own your expertise and price it accordingly – yes, even in audits.
by alan anderson, cpa
transforming audit for the future
those firms that value the chargeable hour above all risk losing their best team members. the ones who want to think, innovate and come up with creative ideas that add value to the client and the firm will leave.
more: give advice while remaining independent | stop mixing up your v’s and losing your best people | how to upgrade c and d clients | can a service center model solve audit staffing shortages? | move to advisory and assurance with relevance | use eight audit exit items to deepen client relationships | know your three audit w’s | planning lays the foundation of audit relevance | are you correctly identifying the relevance intersection?
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when audits are billed out on a flat-fee basis, is an hourly rate still relevant? tracking time isn’t a revenue system if it does not impact what the client pays you. the billable hour is nothing more than a cost accounting system. production is what the client pays for, so measuring that, plus instituting measures for accountability, more closely mirrors what brings money in the door.
for the last 20 or so years, ron baker has been pushing firms to get away from the billable hour and embrace value pricing. the idea behind value pricing is that this is a fee agreed upon up front for a specified scope engagement that includes demonstrable additional value for the client. the price for a specific engagement depends on the dollar amount of value that your services provide to the client, not on the time it takes to do the work.
over on the tax side, firms have been successful with value pricing for tax strategy and planning. for example, a firm could come up with an industry-specific tax strategy that they could build out in a day for a specific client. most firms would bill that out as eight hours of someone’s time. implementing that strategy could save a client millions of dollars in taxes, so for the client, the value of that tax strategy consultation is clearly more than just eight hours, even if your rate is $2,000 an hour. why not capture some of that value in your pricing?
to those who say value pricing can’t be done in audit, i give you the example of k·coe isom. back in 2013, they brought in michelle golden as a partner to help them with their pricing. they specialize in agricultural businesses, and they have value creation agreements for their audit clients. for an agreed-upon annual fee, the client gets unlimited access for the year plus the audit. quick little calls asking for advice are included in the annual fee, so there’s no additional fee, which clients like. this encourages clients to call before they do something, rather than after. they defined the scope of those agreements, so anything beyond that scope is a separate agreement and an additional fee. when kurt seamers was ceo, they had about 80 percent of their clients on value creation agreements.
giving the client a price up front helps the client relationship, according to golden, who now runs a consulting firm that helps accountants with pricing. “it’s not an estimate that we adjust to any kind of actual later. any problem with that is our responsibility. it shifts the risk from the customer to us, so it’s a very high customer experience situation. the customers love it because they can budget for it. they don’t like surprises,” said golden. “it helps improve the relationship. how can you be somebody’s trusted advisor if they can’t trust how much they’re going to spend with you, and you surprise them with ugly bills?”
to implement value pricing successfully, you need to actually provide value in what you deliver beyond satisfying compliance. like anything that gets assigned a value, that value is in the eyes of the beholder, which is the client. that value is not as great as auditors would like to think it would be, and the clients know that because audit firms are the first ones to lower their prices when they get some fee pressure.
if you aren’t an expert in an industry, you’ll likely price your work according to the lowest common denominator, which is price. but if you have industry expertise, the good clients will expect to pay more because they will get more than just an audit.
for example, in the ag industry, the implement dealers know that k·coe isom audits all kinds of implement dealers. because of that, they know k·coe isom already knows more effective ways to finance and structure a business, so they’re not thought of as a pure commodity. the implement dealers know they’ll pay more with k·coe isom, but the additional value they receive will more than compensate for the extra audit fees.
these days, firms are experimenting with different kinds of business models, like access-level agreements and subscriptions. now, this isn’t a text on any of those pricing models, so i recommend you study resources like “implementing value pricing” by ron baker or “subscribed” by tien tzuo. some firms are also experimenting with compensation models where team members pay a percentage of the revenue for the engagements they work on. some of those firms are finding that everyone makes more money when they all have skin in the game.
the audit firms of the future will not look like the audit firms of the last 20 years. as pure compliance work becomes more commodified and technology takes over the ticking and tying, audit leaders will need to experiment not just with technology but also with how they run their firms and what kinds of services they will provide.
the great experiment in all-remote work during the covid-19 era demonstrated that relying on the usual metrics of chargeable hours and realization rates may not yield the results or performance you anticipate. firms that pivoted rapidly to helping clients survive the pandemic shutdowns and navigate the government funding resources available were able to serve their clients better.
and who doesn’t want to serve their clients better?