[IMGCAP(1)]Did you ever hear that accounting firms, particularly the larger ones, don’t provide distinctive client service and only compete on price? Sure you have.

Why? It’s because many of the Top 100 firms have become merely good firms with partners, trapped in a saturated marketplace, who have begun to believe that their basic services are purely commodities.

After all, when you hear this from the business community almost every week, many partners begin believing it. That’s sad, but understandable.

What isn’t focused on, however, is the opportunity to tap into the value that can be derived from basic accounting and tax services that clients need from their accounting firm (i.e., the audit report and tax return). This untapped value, which is what clients want from their accounting firm, can be unlocked if the firm’s leadership takes the tough, bold steps of changing training paradigms. Their accounting professionals need to think in the future tense so they can start to provide client solutions to business challenges such as working capital improvements, enhanced EBITDA and stronger market valuations.

For the most part, clients aren’t getting these forward-thinking business insights from their accounting firms so they retain boutique consulting firms to help them release the true value of their companies. And, guess what? Clients are willing to pay for valuable advice and counsel that help them deal with these and other challenges. Truly a lost opportunity for accounting firms!

How did accounting firms fall into the trap of providing plain-vanilla services for thin margins? To answer that question, we need to go back to the good old days when accounting firms were paid an hourly rate for their services based upon a multiple of partner/staff salaries and benefits plus a factor to cover overheads. Things started to change in circa 1991 when the Big Eight consolidated to the Big Five and further changed when the Giant Four arrived in 2001. Sensing a saturated marketplace, clients started to demand flat fees. Accounting firms were quick to oblige by billing at a substantial discount from the old hourly rate fee model. They failed to seize the opportunity to innovate, however, and create distinguishable services that could result in billing for value.

Now fast forward to the financial crisis and the aftershocks of an anemic economy. Mid-market companies, not growing at an acceptable rate and therefore not needing a significant amount of special advisory or consulting services, are putting added pressure on fees derived from basic audit reports and tax returns. Again, a saturated market of accounting firms quickly obliges (perhaps thinking it will make it up on volume). Because of the anemic economy and the seasonality of the accounting business, however, firms have underutilized staff. So they are continually reducing their headcount and doing more work with fewer, more junior people.

Staff members, who see what is happening, decide that a “sweatshop” is not where they want to spend their professional careers. This causes an exit of many bright young people—many of whom are capable of becoming future accounting firm leaders. Clients get disgusted with all the turnover on their accounts. And when they are dissatisfied with their current firm and seek a new relationship, their “buying” decision for a new accounting firm usually gravitates to a “feel” for the people, client credentials and low fees. Rarely is it based on the ability to evaluate an accounting firm’s potential to provide meaningful solutions to their business challenges.

Today, so much of the competition for new accounting and tax business centers on price, not value add. Over the past few years, accounting firms are entering into new client relationships with pricing that can’t be sustained. This pricing pressure ultimately affects client service. When client service gets to be unacceptable, it results in lost clients. It’s a vicious circle and a trap that has considerable negative implications for the dynamics of the client, partner and staff relationships.

How Do Accounting Firms Escape the Trap?
In our opinion, the traditional accounting firm service and fee models are seriously flawed and outdated. Most accounting firms have unfortunately been tone deaf and unwilling or unable to take bold steps (not just lip service) to become catalysts for client performance improvements that, if properly executed, present opportunities to bill for value.

Is your firm up to the challenge? If the answer is yes, we strongly encourage you to consider training your professionals to provide distinctive client service and, as a byproduct to attest services, identify solutions to business challenges. Here are two tools to help you get there—starting with your major clients:

(1) A Client Service Plan (tailored to match your client wants) that collaboratively defines client expectations on advice, information gathering and communication of value added by products. The Client Service Plan also measures the accounting firm’s actual performance against agreed-upon stated goals. The steps include:

  (a) determining key service criteria;
  (b) setting performance standards around client service team continuity;
  (c) evaluating results on meeting deadlines and committing to fee estimates; plus
  (d) providing feedback, including great ideas around creating, enhancing and preserving wealth or identifying “best practices for business processes that are usually uncovered because of industry know-how.

(2) A Performance Improvements Memorandum as a unique by-product of your attest services. Share your preliminary thoughts and observations on how to improve working capital, EBITDA and market valuation with senior management of a portfolio company as well as with an outside investor such as a private equity group. If there is a desire for you to assist with the implementation of your suggestions, you of course would be happy to do so—understanding that there are certain limitations, particularly with public companies.

The unattractive picture that accounting firm basic services are purely commodities presents an opportunity for those firms who want to be more than merely good firms and desire to become mid-market sustainable brands. There is tremendous opportunity for a firm to be the disruptor and become the “category killer” for the mid-market companies space.

Dom Esposito, CPA, is the CEO of Esposito CEO2CEO, LLC, a boutique advisory firm consulting with small and midsized CPA firms on strategy, practice management, mergers and acquisitions. Dom was voted one of the most influential people in the profession for two consecutive years by Accounting Today. He has written a book, “8 Steps to Great,” a primer for CEOs, managing partners and other senior partners, published by www.CPATrendlines.com. Dom welcomes questions and can be contacted at desposito@espositoceo2ceo.com or (203) 292-3277.

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