For the past two decades, I have watched accountants price services based upon the cost of labor plus a desired profit. This is the effort-based economy trap. About 15 years ago, we developed a pricing matrix for consulting services in an attempt to capture the perceived value of the services in the eyes of our clients. We coupled this with a strong engagement letter that clearly defined the scope of our services; in addition, we utilized change orders as engagements expanded.

Industry experts believed that model was fine for us, but said that it would not work in the accounting profession. Many of those same experts have cited similar reasons why value billing won't work, and re-iterated the importance of the time sheet to Ron Baker.

Baker has been a researcher, historian, writer and lecturer regarding pricing in our profession for well over a decade. During that time I have been enrolled in Dan Sullivan's "The Strategic Coach Program for Entrepreneurs." Seven years ago, I was one of the first to enroll in the program, which focuses on how to leverage unique processes and package intellectual capital.

Every firm possesses intellectual capital, but most don't capture and value it, because accountants have been taught to value effort in a cost-plus pricing model. As Baker points out in his book, Pricing on Purpose, intellectual capital can also be negative. Old methods that hinder people from achieving full potential are negative, and cost-plus pricing is a specific example.

INNOVATION HERALDS TRANSFORMATION

Joseph Schumpeter, an economist and political scientist who taught at Harvard until his death in 1950, defined the term "creative destruction" - a process of transformation that accompanies radical innovation. I have learned a great deal from Sullivan about the topic, and I believe the accounting industry is not exempt from this principle.

A depleted industry is characterized by commoditization and increased internal and external regulation. Regulation continues to increase in the accounting profession (e.g., Sarbanes-Oxley, NASBA and new auditing standards). Industry transformers design ways with intellectual capital and unique processes to bypass the depleted industry, to differentiate themselves and create an emerging industry. From an emerging industry comes a growth industry, and from a growth industry comes a status industry. The life cycle used to be decades, but with technology and globalization, the industry life cycle can be shortened.

Learning is generally easier when it involves another industry, so Sullivan cites the automobile industry as an example. General Motors has over $2,500 of legacy costs in every car. They have brands that cannibalize each other, and have dumped thousands of cars into rental fleets. This has destroyed their perceived value in the marketplace. One can say that the same has happened in the accounting profession. Not only has it caused commoditization of services from the client's perspective, it has caused existing talent to leave the profession.

The old economic model of pricing based upon cost-plus has limited the accounting profession and is responsible for a lower perception of value in the market. Clients and entrepreneurs often have a different idea of value than what is taught in accounting classrooms and in many firms. Along with an aging population of CPA partners, the current environment provides a "perfect storm" for industry transformers who can create value in the minds of clients.

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