Earmark Podcast | Earn Free Accounting CPE

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Blake: [00:00:25] Welcome. We'll get started shortly. Before we begin, here's how to earn continuing professional education credit for attending this session. There are no polling questions or attendance checks. Instead, you will demonstrate your knowledge by taking a brief multiple choice quiz using the earmark app. Visit earmark app in your web browser. You can also download the mobile app by scanning the QR code on the screen. Log in or, if you're new, create your free account. Be sure to use a valid email address, because that's where we'll send your course completion certificates from the home screen. Scroll down to find the course. You can also tap the magnifying glass icon to search for the course. Tap on the course artwork, then the enroll button. On the course tab, you'll find the recording and quiz questions. Complete the quiz to earn your CPE certificate. It takes us a few days to create the course on the app, so if you are attending this session live, please wait a few days. We'll email you a link to the course when it is ready. If you have questions or need help, email us at. Support at earmark Cpcomm. And now on to the event. Hello everyone, and welcome back to earmark. I'm your host, Blake Oliver, and today I'm joined by Ryan Stone. Ryan is the CFO of Sikich, a professional services firm headquartered in Chicago. Sikich is ranked number 27 on Accounting Today's list of the top 100 firms with more than 1900 employees globally and $364 million in annual revenue. I'm looking forward to talking to Ryan about psychics, evolution beyond the traditional partnership model, strategies for attracting and retaining top talent, and the impact of their recent private private equity investment from Bain Capital. Ryan, it's great to have you on the show. Thanks, Blake.

Ryan: [00:02:15] I'm excited to be here. Honored.

Blake: [00:02:17] So let's talk about the partnership model. The traditional partnership model. In the title of this episode, we talk about CPA firms. But I understand based on our prep for this, that psychic is not a CPA firm anymore. It's adopted a alternative practice structure, as they call it. Can you tell us about that? I'm curious to know, like how it works.

Ryan: [00:02:46] Absolutely. Happy to. So, um, as many of you are aware, I'm not sure if you're aware of Blake, but there's a lot of regulation around CPA firms, particularly related to assurance and ownership. And so what an alternative practice structure does is it solves really what I would call the financing problem for CPA firms in particular related to the non test portion of their business. It allows the non test portion of their business access to funding outside of just passing the hat around to to partners. And so for psychics we have psychic CPA which provides insurance services to our clients, and psychic LLC which provides all of our other consulting and advisory services.

Blake: [00:03:29] Got it. So the private equity investment from Bain Capital. Like tell me about that. That's a recent thing, right?

Ryan: [00:03:36] Yes. So we did a minority investment at $250, $250 million investment from Bain Capital. There are Special Situations Group, which is a minority investment, which to my knowledge is the first of its kind in in our industry. We had a lot of the same In concerns that other firms did around that do or talk about private equity and what that could mean. And so it was imperative for us that we maintain control. But the exciting thing is we were able to to achieve that while getting access to outside voices and, and resources that we didn't have before. So, um, very excited about this investment. The Bain team has been everything that they said they would be from the beginning. And it's great to have this additional voice so that we can supercharge our growth. We've been on a growth trajectory, probably averaging over the last five years, 20% annual growth. And we see the marketplace changing. We're targeting the middle market like a lot of firms are. And those clients require expertise with a breadth of knowledge. And in order to have that arsenal of talent under under our umbrella, we need to make sure we're out there attracting the top folks, because if not, we look at the world that you'll be in, it's death by a thousand cuts. You'll eventually lose your clients. Clients want top talent that have a breadth of knowledge working for them. The top talent wants to work on interesting projects, so you either reinforce that that that wheel, or it's just going to be a death by a thousand cuts and you'll slowly lose all your top clients.

Blake: [00:05:13] You said this is possibly unique, this deal. Yeah. Help me understand that more, because I know a lot of firms in the top 100 have been taking private equity money recently. How is this different?

Ryan: [00:05:25] So all of those, to my knowledge, are majority control, which means that those partners are no longer are the majority owners of their firm. And that private equity firm has control its final say in all those decisions. Um, for us that was a nonstarter. You know, quality, um, the long term PE does a lot of good things, but some of the concerns with PE is that they'll have more of a short term bias, or they'll have an exit date that they're concerned about. And so the focus is or the concern is are they worried just about the profit and the bottom line and not about the longevity and the ability for the firm to really continue into into perpetuity? We want this to be a place that people can come and work for, for the rest of their career, if they choose.

Blake: [00:06:10] Right. What's good for clients may not be what's in the short term interest of a private equity group. That has to. As I understand it, these private equity groups try to turn around their investments in a pretty short time frame, sometimes 3 to 5 years, maybe longer for accounting firms. But yeah, that seems like right. That seems pretty difficult to do in our in our profession.

Ryan: [00:06:39] I mean, our profession is is is great. There are, uh, we're considered trusted advisors to our clients. And what that results in is essentially a recurring revenue stream or recurring set of work. And of course, that's very attractive to outside investors, like like private equity. Um, and what we liked about Bain Capital Special Situations Group is they weren't their traditional PE arm. This is a group that looks at different types of investments. They're very much a long term mindset. Um, and we wanted to really accelerate our growth. We want to build a national brand, um, expand globally over time. And we really needed a partner to be able to do that.

Blake: [00:07:17] So how are you going to deploy that capital? How much did you raise and what are you going to do with the money?

Ryan: [00:07:24] 250 million. Um, we will invest it really in in acquiring talent. Um, we'll also we've been acquisitive, uh, since before I joined Sikich will continue to be acquisitive, um, looking at even larger targets than what we've done historically. And we'll continue to invest in resources for our employees and team Technology and other resources. In particular, we put a ton of investment into our human capital organization to just build that infrastructure for our employees to really enjoy working here, um in particular focuses on education and wellness to make sure that, uh, our motto is happy employees and happy customers. So if we take care of our employees first, our customers are going to get the benefits of that.

Blake: [00:08:13] Yeah, that's a problem in our profession. Uh, we saw in the news recently, an employee at EY in India died from overwork. She was just 26 years old. We've, uh, we've seen this here in the US as well. Um, it's not frequent, but it happens. But to me, like, what that indicates is that there's a deeper underlying mental health issue in the profession. And and you see it in like, the, the hours people are working and then how they feel. And anyone who browses, you know, the accounting subreddit on. On Reddit or reads going concern. And here's what people are saying on Twitter about accounting. I mean, I know that's not all firms. It might just be a minority of firms, but it's pretty. Terrible working conditions. So I'm curious, like what you think about that broadly. And then. You know what? You know, how are you how are you different at Sikich?

Ryan: [00:09:18] Well, first, we absolutely prioritize employee wellness. So any employee at Sikich essentially has wellness benefits, whether they choose to use our general benefits package or not. They all get it no matter what it includes. Um, access to, uh, um, being able to talk about problems you have without having to pay for it, that's available just as our basic package. So if people have, have, uh, um, work at psychics that come standard don't even have to sign up for it. Second, we are leaning into this idea of of flexible mindset, um, work life integration, like people say, you know, work life balance. It's hard. You know, you have families, you have work. It is who you are. So we talk about it more like work, like work life integration. And so we've leaned into flexible working. You'll never hear psychics talk about a mandate to come back into the office. Um, I have children. I want to make their events. Um, and so we encourage people to work around that, um, communication and really trust is that at the core of everything that we do with our employees. And so we don't track a lot of the metrics that other people track, because honestly, they don't add that much value and it stresses employees out. So anything that we can do to reduce the stress level, allowing employees to be more productive, more productive folks, what we find is folks that live close to one of our offices often like to go in.

Ryan: [00:10:51] It's easy, but folks have long commute. Want to save that time so that they can either have more time with their family, or use that commute time to get more done in the workplace. So we stopped tracking like metrics, like total hours a long time ago. I have no idea what people's non-billable time is. We assume they're using it. Well, we trust them to make good decisions. We trust them to stay current in their credentials and their education. Um, and you can easily, you know, verify that just by the completion of those classes. You don't have to watch how many hours, folks. Folks do. And we have access to a lot of survey data. What's great about this industry? There's a lot of survey data out there that you can participate in. And what you find is all these firms will talk about all the hours they'll listed, almost as if it's a badge of honor. How many hours are people working? 2400 2500 2800. Um, but if you look at the stats on the actual billable hours, those are pretty common across the organization. Organizations we can't even fill out like total hours. We don't track it. Um, and then the other thing that we've found that's been a passion of mine is often the way, uh, professional services firms in general have tracked and monitored employees.

Ryan: [00:12:02] Um, doesn't match actually, how they contract with clients. Uh, in our industry, I suspect, um, you'll hear numbers, like 40% of the work is not traditional TNM. I, I suspect it's closer to more than 50%. If they actually looked at the contracts and looked at how they're being executed, there's a lot of value based or fee based, um, type of engagements and contracts out there and that type of contract. Um, if you think about it, why would you be worried so much about hours? Right. The idea there and what's great about those contracts is it frees employees up to be innovative. If you can get more done with your time, if you can be more efficient for the benefit of the client, you want to be incentivized to do that. And your traditional TNM sort of engagement actually doesn't drive that incentive. It almost drives the opposite ones. We've been leaning into trying to do a much better job at scoping so that we can have the type of, of, of, of client relationship that reinforces the ability to encourage our employees to be innovative for their benefit. It's rewarding to them. It's rewarding to the client, and that benefits everyone all around.

Blake: [00:13:13] That was the hardest thing for me about working in a larger firm, similar in size to CCH. When I worked there was that, uh, I didn't really have an incentive to be more efficient in my work because if I, if I became more efficient, then I would just have to go find more billable hours somewhere else. And and it was even more so for my team. I was a manager and I had staff, and one of my, one of my staff actually showed me her secret spreadsheet, uh, where she had the budget for all of her projects. And so she knew how much she could bill for each of them. And then if if she was like, over or under on another project, she'd just borrow ours from, from one to, to make the other meet its target. And as soon as I saw that, I thought this must be happening across the firm. Right. Like smart people figure out how to game the system if you incentivize them that way. So I guess my question is, uh, how if you're still tracking billable hours, how do you and you have a target for that, right. How do you make sure that those hours. How do you know those are real? And and like, how do you actually incentivize people to work more efficiently on projects if they're still billing time?

Ryan: [00:14:35] So some work is difficult to scope and the safest, you know, the accepted way in the marketplace to structure those contracts, both from the client side and the services side is TNM. And you have to track it that way. Um, we have a group called the Emerging Professionals Council. It's a group of younger, uh, folks that across the organization, our leadership has said, hey, these folks will be leaders someday. They're on that path. And so each year we have a different group. The first year we did it, a couple of years ago, uh, we asked these groups to come up with big ideas for the firm. And one of the first topics was, how do we get rid of ours? How do we get rid of tracking ours? I want to be more innovative. I want to find ways to be more efficient. But the way that we're working doesn't incentivize that. Um, can we do more value based billing? Can we do more fee based billing? So we have been experimenting down that path. We're not all the way there yet, but that is how you align the incentives properly. Even TNM contracts, ideally those should be larger in scope. The you've given the client a budget almost all the time, right? I've never seen a regular check ins with the client. Everyone knows what the exchange is. You're setting aside people to be dedicated for a period of time to those to those clients. Um, it'll take us time. It'll probably take the industry time to get better and better at it. But I think the firms that can have those discussions with the clients about, hey, we're going to provide we're going to give you these outcomes in this time period. We're going to meet these deliverables. Um, and this is the value that you're going to get for that. That sort of contractual arrangement allows employees to try to exceed that which benefits everybody. Yeah.

Blake: [00:16:24] I've never seen a time of materials contract that didn't have like a limit on the hours. Right? You'd be silly as a client if you didn't demand that. And so as soon as there's a ceiling on the hours, that basically becomes the fixed fee.

Ryan: [00:16:39] And it's just being honest about what you're actually transacting. And so we have and definitely we encourage from the top down what are we really doing at a firm as a firm. Does it drive the right behavior. Is the client happy with it? Our employees happy with it? If the answer to these questions are no, can we can we tweak that, um, so that, you know, it brings down the stress level, as we talked about earlier, uh, and again, happy employees are happy clients. You know, it's it's 100% of the time. Yeah.

Blake: [00:17:13] Okay. So let's let's dig into the metrics that you are tracking. If you're if you don't care about total hours worked, what what do you look at to identify who are your top performers and who might need some help.

Ryan: [00:17:27] So we will have engagement reviews. Um, usually folks are assigned to different tasks. We'll see how well those tasks go. So it's very much on the outcomes of the different activities. Um, if you ask our leaders, we use the term principal now. Um, who worked the most. They couldn't tell you, but if you ask them who their top performers are, they could they could tell you across the board. Um, so we have a lot of qualitative measures related around client satisfaction related around meeting deliverable timelines. Um, uh, related around actually how well the deliverable solve the, the, the intent of the goal. A lot of qualitative tracking that we do on an engagement or client satisfaction level from a financial metric level. We don't look at ourselves by geography or book of business. In fact, we really hate the term book of business that we want. Um, at the end of the day, when people serve clients, it's a team of people delivering. It's not one person's book. And so we organize by the service offering that we're providing, and those are groups of teams. And we don't do you won't see us. I don't I've been a in finance a long time, and when any finance person going up the ranks was forced to allocate costs around, it didn't like people just bucketing things that didn't add any value. So we don't believe in a lot of wasted time on trying to allocate costs.

Ryan: [00:18:51] So what we do is we within our um, we call them teams, many business units, however you want to think about we do have panels and they're, they're they are loaded with all of the direct costs and we don't, um, allocate parts of people. We have some if if we do encourage resource sharing, we have an automated way to just to, to to kind of align for that. But essentially it's a real cost. It's not the hour of the person, it's the person a part of your team. They're a part of your overall delivery team. And so we focus on the contribution margin of groups of teams or business units. And that's the financial metric we work with. You won't hear me talk about gross margin because I can. We can get to a better number. It's funny you talk about this industry. You have gross margins, 60, 65%. I'm like, that's not real. There's a lot of other costs that you're just excluding from that, that you then later call overhead or something. So we it's much more of a corporate mindset. Again that's where I came from before joining Sikich is you have these business units you you and the best thing you can do if you're going to empower someone to run a business unit for the betterment of their clients, is really measure them on what they can control and don't don't burden them with what they can't.

Blake: [00:20:06] So this is a big change from the partner model, where really in a big firm it is like hundreds of individual panels organized by partner essentially, and all the costs are allocated down to that partner and their book of business. And when we say book of business, it's all the revenue that they are assigned. And then we allocate all the staff costs by hours billed and we get to some gross margin number that is, like you said, imaginary. Yes. Uh, and, and then, you know.

Ryan: [00:20:43] The people will pick at a million different ways because you allocated all this cost to them, and so you don't get anywhere.

Blake: [00:20:47] Yeah. And then and then you get in a, in, in a firm that's a bit dysfunctional. You get partners bickering over how to allocate all these staff costs, you know, and then they don't want to share or. Right. So if it's not done you know to their standards. So but you've you've flipped that around where. So now the panels are by business unit. So like give me an example of a business unit.

Ryan: [00:21:13] Uh, so um, we, we have layers of business units that we can kind of roll them up if there's, if they tend to share resources often, but we, we will separate our transaction advisory business unit from our, um, forensic accounting business unit from our we provide marketing services. We have uh, technology services focused on enterprise clients. We have technology services like ERP related implementation and support services focused on on the mid-market. Each of these um business units have skill sets that tend to be where all the resource sharing would be. Um, though occasionally we have very interesting, um, problems where resources will dry up. But we've, we've invested in a very modern ERP system, so not the normal, uh, kind of hours tracking ERP that you somehow come up with, with, with an invoice. But we've automated behind the scenes. If we share resources, we have a way to to credit the panels just automatically they don't have to think about it, um, behind the scenes. But for the most part, folks who are either assurance personnel or tax folks, um, if they are doing client accounting services, if they're doing managed IT services, if they're helping implement an ERP, those are distinct offerings, um, that tend to need distinct, special, uh, special. Um, subject matter experts.

Blake: [00:22:43] I'm curious to know, what is your ERP system? How do you how do you do all this? In a way.

Ryan: [00:22:49] We. So we are we consult with the with um, we use a lot of products. I don't want to give it away because, um, uh, we are very strong in the marketplace with Microsoft. We're strong with Oracle and NetSuite. Um, we're strong with Salesforce. We consult on all these products. We use them all internally in different ways. I will not play favorites, but it is an enterprise level ERP that we use internally as well as enterprise level, um, uh, CRM system and HCM system. We use. Top of the line. Got it. Probably we can grow into this for a long, long time.

Blake: [00:23:25] So you're not using, like, the time and billing that came with your tax software to. No, no. To allocate these costs. Yeah.

Ryan: [00:23:33] That was we abandoned that 3 or 4 years ago. Yep.

Blake: [00:23:36] Got it. And were you part of that change?

Ryan: [00:23:40] Yes. When I was originally, uh, recruited in by our CEO, Chris Geier, first task was to help, uh, determine what sort of ERP we should use and roll out across the firm. And there are a lot of best practices. Again, we're diversified professional services firm. We employ a ton of CPA experts, also top ten technology experts, and what I would call folks who have industry experience or very specific subject industry subject matter expertise. We really like to bring those things together, um, clients who obviously they want you to understand the regulatory environment, environment and what they need to comply with that. But they also expect you to know the technology tools that make that that are best for their their industry. And they they would love to know that you employ people who've been in their shoes before. So we look to bring that all together. And my first assignment was to modernize that, our ERP and our technology stack, if you want to think of it that way, and we've taken a lot of the best practices from these tech consulting, and there's no reason they can't apply it to to other areas, like if we do a lot of fixed fee work and we use percent complete rev rack behind the scenes, you wouldn't believe the rev rack stuff that goes on in accounting firms, but the oh.

Blake: [00:24:55] Trust me, I know, I know, but like that's see, that's so great that you are using the tools that you are consulting on because you go to some accounting firms and they're NetSuite experts or Microsoft experts, but they're using this like ancient system to track time and calculate profitability and bill their clients. And like the system we used when I was in public accounting. Couldn't even send an online invoice. We had to, like, print them all and mail them. So yes, that is.

Ryan: [00:25:22] Not a good use of of of folks time. We've automated, um, much of the invoicing and in fact we could as we gain, you know, we're three years into this, this journey, as we continue to gain trust throughout the organization, we'll those folks who are still holding on to wanting to control invoicing, we'll get them to let go of the reins as well. It's not it's, um, customers care less than you realize what the invoice look like. It's the number that they care about the most, but the rest of the stuff they're less concerned with. Yeah, they.

Blake: [00:25:54] Generally don't want to see those time entries, at least in my experience. Now running a few businesses, if I get like a detailed invoice with all the time entries from my attorney, like I don't know what to make of that. I don't know how long this stuff is supposed to really take you. What I care about is, you know, what did we say it was going to cost roughly. And is that what you're billing me Exactly.

Ryan: [00:26:16] Yeah. Are you communicating with the client along the way? Don't be afraid of them. Um, they're. You know, you do great service. It has value. Talk to them. Keep them abreast of what's going on. If scope changes, bring it up.

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Blake: [00:26:31] So, Ryan, you have a bit of a nontraditional background for being in a large public accounting firm. You had a career as a corporate controller. I like I read that you did that.

Ryan: [00:26:45] I've probably. So I, um, I missed out. I was studying overseas my senior year, so I missed out when the big four were coming to Indiana University way back many, many moons ago. Um, so I ended up going straight into corporate America, and I've had every finance job in some IT jobs, uh, um, that you can think of from shared services accounting to corporate planning to supporting, uh, operations and cost accounting and to helping sales and marketing forecast. I've had every role out there, including being a corporate controller for a public company and later a CFO.

Blake: [00:27:25] How has that you know? How has that informed your view of working to modernize an accounting firm?

Ryan: [00:27:35] So I have the view that I think it would be better for all firms if there was more rotation in industry and out. So, uh, for, um, a lot of folks go straight into CPA firms and either do audit or tax work or whatever it is, having never actually worked at the organization and having had to run that. So having both sides of it, I think would be very valuable. Um, for, for folks. Um, so I come from that perspective where I was a customer. So I bring the customer perspective to Sikich, uh, at as working with either your audit team or your, uh, internal audit team and so forth. So I can bring that perspective now at Sikich. Uh, again, we target the mid market. We don't audit public companies. You need very specialized expertise for that. We do not dabble in areas where we don't have the expertise. Um, but yeah, I was at large, uh, public and private organizations. And I got to see the customer side of the house.

Blake: [00:28:40] I've always thought that's a bit funny how audit works, where you start out as an auditor and you've never put together a set of financial statements, and and I mean, really, what are you doing? In essence, you're checking the work. So how do you how do you check the work of work that you've never done yourself? I find that to be an interesting question. I mean, maybe we should flip it, right?

Ryan: [00:29:05] Yeah. Again, I think the rotation personally, this is my personal value. Um, having now been on this side of the house, and I have a ton of friends who went through the public accounting. Right. Like, those firms are really good at training. Um, they have really good methods and, uh, and procedures. Uh, it's very good. But, um, the job would be easier if you understand the day in the life of of of folks. Like, sometimes they have good technology, sometimes they don't. Sometimes it wasn't designed well. Um. Uh, it's hard to know the effort that went into, you know, closing the books for, for, for example. Um, but what we can but we can bring to the table what we try to do is because we employ both technologists and, um, uh, you know, finance and accounting trained folks. We have folks who understand how the technology works. We can bring them in to provide that expertise. We also have, um, uh, human capital and HR specialist or HCM System specialist. So when serving a client, we have experts that while they may not be a CPA, they can add that perspective that we can add to the team if it helps serve the client's needs.

Blake: [00:30:24] So what pulled you into public accounting from corporate?

Ryan: [00:30:31] Um, so I was, uh, the first person, um, I was an international CFO. I came back to to the US, and I wanted the the seat, if that makes sense. Um, it wasn't available at the firm I was at, so I started looking, um, you know, career growth, uh, same thing that everyone else I was looking for.

Blake: [00:30:50] You were you wanted to be the CFO.

Ryan: [00:30:52] I wanted to be the CFO. Yeah, I wanted the the the top job, uh, in, in this particular career. Um, and I was talking with different companies I wasn't looking or expecting. I was actually warned to stay away from partnerships, And. But I met Chris Squire. I met the rest of the executive team at this. This firm thinks different. And so, um, you know, the rest is history. This is the greatest job I've ever had. The greatest firm I've ever worked for. It's, uh, you know, everyone's very collaborative. It's a very we culture. It's a, again, employee first culture. And it's nice to, you know, it's been a great ride. And we're again on to bigger and better things. There's a lot a lot ahead of us, especially with this investment. Like we're we're really trying to like blow it wide open.

Speaker3: [00:31:43] Yeah.

Blake: [00:31:44] I mean, with $250 million, you can do a lot when you're at about a 2000 person firm. Um, and like you said, we think we.

Ryan: [00:31:55] Have a better mousetrap. So, um, you were alluding to this earlier, but with one of the challenges of partnerships is that only the partners can have the equity upside. It's just like if you involve people in the equity upside, you have to give them a K-1. K-1's are annoying and there are lots, lots to deal with. Um. In for today's top talent coming out of university, they have a lot of options. And there's there's startups, uh, tech, uh, medical health and medical life sciences. Um, lots of interesting investment banking or private equity type roles, uh, uh, corporate America as well. And a lot of those jobs relatively early, you know, not not often right away, but relatively early. As they start descending, you start to get a piece of equity upside. And that's a component of the overall compensation toolkit. It's hard to offer that in a partnership. And that is one of the things that, uh, as leaders at Typekit that we have been talking about, how do we offer that sort of, um, uh, alignment and wanting to be part of that. The value creation that you can do when you're when you're growing a firm and feel like you're participating in that. And and so how can we add that. Offer that to a broader base of employees. And this was one way to to facilitate that. And again, we did it in a way where like we designed our own. We call it management incentive plan. But we designed our equity upside ourselves for our our employees. There's no a lot of private equity at this waterfall. After private equity is covered, then it waterfalls over to everyone else. But if you don't achieve that hurdle, it's worth zero, right? No, it doesn't happen as if you have a piece of equity. It's worth the same as anyone else's.

Blake: [00:33:44] So who can get equity at psychic? Could I as a manager you know get are they stock options. Like how does it work. Is it an Esop.

Ryan: [00:33:54] Is it I don't I am not the tax expert. So um there's different types of. It's because we're not a publicly traded company, not publicly traded shares out there. It's essentially a deferred compensation, probably from a tax definitional perspective. But we're an LLC. They're units at the end of the day, and we've gone from approximately or a little less than, say, 5% of the population were what you would call partners and eligible. Now we have 30% of the population kind of defined in the program. And we always, uh, uh, budget a discretionary amount if you want to think of it that way. Um, for rising stars, because what we want to do is we want to retain our top talent. We want to have if they're, um, have them feel like they're involved, like, if they're driving value, we want them to see it. Yeah. So we we've set up, um, you know, reporting to kind of mimic what you. I came from both, uh, I was at public companies previously. You can just follow the Follow the share price. So we've done things internally to kind of mimic that sort of tracking so people can see where things going up or down, like we're all participating and we're all aligned in the same direction.

Blake: [00:35:10] So you don't have to be a partner anymore to have equity. You don't even call your partners partners, right? You said we.

Ryan: [00:35:18] Call them principles.

Blake: [00:35:19] Principles, right? Yeah.

Ryan: [00:35:20] I mean, within the CPA world, uh, we do. Becoming a partner means a lot to people. And so we didn't want to get rid of that career progression, that achieving that milestone. So we have, uh, the, the principal role, um, a very similar sort of, um, uh, career path and being able to celebrate achieving that milestone. But what we've eliminated is the, um, the complexity of, of K-1 accounting, the need to make a giant investment, the need to then wait, um, 20 years to, to get your retirement asset.

Speaker3: [00:35:58] All of.

Ryan: [00:35:58] That we've eliminated from the process and again, can offer something that's much more competitive to what people would see if they're, you know, in a startup and they're using Encarta to track their their units behind the system, or if they're a public company and they have some sort of restricted stock or options program, we have a competitive offering for, for for our top talent. And we want to, uh, um, a large portion of Sage to be participating in that.

Blake: [00:36:24] Yeah. So you went from 5% to now about 30% of civic participating and having equity units. And you you don't have to buy in now. Not a big buy in. You don't have to borrow money to buy. No.

Ryan: [00:36:39] We've, um, form, uh, formalized the reinvestment of our of our net income back into the firm. The craziest thing, if I'm allowed to say when I, when I first started looking at partnerships, is you ask the question, you know, what's your net income? What do you mean? And there is none. It's all distributed. It's zero. Well that's not it's not really zero. Like. So what? Um. Well, what was nice that we had done a lot within the partnership model, again, to mimic best practices. Um, so we knew, um, what our performance compensation was and what our partners, what I would call ownership compensation. You think of it as a dividend distribution if you want. Again, we use terms to mimic. It's not technically for tax folks listening. It's not technically what it was. I know it's a distribution. But we mimicked we were able to segment, uh, what partners receive to say, hey, this is the market rate for the job, the role you have at the firm, and the rest is really your ownership, and you're getting a return on that investment. So, um, but now we can, you know, it's in the model that that we're in now again, we have there's real net income. We reinvest it in the firm again to drive that the the longevity. We want to build a brand that everyone knows, um, out there in the marketplace. We want to be known as the most innovative firm out there in the marketplace to the mid market and again, long, you know, long term plans to be known uh known worldwide.

Blake: [00:38:04] And the way you say it is so simple I love that you've like you've automated reinvesting your net income into the firm. Yeah. And I feel like that is worth emphasizing because this is the fundamental problem with the partner model. The traditional partner model, right. Is that all the net income, all the profit is distributed to the partners every year by default. And so if you want them to if you want to make big investments, it basically comes out of their pockets. That's how they.

Speaker3: [00:38:36] Feel. Yeah they.

Ryan: [00:38:37] Feel. And so folks who are close to retirement like, well, why would I make that investment? I won't be around here to get it. Now, I do want to, um, I've been at tickets for six years. Uh, but the, the partners that were here when I joined and the the, um, everyone has always been focused on the firm. We, you know, every firm says we're a one firm. We have one called. We do. Um, and right. They were on they were all on board, um, on building something that that can last. Um, and the young, uh, the younger partners, you know, had the same concerns that the, the new generation is saying, oh, that's not even interesting. You know, why would I even join if that's the model, I have to do my time. Um, and maybe I'll make partner. And if I do, I have to then find out what did I earn over some period of time and multiply that by something, and maybe that there's a lot of potential. It's not a bad model. It's worked well for a long time. I'm trying to criticize it, but it can lead to the wrong behavior or the wrong incentives. And so yeah, we we were constantly focused on how can we align those incentives, uh, for the betterment of everyone involved.

Blake: [00:39:49] I think it's fair to say that people respond to financial incentives. Yeah, right. And like so you can have a great firm culture and you can as a firm believe all of these things. But unless you have your financial incentives set up to reward that kind of behavior, it's not going to be optimal, right? You're not going to get the best result. And and it feels to me like what you've done is really align the mission of the firm or your goals. Right. With how you're compensating people. And so is the plan to like, you know, eventually like broaden the equity further, like how far are you going to go with this?

Ryan: [00:40:30] So as I mentioned, um, it's relatively new. So we've we've just implemented it this past year. Um, nothing's perfect the first time, you know, but we have no, uh, um, uh, blanket on the word. Um, we know it's not. We know that we won't be perfect the first time, so we'll iterate over time to make it a better program. About 30% is targeted if I can use that word to to receive an annual grant. We know that when you make a grant, it dilutes everyone else. That's okay, because you're again, you're building that growth. The firm grows. Exactly. And so, um, that'll be for for the benefit of everyone with that discretionary bucket that'll really expand that group even beyond the targeted 30%. And so we'll see how these these next year or two go. And we'll again iterate and make improvements to the program. I'm not sure you want to say everyone's in. Actually we want it to be merit based. We want it to be something to to work towards. Um, but it shouldn't be something that you have to wait 20 years to have any shot at and you're not sure. Um, and then the program is kind of weird to begin with. You're trying to understand the math, and no one ever does. And then. And then you get to k one and everyone complains about it. And what's taxable.

Speaker3: [00:41:46] You figure.

Ryan: [00:41:46] Out that's off the table.

Blake: [00:41:48] In a traditional model, you figure out what your partnership share is worth when you retire at 65. That's when you find out, right?

Speaker3: [00:41:54] Right. Exactly. Yeah.

Blake: [00:41:56] Um, yeah. I mean, yeah, it's just like to me, having gone from accounting into startups where I was rewarded stock options and I could actually like, tell, you know, I could kind of get an idea of what they were worth. And that was like, super motivating for me. So, like, this is music to my ears.

Ryan: [00:42:09] The feedback that we have gotten, I, um, like Chris, will tell you, people reaching out to him directly, it's been off the charts. So it's it's something that, um, absolutely. We're going to continue to reinforce, um, continue to improve on the program. Um, and we have great people, great leaders across the organization. And we have I know a number of folks who said, ah, you know, maybe I don't want to become partner if I, you know, I don't have that in my like every partnership has a minimum. You have to invest if they become an equity partner or whatever terminology that firm use, we've taken that burden off the table again, automated the reinvestment of net income. Um, and, uh, uh, I, you know, now we just have to execute.

Speaker3: [00:42:55] Um.

Blake: [00:42:56] So how do you create liquidity? You're a privately held company. If I have some units, uh, you know, the traditional model, you have to retire basically to get paid out. Yeah. Um, and this is this is the big challenge, right? Of, like, an Esop or something is creating liquidity. How do you, like, how do I cash out.

Speaker3: [00:43:20] I guess is my right.

Ryan: [00:43:23] So I'm not at liberty to tell you. Let me just, uh. But what I can tell you is every partnership, any firm, regardless of structure, will have that challenge if they're not publicly traded, if they don't have liquid shares on the marketplace. So partnerships come up with a method it's retire paid out over ten years or whatever the program is. We have a default method. Any form that's creating cache, creating net income. Again, we can use our own net income to essentially redeem those units if you want to. That is absolutely on the table. There are other options we could consider. There are there is one public firm out there that that's in our industry. That's something we can look at down the line. We like the options that we see in the future. Um, option value is good. So we don't we don't want to narrow those options today. But there are a lot of different ways to to create that liquidity. We do have a default mechanism that um, essentially, uh, mirrors a little bit of what we did before, but over a much shorter time period. Um, and it's much more formulaic for um, uh, um, basically, you know, like a pawn separation type thing, this happens, that type of aspect. But that's our secret sauce. I gotta keep that under, under under.

Speaker4: [00:44:43] The their.

Ryan: [00:44:43] Belt.

Speaker4: [00:44:43] Here.

Blake: [00:44:44] Totally understood. So basically, like there is there are ways that you do that. You create liquidity and then like so if I leave the firm, I'm not stuck with, you know, shares that I can't ever redeem or units or whatever we call them.

Ryan: [00:44:57] Correct. There is a formulaic method to, to to resolve that. Um, we make sure that there can't be a run on the bank and so forth, as well as for the protection of the firm. There's lots of things that go into designing this, but it's it's it's simpler. You don't have to wait to your, uh, you know, 65 or whatever. Um, it's it's a much simpler model. And again, touching a much broader base of, of of the contributors who are really, you know, driving the ship.

Blake: [00:45:28] So one more topic I want to hit on is internal mobility. I understand that is a little bit different. In this way you don't get put in tax or audit and then stay there forever. How does internal mobility work? Moving around in the firm to different roles or to different teams?

Ryan: [00:45:47] So I would say it's a it starts first at tone at the top. So we 100% every firm does. But we recognize we want to keep our top talent. So from a tone at the top, from a general philosophy, um, if someone would like to apply for or go for a different position in the firm, it's it's 100% supported. Now, you know, if they're doing it every two months, you know, like like when you're interviewing someone off the street and they're constantly changing jobs, you're asking, hey, why are you not, uh, but, um, in my personal career, you know, every two and a half, three years, I was looking for the next challenge to, um, to learn something new to to to feel I accomplished something and try to accomplish something else that I hadn't done before. So I suspect most people are like that. So we absolutely encourage.

Speaker3: [00:46:39] Folks.

Ryan: [00:46:39] To look at all of the positions we have across the firm if they're interested in something. Um, you know, we're not going to let, uh, we're not going to stop them from from from taking the role, especially if they've been in the role that they have been for for some time. We would be our messaging from leadership down is that's that's that person's right. They can apply for it like anyone else. Um, and everyone has embraced that. So that's really it from a secret sauce perspective is what's great though. We have diversified services. We probably have 35 different, you know, service offerings. Um, a lot of those skill sets are common to other skill sets. And so, uh, we had folks move from, uh, like assurance related work into transaction advisory, which they find interesting. Hey, I get to advise firms who are thinking about, um, you know, selling to someone else, but they're not sure how to how to how to do that. Or maybe they want to buy something. They need that, that forensic thought. Um, so we have a lot of different.

Speaker3: [00:47:37] Roles.

Ryan: [00:47:38] Across the firm. And again, we encourage rotating and moving around.

Blake: [00:47:44] I lied I've got another question for you. Yeah. Uh, this has to do with technology. So psychic. Is very tech forward. You are personally very tech forward. You implemented this new ERP system, which. Like you say it like, oh, you know, we did this thing, but that's like a massive project, right? Anyone who's participated in one knows that. Um, but obviously it never ends.

Speaker3: [00:48:05] Yeah.

Blake: [00:48:06] You're never. You're comfortable with it? Uh, and then technological change and, you know, accounting is, uh, going through some really rapid technological, technological change right now with artificial intelligence. Uh, these tools are getting so good. We saw the development of GPT four zero and zero one and and the new model zero one is has an IQ of 120, smarter than 90% of humans on an IQ test. Like, how do you see the next few years going, you know, for accounting what is going to happen if you if you had to look into a crystal ball, you know, where do you see things headed?

Ryan: [00:48:48] So, um, obviously we're dabbling in or dabbling is not the right term. I would get yelled at for using this term, but, uh, we're experimenting with, with, uh, we've looked at different AI offerings, um, models. We're training our own AI on internal IP and trying to to use that to make our teams more productive, um, to, to facilitate answering questions. Uh, in a number of cases. Um, it's it's fascinating, uh, technology, but it but so far, all the use cases that at least are I'm seeing throughout our, our, um, our firm really are adding productivity, but they're not completely replacing a role. You know, if you, um, If you do a meeting or if people wanted to summarize the this, this, this podcast episode, I could listen to it and give you a summary of everything we said right after. That's really nice. It takes a few hours of work of putting the minutes together right off the plate. Very nice.

Blake: [00:49:48] Don't tell anyone or they won't listen to the show. I'm a little.

Speaker3: [00:49:50] Concerned.

Ryan: [00:49:51] Sorry. Um, but that's that's out there. That's active. It is. We've we've trained AI internally on all of our, um, we call it total rewards, our employee rewards, our employee benefits, our, um, uh, anything really to kind of HR employee, uh, and benefits and, um, uh, the things that they may, may use. And so they can just ask that and get the answer right right away. It's just super easy. Um, that doesn't change very often. You update once a year where I think people underestimate. They've. I've been hearing for many, many years that all of this is going to be automated. It will. You will. Everyone will get more productive. They'll get more done faster. But as you get things done faster, as you're able to have your summary of your meeting right afterward, you're going to deliver better. And then there's going to be more expected of you. So, um, and the rules for compliance industries, whether it be, you know, uh, accounting and CPA related compliance or FDA compliance or any compliance that firms need, those rules are always changing, and the technology is always going to be catching up and automating the most recent change. And so I think those tools will get faster. And the expectation is that as the rules change, that people will be able to update that. But I don't see the need for interpretation going away anytime soon.

Blake: [00:51:18] I feel like actually the accounting profession is in a pretty good spot because from a regulatory perspective, like you said, um, we still have to have a human review and sign off on a lot of this stuff, and that's required and that's not going to go away anytime soon. So the prep work might get done a lot faster, but the review is still going to be necessary.

Speaker3: [00:51:42] And what you're.

Ryan: [00:51:42] Reviewing is going to change. So even it's been happening for a while. Sometimes you're reviewing code and checking that the code gave you the output, like what you've automated through some sort of technology solution. But there's been, you know, RPA, robotic process automation. There's a lot of automation tools out there. I know that, um, uh, clearly coming into the automation space and adding value, um, but I think it will feel more incremental than, than a shock. And awe could be wrong. I keep hearing I keep talking to people like, oh, you guess what this can do? But as it gets, as the use cases get fully rolled out, um, I think people will be surprised at how much they've already been using it. Actually, they didn't realize it to date. And as they won't notice it, as much of a shock is just the tools. The subscriptions that you're paying for everything is going to have this. Embedded, and it's going to make us more productive.

Blake: [00:52:39] Yeah, I think it's going to it's going to really hit when like customer service. Tier one customer service moves over to AI, which I'm already starting to see when I. Chat through a chat bot on a lot of these, you know, uh, any company I work with. Like a lot of them are using AI to do the tier one support, and it can be a good experience. Or if it's a bad implementation, it can be a horrible experience because you can't get to a human now, right? Sort of like the old call center problem. Um, yeah. So it's sort of like it's all in how you do it. And I agree with you. I feel like it is going to feel more incremental than people are projecting. There won't be some just, like, magical moment when everything becomes AI. It's like the self-driving cars, right? Yeah, they that's been super incremental. We now have them all over Phoenix. And. But there are still limitations, right? They don't go on the freeway, as far as I know.

Speaker3: [00:53:33] Yeah.

Ryan: [00:53:34] If you were to jump five years in the future, I'd be like, wow. Like, I can't believe all that's happening. But the journey there won't feel as shocking, I think, as people expect. It will be different. Like. And if you go and, you know, look at what was happening 20 years ago, you're like, oh, that's like so seems forever ago. Um, so it will be different, uh, and exciting. But, um, we like to be leading edge, but not bleeding edge. We are not a software publisher. We're we're we we are services company at heart. But we use all those products and we will stay current on them.

Blake: [00:54:09] Well, it's a great place to be. And it sounds like Sikich is a great place to be. Uh, Ryan, if if anyone wants to follow you online or connect with you, where can they do that?

Speaker3: [00:54:22] Oh, wow.

Ryan: [00:54:23] Uh, I mostly from a social media perspective, just, uh LinkedIn feel free to reach out to me. I would love to connect with folks. I'm happy to add you to my messenger.

Blake: [00:54:32] I have been speaking with Ryan Spohn, CFO at Sikich. Thanks for joining me, Ryan and everyone. Stay tuned for a quick message on how to earn your free continuing professional education for listening to this episode. Today's event has ended. To earn CPE, go to earmarked app or scan the QR code on the screen, then log in or create your free account. Search for the course by tapping on the magnifying glass icon on the home screen, and then entering the name of this event. It takes a few days to make the course, so if you're attending this event live, keep an eye out for an email letting you know when the course is available. Pass the quiz to earn your CPE, then tap the button to email yourself a certificate. Stay tuned for more events from earmark. Thanks for joining us and we hope to see you again soon.