A shortage of quality people, commoditization and increased regulation result in what Harvard economist Joseph Schumpeter referred to as a depleted industry in need of transformation.These are scary times for accounting firms that don't have a plan and path. For those that do, however, the future is exceptionally bright. Overcoming the obvious obstacles to growth should be a top priority for all firms. Ignoring them and hoping things will return to the way they were is unrealistic - and only exacerbates the problems.

All progress starts with the truth, so ask yourself and your partners the following:

* Does our firm have a documented strategic plan that is shared with all employees?

* Does our partner compensation system integrate with the strategic plan, or is it based upon traditional formulas such as book of business and personal production?

* Am I still pricing by the hour?

If your answers are "Yes," "Yes," and "No," your firm is positioned to grow and prosper. It's a "transformational" firm that is positioned for exponential growth. If you answered the questions differently, I suggest that you read and share this article with your partners. While some will disagree, all should at least realize the challenges facing firms with people, succession and margins.

PRICING

The "hours x dollars" (or cost-plus) formula does not work in today's results-based economy.

Value is ultimately determined by the client, even though you have probably been trained on the importance of effort and a cost-plus model. All partners are not created equal when it comes to determining value. This article cannot address all pricing strategies, but I recommend some basic ones below that will improve your margins and proposal closing rates.

1. Review all engagement letters and discuss pricing openly and up front. Utilize fixed-price agreements, rather than engagement letters with open-ended fees based upon additional hours.

Do not do work without a fixed-price agreement or change order. Refer to change orders in the fixed-price agreement. Fixed fees reduce the perceived risk to the client, while change orders protect the firm from scope creep. Clients don't buy pain reliever until they feel the pain. Most accountants (sellers) have the unique ability of being able to quickly assess the problems, while clients (buyers) do not readily understand the issues.

2. Put one person in charge of pricing. You may use a task force, but ultimately one person should have the authority and responsibility. Ron Baker refers to this person as the chief value officer. In the past I have referred to this person as the billing partner, but I now believe that they do not have to be a partner. They must simply be able to communicate with clients and sell value, rather than sell effort.

3. Filter your existing clients based upon a set of pre-determined criteria (not just by revenue). We suggest the following:

* Utilize: Does the client purchase more than one service?

* Appreciate: Does the client show appreciation?

* Reward: Does the client pay promptly and willingly?

* Enhance: Does working for this client enhance our capabilities?

* Referral: Does the client refer us to other quality clients?

Many firms and partners get this far in the exercise and stop without taking serious action. Why? Their compensation formulas are based on personal production and book of business. They need to be penalized if they are doing low-level work and not focusing on clients who meet the firm's profile.

Execution is the key. Don't expect to lose clients when

you restructure the fixed-price agreements and raise fees substantially. Most clients will agree to the terms if they are communicated as a value proposition. This applies equally to tax and accounting services. It concerns me greatly to see firms providing professional services at or below market because the partner will not discuss pricing up front with the client.

COMPENSATION

Compensation is also a complicated issue in personal service firms. One size does not fit all, but today many compensation systems reward partners and staff for doing the wrong things. Others reward mediocrity. While production is important, it is not the only criteria in determining value. Book of business and personal production are often over-valued, while management and development of people are under-valued.

Compensation systems require thought, planning and communication. A compensation system should be linked directly with the firm's strategic plan - and change accordingly. The Balanced Scorecard approach is emerging as a popular and expedient way to make this happen. It reflects upon four perspectives:

* 1. Financial: While important, most accountants over-emphasize this perspective.

* 2. Client satisfaction: This is often ignored and under-valued. Client satisfaction is a key component in the value proposition.

* 3. Professional development: Retention and attraction of quality people are priorities, and partners should be rewarded for facing these challenges.

* 4. Processes: New processes and systems must be utilized to leverage a limited labor supply. Managing change, rather than resisting it, creates value.

Most firms realize the value of all four perspectives, but do not value them equally. Furthermore, the tendency is to make everyone's scorecard equal, with goals that are too easy to attain. Scorecards should be individualized, contain stretch goals, and be tied to the compensation system and strategic plan. People have unique abilities, and their personal game plans should focus on these in order to accomplish the vision and mission of a shared-vision firm. People who utilize their unique abilities are happier and more productive.

The other problem that most firms face is how to transform from their existing compensation systems to a new one that integrates with their strategic plan. I recommend freezing the old compensation plan at current levels, or initially reducing it by up to 20 percent. Focus any increase in the compensation pool toward the Balanced Scorecard system.

This requires building models, time and communication in order to implement. It will probably require outside facilitation. Partners fear change and want to know what is in it for them. You can expect resistance from some or all partners, but that is not a valid reason to avoid changing your compensation system. For this reason, many firms are moving toward closed compensation. Transparency creates conflict among partners over insignificant differences in compensation. It also increases the amount of time spent on administration.

Start at the partner level before proceeding with other staff members in implementing scorecards. One of your biggest challenges will be getting partner buy-in. Mediocrity generally loves the old system, in which rewards result from past accomplishments.

It takes time, but addressing the issues of pricing and compensation will improve your firm and make it more attractive to quality people.

It's about progress, not perfection.

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