How finance leaders are managing talent shortages amid increased M&A activity
AUDIO | May 19, 2022
Authored by RSM US LLP
The pandemic introduced new trends and challenges for CFOs and their finance teams. From disruptive technology to executive talent outsourcing, finance transformation today looks different than it did yesterday.
RSM Directors Kristen Oats and Cody Roth joined ACGâ€™s Middle Market Growth Conversations podcast to talk about how finance and accounting departments are adapting to remote work, supply chain disruption, talent shortages, and increased merger and acquisition activity.Â
Oats and Roth share how theyâ€™ve seen finance and accounting teams bridge their talent gaps, and when to consider temporary or fractional resources. They also discuss how strains on finance departments are affecting M&A activity in the middle market, and what finance teams should focus on post-transaction.Â Â
The conversation closes with a look at the trends to watch in the year to come, and how rising input costs, salaries, and interest rates are affecting forecasts.Â
This interview has been edited for clarity and length.
Middle Market Growth (MMG): Kristen, as we look back on the two years since the start of the pandemic, which developments would you say have had the biggest impact on finance and accounting?
Kristen Oats: Historically when we talked about finance organizations, it has been people, process, and technology. Now it's starting to transition more toward people, process, technology, and dataâ€”and organizations have a large amount of data easily captured, but harder to determine how to use in a meaningful way. Over the past couple of years, the FP&A (financial planning and analysis) function has become more front and center to organizations, becoming more of a business partner to provide insights and more proactive, data-driven reporting for the business to make more real-time decisions.
This shift has continued to drive finance organizations from being less transactional and more of a strategic function. Additionally, finance organizations have invested heavily in technology to help drive efficiencies and support more remote or more of the hybrid work environmentâ€”for instance, automating the close process.
Many finance organizations had typically been in person before COVID, and during close, CFOs would walk down the aisle and learn what journal entries had been performed and what was still outstanding. Finance team members used to collaborate in person during the close, and what became a priority during COVID was still being able to close the books in the same amount of time, but more in a remote world. This drove companies to implement automation tools such as Blackline to help CFOs and finance organizations obtain visibility to the close and drive efficiency within the close process.
Other areas companies invested in were quick wins in terms of allowing employees to work more remotelyâ€”for instance, transitioning from cutting checks in-office to having the bank cut their checks, or working with vendors to move from paper invoices that would be sent to them in the mail to electronic invoices.
Some areas we've seen more recently are specifically around the supply chain. There's been a lot of unpredictability in terms of when goods are expected, and from a forecasting and budgeting standpoint and impact in terms of how much was expected to be sold versus what was actually in inventory able to be sold. Ultimately, across all industries, it seems as if talent from a retention and hiring standpoint is difficultâ€”and understanding what the future of work looks like going forward.
Organizations are still working on how to manage flexibility, and it's an evolving process that they are still trying to figure out.
MMG: All of that makes me wonder how prepared finance executives were to deal with these changes, especially coming from all these different fronts. You mentioned technology, but also supply chain and talent. Cody, how prepared were these finance executives, from what you've observed?
Cody Roth: That preparedness is dependent a lot on the executives themselvesâ€”whether they're strategic or transactional, as Kristen mentioned. So, transactional: pretty reactive, want to keep plugging away, solve some of the problems by throwing bodies at it, or just buying a technology they thought would help. The strategic, they want to look at their business more as a whole.
Once this new working environment was stabilized, it became an optimal time to invest and focus on how to improve your business. This wasn't limited to a transaction, necessarily, or where you are; you're able to do this at any stage.
Then with what's become a little bit of a war on talent, and these supply chain issues we're all experiencing, it's been an unprecedented time, and very difficult to plan. Strategic executives can see a holistic view of the company and understand the dynamics of it, how things are working together, how different employees are reacting to the new environment, and so on.
Some of the issues have been historical knowledge of the company itself. That's a difficult thing to transition and a very difficult thing to replace. And it's also led to less ties between the employee and the company. So that retention risk has really been front and center. And again, what Kristen said, (not) being in person has been really detrimental and a big change to finance organizations.
It's very easy to stand up and shout across a cube or go into an office to understand where people are and what's being done. It's been a complete shift on the way work is done, going from all-day workshops to splicing up some of the time and especially the time together. So that's been a difficult thing to balance when you're working from home or in a hybrid environment and aligning those schedules.
MMG: Going back to your point on supply chain, in a lot of ways this was unprecedented, and I wonder if this was a major learning curve for CFOs or if they essentially knew what they needed to do. But it became more of a resource question and not having enough people or technologies to manage some of the supply chain disruption.
Roth: Well, in a lot of organizations, the supply chain, I wouldn't say it was an afterthought for CFOs, but that was something the CIO or the procurement team handled, that finance kind of consumed. And now with planning and forecasting and having to understand when you can't fulfill a need, that's been something the CFO has really been pulled into and has to then balance their business, their expectations, their financial reporting as a result.
MMG: Both of you have touched on talent a little. We hear so much about the Great Resignation in a lot of different industries, and job functions are experiencing a shortage in the talent they need to run their operations. Within finance and accounting, I wonder what roles are most in-demand or hardest to find right now.
Oats: It's really a challenge at every level. If you think about slicing it between your more skilled, experienced, and entry-level employees, at your skilled level, you have your senior accountants, your controllers, CFOs. Organizationsâ€”especially that are remote or hybridâ€”need employees able to come in with the right skill set. If employees came in during COVID, they may lack ties to the organization. With the amount and volume of opportunities out there, it's easy for them to leave and not necessarily stay with the company as long as they may have previously.
On the entry-level side we've seen the pay scale compensation structure has changed, so companies are looking to adjust that. But it's the same, where employees coming in out of college or in more of an entry-level position may not feel as if they need to stay tied to a companyâ€”especially if they came in during COVID, because they don't feel as attached as they would have if they were actually there in person on a day-to-day basis.
MMG: In this environment of limited resources but high demand, what are organizations doing to bridge that gap?
Roth: Companies are focused on driving efficiencies, how you can do more with less, while also balancing burnout. That can be investing in technology to drive efficiency, or moving to a shared service or an outsourcing model. One thing we've seen in the market a lot is temporary staffing. That used to be bridging some gap and just reacting to a situation, and now it's becoming more of a norm with our clients.
Temporary staffing has been great in the past for some of that entry-level transactional processingâ€”just kind of throwing some bodies at one of the problems. And now we're hearing that they need more senior-level people, such as interim CFO, chief revenue officer, and so on. Organizations have and will continue to leverage third parties and professional services organizations to help support some of the larger strategic initiatives with these longer-term impacts and planning for the future.
MMG: What are some questions a business should consider as it decides whether it needs a permanent on-staff professional, or if it should utilize a temporary or fractional resource?
Roth: What is the need? Is it a short-term need or a longer-term need? Temporary staffing, historically you've had the opportunity to hire that resource full-time if you liked them and the need continued. They have a little bit more power in the business world these days because there's so much demand for it.
Is it just temporary? You've lost a lot of employees and you have to fill the gap and you don't want to hire just anyone that applies, you want to hire the right person. That could be a good time to use temporary staffing. Other times maybe you just can't find the resources out there or your pay scale isn't where you need it to beâ€”and you have to react from that budgeting and forecasting and need to fill in the gap while you're doing that.
MMG: All the challenges we've been talking about are happening against this backdrop of a heightened M&A environment in the middle market. I'm interested to know how these challenges are complicating M&A today.
Roth: They complicate it a lot. It kind of goes both ways. M&A can complicate issues as well. Your execution time on an investment is very fast-paced. We've talked before about this, where teams are already stretched, you're doing more with less. You want to retain talent. Now you're trying to balance the execution of their day-to-day job with this new transaction.
You're piling more on top of them, so that's going to just lead to more burnout. You're going to have to perhaps staff up. That's where temporary staffing could help. But youâ€™ve got to have the right people in place as well. And as you're doing thisâ€”using temp staffing or hiring quickly or reactingâ€”having a resource that has M&A experience that can help you go through this transaction becomes a substantial risk and an unknown.
Also, you lose a lot of that institutional knowledge of the company as employees move around and you have temporary people.
MMG: It's interesting, too, given that so many private equity investing strategies are predicated on the plan that they'll make a series of acquisitions within a really short time frame. But it's sounding like, if you don't have the right people or they're leaving the organization, it's going to make that all the more challenging, to achieve what essentially underscored the original investment thesis.
Roth: That's right. On top of that, the transactions are happening at a near-record rate. There's a lot of transactions going on in the business. It's a really good time to do that. Throwing the Great Resignation and retention and all these problems on top of that leads to some large risk potential in these investments.
MMG: Then looking toward post-transaction, Kristen, what types of improvements or changes related to the finance and accounting function should be made after a deal closes?
Oats: One of the main areas is around financial reporting and making sure the books can be closed for a private equity firm to get accurate and on-time reporting. Typically this has been a little bit more flexible in the past. So, understanding the financial close process. And it really is the result of upstream processes. It's not just a finance function, but very cross-functional, to close the books. So, understanding what are the data, systems, and processes involved and what can be improved to expedite the close.
Also top of mind is typically companies have a lot of data. So understanding what data is out there and leveraging the data and packaging it in a concise and effective format for stakeholders to gain visibility to real-time financials in order to drive revenue and manage costs is critical.
Other areas that we see private equity firms and companies focused on post-transaction is around investments in technology and RPA (robotic process automation). There's a lot of institutional knowledge, legacy systems and manual processes at organizations, versus private equity firms, are looking to build efficiencies. So standardization in the back office, both from a technology and a process standpoint are top of mind, especially with roll-ups.
Overall, there are two levers. It's either increasing revenue and stabilizing costs or decreasing costs while maintaining revenueâ€”or pulling on both levers. Evaluating the opportunities based on the PEG (price/earnings-to-growth) strategy is important in terms of determining how to get there. And as Cody alluded to, trying to retain people as you're driving these efficiencies and they have more to do with less.
Companies are trying to figure out how to make this work. It's a balance they're still trying to figure out.
MMG: Of the two levers you mentioned, I wonder if the stabilizing cost option becomes more challenging in a time like we're in now, where we have rising input costs due to inflation, imminent interest rate increases, salary increases. I wonder if businesses are going to be kind of forced into focusing more on that first lever.
Oats: Exactly. I think it's still an evolving aspect in terms of what the costs are going to look like over the next year and what the new norm is going to be, especially as we look at interest rates increasing and the impact in terms of compensation and what needs to be provided to employees, either from a hiring standpoint or to retain existing employees.
I think companies are going to need to reevaluate how they were looking at it in terms of are they actually able to stabilize cost as they originally thought or are there other levers they're going to need to pull.
MMG: Beyond what we've talked about so far, which trends within the accounting and finance arena should investors or operators be focused on through the rest of this year?
Roth: All the issues you're going to see post-transaction that are going to have more of a spotlight on we've hit on, I know with the retaining talent. A lot of times you don't know what you're walking into through the transaction process. You're having to quickly assess that at the front end.
You need to identify who knows the critical finance and accounting information. It might be one person knows everything, and that can cause a problem. If you don't have that person and you don't have a retention plan in place, you're going to have to document what's going on now to reduce risks and really help through the transaction going forward.
That's the target company having experience with the acquisition process. Have they gone through this before? That's why so many companies reach out to professional service organizations like RSM, because they may have people that have never done this or done this three times, whereas we have people doing this six to eight to 10 times a year.
So just kind of knowing everything that pops up, what are those first hundred days looking like? And finance and accounting is the ultimate consumer of all the changes and updates that happen through an M&A process. Having that finance and accounting leadership and representation is going to help them understand the downstream effects and the impacts on the business that someone in an operations role may not understand their decisions are making.
The finance and accounting challenges are somewhat dependent on the environment and the transaction. As Kristen alluded to earlier, you could just be getting acquired by a PE firm, and that's going to change the landscape of your financial reporting, make it much more complex. You may be measuring your business on 10 to 15 KPIs (key performance indicators), and now you've inherited a 96-page board deck to report on monthly, and that is a significant bandwidth issue for companies. If it's a merger of two like companies, how are you looking at the people, the processes, technology, dataâ€”how are you merging those? What do those steps look like to get there? And then you could be going public, so you're going to add regulatory and compliance issues on top of that.
On the talent, what we've talked about over and over and we're just seeing it so much is, what does the wage increase look like? What are those retention bonuses? Who do you need to keep in place and for how long? And how do you incentivize those employees to go through this transaction, and add value, while still doing what they're expected to do on a day-to-day basis?
MMG: Kristen, any parting thoughts, any things that executives or investors should be keeping an eye on in 2022?
Oats: I agree with everything Cody mentioned. The one point I would add is around the interest rate, in terms of pricing and how much is passed on to the consumerâ€”repricing of goods and services. Also, kind of on the flip side of that, what are the employee salary increases? What's going to be passed on in terms of the benefit to employees throughout this?
So that's going to be another variable from a budgeting and forecasting standpoint that organizations are going to be working for this year.
Podcast originally published by Middle Market Growth.
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This article was written by RSM US LLP and originally appeared on 2022-05-19.
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