Jack Hammett
The last 18 months have seen a seismic shift in the Australian professional services landscape as traditional players, mired by high-profile scandals, are giving way to a rise in specialised consulting and boutique accounting firms.
The PwC tax scandal triggered multiple enquiries and federal examinations into the way the Australian Government buys professional services, and how the Big Four firms are structured in Australia. This echoed what we have seen globally, with many pushing for the Big Four to split audit and accounting from their consulting practices and re-evaluate governance and conflict in their business models.
Nevertheless, demand for specialised professional services remains strong. Client demands are driving the need for outsourcing and for trusted, specialist advice in an increasingly complex regulatory environment.
In our view, whilst the turmoil in the Big Four won’t last forever, there has never been a better time to build a challenger professional services firm. We are seeing local boutique firms with progressive working cultures, and a clearly defined customer value proposition take on incumbent players and build momentum in the local market. In addition, global challengers such as Alvaraz & Marshall are quickly gaining traction in Australia and taking market share (and employees) from the Big Four.
However, professional services firms have had to balance this demand with an evolving workforce. Traditional graduate employment routes like accounting now compete with a much broader range of career options. It is increasingly difficult to attract and retain good staff, with workplaces needing to become much more progressive and flexible to attract and retain the best talent.
Pemba are one of the leading investors in professional services in Australia and New Zealand, with a track record spanning nearly 25 years. Current and former sector investments include ConnellGriffin (infrastructure advisory), Ampion (cybersecurity services), and, most recently, Rennie Advisory (net zero advisory).
I chatted with Giam Swiegers, one of Australia’s most distinguished leaders in professional services, who has over three decades of leadership experience at Deloitte and Aurecon. Giam was CEO of Deloitte Australia from 2003 to 2015, where he is regarded as being responsible for driving the turnaround of the firm from the “fifth of the Big Four” to the clear leader that was growing at double the rate of its competitors. After retiring from Deloitte, he was appointed as Global CEO of Aurecon, a global engineering firm. Giam retired as CEO in 2019, is currently Chairman of Aureconand and is part of Pemba’s Business Services Advisory Panel.
Defining success
In professional services success can be interpreted across multiple criteria including scale, financial strength and reputation, and for multiple stakeholders, including for shareholders, for employees and for clients.
From a financial perspective, Giam points to the need for sustained profit, ability to get cash out of the business, and warned of the danger of chasing revenue growth over watching the bottom line grow.
Ultimately however, success falls to attracting, inspiring and retaining the best talent as this drives the long-term ability to scale, earn a high-quality reputation and a build competitive moat.
There are many nuances to this including client management strategies, branding and marketing, internal systems and process, innovation to name a few; in this article, we will focus on talent, organisational structure and M&A.
Importance of people
Employees are a professional services firm’s most critical asset. A firm’s ability to deliver value to and win clients relies on the skills and motivation of its professionals, and the skills and attitude of those professionals affects the quality of the client experience. Giam adds “What your staff says to your clients, about your firm, during their daily contact with them is what shapes your brand in the mind of your clients.”
Professional services firms in Australia are facing competition for the best talent from well-funded new market entrants, declining graduate numbers in some sectors (e.g. accounting), and evolving workforce expectations.
Offering competitive salaries and financial incentives is one way to attract potential employees but the challenge is retaining the best talent through developing a compelling “employee value proposition.”
Underlying this is workplace culture, a catch-all term that is often used overzealously in the corporate world but really boils down to authentic purpose and values, a feeling of pride and ownership (real or perceived) in a company and engaging and inspiring client projects.
Crucially, whilst contingent on quality leadership, a culture should be collaborative, rather than being forced from top-down. Building this team camaraderie can come from transparency in mission, collective decision-making as well as project teams across multiple offices.
Giam emphasised the importance of ensuring staff are engaged and motivated to provide clients with the best experience: “I made sure that every one of the business plans that I had my fingerprints on had people at the apex of the business model. Like a sports team, staff need to be motivated to be loyal to the firm; the environment must be good for the employees first, and then the client.”
When he started at Deloitte, Giam was faced with employee engagement scores of c. 25% and over 40% staff turnover. Over the first four years of his leadership period he focused on inspiring junior and mid-level staff, partly through removing leaders who withdrew from the experience of their juniors and then ensuring juniors worked directly with talismanic seniors on high impact projects.
Giam’s advice for smaller professional firms is “to create an educational experience that is so valuable and enriching, that people just don’t want to leave.” This can range from training academies providing a complementary skill set, to ensuring that juniors are in the office and in meetings with the partners from an early stage so they can see the impact of their work and develop sound judgment and analytical skills.
Giam concludes “Quality staff stay and thrives when the know they are growing…. As they say at INSEAD, the only sustainable source of competitive advantage available to business today is the manner in which you lead your people.”
Path to Partner
While not everybody is motivated by the hallowed partnership status that exists in many professional services firms, a transparent and meritocratic route for promotion is essential.
With the route to partner becoming longer at traditional players, boutique firms are redesigning the career pathway to create more dynamic workplace environments. This includes initiatives like accelerated promotion pathways for the best performers.
A recent trend in professional services globally has seen a transition from the partnership model all together to more corporatised structures representing a shift from the revenue-model to one of capital appreciation. If structured well it provides a more equitable way for junior partners to take ownership in the firm as well as freeing up capital for investment and creating a potentially more lucrative liquidity event in the future.
Simone Rennie, formerly a senior leader at EY, wanted to create a differentiated promotion model to that of her prior workplace:
“Our view was simple. We wanted the ability to create a new model, and by establishing Rennie Advisory as a company, we have dispensed with the traditional partnership structure. To the outside world, it may look as though the two models (partnership and company structures) have a lot in common. It is only by examining the business and operating models of each that the differences become evident.
From a business model perspective, Rennie’s model combines a lower average utilisation target for staff with a strong focus on origination and client service at senior levels, which has greater senior level accountability than would be expected in a large partnership structure. This means that our people aren’t driven as hard towards purely financial metrics, but instead are part of an overall organism with shared goals and objectives.
From an operating model perspective, the company structure means that we can ensure that the firm has a top to bottom alignment on our values of authenticity, teamwork, excellent and resilience.
The extremely diversified ownership of large partnerships can create an environment where senior leaders lack the positional authority to make effective change and to remedy cultural issues as they arise. For Rennie, the Co-CEOs and executive leadership team are the true custodians of our culture, values and quality, and are incentivised and aligned to the company’s sustainable growth ambition.” Simone Rennie, Co-CEO Rennie Advisory.
Accelerating growth through M&A
In professional services, a fragmented market can mean that acquisition is a route to build out teams, enter new industry verticals and break into new regions quicker than doing so organically.
M&A can successfully enhance the professional services firm’s offering for existing clients (and provide an opportunity for cross-sell of value-added services), access to new clients as well as innovation (e.g. adding technological expertise).
Some of the risks of M&A in people-based businesses include a lack of cultural alignment and a poorly executed integration plan. If not properly thought through, key staff can walk out the door and take client relationships with them.
Giam emphasises the need for a clear strategy and rationale for acquisition-led growth, rather than pursuing acquisitions for the sake of scale. He points to Deloitte’s acquisition of Access Economics in 2011. Deloitte’s consulting and corporate finance teams saw a growing demand for expert knowledge and industry experience in economic consulting, modelling and forecasting. They also needed enhanced access to the C-Suite and Board-level at companies where they didn’t have a well-established audit base compared to their competitors. The acquisition of Access Economics allowed Deloitte’s team to win over the C-suite and Boards and gave them a competitive advantage for over a decade.
The role of private equity
The professional services sector is an attractive investment opportunity for private equity as it offers robust, resilient growth and multiple avenues for value creation.
At Pemba, we look at professional services businesses ranging in size from 20 to 400+ employees. The founders and management teams we speak to all have common challenges. In growing successful professional services businesses, there is often a balance between working in the business and on the business.
Private equity investment allows existing partners and shareholder to de-risk financially and provides capital and expertise to accelerate the next phase of growth. In an increasingly competitive market this can mean working together on talent initiatives, finding M&A opportunities, or helping with new go-to-market strategies.
With the right private equity partner, ambitious professional services businesses can accelerate their growth in a sustainable manner and provide significant opportunities for employees.
As partnership investors, Pemba work with shareholders and management teams to find a structure that works for them and enables both succession and incentivisation. Increasingly, we are seeing professional services firms re-think the traditional partnership model to one that is geared towards long term value creation.
Conclusion
Whilst there are different criteria to ascertain success in professional services, creating a culture capable of attracting and retaining the best talent is paramount to creating a successful firm that can scale.
We are actively looking for new opportunities within professional services, including financial services, legal services and specialty consulting. If you would like to speak to the Pemba team, please reach out to jackh@pemba.com.au.
