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.
A TIME OF OPPORTUNITY
I believe that we are in the best of times for those accountants and firms that desire to be industry transformers. In order to be an industry transformer, you must understand intellectual capital, unique processes, packaging and pricing. These skills are beyond what the typical accountant learns in college. A commitment to life-long learning and capturing experiences is essential.
People create intellectual capital, yet many firms allow that intellectual capital to leave when people leave. They don't even account properly (from an economic sense) for intellectual capital - they expense it. They should take the time to package, name and differentiate unique processes. Much of what firms "give away" is what the client really values.
Based on my studies and experience over the past 15 years, I make the following suggestions to firms that are interested in becoming transformation agents in a great profession.
* Select a "value champion" for your firm. If you are into titles, call that individual the chief value officer. Her primary function is to create value from the clients' perspective and to price services. Value is subjective, and accountants generally have difficulty looking at it from a client's perspective. This person should communicate frequently with clients and determine their perceptions. More importantly, she should understand each client's dangers, opportunities and strengths.
By doing so, it is easier to provide services that clients perceive as valuable. (Many of these have less risk and greater margins than compliance services.)
* Assign an intellectual capital task force. This team should inventory intellectual capital, then document, name and package it so that the firm can train to unique processes and price on value, rather than hours multiplied by dollars.
* Reach outside the firm for help. Don't continue to let old paradigms limit value and profitability. Even though people mean well, it is what they don't know they don't know that costs them - and limits their growth and value. Get coaching, read and educate yourself.
* Define the profile of your firm's ideal clients and filter out those who do not fit it. The plans, people, processes, technology and pricing that got you to this level will not enable you to transform into the emerging industry.
* Embrace a training/learning culture. In such a culture, everyone learns and everyone teaches. It is a two-way street. Thorough training encompasses much more than technical continuing professional education - it also includes soft skills, as well as technology. Technology is the accelerator.
These steps sound simple, but are hard to accomplish. Gravitational forces from the past and old paradigms regularly get in the way. It is somewhat like simultaneously performing a two-act play. On the one hand, you need to sustain a "current firm," while on the other developing the "future firm." Vision and leadership are necessary for change. You cannot be driven only by short-term profits; you must also possess a compelling vision of the future with ongoing learning, coaching and confidence-building. Change is not about perfection, but about progress.
There are good times ahead for agents of transformation.
Gary Boomer, CPA, is the president of Boomer Consulting, in Manhattan, Kan.
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