let’s look at the different focuses or orientations that firms can take toward managing and running their practices and see which ones the traditional pricing methods encourage. any organization, whether an accounting firm or not, usually tends to have one of four focuses.
they are either selling-oriented, product-oriented, production-oriented or marketing-oriented.
each focus will have a direct impact on how a firm looks at servicing clients and pricing its services. the predominant focus is often dictated by the value system of the founders of the organization or its current management team. perhaps when the firm was first started, the predominant focus was appropriate. however, a danger exists when the external environment changes and the internal environment of the firm stays the same. in the ’70s and early ’80s firms did quite well by following a production orientation focus. in the late ’80s and the ’90s, this strategy did not work as well. and it certainly does not work today.
historically, a company with a selling orientation was centered on selling efficiency rather than customer needs and wants. the selling orientation assumes that clients will not buy the product or service unless the organization makes a substantial effort to stimulate their interest in its products.
for example, you might think of a door-to-door salesperson selling magazine subscriptions that you really don’t want or need.
accounting firms have never lowered themselves to this level. there are, however, many firms today that have hired part- and full-time sales professionals to develop leads for the firms. in a way, these firms are trying to increase their market share merely by increasing their selling power.
selling a professional service is a complex endeavor. while a sales professional can uncover an opportunity, it is really the service provider that the client wants to know. and, if there is no trust or chemistry between the client and the service provider, a sale will never happen.
clients will often ask a new service provider these questions:
- why you and your firm?
- what’s your experience in this area?
- what’s your experience in our business?
their real concern is how you will solve their problems and how well you will work for them. the true selling orientation does not usually address these issues. and, firms that embrace the selling concept may spend more on advertising, public relations, social media and other kinds of activities that increase demand for their services.
finally, organizations that really believe in this orientation have a very strong sales force. also when there is a surplus either of the service or goods, firms will begin to take a stronger look at hard selling. in the accounting profession today, there is a surplus of providers, especially in the commodity market. even if outside salespeople are not used, there will be more pressure on partners to “sell” more as long as the external environment continues its current course.
those firms that follow a product orientation believe that clients will purchase the service or product that is the best in the market. the organization’s primary task is to constantly improve the quality of their products. it is through product quality that these firms believe they will keep and obtain new clients. product quality in the accounting profession is very difficult to distinguish from one firm to another. it is virtually impossible for the client to determine who has the best quality.
most clients cannot judge the quality of your audit work, the quality of your tax research or the quality of your systems consulting expertise. for professional and intangible services, trying to differentiate your service based on a quality product or product enhancement will be extremely difficult. the major problem with this orientation is that a firm can believe that it knows what its clients really want. however, product-oriented firms seldom speak with or listen to their clients.
in a non-accounting environment, the production focus is often appropriate where the demand for the product/service exceeds supply. in today’s marketplace, there are very few areas in the country where demand for accounting and tax services exceeds supply. there is, however, another situation where this concept makes sense. if the product’s cost can be reduced through production efficiencies, then it may make sense to follow this concept.
however you look at it, the production focus means that the organization places most of its emphasis on making and distributing the product or service. philosophically, what this means is that the organization believes that its customers are there to buy whatever the firm produces, rather than the firm trying to determine the needs of its clients and then developing services or products that could best meet those needs.
most accounting firms, whether they realize it or not, go into production orientation during tax season. i can think of many accountants who know exactly how many tax returns they were able to complete during tax season and the higher the number, the prouder they are. no doubt these individuals have either achieved a high degree of efficiencies in producing and distributing tax returns or worked an unseemly amount of hours during tax season. but, what about the clients? was sufficient time spent with the client?
neither the rule of three method nor the cost-plus method of determining billing rates takes into consideration an effective way to measure the value of the service to the client. by focusing on volume and cost, both the rule of three and the cost-plus methods foster a production orientation in firms. firms that use these traditional methods sell hours, forgetting that it is the benefit or value of the service that is most important to their clients and prospective clients. the result is a production orientation in firms.
focus is what sets the marketing orientation apart from the others that we have just discussed.
those firms that embrace the marketing orientation seek to understand the needs of their target markets and then offer them the services and products that best meet those needs better than any of their competitors.
if we apply some of these ideas to an accounting firm, the first thing that comes to mind is to ask ourselves, “what knowledge do we have of our prospective clients’ and our current clients’ needs and wants?” many accountants that i speak with tell me that they know what their clients want. when asked how they know this, they just answer, “i know,” even though they have never taken the time to survey their clients. marketing is discussed but not truly practiced in these firms. or they confuse the marketing concept with selling their existing services to clients who may or may not want or need those services. if the emphasis is mainly on selling or moving the services through the firm more efficiently, where does the client fit in?
how many firms actually organize their firms to satisfy the needs of their clients? firms that embrace the marketing orientation follow these basic principles:
- they find out what their clients really need and want through mail or online surveys and other means of communication.
- they provide the necessary services that will satisfy these needs and wants, whether they have the in-house capabilities or refer the service through some sort of strategic alliance with other accountants or consultants.
- they develop methods of delivering their services more effectively and efficiently than their competitors.
- they train their people in client service, communication and listening skills.
- they put the client at the core of their practice.
how a production orientation can be harmful to a firm
a pure production orientation can have negative consequences for an accounting firm. these consequences include a focus on internal measures, billable hours and technical aspect of tasks, and inhibit the development of a marketing orientation. a discussion of these four consequences follows:
1. a production orientation gives the firm an internal focus rather than an external focus. by emphasizing volume, accounting firms are using internal measures to price and evaluate their services and the contributions of their accountants rather than letting the market determine the true value of the services they are offering. i would like to suggest that firms need to change their focus from emphasizing top-line revenue to emphasizing bottom-line profitability. to do this, firms will need to take more of a value-based approach to their services.
2. a production orientation causes the firm to focus on billable hours. the use of billable hours to price services and to evaluate performance creates at least four marketing-related problems in most firms.
first, billable hours are truly the antithesis of client service. the natural incentive for accountants is to bill more hours, which results in higher fees, rather than to perform the service in the most economical fashion. the accountant may not even be aware that he or she is giving a silent – or not-so-silent – message to the client that the time spent is more important than the value provided. because the focus is on time, we may not even think about the client as much as we should. for example, it is not uncommon in many firms to have several professionals spend time in the preparation and review of a tax return. does each person really add value to the process? in most cases, the answer is no. in short, there are often too many accountants assigned to an engagement.
second, billable hours focus on individual performance. now there is nothing wrong with individual performance. we all need to keep score and know where we stand throughout the year. but, as any sports team manager knows, teamwork and cooperation are just as important if they want to win the championship. for an accounting firm to win the championship, that is, to have a very successful year, both teamwork and cooperation are crucial. in addition, they are also needed for a successful accounting firm marketing program.
lack of teamwork, cooperation and interdependent goals also inhibits cross-selling. even worse, it may push someone who is not the best qualified in the firm to perform a service for a client. the results of such a scenario include a dissatisfied client, a potential write-off and possibly a lost client or lawsuit.
third, emphasis on billable hours also encourages accountants to drift into areas where they can bill more time. these areas may not fit with the strategic direction of the firm and they may not be consistent with the strategic, growth or profitability goals of the firm. for example, joe has certain interest and skill in nonprofit accounting. the firm has decided that it does not want to take any engagements unless the realization is at least 80 percent. but because there is so much emphasis on billable production, joe continues to go after work in this area. he does reach his billable hour goal, but the overall realization is less than 60 percent. the firm feels joe has wasted his time and ultimately reduces his draw. thus, he becomes further discouraged and the firm’s profitability suffers. both joe and the firm lose in this situation.
3. a production orientation emphasizes the technical aspect of tasks, thus likely producing technicians instead of client service professionals. production-oriented firms create and encourage technicians, that is, accountants who have excellent technical abilities, but lack key competencies in building client relationships, business development, communication and listening. these accountants often develop an employee mentality rather than an entrepreneurial spirit. they either work on business that was passed on to them upon the retirement of a partner or they become more comfortable working for other accountants’ clients than going out and getting clients of their own. if this is happening in your firm, you might want to see what you are measuring and where you are placing your emphasis.
4. a production orientation keeps a firm from developing a true marketing orientation. this is perhaps the most significant and most harmful consequence of using billable production to determine compensation. emphasis on production has also resulted in professionals who do not understand the marketing orientation or its importance to the firm. such professionals equate marketing with marketing tools, such as newsletters, public relations, advertising, seminars and webinars, while failing to acknowledge the strategic value of decisions on pricing, client service and product, and delivery.
the following example is a clarification. we have two partners in two firms, firms a and b. both partners have the same talents and skills. firm a is a production-oriented firm and firm b places equal importance on marketing and production. in firm a, the partner’s compensation is based on billable hours. what do you think this partner will do and where do you think he or she will spend his or her time? in firm b, both marketing and production factor into the compensation formula. at the end of the year, each partner reports on his results. this is how they may look:
in this simplified example it is quite simple to determine which partner is worth more.
changing from a production orientation to a marketing orientation
there is no quick way to change from a production orientation to a marketing orientation. firm leaders need to embrace this new orientation and reward partners accordingly. to help you evaluate your firm see the table below:
this table is important because too many firms think that they are marketing-oriented when in reality they are product- or sales-oriented. you should look at each of the above functions and determine how you really feel about them and how well you execute them in your daily business life.
it will be a slow process because you are really changing the culture and individual attitudes in the firm. the following is a tested way that will help you make the change in your firm.
the most logical and important way to reduce a firm’s dependence on billable hours is to change the way fees are determined and partners are compensated. it is important to remember that when you calculate fees on the basis of how many hours go into a particular engagement you are ignoring all external influences on the pricing equation. and unless you change the way that you are going to compensate partners and staff, not much will really change.
one option is a truly performance-based kind of compensation arrangement that encourages a marketing orientation. firms that have moved in this direction have done it slowly. they may experiment with one arrangement and involve only the partners to gain a better understanding of the process and the pitfalls.
to find out how marketing-oriented your firm and its pricing strategies really are, complete the self-analysis exercise below.
similar to a balance sheet, your answers will give you a snapshot of where you are today. your goal is to lay out a plan to get you to where you want to be tomorrow.
a self-analysis exercise:
- from your point of view, how would you describe your firm’s image?
- how would individuals outside of the firm, such as your clients, referral sources and centers of influence describe your firm?
- what are the unique characteristics of your firm?
- what marketing activities does the firm use to acquaint prospective clients and clients with the value of a service or benefits of employing the firm?
- how much time do you spend assessing the needs of clients?
- how do you determine future growth areas?