The cover story of the April 2010 edition of CFO Magazine was "Auditing Your Auditor." Firms were in the throes of fierce pricing pressure, telling horror stories of ruthless underbidding and price gouging. Clients who'd been well-serviced for decades started looking for cheaper alternatives ... and found them.

A few weeks ago, I showed the cover of this magazine, now 28 months old, to a group of firm leaders from the U.S. and Canada and asked, "How is the pricing pressure now?"

"Still there," was the overall consensus.

And with even tighter auditing regulations, I predict that fee pressure -- from clients and competitors -- will persist for some time to come.

That's because audits, like taxes before them, are being commoditized.

Commoditization is the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers. It is the movement of a market from differentiated to undifferentiated price competition and from monopolistic to perfect competition.

Are your firm's services being commoditized? Ask yourself or your team:

• Am I setting fees, or are my clients or competitors?

• Can I clearly describe how my firm's services are different than my competitors, and are clients willing to pay a premium for that difference?

• If we were no longer able to service our clients, would they easily find a firm to replace us?

• Are we driving our firm's economic destiny, or is the market?

To deal with greater commoditization and lower fees, many firms will follow two predictable courses of action, each with their own set of consequences:

1. Cut expenses. Do more with less. Run "lean and mean." We saw this happen during the Great Recession. Firms purged staff, froze wages, set all the copiers to duplex, and canceled the annual picnic. This is a classic response to a recession, one that is often necessary to save the firm.

But it can go too far; firms that rely on cost-cutting alone can find themselves in a downward spiral of accepting lower fees, having to cut costs more, accepting even more low-fee work, not having enough staff to do the work, etc. It's like a death spiral, because it's unsustainable. As George Soros famously quipped in 2010, "You can't cut your way out of a recession -- you have to grow your way out of a recession."

There is a second popular approach.

2. Buy another firm, or sell your firm to someone else. The past two years have seen some amazing mergers and acquisitions. There are several causes, ranging from lack of succession planning ("Let's sell the firm to someone else because we don't have a bench of talent who can take over") to the love of deals (some managing partners love wheeling and dealing; buying and selling firms is a game), to the Napoleon complex ("I just want to be bigger!").

But a large driver of the M&A mania is a response to commoditization; you have to earn on volume what you're not earning on margin.

The downside of M&A is well-documented. Mergers rarely work in the way they were supposed to. Cultures clash. "Promises" go unmet. Partners who were big dogs in their own firms now have to toe the line and fight for resources in the new, combined firm. Even in well-orchestrated and carefully planned mergers, it can take years for employees to really feel that they're part of something new and bigger -- allegiances are always to the firm and leaders they joined.

The third approach to commoditization is as difficult as the first two, but more sustaining and morale-boosting to the firm.

3. Innovation. The firms I'm fascinated by right now are innovating. They are growing organically. They are finding new operational efficiencies, and designing new solutions that their clients love. They are avoiding commoditization because they are differentiating themselves in everything they do -- from how they compensate staff (team bonuses?) to how they design new products (sit side by side with the client and build something together.)

These firms are living into the promise of the "experience economy," which combines a product, a service and an experience for a more complete and fulfilling client solution.

What can you and your firm learn from innovative firms?

Face the facts. Tax and audit, our traditional lines of service, are becoming commoditized. They are becoming "products" that our clients can get anywhere on the open market. Once you accept this fact, you can design around it and with your clients.

The client as collaborator. Innovative firms aren't just gathering their teams in conference rooms and drawing on white boards. They are spending time with clients, mapping out entire client processes and zooming in on the headaches. This requires a more collaborative and less technical approach. One partner said, "We don't have anyone on our team who can do this!" I wondered if he was wrong (and didn't know his people very well) or if he was right (and needed to start thinking differently about what he looks for when hiring).

Product + service + experience. This is the experience economy equation, and you see it in our industry. Although not a CPA firm, Wolters Kluwer offers the template: take a product that every client needs (i.e., the humble tax return), wrap a service around it (i.e., ProSystem fx), and then offer clients an amazing conference experience in a great location every year.

This product + service + experience framework drives innovation at firms in all industries. And in an unofficial survey of innovative firms, their new offerings have significantly higher profit and realization rates.

Of course, innovation isn't easy. Cutting costs is easy -- even a sport -- in our industry. And M&A seems mysterious and sexy. Innovation may seem like grunt work. But as my dad used to say, "If it was easy, everyone would do it." And while herds of CPA firms pursue traditional responses to commoditization, a brave few will find the sweet rewards of innovation.

Rebecca Ryan helps progressive firms navigate key trends. Reach her at (888) 922- 9596 ext. 702 or rr@nextgenerationconsulting.com.

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