Your firm prides itself on its technical expertise and client service. You recruit the best employees and invest heavily in their training and development. You instill a culture of excellence in every area of your practice. You’ve even built several niches of industry expertise.
Despite your efforts, the high costs of fee compression and client turnover, combined with the high costs of an increasingly expensive workforce, are forcing many firms to consolidate in order to survive.
Consolidation, however, won’t fix the structural misalignment within the industry in the long term. A conflict has developed between the natural operating structure of the accounting industry and the operating structure that the industry is unintentionally adopting because of market pressures.
DEFINING THE DISCIPLINES
In the 1995 book The Discipline of Market Leaders, Michael Treacy and Fred Wiersema explain that every successful company positions itself as a leader in the marketplace through one of three value disciplines: product leadership, operational excellence or customer intimacy.
Whichever value discipline a firm selects, it must align its entire organization around that discipline, including its operational and organizational structure, management and strategic development, systems and processes, branding, people, and incentives, among others. If any components are misaligned with the selected discipline, the organization will struggle to reach peak performance.
Of the three value disciplines, product leadership has the least relevance to accounting firms, as CPA firms are typically not designed to be introducing new services on a frequent basis.
At first thought, operational excellence might seem to be the key value discipline for accounting firms because of the standardized processes that firms can develop and scale for audits and tax returns. To succeed, however, this value discipline must allow the firm to create market differentiation. Since accounting firms are so highly governed by industry standards and regulations, it is typically not feasible to create competitive advantage based on operational excellence. Furthermore, the supply chain of a firm is primarily its workforce, which is a highly competitive market. So it is unlikely that any firm will be able to create sustainable advantage through a lower-cost workforce than its competitors.
That leaves customer intimacy: the natural value discipline that accounting firms should be cultivating. It doesn’t require a big investment in product development, systems, processes or supply chain other than the investment the firm is already making in order to be competitive. It merely requires a different mindset and a new approach to creating deeper relationships with clients.
TORN BETWEEN MODELS
The conflict in the profession today is that the market is forcing CPAs into an operational excellence value discipline by its constant pressure for lower fees, which conflicts with the customer intimacy discipline that is aligned with the natural operational and organizational structure of the profession. If that misalignment is present in your firm, you will likely encounter lower profitability, and higher client and employee turnover,.
What’s the solution? The CPA profession must shift the market perception back to the days when CPA firms were viewed as business consultants as much as auditors and tax preparers. That’s when intimacy with and service to customers was the rule, price was not the deciding factor in selecting a firm, client retention was high, and prospective employees actually competed to even be considered for a job in a high-quality CPA firm.
What can CPA firms do today to change their individual market positioning? Firms that can provide “value-growth” services to their clients will be able to preserve their customer intimacy value discipline in the face of market pressures.
Value-growth services are designed to help clients maximize their future value. The process begins with an enterprise-wide assessment of the client company, in order to gain a full understanding of its strengths and weaknesses. The assessment is followed by a multi-year relationship of advising the client on initiatives to strengthen its ability to support long-term sustainable growth and reach peak performance.
The process can be incredibly transformative to the client’s growth, profitability and overall value, while generating substantial new revenue streams for the CPA firm and fulfilling the customer intimacy value discipline that will help to align the firm’s market position with its operating systems.
Consider this widely accepted customer relationship hierarchy: At the top are trusted advisors, followed by solution providers; in the bottom half are value-added suppliers, and at the lowest point are product vendors. Most CPA firms and, indeed, most consultants, live in the bottom half of the hierarchy as value-added suppliers. Even though they meet or exceed client expectations and their clients are satisfied with their services, they remain on the defensive and must continually compete on fees. This is where companies that follow an operational excellence value discipline can thrive, but not CPA firms. It’s a terrible place for professional service firms.
At the top of the hierarchy are the most trusted advisors, those who have the loyalty of their clients. Firms that live there are not on the defensive and no longer face price as a critical factor. The only barrier to CPA firms moving to the top is their reluctance to do so. All it takes is the willingness to move slightly outside of your comfort zone, and open up your client conversations to include all of the functional areas of their business. Your client’s perception of you will quickly change to that of a broad-based business advisor, rather than a commodity service provider.
Although it may require some investment of time and resources to establish a value-growth services practice, the investment is likely far less than the annual costs associated with replacing lost clients and employees, and it has the potential to double the annual revenue generated from any particular client compared to audit and tax services alone.
Clients need, and are seeking, value- growth services, and such services are a natural fit for CPA firms. The market opportunity is wide open, and the time is now.
Kenneth J. Sanginario, CPA/CGMA/ABV, CVA, CMAP, CM&AA, CTP, MST, MSF, is the founder of Corporate Value Metrics, and developer of the Value Opportunity Profile, a cloud-based platform designed to help advisors to maximize the value of their private company clients by providing value-growth services.
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