Practical Considerations dealing with the Talent Crisis

The ongoing pipeline crisis in the accounting profession is part of the bigger talent shortage in the professional and business services sector, which exacerbates the problem for accounting firms.

On the one hand, state boards, national and regional associations consider making the exams less arduous, the profession sexier and credit-hour requirements less taxing. On the other, accounting professionals complain about low salaries, mundane work, AI-competitor uncertainty and constant burnout. Let us suppose all of the aforementioned concerns and issues were magically resolved overnight. Would the pipeline crisis go away?

Consider the following three macro factors that, in my view, introduce serious impediments to crisis resolution: demographics, college enrollment and unemployment rate.
These three macro factors impede talent supply.
First, the demographic landscape of 25-to-34-year-olds isn’t going to improve any time soon. According to Census data the positive change in labor force for this age group is expected to occur by 2032. This means no increase in junior candidate pool in the next nine years.

Second, according to the National Center for Education statistics the college enrollment has been on decline: “The overall college enrollment rate for 18- to 24-year-olds decreased from 41 percent in 2010 to 38 percent in 2021.” AICPA report isn’t encouraging either: "Bachelor’s degree completions in accounting dropped 7.8% from 2021–2022 after steady decline of 1-3% per year since 2015–16. Master’s degree completions also fell in 2021–2022 (-6.4%) . . ." While the labor force is expected to be stagnant in size, and the number of people getting higher education dwindles, the talent pool will keep shrinking.

Third, the unemployment rate is very low — 3.4% in Jan 2023 up to 3.8% in Sep 2023 — making it particularly challenging to attract professionals from adjacent professions. The highest unemployment rate we’ve had was during COVID (at 14%) — an anomaly — while in the last 35 years it never went above 10%. Even if the rate suddenly soared to 10%, firms can’t expect to have more than twice the number of candidates they currently get due to the former two factors.
Long-term programs & incentives, while commendable and important, aren’t helpful to your firm short-term.
The efforts of associations are commendable and important long-term, but are unlikely to solve your firm’s short-term challenges. If we imagine the profession did become snazzy overnight, the 150-hour rule for a CPA license went down by 30 hours, and the examination was somewhat easier — that’s still four years until there’s extra talent on the market. The question is: “Do we wait it out or is there something we can do today?”

We already know how to deal with labor shortage

If we go back in time, we’ll see this isn’t the first crisis in the profession. The other big one which lasted for 15 years began in 1985. As Baby Boomers got older, a massive supply-demand gap in available candidates for junior positions continued to get gappier. The percentage of the 25-to-34 group of the total population went down from 17% in 1985 to 14% in 2000. In 2021 this group constituted roughly 13.7% of the population — a similar disposition. At the same time the unemployment rate went down from 7% in 1992 to 4% in 2000 — similar to the current rate of 3.8%.

Therefore, the situation we’re in today in the U.S. is comparable to what was happening two decades ago. Even though I haven’t done any research on other major global markets, I did receive similar distress signals from several European professional service firms. This isn’t just the U.S. problem.
Professional labor shortage isn’t a U.S. problem only.
All of the above can be summarized in two words: labor shortage. The seeming gloom-and-doomness of the situation we’re in lurks in the background of the macro trends mentioned earlier. However, since the pipeline crisis isn’t a new phenomenon we can turn to the tried and true tactics that had worked in the past. But first we must identify the implications of the problem.

Labor shortage is the result of high demand and low supply; the bigger the gap, the bigger the problem. Working with firms I always advocate for working toward higher demand on their services. However, in a well-balanced marketplace, high demand for one firm means less demand for another firm. Nowadays, the demand is high for “anyone we can get”, which isn’t that great, because there are bad actors and carefree opportunists.

The consequences of the gaping gap are, unfortunately, obvious:

• salaries and benefits will continue to rise, making it harder for firms to operate sustainably without raising fees which wouldn’t make clients happier either;
• rampant headhunting will increase voluntary turnover, which will require more hiring efforts and extra costs for onboarding, orientation and training;
• as staff will be forced to work longer hours, and senior people engage in the lower-tier work, the morale will go down, leading to more separations and lower financial performance;
• the temptation to accept more work will create pressures to compromise on the quality, to cut corners, to turn an occasional blind eye on something potentially enronian.
• growth opportunities will be constrained.

Some CPA firms know how to deal with the pipeline crisis

I’ve done some research on firms from the Best Accounting Firms to Work For reports (2018-2023) developed by the Best Companies Group and published by Accounting Today. One of my observations was that the voluntary turnover rates increased for both small and medium firms (Figure 1) during the last six years.

However, midsize firms seem to be better equipped with retaining personnel today than in 2018. Given that the voluntary turnover increased for firms of all sizes (small, medium and large), an increase from 9.24 to 10.66 is negligible considering the crisis. Smaller firms, on the other hand, show an alarming voluntary turnover rate.

Keep in mind, these are the average rates of firms that are considered to be “Best firms to work for”, and not just any random accounting firm. One would expect to have low voluntary turnover at a great place to work. After all, there have been precedents in history of professional firms where overall turnover (not just voluntary) was as low as 3%.

My findings also show that firms that consistently showed up in the last six aforementioned reports had experienced 33.8% growth in head count despite industry-wide high voluntary turnover rates and pipeline crisis. An average firm that had 100 full-time employees in 2018, today had grown to become a 134-person firm. Apparently these firms know how to stave off the crisis.

Practical tactics to tackle the pipeline crisis

Now that we’ve recounted the challenges, acknowledged that the labor shortage isn’t a unique phenomenon, and found out that there are firms capable of growing despite the impediments, let us turn our gaze toward some of the proven tactics:

1. Retaining existing staff is the name of the game.
   Things like fair pay, high morale, meaningful work, vision for the future, togetherness, respect, accountable management and colleagues, constant learning and high standards of quality will keep people encouraged and motivated. For example, SAS institute (a software firm) had a three percent voluntary turnover rate back in 1997 amid the aforementioned labor crisis — that’s quite a benchmark to aim for.
2. Non-monetary benefits, such as great cultural fit or outplacement support, can become a powerful magnet for professionals looking for greener not-about-the-money pastures. Talent wooed this way is more likely to stay.
3. Proper staffing of the engagements is key to efficiency and productivity, it also allows your junior people to develop their skills, and your senior people to do more of higher-tier work. Consider a Master-apprentice model. Review the current roles: it might be the case that your CPAs spend the bulk of their billable hours on work that can be delegated to non-certified accountants.
4. Revisiting reward and incentive systems in order for senior people to become more interested in helping juniors develop faster; to improve on the teamwork front; to get better-fit business through the door; to work on building existing client relationships.
5. Culling bad-fit clients is as crucial as ever. To identify which clients to fire first, answer three questions per the Swan-Crawfish-Pike model: which clients are unprofitable, which engagements don’t build our assets, what kind of work isn’t bringing enough value to the client. By firing bad-fit clients you get to solve multiple problems at once.
6. Hiring paraprofessionals and candidates with transferable skills allows for shifting the basic-tier work from professionals, making it more lucrative for new junior people and more senior lateral hires to want to join the firm. Broadening the traditional age pool is yet another option.
7. Allowing part-time employees and new parents to work remotely is an opportunity to fill some positions which require less oversight. Transactional relationships such as outsourcing freelancers or hiring firms abroad could be a short-term stopgap solution as well.
8. Investment in newest technology, both hardware and software, can boost productivity. Explore opportunities of using the technology to pass parts of the work back onto clients. It isn’t only through productivity improvements that this investment recoups its costs, it is also the enhancement of the value your client-facing staff can bring to engagements.
9. Reviewing current service offerings often helps with identifying commoditized ones which tend to yield little (if any) profit margins. Using the same SCP model you can repackage services in a way that:
   A) makes them more valuable to clients,
   B) allows our people to build their personal knowledge and skills while simultaneously creating intellectual and procedural assets for the firm,
   C) charge higher fees.

None of the aforementioned tactics are groundbreaking or unknown to CPA firms. Most of them are common sense things. However, as I have observed, perhaps due to seemingly overwhelming complexity of the business problem, decisions are often postponed, ignored and eventually abandoned. This article is an attempt to reassure top management that their challenges aren’t unheard of and, most importantly, there are ways of mitigating their effects.

Simultaneous analysis of (mis-)alignment of service offerings, best-fit client base and diverse talent needs creates the perfect opportunity to reexamine your strategy: “Are we in the right market, with the right people serving the right clients?” The realization itself might become a solution to the talent crisis; perhaps, downsizing and focusing on profitability and productivity, rather than growth, is currently the right way to move forward for your firm.

Conversely, perhaps, encouraged by successes of the firms that grew by 33% in the last six years despite the crisis in the profession, you’d want to investigate potential growth avenues available for your firm.

Whatever your conclusion, my point is this: don’t let the crisis mentality take over. When everyone in the profession keeps talking about the crisis, it is becoming increasingly challenging to muster an unwavering belief in better future for the firm. Yet, as a leader, you have to be optimistic; your people expect you to be. Here is hoping I managed to provide enough proof and reason to support the faith you already have.