Areas he will discuss include:
- How to continuously achieve double digit organic growth;
- Turbo charging your "Sales and Marketing" engine to produce exponential growth;
- What are the most profitable products and services that firms are having the most success with;
- How firms have used Industry and Service Line Specialization to dominate a niche;
- The benefits of strategic M&A;
- Acquiring "special skill" talent (free agency) to grow and differentiate the firm.
Dan Hood (00:09):
Succession and all kinds of things that accounting firms need to do to be successful. I said m and M&A is a big part of it, but more recently involved in a lot of private equity transactions and understanding that deeply and its ramifications for accounting. So we're very excited to have him with us. He's the CEO of Colton Consulting Group and as I said, if you haven't heard of him, I'd be very surprised, but now you have and we're very excited to have him with him. It's all yours. Thank you so much.
Stan (00:38):
By any chance, Stan? Oh, thank you. Thank you. No, no, no. It's all good. Let me just get going here and then flip forward. Yeah, yeah, yeah, we're good. Thanks buddy. Thanks. Thank you. Greetings. Hello. Hello. Come on. You gave him the choice. You said those. Yeah, yeah, yeah. Come on. Damn. It is so exciting in our profession. I mean, this has been a boring profession for decades, at least ever since I've been and there is so much going on. Hey Adam and group in the back. Are you able just to like those three lights by any chance? Just dim those a bit. Thank you. It's coming right at Thank you. Thank you. And the less they can see of me the better.
(01:26)
Well, let's buckle up. Okay. It is exciting to be in this profession. Thank you for having me. I'm thrilled to be here. It occurred to me it was some 30 years ago, I gave my first speech to an accounting group. I was so nervous. Thank God there's a podium because my leg was shaking the entire time. You ever have that when your first time you talked and then you do it a couple times and it's okay. Courtesy of accounting today, let's just kick off with the crazy year of growth that many firms had last year. Not all, but if we look over a couple of years, growth is in, but more importantly, what is in is raising fees. There has never been a better time to raise fees. And I'm not talking about 5%, I'm not talking about 10%. I'm talking double digits. This is the supply of accounting firm capacity.
(02:22)
Actually, it's a negative and this is the demand, and I think clients are learning quickly that if you raise prices and they go down the block, what happens? That firm tells them they're too busy, they don't have capacity. We all knew we were underpricing our services for years, maybe decades. Now's the time. I sit on the board of a non-for-profit and Wiley is the accounting firm. I can tell it because the story comes out good. They were charging $50,000 to this non-for-profit, summertime work, not as busy. Maybe we'll do it at 50% a standard. Well, guess what? They put it out at a hundred thousand and the client ended up calling me and saying, are they upset with us? Did we do something to really rock the apple cart? I said, no. This is the reality of what's going on. So firms are getting religion and they're charging that.
(03:18)
Well, they put out a couple bids. Interestingly, the bids weren't that different. They kept the client of all the stuff going on. There's a lot of glitzy stuff going on in our profession today. Raising rates and getting rid of crap crappy clients is where it's at. And I would dare say in the last couple of years, I've seen more of it in the last two than the last 20 combined. And kudos to all of you for taking the bold step. Dan talked about it, the move to advisory. Look, there's a lot of firms that aren't investing or if we're investing, we're doing it on the cheap. And the old adage, you get what you pay for really if you're going to do it, do it the right way. Go deep. And that's obviously in the consulting and advisory space. You know, heard the famous quote from Barry Milson, AIC page chair a couple of years ago, his prediction that in five years, which is three years from today because of technology compliance work, is going to begin to evaporate, call it ai, call it bots, call it what you want.
(04:25)
I'm starting to see that happen. One would think, well wait a second, if the cost of sales is this and I can now get it done for this, wouldn't the margin logically be greater false? We've had an exclusive franchise to what we do for decades and somehow when it comes to the great world of compliance, lowest price always wins. Building the accounting firm of the future. If it's not including consulting and advisory and outsourcing, I think you're going to have a really difficult time. I say that because this profession started about 135 years ago, and I dare say for 132 and a half of those, we pretty much, if you think about it, we offered clients two things they really never wanted. Has anybody ever said to you like, boy, that was an amazing experience getting my tax return done. I don't know, I can wait another 360 4 days, right?
(05:19)
That's a little weird, but the real weird one is the one that gets your financial statement, your audited financial statement and calls you on a Saturday night and says, damn that footnote on deferred income taxes. That was a doozy. Yeah, that's a weird client. You may want to exit that one. And we've all known, we call those type one services, right? We're getting into the world of the type two, the services that clients want and need and ah, lo and behold, premium billing and they say thank you when they refer to other happy clients, what's a type three? It's the same thing. It's a value add, but now we're doing more partnering, strategic alliances, those type of things. I'm going to go a little bit quick on some of these. I mean, there's just so much to cover. This is with start with the big four.
(06:07)
I'm sure you all heard the ruckus with E n Y and the deal is dead. They were going to do an IPO. Trust me, it failed the first time. I would believe if we were back here within two years, all of the big forms, big four firms will not exist as we know them. They'll all go through a transformative deal where tax and consulting will spin out. Audit will keep the brand, you'll see the arrival of true global firms and many of those things, P&Y, PWCs already done it. They have trust and value. If you're compliance, you're in the trust department. If you do value added services, you're in the value group. Interestingly, PWC last week, I'm sure you saw on the heel of the post tax season terminations, the spring cleaning that goes on, chose not to do that. Instead, they said that starting next month for all full-time employees, associates, you need to be in the office 50% of the time.
(07:11)
How do you think that's going to play, huh? Well, maybe they'll get their forced turnover anyways by doing that, but I'm starting to see a little bit of a movement back of that going on. Dan talked about private equity. I'll go there a bit later, some exciting stuff going on. Most talent doesn't come in anymore, or if it comes in, it comes in Tuesday, Wednesdays and Thursdays. You just got to give them a good reason. I am worried a little bit longer term, and I could argue this the other way, but when I think of the collaboration, the mentoring, the coaching, the team building, the culture, all those things, I guess what we have to do because the world's not going to change, is we now have to, when they're in the office, we have to load the deck. We have to make, it's going to sound weird.
(07:59)
We have to make the office a destination place so that if they're coming in, it is absolutely worth their while. I think the biggest spike, the last three years, and Dan, we've talked about this, I think it's offshoring, right? Shoring, call it what you want, and this has been around forever and I'll talk to firms and they say, oh, we tried that 20 years ago. We sent a hundred tech 10 forties and we weren't happy. I'm like, really? Is that the best you got? The harsh reality is we won't have in this decade the people power to get that work done. Another economic visual supply of talent demand, right? People come up at conferences like this to me and they say, when's it going to get better? It's not. We're just at the tip of the iceberg. My son, Brian, I love him. I tried to bribe, coerce, take pictures of him doing things he shouldn't have done, trying to get him into public accounting to be like his dad. He took an internship at a top 10 firm. It was in the audit practice, it was over, and he came back. I said, what'd you think? He said, shoot me. I'm, I'm not doing that. I go, well, you know what, listen is hold, hold, hold. Let's try tax. We got one more internship to go do tax. Tax is the smartest people in the room. I mean, just ask them, they'll tell you.
(09:26)
They're like the brain and the heart surgeons. This is, it's cool, it's cool. He tried it. He said, no. He said, dad, here's the reality. And he says, and look, he graduated from a great business school, 64 of the kids, he was one of them of the graduates that got their masters in accounting. He also got one in finance of the 64, 52, chose not to go into public accounting. What does that tell you? He says, well dad, I don't know when you were doing it, you know, weren't smart enough to be a doctor or lawyer, so you became an accountant. He says, today we have all these choices and the pay at the other places is a lot better. So I see a lot of finger pointing at state societies and AICP, all this. Look in the mirror. Look in the mirror and ask, are we paying the kind of wages that get people excited?
(10:18)
When I look at what I got in public accounting as an entry level accountant, then I see what they get today. I think the number 70,000, the needle hasn't moved, but the amount of work sure has. Long story short, on my son Brian, he ended up taking a job at a national firm, RSM, not in audit, not in tax where this is going, but in advisory. He works in transaction and advisory and I look at that and I say, oh my gosh, if a firm doesn't have those kinds of things to offer, how are they going to get that kind of talent? How are they going to keep the kids? Going back to offshoring for a second, it's the biggest spike I've seen. I think it's working. I think it makes sense if for any reason we've got to get the word the work done and in the old days it was an economic play.
(11:06)
I think today it's just, it's a survival play. Loyalty. Talk about a different world. The kids today, they'll leave you during the middle of tax season. They don't think they're being disloyal. I know in my day if you did that, you got blackballed from the whole profession. They view, view the world different. By age 32, they're going to have seven jobs. And if you can help them to continue growing professionally, treat them fairly, pay them a fair wage and not scream at them and tell them they got to work nights and weekends, they'll stay with you. But it's a different world. We're a virtual firm now talking about growth, growth of talent, growth of new business. It was interesting hearing two years ago when Covid hit that we can win clients now that we never meet in person. I grew up like the client wanted their accountant down the block because once every ninth year they want to have breakfast.
(12:01)
So we felt like this community thing and what I saw is some firms literally on a dime changed their marketing activities and said, look where the famous firm in construction where the famous firm and family office where the famous firm and client accounting let's spread the wings and they're winning business. That's the good news. The bad news is you can now have people poaching into your clients and maybe in some markets that you saw thought were a little bit off the grid. It's obviously the same thing with talent and I don't think it's going to get better if we can just clean one thing up. I mean in the eighties and nineties, and most of you look too young to have been around at that time, we used to pride ourselves on pitches to prospects. We'd say we're a quality accounting firm. I mean, that was our thing. I mean, I've never had somebody say to me, oh, that's too bad because I was looking for a non-quality firm. We run around now talking about being the trusted advisor. Stop like everybody's saying that. So you're not differentiating yourself. Show the prospects, show your clients. You're an impact player. You're the most valuable advisor out there and illustrated by the kinds of things that you do.
(13:15)
I'm just trying to see here where I can fast forward a little bit. You're going to hear this from me repeatedly. What got us to the dance. If you want to be a fabulous firm and you want to stay relevant and sustainable, if you're just milking the past and you're just grinding and continuing to do it, it's going to hit the point of no return. Three big Ts, Technology, Talent, Transformation. When you intersect, all of that technology is going to replace the mundane, A, because it makes sense. B, because the really good kids won't do it anymore. Talent we can keep trying and doing. I happen to believe that there's firms that are winning the game on talent because they're investing deeply in it. I think for many of us, and please, I love search firms. This is not a knock on search firms, but it's like we're outsourcing our problem or we go out and we hire our first ever talent acquisition scout and I'm like, that's great.
(14:18)
We got 117 people to find and if that person's really good, they'll get us 10. We have to change how we're doing. We're relying on LinkedIn, we're relying on traditional things we've always done. It's time for a gorilla recruiting and changing the whole suite. But it starts with an investment. It starts with a commitment. And for many firms, interestingly, we're sort of at the trough right now and the feeding the last three years has been really good. 2020 was a record year for many of you in the room. Yeah, okay, take 14 months of revenue and put it into 12 and don't spend any money. I mean if you couldn't make money in 2020, you shouldn't be in this business. And what do we do in 2021? We sort of perfected the plan a little bit more and what do we do in 2022? We got religion.
(15:14)
We said our best clients and Dan, you talked about this is where we're going to spend our time and the crap, the crappy clients, they're gone. Some of them will hold onto, but we're going to double the fees and the exercise you did because it's working everywhere. You take that universe of clients, you double the fees, half of them leave. Is there an accountant in the room that can still do math? What happens if you two x the fees and half leave? You still have that same revenue, but you got a lot more margin going with it. So I worry about the firms and I'll talk more about it later that, how do I say it in a nice way. They have their head in the sand because life right now is the best it's ever been.
(15:56)
Dan, you talked about private equity. It's not for everyone and I don't think it will be, but boy, it's, it's really having a bit of an impact. Firms are exploring it, thinking about it, and there's different ways to look at it. I mean, you can now be acquired by a PE owned CPA firm where instead of now going forward, you have deferred comp, you now have rollover equity. You can be the foundation firm. We worked on a deal that was announced last week. I think someone was here from Pete. Are you here from Unity anywhere? They're all going to be coming up to you. Put it up high way back there. Pete and Pete's got money. Pete's the Brink's truck in the room. Pete, hold it up again so they can just come after you after. So funny story, you just can't make this stuff up.
(16:46)
All the private equity firms are chasing big, big firms. There's a firm in Chicago, a personal friend called NDH, Jeremy Dubbo. Jeremy has a $10 million, pretty much tax only, but some client accounting services firms, uber profitable and they became the smallest revenue firm today to do a PE deal with Unity Partners. I think what's going to happen here is we're going to see, we call it the heavyweights, the middle weights, the lightweights, the heavyweights only want to talk to the firm's 400 million above the middle weights to a hundred million to 400 million. And I'm going to change lightweight because I just offended Pete. So the welterweights, those that are looking at 10 million up to a hundred million, so this industry's going to transform. Dan talked a little bit about it. We're working on a transaction with a top 50 firm. They're not going to sell to a PE firm.
(17:39)
They're going to sell to a wealth management business. And I'm sure the fact that I'm talking about it now before it closed, I probably just cursed and it won't happen. But there's questions coming up with all these PE getting involved, who's going to be the ultimate buyer? The ultimate buyer wouldn't even know who it is, but I can tell you what the alternative practice structure, don't be surprised if someday Elon Musk, don't be surprised if someday Microsoft, don't be surprised if a sovereign wealth fund a family office because they're all sort of asking, wanting to get more interested. And not only have we had the CPA firms doing deals, we've had the resale of those deals. The first one was Ryan Tax and it was an amazing success story. I think it sold at a multiple of 11 in the original deal and recently they sold that investment.
(18:30)
I want to say it was One X over to Aries and it was a multiple of 15 these things work. EisnerAmper two years ago was a 400 and 425 million firm. When they did their deal for the year ending this year they'll be at 850 million, 900 million more than doubled in size. Same on Citron Cooperman, 315 million. They're now a year and a half later, 650 million. I think what's happened is two things. I think the acquirer is able to do deals they historically couldn't do, but the acquiree because of the attractiveness of the economics is happening. And oh yes, we've got all these wealth management owned CPA firms doing deals as well. This slide is either for you or it's not. There are firms that don't really want to give up what they have today. They want to just keep grinding and milking and doing what they're doing. And there's a whole set of firms that say, you know what?
(19:28)
We want to be a legacy firm. We want to stay around. It's going to cost money. And it's sort of the first time in our profession, I call it the fourth industrial revolution. What got us to the dance won't keep us. And how do you get money in a professional service firm? You either increase the amount of capital, which is profitability that the partners leave in. That means they make less partner comp. They go to the bank and borrow more. Trust me, the profile of US accountants is we're super conservative. We're not going to the bank and taking a lot of debt. We reduced deferred comp. That's gone on at quite a few of the bigger ones. The hey days of three and a half times multiple on partner comp is now down to two or maybe as high as two and a half.
(20:12)
We reduce equity partner at retirement age. We do all the above. On and on and on. This AI is real. I think this slide comes from, was that a partner retreat car rigs in Ingram in New Orleans a couple of months ago. I was the undercard. Guess who was the feature speaker as I left the stage, Nick Saban, the legendary Alabama coach, took the stand. I looked at him, he didn't look at me, he just walked by me. But that moment, it was really cool. But if you hear what Bill Carr was saying to take accounts receivable, the audit section two human interventions, materiality, clearing exceptions, and then listen to this, this will be more efficient, but look at the hours that evaporate. That's that same word Barry Malson used a couple years ago. Oh, by the way, we sell hours. The marketplace will unquestionably reprice our work downward over time. We won't get a financial gain on that.
(21:18)
It's hard for some of us. And I love accounts. I've been doing it for 30 years, a hundred thousand hours with accountants. I tell people that and they say, oh my god, what a boring life. How do you do that? And I say, well, it could be actuarial. I mean it's really good. So this is Detroit, Michigan. You've been there, you've seen it on TV. That's the old auto plants. And now they have this thing called AI robotics going on. What that looks like today. Look at all those people there. This is what it looks like today. Wow. Yeah. Now I'm colorblind, so I don't see red. Any of you see red circles up there? Couple of them. Yeah. Yeah. So those are called human beings and they're there just to make sure the robots don't conspire and take over the plant. So we want to look at something like that.
(22:11)
We want to say that is not humanly possible in our business. Oh, it is it. And before you fight me on this, here's the play. I think to the kids today coming out of the schools. Listen, you don't have to have that boring apprenticeship anymore of doing just the grunt work that nobody wants to do. You sit there and you say, I didn't need an accounting major to get this. Well, maybe that's a reason. The big four reduced on campus hiring of accountants and are hiring what science, technology, engineering and math people. It's also a reason they reduced on campus recruiting of accounting grads by over 50% for local and regional firms and mega regional firms like ours. That should have been a really good thing. The problem is the kids aren't going into that field. That's down, that's across the street from me in Chicago.
(23:04)
That's the old board of trade. I used to hate those people. They'd get in at seven in the morning, they'd work till noon and they'd go to the beach and they made a lot of money and drove fancy cars. We got back at them because eventually it closed down technology, put them out of business. You look at a financial services company today, it looks like that. I have a wealth advisor. I like to kid about it. He's a friend so I can do it. His name is Ben. Once I called Ben, I said, Ben, my other son Jack, we're working on a project. Can you pick a stock for me? We're going to track it for six months. It's part of the class we're taking. He was in high school. He was offended. He said, I don't pick stocks. I go, well, I thought you deal in equities.
(23:48)
He goes, we do. I go, well, isn't a stock in equity? He says, ah, but the technology does it. We follow this algorithm. We follow this process. They don't do the grinding anymore. And what has that freed them up to do to win business? Serve clients, grow people. I think a kid coming out of school today in public accounting, the timing could not be better. A, you got to head to, you got a gun to the head of the employer, you don't even have to go to work anymore and they got to pay you real money to make it happen. So it's is happening to our profession. Be in front of it. Don't be behind it. You put it all together. It's funny with client accounting services. I grew up in a generation where that was called bookkeeping and writeup, and when you got to a certain size firm, you sort of poo-pooed it like it was beneath you.
(24:41)
We do more things. Well look who got the last laugh, but I think technology really elevated that. The accounting firm we use came in and some of you heard this story, I'm not going to mention the name of the firm, but in a very nice way. They said, Alan, you're a moron. And I said, okay, this is good for building a relationship. Go on. They said, well, you know, had this company, you sold this part to Thompson. Now you just have this part and you have a full-time CFO. You're paying $150,000 with benefits. It's 180 grand. We can come in for 4,000, measly price of $4,000 a month and you can outsource the CFO. You can outsource all of your accounting work to us. And I did it, and it's now three and a half years later and it works great outsourcing, figuring out what the client wants and needs and then custom fitting it to make it happen.
(25:44)
By the time they were done with us, they got rid of our chief technology officer, same pay range, and we use an outside service to do it. Tax is moving as from compliance. Everybody talks about AI and robotics and the takeover of audit. Trust me, the biggest change is going to be on the tax side. They don't have the PCAOB, they don't have the SEC that's going to move even quicker. But the traditional audit, I'm still watching firms grind, doing employee benefit plans and whatever it might be. And I say they see it coming it there's going to be a replacement of how those things get done. A top 15 firm, I won't use names. I remember sitting in one of their strategic planning sessions, they do a lot of banks, lending institutions, and I remember the leader of the practice.
(26:40)
She said the following, she says, can anybody in the room tell me what blockchain is? And everybody sort of looked down. One person was brave enough and they said, well, it's sort of like a chain and it locks in and it's real time and it's sort of hard to penetrate or commit a fraud and this and that. And she said precisely. She says, what do you think's going to happen when banks start using blockchain? What's going to happen? They're going to eliminate the middle person. And the middle person is us and we, it'll start taking capital and moving it from the world. We knew of the report card. What's an audit? It's a report card a hundred days after the fact of the past that usually the client doesn't even want, but there's some third party or bonding agent or surety demanding it. Well, real time reporting is going to happen in a couple of years and it's going to be a game changer for a lot of the things we do. How we do it.
(27:43)
Yeah, yeah. Let me talk about that one a little. I was going to sort of skip over it. So another top firm had me in to do the keynote. I was supposed to be the motivational speaker a little bit. I know I was following the CEO. The CEO got on the stage and some of you I think are in the room here. But the theme of the partner meeting was tear off the blinders. But the things they put on you, if you saw the Kentucky Derby last week and they got those blinders, so they focus, they just look straight ahead. And the CEO's message was, we think it's like Hollywood casting. We think we were ordained or trained to do an audit or a tax return. And we go in and we talk to a prospect and that's what we sell because that's what we know.
(28:36)
And here's was his messaging. He said, look, there's four kinds of things we do for clients. The first one called a level one, it's compliance, projected growth at our firm over the next 10 years ready for this? Zero, 0%. And that's with raising fees. It's the evaporation effect. And I'm on the side of the stage and I'm looking at the people. 80% of the people in the room make a living doing compliance. I'm like, what are you doing? This is very sombering. He said, level two is anything tax, tax planning, tax solutions, international salt transfer, pricing, estate planning, family office, anything in the family suite. That's what clients want. And as long as we keep doing that, it's going to be great growth. We think the growth in that's going to be eight to 13% Type three. You can see where it's going. Level three, it's advisory.
(29:26)
It's outsourcing. Outsourcing what? Outsourcing, Accounting tax, Technology, Payroll, HR, you name it. Explosive area. Projective growth, 10 to 20%. Level four for them was wealth. They're crazy about wealth management. Projected growth, 20 to 200%. And he finished up and he said, look, people, you don't have to retool yourself, but you got to tear the blinders off. And when you're talking to someone and you go to that proverbial building of the client, don't stop at audit, don't stop at tax. Go to supply chain, go to finance, go to HR, go to marketing, find an outsourcing project that you can give back. He sort of said in a nice way, there's a hundred thousand dollars audit. We beat the crap out of it with four other firms and the winner does it for 50,000. He said, I'd love to see you all finished second next year and come back with a $500,000 outsourcing engagement food for thought.
(30:32)
We're talking about growth. And the question always comes up, what's, what do you got to have with growth? You got to have the will to fail, to screw up, to make mistakes. When I go into high performing firms best in class, and some of you have done this with me, we bring the proverbial flip chart and I say, let's just write up the successes and failures we've had and the best firms, they fail and they fail and they fail. It was a firm crow, and I don't know if Gary, if you're here or not from Crow, I think they have an award. They give $10,000 to the dumbest idea. Now they obviously intercept it before it happens, but they're trying to instill the culture that it's okay to fail. It's okay to try. Question always comes up. Why is private equity coming into our business? One of the reasons is because of our partnership model.
(31:22)
Everybody gets a trophy. We sit around a table. I mean whether it's five partners, whether it's 15 partners, whether it's 50 and somebody's unhappy about something or some group doesn't think it's best for their clients, what does the CEO do? What does the C-suite do? We back off. We know it's the right decision, but we don't want to hurt people's feelings. We have to live with them. So they're, one of the things they're doing is exploiting the dysfunctionality of the partnership model. And I'm not suggesting by any means that all are, but you know what? I think we got to change how we do it. I talked about the accounting firm I use. I'm going to talk a little bit about the tax firm and boy, I feel bad. I think that's hard for you to read because I can't read it here, so I'm just going to tell it.
(32:07)
But if you want a copy of the engagement letter, I'll absolutely send it to you. Okay, I'm a sicko. I read engagement letters of accounting firms. I mean, it's like obituaries. Did you ever read some of these? I mean, there's 117 things we're not liable for. How's about starting out? How thrilled we are to have you as a client. I, and I thank God they don't read them either, but so the firm I use for my taxes, they sent me the engagement letter and AHA for the first time ever. I always wondered, are they really adding value? Are they coming up with great strategies or are they just going through the motions? Remember the Lucy show is the assembly line and my return is somewhere in there. Well, that engagement letter says, going forward, Alan, we're going to bill you for the greater of the value we deliver or the hours we incur.
(32:58)
And if we incur crappy hours, guess what, we're going to write them off. And I read that and I said, it's about time. How many of you have that in your engagement letter to bill for value? Maybe you didn't hear the question. How many of you have that in your engagement letter to bill for value? Yeah, I think it's a rite of passage. I think it's in our head. I think it's in our head. And if we don't ask the client and get the approval, it stymies us from being able to do that. Two years ago, there was something going on in Illinois with tax planning and it was probably a basic thing, but to me it was like, wow, that's really cool. We did the tax planning strategy. I remember looking at the clock. It was a seven minute call. I said, I wonder if they're going to bill seven divided by 60 times 500 an hour.
(33:45)
No, $25,000 tax planning strategy. Glad to pay it. Glad to pay it. We're so busy being busy, I swear to you. We're like a mill and we're just trying to get it out the door. Dan said it earlier, more time with our A clients will produce better profit, get rid of those crappy clients. Oh, there's a dysfunctionality of the partnership. I could go talk to you about all these crappy clients that your firm has. They're not yours. They're always someone else's, right? No, I've never met anybody that actually handles crappy clients. Everybody's always talking about someone. So the triangle offense, this is a thing that the Chicago Bulls used in the nineties to win six championships, but let's bring it more to CPA firm growth. Matter of fact, I'm going to see if I go too far here. That phrase in the middle is my tombstone.
(34:43)
I've already got the quote. In the world of public accounting, if you don't grow, you die. You die a slow death. I watch so many firms that struggle to get and keep people and I say, don't you get it? Like you never grow. You don't have exceptional growth. Your idea of growth is a request for proposals coming in. Your idea of growth is just raising rates. Superstar performers want to get advanced quickly. They don't want to wait eight to 10 years. They don't want this apprenticeship model. They want to make big money today. They want the best clients. You have to be growing because if you're not, you're holding on to those other clients hoping they get better. Trust me. See, clients never, ever get better. You need to grow. So what are the three PLA areas of growth? One is organic. And I observe in many firms that organic just comes in.
(35:46)
There's no targeted strategy. Something as basic as multiple people on the account. Here's a list of everything we do. Here's a list of all the clients. We have put an X in the box of the things we do, put circles in the box of opportunities. Let's go cross sell. Let's go talk to clients about those things. Everybody has the flavor of the month. They try to do something like that and then they revert back to what they're doing. Millions of dollars of revenue sitting in the client base. Ah, much better. Thank you. Oh wait, am I maybe, oh no. Okay. I saw something pop up here. To me, a version of growth is M&A. I don't call it mergers and acquisitions. I call it a tracking talent. It just happens to be prepackaged. What I love about M&A is it's a way to get talent.
(36:45)
What's the best merger you could do to today? It's a firm of with no clients and 50 staff, right? Wouldn't that be a great thing? Yeah, so you could have geographic merger, you could have industry expertise. I mean, at its core concept, we're not an accounting firm. We're a business. We're people business. The group that recruits and retains and grows more of its talent will always have an edge. But what is it that makes us better? I see a lot of firms get bigger but not better. They add bulk, but they're providing the same things on the supermarket rack. I think you can't possibly home grow all the stuff that clients want. And we should be out there looking for those things. If they come the way of a merger, great. If they come the way of what we call free agency, lateral talent, some firms play in the game heavily.
(37:46)
Other firms, they just don't. Here's why it takes capital to steal talent, steal stars. We call it surgical strikes from another firm. Let's just pretend that Mary is over there and Mary is an exceptional estate planning manager, senior manager. Mary's problem is their firm isn't growing. Mary wants to become a partner. It's been promised it's not happening. We now are going to go and bring Mary over. But here's the problem. That firm is Perry paying or at least smart enough to pay Mary something, a pretty good wage. And Mary has something called a non-solicit, right? She signed an agreement which says if she leaves and she goes to a competing firm for a period of two years, she can't bring anything with her. Whether that's clients or people. I'm sure most of you have that provision. So to win Mary, we have to pay over and above.
(38:46)
But keep in mind this, she had a 2 million book of business. She's coming over with nothing. So we have to pay more to get less. I mean, think about that. That to me is capital. That is risk capital taking chances on people or groups of people or segments and bringing them over. Remember that flip chart I showed you about successes and failures? Great firms take on risk. And I don't mean risky audits. They take on business risk to advance the firm. So I'll talk to firms about the sort of the triangle offense. And usually what happens is they're stuck in that one wheel of organic growth. New clients, no cross-selling and investing very little in the entire growth equation. Famous people, famous firms. I believe there's some people here from Moss Adams, I think that was the firm that coined it back before the internet.
(39:46)
And boy has that taken hold and look at the other professions. Who makes the most money in the practice of medicine? The family physician or the brain and heart surgeon who makes the most money in the practice of law, the corporate attorney or the estate and trust or m and a or securities attorney specialization. I think with the kids today coming into our firms, we should channel them at an early age. What do you want to be famous for? What do you want to be the go-to person in our firm, pick out an industry, pick out a service line, let's go make it happen. And with some of these new services that Dan talked about it, it's interesting watching how firms are sort of doing some of this, but doing it to win business. There's a top 20 firm out there that has an enormous cybersecurity practice.
(40:39)
And they have told me that when they pitch an audit, they sort of say, look, unless it's construction, which we're the famous firm in, or unless it's SCC type work, which we're the famous firm in what there's going to be eight other firms at the party. And the truth is the lowest bidder's probably going to bid, win the work. The client doesn't want the audit anyways. They have to have it. So we have to have a zinger. We have to have something that will differentiate us. How do you differentiate yourself? You either have the lowest price, I'm not sure. That's a great strategy. You can have industry domination, industry specialization. I like that one. But for most of us, that's easier said than done. What this firm decided to do is they said, what's the single biggest risk that could wipe out a company overnight?
(41:30)
Well, you know what it is. It's a cyber attack. You probably had some clients, you may have even been hit in your own accounting firm. What do they do? They give a free cyber review away this part of the audit, and they win about one out of four audits because the client says, when we said, why did you pick us? They said, well, heck, you were willing to do that review for free. That could wipe me out tomorrow. And what happens? They do the review, but then they do the bigger engagement. Six figure engagement and good things happen. It takes time to do this. You've been around the block long enough in this profession. You see sort of three strategies of how we try to build new things in an accounting firm. One is we don't. Any new idea gets shut down. Life is good.
(42:25)
Why would we take the risk? What if it fails? I mean, the true personality of the group comes out. The second is we do it on the cheap. We have to be some of the cheapest people in the entire business community. I mean, it's like we're trying to get a bargain. I remember years ago with marketing directors. Well, there's three of them. I think I saw Gene in the room. Jean, Jean will laugh at the story. There's the $40,000 marketing coordinator, there's the 80,000 marketing manager, and there's the $140,000. I'm using 19 $90 gene. It's gone up quite a bit and there's $140,000 chief marketing officer. And what do the partners do? Which one do you think they pick? They either pick the first time they do it, they pick the cheapest one because they think they just won the lottery and then they do it again and again.
(43:21)
And now they've convinced themselves that concept doesn't work. Cause it fails every time. If you hire not so good people, guess what? It's not going to work. And then they hire the middle person and eventually they get religion. It happens in marketing technology I see with chief people, officers, on and on and on. If you're going to run a business and you're going to do it for profit, hire the best. And here's a little trade secret. I'm hiring the best. If you're honest with them upfront about what they have to achieve and you meet regularly and you talk about how they're doing, if it's six months later and it's not happening, you can part ways. So I don't know that you're ever spending all that much to figure that kind of stuff out. San Diego, I put this slide in here. I spoke at a Inc magazine conference, the fastest growing 500 closely held businesses.
(44:14)
They all win the awards and this and that. Five years later, half of them go out of business because they grew so fast. But for another day I asked them, they had the clickers in their hand and I said, look, I'm a sort of a sicko accountant just to appease me. Would you do me a favor? If you had a magic wand, think about your accountant, your accounting firm, what service do you wish they would provide for you? And I just shut up and this is what came back. And it's riveting. Where in there does it say financial statement preparation? Where in there does it say tax return preparation? This is what they're asking for CEO coaching. I've never seen that on a website, but I know firms that do it firm that I use does it. They come out once a month, we meet for three hours.
(45:11)
The first eight minutes they talk about the financial results of last month and the other three hours and 52 minutes. It's a blank sheet of paper. And she says to me, what's keeping you up at night? What are your problems? And we keep coming back to it. I get more pressure from that than from a board. We're all trained. You see it. We are all trained as experts in business, but we hide behind this thing called financial statement and tax return. And we're missing the opportunity. The client is begging us. Well, they're begging us for wealth management. I've had many clients say to me of accounting firms, all I care about is taxes. How much can you save? What can you creatively do? What can you help me to grow profitability, making money? I watch firms go in and do the audit, not even thinking that there's a real business over there looking to improve their profitability.
(46:12)
What did you do to impact that? Well, it wasn't part of the engagement letter. Well go make it part of the engagement letter. We think advisory and consulting is all this sexy cool stuff that we got to go out and buy. How's about it sitting right in your brain? You've got all these years and all this knowledge, don't be afraid. Go for it. And all of a sudden, I promise you, you'll get traction. And when another accounting firm pitches, your client says they'll do the audit for 50% less. They're not going because if they go, they lose you. They lose the stickiness that goes with it. The other big thing in high performing, high profitable firms is this concept of making money unrelated to time. And this list, which I think started out in the nineties selling life insurance, there's probably, I could fill two more pages of things that accountants accounting firms do to deliver value and not track one billable hour.
(47:15)
I believe we go from sort of leasing the client to owning the client, but it requires an investment. And if it's an investment we don't want to make, we can partner with another company to do it. I mean, some of you have done a great job of it in the R&D and tax credit, the cost seg studies and things like that. There's a whole universe of things like that that clients want. And I feel like there's almost some stigma because it doesn't come through the traditional billable hour. I'm here to tell you, clients care about making money and if you can show them ways to do it, you're going to have them for life. Just because it's a growth conference and we're talking about it, I don't know why. Here we are so many decades later, salespeople, I think some firms will tell me, I'll go in and I'll say, well, can I just meet with the sales force?
(48:11)
I mean, marketing can attend. They say, well, you mean the partners? I say, well, that'd be good too. But I said, the partners lots of times are really Billy busy and their skill set, I'll equate it to baseball. I think that partners and CPA firms, if I put a prospect in front of one of your partners, they remind me of the closer of the baseball game. If you tell them they're the prospect is unhappy, you tell them what the situation is, they will win that account four to five times. But pitching the first nine innings of the game, who's doing it? You know what I've learned? For every seven users of accounting firms, one in seven, 14.2% is getting crappy service. But this is their second or third rendition and they just assume they all suck. I mean, if we would only be out there more visible, yes, it's an investment of capital.
(49:04)
We hired three salespeople the first time we did this before some of you were born, we hired an ex-president of a bank. We said the banker knows everybody in the community, but they said at age 58, the person has to retire. They just introduced us to people. We hired a young kid out of, I don't know, was Robert Half or ADP or one of the payroll companies where they have sort of a boiler room and they had to make a certain number of calls a day and get a certain number of appointments. And we called them the Glen Garry leads, if you remember that movie. And we matched people up based on personality size, a client, geography, industry, et cetera. We as partners in an accounting firm, I'll give you a little bit of room here. We have a day job. We get paid to serve clients, to grow people, and we bring in business when we have time.
(49:56)
I rarely see partners that they're doing it with intention. I just don't know why this hasn't taken off more so the strategic question, and I know we're coming up a little bit on time here. I think we've got three kinds of firms. You figure out which one you are, and door number one, I can't help you remember the Bill Murray movie Groundhog Day. It's like it just keeps repeating itself. I'm here to tell you that that won't be a forever anymore because of technology, because of that war on talent, because of transformation, it will get harder and harder and harder. When do you figure out what to do? Do something different when you're in a position of strength door number two, the vast majority of us that stay independent, but you got to keep doing the makeover. You got to keep doing the reconstructive surgery. You can't just get bigger. You got to get better. So what are the strategic initiatives we're going to do? How much? What's the risk factor? Probability of success, how long do we have to do it? Door number three, wiser a merger frenzy. I think some firms are saying we can't get unity on door number two to get partners to do it. And door number one is no longer an option. We're going to go pick out a best in class culturally strategic strategic firm that is good for us.
(51:19)
I finally figured this out, and some of you have heard me talk about this. When I go into assess a firm, you would think, I get the balance sheets, I get the income statements, I get all the metrics from the accounting today, surveys and things like that. And you think I lock myself in a room? Well, I do. But the first thing I do is I sit down with the managing partner and I say, give me the list of everybody in your company. Everybody, yes, everybody. And I say there's three kinds of players, three kinds of performers. I said, that's the tree of growth. And we got to figure out what our culture is here because the worst thing we can do is copy an idea from another firm that has zero probability of success. You've heard me use this quote before. The operation was successful, but the patient died.
(52:02)
We tried a really good idea, but it didn't have a chance of working at our firm. So the content is the one that gets to the tree of growth and says, don't ask me to do anything different. I just want to keep doing what I'm doing until I can retire. Leave me alone. And here's what I would tell you. The person's valuable. I'm not this and them, but I'm saying if we want to become an elite firm, and that's the majority of our players, not a prayer. The climber. The climber. Many of you sitting in this room right now, January 1st is a very depressing day for you. I know it is. And it's not because your football team loses, it's because you're probably coming off your best year ever. How many of you had it? I'm just, it's not bragging. How many of you had a great 2022?
(52:43)
Just hold your hand up. Okay? I mean, some of you said you had a great year. You're not holding your hand up. We're going to have to report you to your firm. Okay? Yeah, yeah, yeah. So those of you that had it, it's a depressing day because you say, that was a great year. I don't know if I can do it again. There's a little bit of paranoia, there's a little bit of insecurity all setting in. That's the kind of players you need, people that want to be worth more to their clients next year than this year. People that want to justify a higher billing rate. People that have a bring it on mentality. And it's almost like the debt to equity ratio in a balance sheet. I'm trying to find out, are we a climber culture or a content culture? And candidly, if content is more than 40% of it, that firm is looking at mediocrity and it's going to hit them right in the head.
(53:34)
Trust me, I, I've seen awesome firms and I come back five years later and I said, what happened? Well, sometimes it's the third C, it's the crazy. It's the crazy leader. Some of you in the room, you're never satisfied. You drive your partners and staff crazy. I mean, I'm already telling you they've figured you out because they know you're coming back from this conference on Thursday and they're not coming in the office because they know you got all these new ideas. They're already up to here with your ideas. And they know by Friday you'll forget what the idea was. So they got you figured out. But it's the crazy, in a first generation firm, it's a founder in a multi-generation firm. It's a group and it can be a culture. It's a way we're never satisfied. We're always trying to improve that, bring it on mentality.
(54:25)
That's what makes great firms. I also think we got to figure out, are you really a sustainable firm or not? I did an article on it in the Journal of Accountancy. There's two kinds of accounting firms. There's ones that the partners have the accounts, they own the accounts, they talk about my client, and they hire a lot of grunt to get the work done. It's like fungible goods, tonnage. And they can't understand why they can't build future leaders of tomorrow. There's the other ones that bring it in and as quick as they bring it in, they feed the others. And what do they do? They go back out and hunt for more and they push the people, they put them in the fires. Those firms go like this. So we talk a lot about what's the next new product? What's the next new survey? What's the next new industry?
(55:09)
The truth is, if we are not culturally lined up to be a great firm, we can do whatever we want. The operation will be successful, but the patient will die. I'll leave you with just two things and we'll it a day. You got to become a talent scout. It's too hard out there. We can't wait for LinkedIn. We can't just wait for the recruiters. We can't wait for HR anymore in January through April. I'm like the Maytag repairman. Accounting firms. Accounting firms are so busy. So I go to the dark side, I go to PE firms, I go to investment firms. I go to consulting firms and they make fun of us. They say the accounting firms, they ring the bell when they bring in a big client, you know, could cross sell something as big, doesn't matter. He says in financial services companies, whether we call them McKinsey or Goldman Sachs, Booz Allen, you know what?
(56:04)
When they ring the bell, not when they get a new client, when they steal a star from another firm, that's because great people, this produce great clients, which produce great fees. On and on and on. So we have to, we're going to do a merger. We have to take marketing and combine it with HR, and we have to begin to treat the talent as a prospect base and get all the partners involved. Was at a partner retreat last week. I'm not going to say the city, because if you look at my LinkedIn post, you'll know who it was and they thought they were doing a pretty good job. They had a talent acquisition scout, and they did, but I said, you all have to be involved. And just for fun, we went around the room, I don't know, I think it was 30 people in the room.
(56:50)
I said, tell me how many are on your talent prospect lists, not client prospect lists, talent prospect lists, and you know how it went? 0, 0, 0. 1 23. It was a tax partner. They didn't understand the question. 0, 0, 0 1. We aren't in the game. Our peer group at other consulting and advisory firms in the high hierarchy of why we make money, steal the stars is far and away number one. I think I'm going to call today dm. I did it again, Dan. I got more stuff and I apologize. But we thank you all for listening. Give yourself a round of applause. I appreciate it. Thank you.