The Great Realization: Keys to Achieving a Modern Business Model that Unlocks the Future of Work (2021 Stansberry Conference & Alliance Meeting)

Joel Litman [00:00:00] I get to introduce a great friend of mine named Miles Everson. I met Miles many years ago when he was the global head of consulting and advisory for PricewaterhouseCoopers. So he was the head of PWC, which actually means that he was the head of one of the biggest professional services firms, one of the biggest consulting firms in the world. He had been a PWC for like 30 years of his career, starting out just as an accountant and then going into becoming the head. At one point, PWC had sold off its consulting group, which was there left after selling off all the pieces, maybe with $500 million of consulting, and Miles and his team helped rebuild it to this amazing firm that it is today, which is another 11 to $12 billion in revenue. And He says to me a few years ago, he says, "Yeah, I'm going to retire." and I said, "You're going to retire. You're only 53 years old. What are you going to do for the rest of your life?" He said, "No, I got something bigger in mind." I said, "Bigger than having achieved being the head of PWC consulting?" He goes, "Yeah, something bigger." And that's what he is going to talk about now. He's also a user of uniform accounting, as you might imagine and he was also a longtime Stansberry subscriber like you, and also our first-lifetime partner for Altimetry. So anyway, please join me in a warm welcome for Miles Everson.

Miles Everson [00:01:32]  Thanks, Joel.

Miles Everson [00:01:32] Well, good morning, and thanks for spending time today. How many people have heard about the great resignation? Well, I'm going to share with you some stuff today that I think it's a lot more about the great realization than it is the great resignation. And that's not just a play on words, because I'll go through some trends that I've been tracking for about a decade because as you might imagine, I managed a very large human capital team, excess of 60,000 people globally, and I've been on these trends for a long time trying to understand what it meant for the future work for myself and for society in large. And there are some very significant trends that are not temporal, that are happening, that are really going to change the way you generate returns in the future.

Miles Everson [00:02:25] So let's get into it, the 4 trends that I've been tracking for a long time. The 1st one has to do with the Rate of Change is Accelerating. I know that's not a news bulletin to people in this room, but the significance of the rate of change accelerating is that the rate at which innovations are coming out is also accelerating and when innovations converge, you get demonstrable impacts on society. Let's just play one that everyone is thinking about these days. Artificial intelligence is invented in 1956. After about 3 attempts to get mass adoption of artificial intelligence, we finally got it in the 80s and that adoption was in the world of electronic trading. Why could we do that? We're able to do it because of innovations in technology, data storage, data organization, data movement. Without that, A.I. failed on every attempt. So I'm sitting here now in the mid-80s, and we're using it for electronic trading. Only 20 years later, A.I. is now being used in smartphones. Why is that? Bandwidth on communication networks, nanotechnology, mobility technology, its independent innovations that converge and allow us to put a billion-dollar computer in our pockets? Which ties to the 2nd megatrend that's happening, which is Progress is Deflationary when it has a societal impact. Who would have thought that you could be carrying billion-dollar computers in your pockets by billions of people on the planet? We're only talking about 20 years ago, folks, not even.

Miles Everson [00:04:41] Another example, take the Genome Project cost $100 million to decode the genome in 2000. Today, you get it done for less than a thousand dollars at scale. Progress is deflationary when it has a societal impact. We're going to continue to see this and it's going to happen at a faster and faster rate. So now let's go a little bit closer to home on the topic of talent and human capital and this is the Power of Knowledge Flows. In the industrial era, the strategy was always, I'm going to get my intellectual property, I'm going to keep that is a secret recipe, and then I'm going to sell it mostly in binary transactions. But today, knowledge flows, which is I open up my questions, I open up my technology to get more people thinking about it and solving for it. I would argue that the most innovative technologies on the planet today are coming from open source technology.

Miles Everson [00:05:50] That's the power of knowledge flows. GitHub, roughly 50 million people working on 30 million projects during development. You would think that you would only do that for one company because the tech development is so proprietary. GitHub works for every large tech company in the world. That's knowledge flows. It's no longer about protectionism.

Miles Everson [00:06:18] Protectionism rarely works in the long term, which now gets me to the 4th one, which is the Fractionalization of Everything. The first tracing that I can see of the fractionalization of everything goes back to. It's a couple of hundred years at this point, but it's the East Dutch India Trading Company. So what happened for those of you that aren't familiar with it is an individual investor would finance a ship of goods to go to a destination and too frequently because of storms or disease, those goods would never get to the destination. So you have a 100% loss. So a few folks got together and said, well, instead of me backing just 1 shipment, why don't 5 of us get together and we take 20% of 5? Sounds a lot like risk diversification. It's a couple of hundred years ago that's where it was invented and then we saw all kinds of fractionalization. I would argue that traded equities, traded bonds, traded commodities are all fractionalized assets. The one asset that was fractionalized in this country, that is fueled our economy for the last 40 years, is homeownership. If I was sitting in a room with people that don't have the wealth that sits in this room, and I said, how many of you own your home? 80% of the hands would go up. I'm sorry, I should have been more specific. How many of you have the title or the deed to your home? Right? So in this room, there's a lot in the typical room, it's less than 25% of the people. Why is that? It's because we fractionalized homeownership through these things, called mortgage-backed securities starting in the 80s, and it has fueled the US economy. Liquidity in markets, boats rise. The good news for those people that don't own their own home or don't have their own deed is they probably are invested in an asset-backed securities somewhere in a fixed income or a balanced fund. That's a positive note.

Miles Everson [00:08:48] So I hear a lot of people talk about the pandemic and they say, well, it's changed remote work and that's why there's a whole bunch of people now that are choosing to be independent and are going to get to some specifics on this in a moment. But what's happening well before the pandemic is that we began to see the start of the fractionalization of the workforce no longer being just full time employees. That's why I left where I was and I came to do what I'm doing today. Because if once you fractionalized that asset class, the human capital asset class, people are going to get a better way of life, it's going to improve their well-being, and companies need to fractionalized because a full-time dedicated workforce is no longer sufficient in terms of attracting the best talent. So you've got both sides are working at this. What the pandemic did do, we haven't been able to prove cause and effect, but there's high, high correlation between societal acceptance of remote work and the use of independent professionals in a workforce. We'll see it over time, how it flushes out, there's just not enough data yet, but it's high high because the expectation of how you do work has changed. Another topic to touch on here on the remote work is there's the group of folks now that are workers that are referred to as digital nomads and a lot of people think that those are young kids that go to the islands and surf in the morning and work in the afternoon. Well, I'll tell you, it's a lot more than that. United States today there's 15 and a half million people that call themselves digital nomads. That's up 42% from 2020 and the logical response is, well, of course, it is, Miles, because everybody had COVID. So they went they decided they could go be digital nomads. Well, it's up 112% since 2019. It's not a short term pandemic trend. It just got the attention. I would argue that the pandemic, as it relates to the workforce, has accelerated remote work somewhere between 5 to 10 years. The technology was already there. The limitation was cultural acceptance of remote work. The human is the constraint, not the technology.

Miles Everson [00:11:19] I hear a lot about. We got a problem with A.I. automation. It's going to eliminate all the jobs people are going to have work to do. We have a human scarcity issue, not a human abundance issue when it comes to work. In the United States, there's a number of factors at work here. In the United States, we're at the lowest growth of population that we have been since the 1700s. Three million baby boomers retired this year. The best thing for baby boomers that are healthy and want to work is you are really scarce. You're in high demand. There's a company named EMSI (E.M.S.I) that is a data and economics firm that deals with talent. They published a report called The Demographic Drought about 6 months ago. In that report, they're estimating that the labor shortage in the United States is somewhere between 6 and 7 million people today. You say, let me think about this, I got a labor shortage of 6 million people. I got the lowest participation, in the labor participation that I've had in decades, which since 1970 were about 65, 61.5% labor participation rate and unemployment sits at 4.8%. Yet I'm still short 6 million people for these jobs. We don't have an issue of technology taking away jobs. We have an issue of not enough people to fill the jobs that are going to get done. Technology amplifies humanity. It will not replace it.

Miles Everson [00:13:16] So let's dig a little deeper in some of this data. The Employer-Employee Bond is Broken. In 1980, 60% of private companies in this country offered a defined benefit retirement plan. Today, as of May, 3% of American workers working for private companies have a defined benefit plan. That was the start of the break in the bond. Now we could debate whether those defined benefit plans were financially smart or not. But the reality is they were here. They're gone. It broke the loyalty that an employee had. You look at the stats in front of you right here. If you are under 45 years old in the United States, you will change companies on average every 4.1 years. If you're under 35, you will change companies every 3 years. Who thinks the United States is going to have a permanent workforce for any company? The full time employee model for human capital management is dead. It's not going to go away in its entirety, but if what you're relying on is your only, CEOs all the time, "I'm hired the best and brightest." No, you don't, because there's over 50 million Americans that choose to be independents. They're not even on your radar screen. That doesn't count all the people that are working for some of the business process outsourcing firms. By definition, you can't make that statement. Just not true.

Miles Everson [00:15:11] So this is a little dance chart, and I apologize for that. It's more data, this is from the Bureau of Labor Statistics and what this shows that little tanner-orangish color on the bottom is the new business applications. By people that had a high propensity to employ others. The gray is those new business applications by people that had a low propensity, i.e. likelihood to employ others so solo entrepreneurs, they want to incorporate, they want to start their own business, whether it's product services doesn't matter. What you can see is that the orange line on the bottom has ticked along since 2006 to the last 15 years, basically at the same level until the pandemic hits and then you see some volatility in there. It is the gray section where you see demonstrable change. It was taking a line between 75 and 100,000 applications a month for about 12 years. Then you start to see it spike up. But look what you see, in '20 and '21, you go from averaging about 100,000 new business applications a month to over 500,000. People are choosing to be independent professionals, they're starting their own businesses. So the question is, where are those people going that change companies every 4 years or every 3 years? Well, the current data tells us they're going to go start their own business. They're not going to be available to go to work for a company. They've gotten a taste of what it feels like to control their own day. It's very different than what it was.

Miles Everson [00:17:12] So the company I'm with today is a company called MBO Partners. We've got the longest-running research on the state of independent consultants in the United States, just over a decade of research on it and publishing for over 10 years. So this year, what we saw was this is the great realization I talk about. 2021 we're up 34% for independent professionals in this country in 1 year, up 34%. Then you say, well, OK, I had COVID probably up, get it. 68% of that growth was in millennials and Gen Zs. For the last 30, 40 years in this country, independent contractors, professionals, contingent workers, whatever name you want to put on them were largely people that had worked 2, 3, 4 decades, quasi retired, they're going to do some consulting gigs on the back end. That's not what's happening now. The Gen Zs are declared as the most entrepreneurial generation in this country, and we're seeing it in our numbers. These numbers at 34% increase, so over 51 million people. They are independent professionals in this country. It's a 3rd of the US workforce. The other encouraging thing is, and this part of the reason I came to do what I'm doing now is to give access to more people to the economic flows. So what you see is the growth is 55% are being driven by women coming back into the workforce as independents. So these happen to be the current statistics for this year, but they're effectively the same for the last 5 years, and here's the story. 87% of independents say that they're happier than when they were full-time employees. 78% say they're healthier and 2/3 say they're more financially secure. That's shocking. If you're an independent, the best independents, they basically have a half dozen or so clients that they work for. So what did they do? You're back to diversification. They diversified the income stream for their household, and they're not beholden to that manager they don't like or that company that decides they're going to do a merger, etc., etc., etc. They control their own destiny and because they control their own destiny, they're actually happier. Like, who doesn't want to be happier, healthier, and more financially secure? What's interesting about finance being more financially secure? We don't have the data on it, but from my conversations with them, I think it's just because they have a much higher financial acumen. Because they need to figure out how they're going to get work, how they're going to pay the bills next month. They're not relying on anybody else for their retirement plan. It's on them, they own it and the point I made about the millennials and Gen Zs that 68% growth of the 34, that front end of the funnel is now pushing through. So as the baby boomers retire, we're going to see these rates skyrocket in terms of the number of people that are working as independents.

Miles Everson [00:20:49] I've got 5 predictions for you. What's going to happen as it relates to the workforce? Number 1, we will see the fractionalization of the human capital asset class accelerate. I know some people might think that me calling the human capital or people an asset class is a bit crass. But when you're talking about how you're going to get a return, how are you going to get productivity in a company, you've got to view them as a resource you're deploying, and am I getting a return on that? Joel was up here 45 minutes ago, an hour ago and talked about how you record assets and the GAAP doesn't reflect the assets. There's no asset on the books for my human capital. It's an expense. In fact, when there is something on the books, it's a liability because I got a liability for vacation pension accruals. It's not an asset, it's a mismatch in the financial numbers that are reported. 

Miles Everson [00:21:52] The 2nd prediction here is global wage scales normalize for many white-collar workers. We're seeing it today and when I say it because of remote work, because of all the innovations in technology that they asked, I'm going to use developers as an example. If you're a great JavaScript developer and you live in, I'm going to just pick India. You will make about 20 to US$25 an hour for your work. A JavaScript developer in the United States will take about $100 an hour. Well, if I don't care where they work. A 5% compression on the U.S. wage is $5. That same $5 is a 25% increase in the take-home pay for the person working in India if they're an independent. I'm not suggesting we're going to see an equilibrium anytime soon. I am suggesting that we will see compression in certain white-collar job classes.

Miles Everson [00:23:11] So my 3rd prediction is that politicians will pursue protectionist and tax revenue policies. One of the largest sources of tax revenues is wage taxes and income taxes and so we know that they're going to do, so protectionism, you've seen it in some of the California AB5 stuff that's come out. AB5 is a rule that basically says everybody should be classified as an employee. There are 2 schools of thought. One school of thought is they should be classified that way because the big guy, the corporation is picking on the little guy, the unskilled person, and taking advantage of them on these tech platforms. The other argument or thought is that it's because the government wants a consolidated tax collection system in place, so you can't paint all workers with the same brush. Because I'll tell you, people that write on my platform are making 200, 300, some making over $1 million a year, their PhDs. They don't need a government bureaucrat telling them whether they should be an independent business or whether they should be an employee. Tax revenues already we're seeing it's happening in certain countries. So in Brazil, if you offshore work, just offshore services work. When that bill comes into Brazil, it's got a 40% back tax on it and they're doing it because they want Brazilians doing the work and if they're not going to do the work, then the foreign use of that service, they're going to pay the tax.

Miles Everson [00:24:57] So I talked about this a minute ago, but the next prediction is that the balance of power accelerates to the worker. As a corporation, I no longer give them any handcuffs. Back in the industrial era, how did workers get power? Organized in unions. Who needs a union to organize today? You can organize in 5 minutes on social media platforms, and you need to look no further than the last presidential election to see how fast workers can mobilize to influence society and companies' decisions. The balance of power is going to accelerate to the worker and when you're good at what you do, you have those 5, those 6 clients you get to pick which ones you work for and if some of them are rude, they don't treat you fairly, you'll just pick another one. Because there's scarcity and because you can. Innovations have made it possible to do this, and it's societally acceptable to work remotely, to communicate asynchronously. Just to be clear, synchronous communication is when we're communicating back and forth, real-time, asynchronous is when you don't have to do it immediately. We're doing massive amounts of asynchronous communication in the world today. Our education system effectively had to do it during the pandemic. That change, that's going to be a societal change that will last forever. So the last prediction here is that by, all of our research and analysis tells us that by 2025, over 50% of Americans will have worked as an independent during their career. That's only 5 years out. You go further out, it's going to be a much higher percentage. So you'll have half of your workforce that you're trying to attract. That identifies themselves as an independent, not as an employee. So how do you possibly deal with this if you're an enterprise? You can't ignore it. I mean, every company you talk to. I don't have enough of the right people. Nobody can get enough of the right people. It's because they're fishing in the wrong pond. They think people mean that they want to be employees. They don't. So I had Joel's team before I came to MBO, I said I have this thought, but let's pressure test it. Can you tell me if there's any type of correlation between the creation of enterprise value and the relative share of independents to full-time workers? Look, let's look at the data was what I was trying to do and so 2 years ago in the same industry, those companies that had a higher relative share of independents versus full-time workers, thousand basis points better on enterprise value. They ran it again for me in July, 1,400 basis points higher. That same sector competing against each other. Just what's the relative share of independents? You could say it another way and what share of the workforce are owners of their own business with an entrepreneurial spirit? It's not just classification for tax payment, it's the way people are wired, and are you tapping into the people that are actually entrepreneurials? We started at Amazon. They said they were going to give people US$10,000 to start their own business. They happen to get it and they have a very high percentage of independent workers. So I do have a couple of stock picks here for you.

Miles Everson [00:29:19] I'm not a stock picker by background, but working with Joel and his team, we identified 3. So the 1st is Cognizant. Cognizant unleash the power of outsourcing. They did it when people were basically doing outsourcing to arbitrage wage between, you know, different economies. What you see here, it's rated in their cost of capital. I mean, their return on assets, as reported, is basically 10% return on unadjusted are on assets on a uniform basis is in the 30s. They've now started to lay in more technology. But think of this is, they're part of the extended workforce of an enterprise. My next one, Excel services. They're doing this in insurance companies. So they've taken in, they offshored and then they automated in insurance companies and if you look at their numbers, you go back. Fact, these guys are up over 100% this year and you can see that as reported versus the uniform. As reported, they look like their return on assets is 5%, when in fact, it's more like 30%. The GAAP financials aren't reflecting this, and then the third one that I had is I don't think that they're so much a company that has focused on themselves using independence as an advantage. But they make a lot of money helping other companies deal with the leadership issue and recruiting people that are going to set the stage for them for the next several years and that's Korn Ferry. So with that, I thank you for your time and I'll get out of the way.