Today’s business model is changing, which puts a new emphasis on firm leadership and management. The business environment can best be described as transformational: from “business as usual” to “unusual business.”
The management of a CPA firm has become more complex due to the breadth of the service offerings, advancements in technology, required skills and rapid change. We need simplification to break through this ceiling of complexity. Firms need more than accounting skills at the management table.
Partners in most firms are currently enjoying their most profitable years ever. Is this sustainable? No, not without changes in the business model and improved firm management. Most underestimate the significance of current/future change and the value of leadership and management. They’ve been able to maintain or even grow partner income, which compounds the problem of change management. Thus, the need to focus on leadership and management to accelerate the rate of change within your firm.
I see one of the next steps in the management evolution as focusing on growing the revenue side organically. In most firms, a 1 percent reduction in labor costs only drives a 1 percent increase in net income before partner salaries. In comparison, a 1 percent increase in revenue generally drives a 3 percent increase in net income before partner salaries. The question becomes, how do we increase value to our clients in order to increase fees 1 to 10 percent? A better question is, how can we increase revenue from a client 10X? How can we provide more value and improve the client experience? The answers to these questions will cause you to focus both on the right clients and services. You may say this is obvious. Before you discount this simple solution, I encourage you to ask yourself if all of your partners and managers know the implications of a 1 percent increase in revenue. The chart below shows the results of a 1 percent reduction in labor, a 1 percent reduction in overhead and a 1 percent increase in revenue.
Granted, most costs do not remain static, and your firm’s labor and overhead percentages may differ. The result is you cannot simply cut costs and expect to increase partner income. In fact, recent studies by the American Institute of CPAs indicate a high number of employees are open to new employment opportunities, and turnover rates have increased. Is your firm positioning itself to retain your best employees? Or are you ready to have them leave the firm for better opportunities? Most will say they don’t want to lose their best people, yet they are doing little if anything in the area of talent development and promotion.
There are several things firms can do to increase revenue. The first and probably the most important is pricing. Internal attitudes may be your biggest obstacle. Most CPAs are taught from their first day on the job that time is money. In other words, value is determined by the amount of effort expended. The client actually determines value. Is your firm doing enough to make your clients perceive value?
Signaling value
Pricing of services is an art, not a science. Pricing should definitely not be an administrative function, and too often firms treat it as such. Price signals to your clients what you believe you are worth. Firms often leave pricing up to individual partners, which is also a mistake. This allows for inconsistency within the firm and often results in lower revenues. If you study pricing, you will find communication with the client is critical. There is no way around communicating with the client. You will either have to do it before or after you do the work. You lose all leverage if you wait until the work is complete, yet many CPAs find it difficult to address pricing upfront. Communication is just one of the five Cs of value, as documented in “The Strategy and Tactics of Pricing” by Thomas Nagel. You also must create value for the client. This goes way beyond the quality of work and includes the experience. It also requires convincing the client they must pay for value. This is much easier if you are working for the right clients.
The fact of the matter is that many clients are better negotiators than technical partners and managers! This alone should alert firms they need a person who understands value and negotiations as the primary person in charge of pricing. The only way a firm can capture value (another C) is with its pricing strategy. Hours x dollars does not capture value; it captures effort.
Finally, comprehension of value (another C) comes from thinking like the client and ensuring you understand their motivation. Often, client motivation is much different than perceived by the accountant and far more valuable. Clients are not motivated by the technical aspects, but rather by the experience.
The results of focusing on revenue only compound as you go from a 1 percent to a 10 percent increase. Know your peer metrics, as many firms are underpriced. Peer metrics are valuable. Here are five steps that can help you get there quickly.
1. Name a person in charge of pricing in your firm. Some firms can’t agree on one person, so they use a pricing task force.
2. Educate all partners and managers about the firm’s economic engine and the impact of a 1 percent price increase.
3. Conduct new opportunity conversations with your top 20 clients. Ask them what keeps them up at night. What are their best opportunities and what strengths can they leverage to take advantage of the opportunities? You will be surprised to learn about the number of opportunities that exist, and your client may be surprised to learn your firm has the capabilities to address their needs.
4. Communicate value and ask your best clients for referrals. Talk about how your services are transformational.
5. Develop talent. Firms that are known for talent development have an advantage when it comes to retention and attraction.
Don’t tell clients how good you are; tell them how good they will be if they utilize your services. Clients buy solutions and feelings. Don’t ever forget about the client experience.
