional deferred comp model for your partners, they’re leaving money on the table when they retire. As compared to if they sold the firm, and that’s where your problem is. That’s a problem in public accounting today. And I remember thinking to myself, well, yeah, that’s always been the case actually. I don’t know that that’s a new problem. I think anybody would tell you that outright selling a business to exit and go sit on the beach somewhere, will generally speaking get you more money than a pension or retirement plan. In a business that is being sustained. But I remember thinking to myself, why is that a problem? If your goal is to have, and I’ve got a lot of firms, Justin, that I work with, that, you know, they’ve celebrated a hundred years in business. Their goal is not maximize returns so a founder can lay on the beach. Their goal is to maximize sustainability for decades to come for, you know, the next generation. They want to maximize their impact.

Yeah. It’s pride in their work. In their impact.

Exactly. And I remember thinking to myself, is that actually a problem? And I don’t know that it is. I think there’s a bit of a fear right now that’s being created, and I hear it sometimes in partners that, well, we have this problem that if we aren’t valuing our firm that way we’re leaving money on the table. But it’s only a problem if you shift your motive from longevity to payout. And maybe I’m shortsighted in that, so I’m curious, what are your thoughts on that?

No, I mean, I certainly follow what you’re saying. When it comes to firms, companies, whatever they may be within a profession that have the longevity to be able to say something like they’re celebrating a century of existence. Even most law firms I was ever around when I was in that realm, nowhere close to that. It’s something particularly unique to accounting. I feel like those firms that have embraced that, and like I said, they’ve got pride in what they do and what they represent and how they contribute to the community and how they support their clients, and do good things for them, it’s the self-fulfilling prophecy of do that and you’ll have success. You’re not doing it—primarily—because you want to go retire on the beach in the Cayman Islands or whatever, you’re doing it because you have integrity. You want to make the best impact that you can. So I completely follow you here. And it does, again, seem almost like a bit of a clickbait-y kind of motive that’s just being put out there and getting people to think about something in a way that, well, it’s always been that way, there’s nothing new, so why are you panicking about it?

Yeah. And I should probably point out retiring and sitting on the beach is not inherently a bad thing. No. And I would argue that our, the deferred compensation plans that we have in our profession and what partners make in our profession. You can still retire on the beach.

You ought be able to do that!

With plenty in the bank account, yeah. It’s just a matter of, do you want to have a few multiples of that, I guess is the big question. Which kind of gets to the whole again, so what’s your motive? Is it purpose driven? Is it purely profit driven? And I don’t want anybody listening to think that choosing private equity or choosing to be acquired is purely profit driven. I very strongly agree that there are firms who are private equity backed, that are very purpose-driven.

Yes, same.

And they have more of a motive than just pure profit. So in this context, what I’m saying is, it’s more the driving narrative that we have a value problem in the profession based on how we pay out retirement as compared to selling a business outright. It has nothing to do with who the buyer is. My issue is we don’t have a value problem. There is a difference in the outcome of retiring versus selling and walking away, but that’s not new. And the idea that it is, I’m with you, it’s a bit clickbait-y, but again, I think that’s what’s driving some of that perspective. When you get somebody at a conference that’s like, oh, our profession, I mean, it’s just going to crap. That’s not word for word what he said, but it wasn’t far. It’s like, but it’s not. I get why you would think that it is, because now after hearing somebody say that, I find myself reading more headlines and thinking, oh yeah. Like depending on how your feed is curated, yeah, we’re in a world of hurt.

But if you actually step back and look at it, and there’s a Jeff Bezos quote that I’ve been revisiting a lot lately, and it’s to the effect of everybody wants to ask the question, what’s going to change in the next 10 years? And that’s a great question, but the question that nobody wants to ask is, what’s not going to change in the next 10 years? And I’d rather focus on that question because I can build a business strategy about what’s going to be the same. And I love that for our profession, because what we do isn’t inherently changing. We are still the protectors of the public trust, we are still advisors to our clients, we are still their go-to resource when they have questions, risks to mitigate, exposure to try to figure out how to deal with, and you know, trying to get more of the market share. We are still going to be doing that. How we’re going to do it? That’s going to change. I can’t tell you what AI is going to do in our profession.

I would’ve told you 15 years ago that AI could have transformed everything that we were doing. But it didn’t. I mean, if we remember IBM Watson was the next great thing and that was going to change everything and then it didn’t. It won Jeopardy!

Won Jeopardy!, exactly.

Which is really cool, really cool. Super fun, great party trick. It didn’t actually then change everything. And then we went through a lull of hearing about AI and now it’s back. I mean, blockchain was going to render us useless. Like all of these different, those are the how we do what we do, not what we do. What we do isn’t even producing a tax return that’s mitigating risk, is really what we’re doing there. What we do is protect our client. How we do it will continue to evolve. What we do doesn’t change. I think that’s a great profession to be in. It’s the same profession that’s been around for however long our profession’s been around: decades, or maybe centuries. Obviously we’ve got firms that have been in business over a hundred years. So centuries. We still do it, we’re still that go-to call, we’re still that advisor. We just do it differently.

Yeah!

Well, Justin, I’ve enjoyed this conversation.

So have I.

This banter back and forth on the state of the profession. It’s one of those, it’s just one of those topics that’s kind of been simmering under the surface. Every now and then you see a headline that makes you think, maybe we could put something out there that, let’s challenge that a little bit. It doesn’t have to be all negativity. I get it. It’s way easier to get a click when people are like, oh my gosh, that scares me. I hope you gave this a listen and you think, man, I feel good about the profession. We’re in an awesome place. We get to work with great people and great clients and I can’t wait for the next several decades. And if that’s the case, I’d ask you to send it to a friend. ’cause I hope they feel the same way at the end of the day, ’cause this is an awesome profession. So much opportunity ahead, exciting times ahead. And with that, I’m really glad that you listened and joined us for today’s episode. Justin, thanks again for joining me. I appreciate it here on The Upstream Leader.

Thank you, Jeremy. Really enjoyed it. Talk to you soon.

Sounds great.