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The (Overdue) Collapse of Bullsh*t Companies — Transcript

by The Invisible Game · 3,076 words · 493 segments · language en · Watch on YouTube

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0:00In December 2024, [music]
0:01the Australian government hired the
0:03world's largest corporate firm to give
0:05them advice on how to fix one of the
0:06country's most [music] pressing issues,
0:08an automated welfare system which
0:10penalized the nation's most [music]
0:12vulnerable. And after a rigorous 7-month
0:14brainstorm and $290,000
0:17in [music] fees, the results were back.
0:20However, there was just one issue. All
0:22the hard work that Deloitte had been
0:23doing had been done by AI. The report
0:26included fake references, fake quotes
0:29from a fake court hearing, and even a
0:31citation to trusted academic work, all
0:34of which didn't exist. While this might
0:36seem like a somewhat extreme example,
0:38these firms have been getting away with
0:40dressing up obvious advice and solutions
0:42behind extreme [music] price tags for
0:44decades. That is, until the last couple
0:46of years.
0:47>> The accounting giant PwC is facing an
0:49existential crisis. Revelations that its
0:51senior partners misused confidential
0:54government information to help
0:55multinational tech companies avoid tax
0:58has rocked the firm to its foundations.
1:00>> Round after round of layoffs are
1:02starting [music] to puncture these big
1:04companies. But while the problem is most
1:06acute with the Big Four, [music] the
1:08same problems are showing up across
1:09pretty much the entire corporate world.
1:12Bloated firms that have gotten away with
1:14overcharging for decades are seeing
1:15their [music] business model begin to
1:17fall apart. And while you might think
1:19that the industry is just another
1:20[music] victim of the AI revolution,
1:22while in part that's true, there's
1:24actually a lot more going on here. Over
1:27the past few decades, [music]
1:28corporate America has hollowed out its
1:30competition. But doing that comes
1:32[music] with its own risks, and firms
1:34are only now just starting to pay the
1:36price.
1:38Okay, so pretty much anyone who's worked
1:40a corporate job knows that these
1:41companies can be a bit of a joke these
1:43days. In 2014, in what should have been
1:46a routine audit, PwC managed to
1:48overstate Tesco's projected quarterly
1:51profit by 250 million pounds, almost 30%
1:55higher than what they actually brought
1:57in. And events like these aren't a
1:59simple one-off. Time and time again,
2:01these companies have made massive
2:02mistakes on what should be fairly basic,
2:04if lengthy tasks. However, there was
2:07actually a time when these kind of
2:08American corporations [music]
2:10were the envy of the world for the high
2:12quality of work that they would do.
2:14>> [music]
2:15>> The 1970s saw the birth of the modern
2:17era of multinational corporations. After
2:20conquering America in the decades prior,
2:22[music] companies like IBM, Coca-Cola,
2:25and Ford began building operations that
2:27spread to every corner of the globe. But
2:29that presented a unique challenge. How
2:31do you keep track of money moving
2:33through [music] dozens of countries at
2:34once when every single one of those
2:36branches operates [music] under a
2:38completely different tax code and a
2:40different set of accounting rules?
2:41Ideally, you'd have one trusted, [music]
2:43independent outsider who could come in
2:45and check the books the same way
2:47everywhere, no matter which country
2:49you're operating in, which is what gave
2:50rise to these. Originally known as the
2:52Big Eight, they were firms which
2:54specialized in verifying companies'
2:56financial statements. They sat at the
2:57very heart of corporate America, helping
3:00run the biggest organizations in the
3:02Western world. By the late 1980s, the
3:04Big Eight together controlled about 98%
3:06of all public company audits. But
3:08gradually, as time went on, firms that
3:10couldn't keep pace with their bigger
3:11rivals got absorbed by them. So by the
3:13start of the 2000s, only five of the big
3:16original eight were left. Now, in
3:18theory, it's not anything unusual for
3:20the worst-performing firms [music] to go
3:22extinct. After all, that happens all the
3:24time to smaller corporations in history.
3:26But problems start to emerge when new
3:28firms aren't able to come into the
3:29[music] market at all. And in a sector
3:31like financial auditing, that's
3:33exceptionally difficult. Imagine you're
3:35running a multinational corporation
3:36[music] that sells cars across Europe,
3:38and it comes to that time of the year
3:40again, and you need to do an annual
3:42audit. You're presented with two
3:43options: a new startup audit firm that
3:45nobody has ever heard of, or one of the
3:48same multinational auditing firm who's
3:50been checking your books for decades and
3:52probably does the same for all your
3:54competitors and most of the governments
3:56of Europe. [music] On the balance of
3:57probability, you're probably going to go
3:59with the latter. After all, this isn't
4:01really the kind of thing that you want
4:02[music] to take a risk on. The point is,
4:04it's a world built on reputation and
4:06that's exceptionally difficult to build
4:08from scratch. So, over the last couple
4:09of decades, we've seen this same effect
4:11[music] of consolidation play out across
4:13all sorts of industries in corporate
4:15America. Three credit rating agencies,
4:17S&P, Moody's and Fitch, [music]
4:19collectively control about 96% of the
4:22global ratings market, a dominance
4:24they've held for over a century. And
4:25it's the same for strategy consulting.
4:27McKinsey, BCG and Bain dominate not
4:30because nobody else can do the analysis,
4:32but because we hired McKinsey is a much
4:35>> [music]
4:35>> easier sentence to say in a board
4:36meeting than we hired a firm that nobody
4:39has ever heard of. Law, finance, [music]
4:41asset management, private equity, all of
4:43these industries are increasingly
4:45dominated by a smaller and smaller
4:47number of firms. And in practice, that
4:49means these companies can get away with
4:51offering worse and worse services
4:53because they know that their buyers
4:54don't really have any sort of
4:56alternative. [music]
4:56Now, big corporations across all sorts
4:58of industries have been getting away
5:00with charging huge prices for sub-par
5:02services simply because they control
5:05enough of the market. And the same thing
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6:02As the quality of the services which a
6:04lot of the country relies on continues
6:06to decline, something is eventually
6:07going to go badly wrong. And in 2001,
6:10that's exactly what happened. By the
6:12late 1990s, Enron was one of the most
6:14admired companies in America, an energy
6:16trading giant worth tens of billions of
6:19dollars on paper, and its auditor was
6:21Arthur Andersen, one [music] of the Big
6:23Five. And the relationship between these
6:25two companies was extremely lucrative.
6:27In the year 2000 alone,
6:29>> [music]
6:29>> Andersen earned $25 million in audit
6:31fees and an additional $27 million in
6:34consulting fees, both from Enron.
6:37However, behind the scenes, Enron was
6:39quietly hiding roughly $20 billion in
6:41debt off its balance sheet using a web
6:44of shell companies built specifically to
6:46make Enron look far more profitable than
6:48it really was. Of course, spotting that
6:49kind of manipulation was exactly what
6:51Arthur Andersen was getting paid for.
6:53They just completely failed. And when
6:55that came out, it cost the company so
6:57much that just 9 months down the line,
6:59they completely collapsed. [music] The
7:01trouble is, rather than learning the
7:03lesson from this that corporate America
7:05had become uncompetitive and needed to
7:07be broken up, the opposite ended up
7:09happening. Today, those four remaining
7:11audit companies audit every major
7:13organization in the Western world. Of
7:15the 500 biggest corporations in America,
7:18498 are audited by these companies.
7:20[music]
7:21And when a firm picked which company
7:22they're going to go with, it takes them
7:24an average of 23 years to change once.
7:27This is BCE Inc.,
7:29>> [music]
7:29>> Canada's largest telecommunications
7:31company, and it's been audited by
7:33Deloitte for 144 years. [music] Now,
7:35that might sound like a recipe for
7:37subpar service, and in many ways it is.
7:40But [music] as long as these firms could
7:41maintain the illusion of prestige, it
7:43just about works. The problem is, after
7:45decades of charging millions for orders
7:48that [music] aren't even accurate,
7:49people do eventually start to notice. In
7:512022, regulators found that 43% of EY's
7:55[music] orders had what they called a
7:57deficiency. Essentially meaning that the
7:59auditor didn't even gather enough
8:00evidence to actually support the opinion
8:02it was signing off on. The following
8:04year, they were forced to walk away from
8:0684 audit clients, giving up $215 million
8:09in fees. And it's not just them, either.
8:12Regulators found that the average
8:13deficiency rate across all Big Four
8:15firms more than doubled in just 2 years,
8:18from 12% in 2020 [music]
8:20to 26% by 2022. Given that, it's hardly
8:23surprising that firms are increasingly
8:26choosing to bring in what they call
8:28in-house, or moving these services out
8:30to smaller firms. And this isn't just an
8:32audit story. It's the same pattern
8:34playing out right across the corporate
8:35world. These giant firms spent decades
8:38building themselves [music] into
8:39effective monopolies on the back of the
8:41idea that what they did was so
8:43prestigious that nobody would ever
8:45seriously challenge them. However, the
8:46problem is, once they became safe, the
8:48quality began to quietly slip year after
8:51year, until eventually the firms that
8:53were supposed to be the kind of gold
8:55standard in the industry
8:56>> [music]
8:56>> are now the ones that are rubbish and
8:58don't even do the job they're paid for.
8:59Now, it's important to remember that a
9:01big part of why these firms were able to
9:04dominate for so long wasn't just their
9:06reputation, but the scale of cheap,
9:08high-quality labor that they could
9:10attract. [music] For decades, the best
9:12graduates from the best universities
9:14funneled straight into some version of
9:15accounting, law, or finance almost by
9:18default. At Harvard, roughly 57% of the
9:21class of 2022 went straight into
9:23finance, consulting, or technology. And
9:25that made it insanely hard for smaller
9:27firms to compete with them, as their
9:29name brands just didn't have the same CV
9:31attraction for fresh grads. But, ever
9:33since the introduction of AI, that
9:35advantage has been massively eroded. The
9:38very same tasks which gave these massive
9:40firms a competitive edge are exactly the
9:42kind of work that AI massively speeds
9:44up. [music] Data extraction, pattern
9:46matching, document review. The actual
9:49grunt work [music] that used to require
9:50armies of junior staff can now be done
9:53faster and cheaper by software
9:55supervised by a smaller and smaller
9:57team. And perhaps most critically, none
9:59of this groundbreaking technology is
10:01exclusive to the old corporate [music]
10:03giants, which massively reduces the
10:05barrier to entry to compete in the
10:07market. Okay, so the sudden introduction
10:09of AI, along with the fact that the
10:11services the Big Four were providing
10:12just weren't that good, has meant that
10:14the companies have been bleeding clients
10:16for years now. But there's actually an
10:18even bigger threat to these companies
10:20which might bring them down even sooner.
10:22Government antitrust. Starting in the
10:241980s, what was then the Big Eight
10:26realized something very important. Given
10:29how good their reputations had become,
10:31they didn't just need to sell an actual
10:32service. [music] Instead, they could
10:34simply sell advice. That's what gave the
10:36rise to corporate management
10:38consultancies as we all know and love
10:40today. Deloitte Consulting, [music]
10:41PwC Strategy, EY Parthenon, and KPMG
10:45Advisory. They all almost exist as a
10:48branch of these original auditing firms.
10:50By 2023, the Big Four were pulling in 95
10:53billion dollars from advisory services
10:56alone. More than the 66 billion that
10:58they made from audit and assurance
11:00combined. But it also presents a bit of
11:02a problem. Remember, the job of an
11:04auditing company is to independently
11:06verify that a company's financial
11:08statements are accurate. At the same
11:10time, the job of a consultancy is to try
11:12and improve how that same company runs.
11:15In effect, you've got the exact same
11:17company doing the [music] job and then
11:19evaluating how good a job it's done.
11:22It's like marking your own homework.
11:24This creates massive incentives for the
11:26auditing side of the business to sign
11:28off on the books a little too generously
11:30in order to make them seem like the
11:31consultant's advice is working better
11:33than actually is. And at the same time,
11:36the people doing the audits get access
11:38to a huge amount of confidential
11:40information, much of which would be
11:42extremely profitable for consultants to
11:44quietly use to win new business or
11:45advise clients' competitors. Of course,
11:48doing so would be totally illegal. And
11:50in theories, these companies all have
11:52its strict internal Chinese walls to
11:55prevent this from happening. But as you
11:56might have expected, they aren't
11:58particularly effective. In 2013, the
12:01Australian Treasury hired a PwC partner
12:03named Peter Collins to help advise on
12:06new laws designed to stop multinational
12:08companies from dodging tax. He signed
12:11three separate confidentiality
12:12agreements, but he then shared that very
12:15same confidential government information
12:17with at least 53 PwC partners who used
12:20it to help clients, including Google,
12:22get ahead of a law PwC itself had helped
12:25designed. This kind of thing has been
12:26going on for decades across the Western
12:28world. And once a firm becomes
12:30successful enough to expand into several
12:32branches of the same industry, the
12:34temptation to use information it
12:36shouldn't really have to boost its
12:37position in both directions becomes
12:39almost impossible [music] to resist. But
12:41it does seem like governments might just
12:43be starting to notice. Following [music]
12:45the Australian PwC scandal, the company
12:47was forced to sell off its entire
12:49government consulting business for just
12:51$1. [music] And in the UK, from 2024,
12:54all four firms had to operationally
12:55separate [music] their UK audit
12:57practices from the rest of the business.
12:59Even the US, known for being the poster
13:01child of free market capitalism, has had
13:03Senate considering a breakup. For these
13:06businesses, getting split up this way
13:07would be totally detrimental for one key
13:09reason. Both sides of the business rely
13:12on each other. Consulting is clearly the
13:14main profitable arm, and in 2023, the
13:17Big Four alone generated $95 billion
13:19from advisory compared to $66 billion
13:22from audit. But it only exists in its
13:24current form because of the credibility
13:26and client access that auditing has
13:28built up over a century. If you cut
13:30those things out from each other,
13:31chances are that both sides would end up
13:33doing a lot worse. And even if Western
13:35governments don't get involved, the
13:37quality of consulting services has
13:39dropped so much that it might not really
13:40matter. [music] Take a look at this
13:42slide from 2016. It's a key deliverable
13:45which McKinsey would have charged
13:46thousands of dollars for. And for the
13:48money, they get words like this:
13:50"Develop value-creating partnerships.
13:52Build a clear mission. Develop
13:54strategies to create a
13:55sustainable-related opportunities."
13:58These words are the output of millions
14:00of dollars,
14:01>> [music]
14:01>> and it's not like they actually mean
14:02anything. But with a fancy graph and a
14:04complimentary color tone, it seems like
14:06the advice must be valuable. Of course,
14:08you can only play that game for so long.
14:10By 2024, only 13% of businesses felt
14:14that consultants were actually doing
14:15more good than harm. Slowly but surely,
14:18firms and governments alike are
14:20beginning to cut contracts with these
14:21companies. And once the branch of the
14:23business that was propping up the entire
14:25operation starts shrinking, that puts
14:27the entire operation under massive
14:29pressure. Okay, so all of this raises an
14:31important question. What actually ends
14:33up filling the space they leave behind?
14:36The most obvious option is that large
14:37companies simply stop outsourcing this
14:39work altogether. If the main value the
14:41Big Four provided was cheap,
14:43high-quality labor to do data extraction
14:45and document review, and AI can now do
14:47most of that work internally. And then a
14:50company doesn't really need to pay
14:51millions of dollars to a consultancy
14:53just to get an outsider's opinion on
14:55something its own staff could generate
14:56in an afternoon. At the same time, it's
14:59also very possible that we see a wave of
15:01smaller boutique firms start to compete
15:03seriously for the first time in decades.
15:05AI is quickly closing the gap in output
15:08quality between a firm with 300,000
15:10employees and a firm with 30, meaning
15:12that the size of your head count stops
15:14being the advantage it used to be. And
15:16the third, perhaps most disruptive
15:18possibility, is that the work stops
15:19requiring a firm at all. Historically,
15:22one of the reasons you needed a firm,
15:24rather than a single expert, was that
15:25any serious piece of consulting [music]
15:27or audit work required more labor than
15:29one person could physically produce in a
15:30reasonable time frame, which is why
15:32these companies were built around armies
15:34of junior staff supporting [music] a
15:35smaller number of partners. If AI can
15:37now do the bulk of that supporting work,
15:39then a single experienced professional,
15:41someone who spent 15 years inside one of
15:43these firms and understands exactly what
15:45clients are paying for, could possibly
15:47deliver the same output on their own
15:49without needing hundreds of junior
15:51employees behind them. This would create
15:53an entirely new category of competitor
15:55[music] that doesn't really resemble a
15:56firm at all, made up of independent
15:58consultants who can undercut the Big
16:00Four dramatically on price simply
16:02because they don't have the overhead of
16:04a firm to support. Of course, none of
16:06these outcomes are mutually exclusive,
16:07[music]
16:08and it's entirely possible that all
16:09three end up happening at once, chipping
16:11away at the Big Four from different
16:12directions simultaneously. What does
16:15seem fairly clear, though, is that the
16:16model which dominated corporate America
16:18for the better part of a century is no
16:20longer guaranteed.

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