PwC's new leadership goes back to the future ahead of schedule

PricewaterhouseCoopers' new U.S. lead partner arrived ahead of schedule, with Paul Griggs taking the reins early after the firm announced it would unwind the controversial restructuring his predecessor had introduced. 

With a new global chair starting in July, PwC announced its U.S. operations would also restructure and reunite its tax division, slash the number of new consultant partners it brings on, and elevate new leadership for its advisory and audit groups. 

The shakeup has caused rumblings that something significant might be amiss at PwC. But a closer look suggests the undoing of the firm's previous plan (which consolidated three practice areas into just two) is more in line with the accounting profession's efforts to create internal management structures that boost collaboration and showcase sector expertise to help win new business and expand business with existing clients.

Struggling with management structure seems endemic to the professional services business, almost regardless of the size of the firm. Larger firms like PwC generally have a structure like a three-legged stool: services, geographic markets and industry practices. This makes it possible for power to be shared, whether equally or not, across the firm's major divisions.  

Whether those divisions are determined by function, geography or industry, the shift in the power balance between these practices dramatically impacts how the overall firm grows, both in the long and short term. 

This was PwC's initial rationale for its previously announced restructuring into just two divisions. Whereas the firm had previously divided its practices by function into the traditional tax, audit and advisory, in an effort to better grow its tax practice, it paradoxically split it in half. 

The firm then sent half the tax practice to join the auditing side while the other half joined advisory. PwC rebranded its practices as "Trust" and "Consulting" solutions.

That made sense in theory: PwC wanted to sell more advisory tax services and partnered some tax experts more closely with consultants, hoping to boost cross-selling. As deployed, it doesn't seem to have worked, and now Griggs has announced that he will unwind the changes.

What does that decision say about the state of the accounting business — and professional services more broadly?

Fundamentally, PwC's decision to rebrand its divisions in the first place was a market-facing one. Large professional services firms regularly tinker with their three-legged stools, pondering track records and growth opportunities and trying to match their structure to the moment.

About 20 years ago, for example, Deloitte wanted to balance the power and results of its auditing and tax practices (which then made up about 80% of its revenue) with the growth of more lucrative consulting services. Without making too much noise, Deloitte adjusted its internal compensation and responsibility scales to put a heavier burden on its consulting partners to bring in new business. 

That strategy, together with a mega acquisition of a consulting business, accelerated the growth of Deloitte's consulting function. Deloitte Consulting grew, at first, to equal the relative size of audit and tax, so each of the three functions contributed an even one-third to the overall firm, which was Deloitte's stated goal at the time.  Eventually Deloitte's consulting services significantly exceeded both the audit and tax functions, and today generates over 40% of the firm's total revenue. It also has the fastest growth rate, with revenue increasing from $4.5 billion in 2006 to almost $30 billion in 2023. 

While it's not certain what PwC's failed restructuring did to its bottom line, it was clear that the moves were unpopular with existing partners. 

Meanwhile, the firm also faced significant efficiency issues, as the flexibility of some of its younger, less specialized accountants — on whom much of the grunt work depends — was lost to the more stringent practice structure. Griggs, PwC's new U.S. lead partner, is already addressing these challenges with his decision to reunite its tax division.

Together those issues drove the demand for new leadership at PwC — all of whom vowed to retool once in power. 

The lesson here is restructuring only works if it drives the right incentives for employees. PwC likely found its new structure didn't encourage the type of cross-selling it meant to encourage. If boosting cross-selling is truly a priority, then the structure of the practice needs to drive toward collaboration. 

For many firms, the dynamic that's ultimately going to work best is one that organizes its practices by industry group. Health care specialists, for instance — whether they work as consultants, tax experts, or auditors — should have a cross-functional and empowered  leadership team. In this model the services structure is subordinate to the primary function of the health care practice: to offer health care clients the right mix of health-care-tailored services to meet their business needs. The same is true for each of the other focus industries where the firm invests in developing deep industry thought leaders  who can share relevant industry insights, valued by their clients.

This sort of specialization is increasingly necessary — especially for smaller, middle-market  firms — as the regulations and concerns of different industries become more complex. Client companies want sophisticated, industry-specific advice, and that makes industry-specialist partners the most effective salespeople and builders of client relationships.

Firms that have made this shift have reaped significant financial rewards, both with top-line growth and bottom-line profitability. Even creating a hybrid power structure model, where industry leaders only own responsibility for top-line growth, empowers the behavior changes that specialization requires. 

Some 89% of high growth firms are organized around industry specialization and services customized or tailored to each sector. 

Industry specialization also helps incent employees to dedicate more time to continuing education that can help the firm differentiate itself.

PwC learned the hard way: Lofty restructuring that fosters artificial barriers between teammates does little to drive growth. Specialization and focus may just be the Big Four firm's next move.