HOW CPA FIRMS CAN DRAMATICALLY IMPROVE PROFITABILITY ... · if they don’t like the price, they can tell you before you start and you can either refuse the work or remove some value

W W W . P A N A L I T I X . C O M W W W . P A N A L I T I X . C O M

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HOW CPA FIRMS CAN DRAMATICALLY IMPROVE

PROFITABILITY THROUGH PRICINGR O B N I X O N , C E O O F P A N A L I T I X

W W W . P A N A L I T I X . C O M

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INTRODUCTION

Pricing is a critically important issue when it comes to improving your CPA firm. If you get your pricing right, you will eliminate write-downs, you will significantly increase your average hourly rate realized and you will improve profit margins. And you’ll improve client service. Given that all of these objectives are on the priority list of most CPAs, we hope you’ll take time to read this whitepaper and discover how leading firms around the world use pricing techniques to make a real difference.


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There are five methods typically used by CPA firms to price engagements. They are:

1. Hourly rate – this is a methodology that is common in many professional service firms and is used in the vast majority of CPA firms. An arbitrary billing rate is assigned to each professional, usually calculated as a multiple of salary. Professionals then track their time on the job, apply their billing rates and the result determines the fee. This is then billed to the client when the work is completed.

2. Value pricing – in a true value pricing environment, the professional and the client together assess the value that will result from achieving the objectives of the job or project. An appropriate price is then proposed and agreed, commensurate with the professionals’ contribution. The price is agreed upfront. The job or project needs clear objectives and ways to measure progress towards those objectives.

We do NOT consider taking a write-up after the fact, using an hourly billing rate methodology, to be value pricing. In fact, if you are using hourly billing rates, to bill more than what is on the clock could be considered unethical.

THE PHILOSOPHY OF PRICING

3. Success fee – occasionally an opportunity will present itself where the professional decides to take a fee risk by agreeing to ano-win, no-fee arrangement. An example may be winning a difficult case with the IRS or obtaining a favorable settlement. A CPA might agree to take on the engagement and be paid based on a percentage of savings.

4. Contingency – an example of this type of pricing could be where a CPA assists a client to sell their business. The CPA might negotiate a fee of, say, 10% of the sale proceeds upon completion of the sale. (Note: check with your State Board of Accountancy regarding any restriction on contingent fees).

5. Cost Plus –this is often used in management accounting. Cost Plus is a variant of the hourly billing rate methodology. Cost Plus pricing determines the cost of production (in the case of a CPA firm, this would be personnel costs plus an allocation of overhead); a mark-up is then applied to determine the price and the profit.


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Of all of the above pricing methodologies, the most common is the hourly billing rate. It is the primary reason why the net profits of accounting firms around the world tend to remain steady at the 30-40% mark. The old 1/3-1/3-1/3 rule of thumb (one third for labor, one third for overhead, one third for profits) means that CPAs get what they deserve, despite having invested collectively billions of dollars in technology to streamline their processes. Jobs are getting done faster, but the benefit accrues to the client, not the CPA.

There are some other major flaws with the hourly billing rate methodology. They include:

• For the hourly billing rate method to be accurate, both the billing rate and the time taken need to be correct. In our experience, this doesn’t happen.

• If your pricing policy is based on time taken to do the job, you are incentivized

to go SLOWER while the client wants you to go quicker. This presents an ethical conflict.

• If accountants are measured on productivity, they will ‘dump’ time on jobs where they believe there will is an available budget.

• The client has great uncertainty, not knowing the price until after the job is completed.

• A combination of all of these factors results in write-downs being the norm in the accounting profession. This has a range of negative consequences.

• It is our view that pricing in arrears is plain wrong and that pricing upfront is the only way to go.


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WHY PRICING UPFRONT IS THE ONLY WAY TO GO

Let’s start with a definition of pricing upfront. This is where you provide the client with a price for each job before you start the work. Note, this is NOT a price for the whole year (who knows what projects might come up?). You are pricing on a job-by-job basis and letting the client know the price before you start.

NOTE – pricing upfront is a mechanical change and is not necessarily value pricing.

There are four important reasons why we believe you should price every job upfront. They are:

1. Your firm will quickly become much more efficient. Your team members will be incentivized to find ways to do each job more efficiently as they are given a budget for each job.

2. Your write-downs will disappear (and become write-ups, which you can now ethically take, since you have agreed each fee with the client upfront.) Your average billing rate will increase, driving up profitability.

3. Your clients will appreciate that you have removed the uncertainty around fees. Now, if they don’t like the price, they can tell you before you start and you can either refuse the work or remove some value and settle on a lower price. This is, quite simply, the right way to do business.

4. By properly analyzing jobs so that you can price them upfront, the boundaries around each piece of work become much clearer. As a result, scope creep is less likely to occur and, with proper training and scripting, your professionals will stop giving away valuable intellectual property for free.


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INTRODUCING PRICING UPFRONT TO YOUR CLIENTS

A common question we receive from CPAs is, “How do I tell my client that I am changing my fee arrangement to pricing upfront?” This is simple! – do not over-think it. Here’s what you need to do:

1. Pick a date. This is the date from which every single job will be priced upfront for every client. Do not procrastinate and wait for the first day of the next calendar or fiscal year. Pick a date in the near future. Making a firm decision on the date is the most important thing you can do to successfully implement a new pricing regime.

2. Clean out work in progress accumulated under the old system. We provide our members with a template letter that informs the client that you are changing to pricing

upfront. The letter explains why you are making that change and outlines that there is a certain amount of WIP that has built up under the previous hourly rate methodology. You are enclosing an invoice in respect of that WIP and henceforth, every job you do for the client will have an agreed, upfront fee.

You may be thinking that sounds too easy and you may have lots of ‘what ifs’. But this process has been followed and successfully implemented by hundreds of your peers. And your clients will love it.

Over the past 20 years, we have conducted hundreds of client focus group meetings with

HOW TO PRICE UPFRONTThe best way to ensure that your firm’s new pricing methodology happens every time is to wrap a process around it. For our subscribing members, we provide a best practice 18-step workflow process for accounting firms. Early in the process is a meeting with each client to determine the scope of the work, determine the value and price the job. Please note that ‘meet’ in this context varies depending on the size of the client and the complexity of the work. It can range from a series of face-to-face meetings to a quick email exchange.


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SCENARIO

Simple compliance or compilation job, same work involved as in prior year.

Simple compliance or compilation job, same work involved as in prior year but you want to provide more value and charge a higher fee.

GUIDANCE

Review the client’s records. Unless you do something different in your delivery to add value, apply a modest increase in price and communicate it to the client. Once the client agrees, schedule the work. You need to document the agreement, which can be as simple as an email.

To justify a higher price, add some value. As an example, consider:• 3 year business performance review

presented graphically

• Where did the cash go (difference between profit and cash flow) graph

• Financial targets for new fiscal year

• Present the information to the client in person and explain the trends.

In this case, follow the same process as above but your price increase will be higher as the client appreciates the additional value you are proposing.

Raising a fee which has been below where it should have been for many years (possibly because you have elected to take repeated write-downs).

Use the following script:‘John and Mary, we’ve been doing some in-depth analysis on our clients and our fees and we’ve discovered that we have been undercharging you for the past five years. Now that’s our fault and we’re not about to rectify the issue retroactively. But, going forward, our fee needs to be at $x,xxx otherwise, I’m sorry, but we can’t do your work anymore.’ You’ll be surprised how few clients actually leave when you use this approach.

Here are some examples of situations you will face, with suggestions on how to price each scenario:


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CREATING CAPACITY WITH PRICINGWhen you price in arrears, your team is not incentivized to be faster or more efficient. When you price upfront, the dynamic changes. Once you have agreed the fee with your client, you provide each professional working on the job with an hours budget (not a dollar budget.) You then institute daily accountability. You take the focus away from chargeability and onto more relevant key performance indicators, such as:

• The number of jobs completed within the hours budget

• Number of jobs completed within the firm’s turnaround time target

• Revenue generated.

When you do this, you will find that you quickly create capacity in your firm because the hours taken on jobs will be driven down (whilst maintaining quality, of course.) If youneed proof that people can do jobs more

quickly than they think, consider when you are at your most effective – just before you are about to go on vacation! Suddenly you are much more productive and do things in half the time. What if you rewarded behavior that created that sort of hustle every day?

In fact, when you price every job upfront and focus on an hours budget for each job, if you’re like most CPA firms we have worked with, you WILL run out of work. You will find that you end up completing 12 months work in nine or ten months. There are, of course, some issues here. There is no point going faster just for the sake of it. You need to refill your new-found capacity, preferably at higher recovery rates, to grow the firm’s revenue and profit and ensure that your clients are fully serviced. Now that you have the capacity, it is time to enter into new discussions with clients to uncover their as yet unmet needs. And this is where you will identify opportunities for value-based fees.


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Value pricing is the ultimate approach to breaking the nexus between hours and price. Consider how many times in your career you provided a client with advice that created significant value but because it only took you 30 minutes, your fee was very low (or even non-existent.). We heard recently from a CPA who had a client tell him that one piece of advice provided in a two-minute discussion had saved the client $100,000. The client was extremely grateful but the CPA felt taken advantage of – and rightly so. It may have been a two-minute discussion but it was the product of 30 years experience during which time the CPA learned HOW to provide such advice. And it’s that value gap that you need to fill by becoming expert at value-based pricing.

A value-based price reflects the value you provide to the client by applying your intellectual capital. The client receives great value and you are properly rewarded.

To price based on value, you need to understand your client’s objectives and the perceived value, if you achieve those objectives. This means you need to become very good at:

• Finding opportunities to have discussions with clients

• Asking great questions• Listening more than talking• Articulating value.

VALUE PRICING – WHAT IT IS AND WHY IT IS IMPORTANT


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SETTING THE PRICE – HOW TO KNOW IF THE PRICE IS RIGHT

A common question we get is, “How will I know if the price is right?” Let’s address that question directly: the price is NEVER right. You have no way of knowing whether the price is right or not. All you can aim for is that you are happy with the price and the client is happy with the price.

As a general rule, if your clients say yes too quickly, then your prices are too low. When we work with CPA firms, we find that a 10-20% price rise generally goes completely unnoticed, providing empirical evidence that their prices were too low. As the price-setter, you have far more of an issue with prices than your clients ever do.

The key to value-based pricing is, perhaps notsurprisingly, an ability to be able to quantify

the value that you provide. Sometimes the

value will be in $ terms, other times it will be qualitative (e.g. less stress, keep me out of jail, IRS off my back.) Whatever it is, you need to be adept at engaging the client in a quality discussion that results in the CLIENT (not you) articulating the value they believe they will receive. We will give you a process to help you do that in the upcoming sections of this paper.

There is no magic formula for setting the price. It is a combination of art and science. Test your prices constantly. Look out for indicators such as clients saying yes too quickly. Change your focus from what you can get out of it to how you can create so much value that price is not an issue.


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VALUE ARTICULATIONThere is value in everything you do for your clients. Even on jobs where the value is not obvious (such as compliance or compilation work), there is value.

When we coach firms, we play a game to help team members understand the value they create and how to articulate that value. The game, named simply Where’s the Value, starts with someone in the group naming a service. Let’s say the service is a basic compliance service. The rest of the group then brainstorms the value that the client might receive. It is important to take the focus

OFF the activity or input and ONTO the value. Some examples in the case of compliance work:

• It satisfies the IRS• It keeps cash coming in• It helps me plan• It helps me benchmark my performance

against other firms in my industry• It helps me satisfy my bank• It lets me know how I’m doing• It avoids surprises• It gives me my key performance metrics

IDENTIFYING VALUE-BASED PROJECTSCPAs are at their best with numbers. That’s why we believe that year-end or compliance services should form a springboard into more value-based projects. Imagine if you held a quality, face-to-face meeting with each of your business clients after completing their year-end work. At the meeting, imagine that you presented a couple of potentially valuable opportunities. And imagine that you had a proven sales process that you used every single time. It’s our contention that most firms could double their revenue just

by doing that, given what we know about how underserviced most businesses are by their CPA firms.

We have created a process called Finding Opportunities. Every time we run this with a group of accountants, new, previously unnoticed opportunities become apparent. We know there are hundreds of opportunities out there – you just need a process to identify them, the courage to present them and the capacity to deliver.


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SELLING VALUE-BASED PROJECTSIn conjunction with the hundreds of CPA firms we have worked with, we have created a unique sales process. The process is based on asking your clients the following types of questions in the order specified:

Decision-makers: ensure all decision makers are present. Don’t hold a meeting with the husband when the wife is actually the emotional buyer (or vice versa).

Background questions: before you launch into determining client objectives, ensure you have some solid understanding of the client’s situation.

Motivation questions: what pleasure does the client wish to move towards, or what pain would the client like to move away from? What are the client’s objectives?

Problem questions: what is stopping the client from achieving their goals right now?Measurement questions: what would show the client that we are on track towards achieving their objectives?

Value questions: what would the client get out of achieving the specified goals? It can be monetary, emotional or any other point of value articulated by the client.

Consequence questions: what would happen if the client did not do something different?Timing questions: is this a later or a sooner project?

One of the resources we provide to our members is a Client Interview Worksheet. Many CPAs have created notepads based on this worksheet and find that it keeps them on track and improves outcomes.


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CONCLUSIONWe have provided a number of ideas in this paper on how to implement changes to your pricing process. Formulating a change in approach is the easy part. It’s the implementation of that change where many firms fall down. That’s why we’ve created a special e-learning program that you can run to engage your partners and team members in these ideas. The program, called Pricing Power, has been used by over 1,000 CPA firms during the past eight years. Put simply, it works.

As part of the program, you will receive the templates and tools referred to in this whitepaper, and more. To get started, please go to www.panalitix.com/pricingpower. We look forward to hearing about your pricing successes.


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HOW CPA FIRMS CAN DRAMATICALLY IMPROVE PROFITABILITY ... · if they don’t like the price, they can tell you before you start and you can either refuse the work or remove some value