Several years ago, it hit me that the root cause of much tension among firm’s leaders is the fact that, in our profession, we’re trying to operate multiple business models simultaneously without acknowledging some key distinctions among our models. In addition to causing frustration, the fact is, we cannot be fully successful at operating different models if we approach operating and measuring them exactly the same way!
Today, business model transformation is a very hot topic with many firms readily embarking on making some big changes. As such, it’s the perfect opportunity to figure out where these tensions occur and how to address them in your overall transformation efforts. I’m a big believer in getting on the same page about how the organization defines certain words or phrases so they can have greater understanding and alignment of what, exactly, we mean when we say “x.” Perhaps this post can help you as your firm defines “business model.”
Defining “business model”
A business model is how a company generates value for buyers. “Business model” includes a company’s revenue models (how the company generates income: hourly, fixed pricing, subscription, and more). However, revenue is only one of nine elements of the business model. The nine elements are: Value Proposition, Customer Segments, Customer Relationships, Distribution Channels, Key Activities, Key Partnerships, Key Resources, Revenue Streams & Models, and Cost Structure. (Note that cost structure is NOT a revenue model. And then there’s the corollary that cost is NOT a price.)
Accounting firm business models
Currently, in the accounting profession, we use two distinct business models (think of them in part as people dependent vs process dependent). First, there’s the highly leverageable “productized service” (transactional) model which typically has a high volume of buyers and a smaller per-sale size. Ideally, this is a recurring revenue stream—perfect for a subscription model. Second, there’s the much less scalable “customized service” (consulting/advisory) model. This model has fewer, larger-sale-value buyers and tends to be one-off sales.
There are trade-offs to each model. With the productized model, the buyer pays a lower price to get your “good” (non-custom) service, so to make more money, you must add volume and maximize efficiency. I say “good” because “perfect” would mean customizing every time, and buyers are often willing to pay less to get “good” as opposed to “perfect.” Thus finding your standardized “good” at the right price point is sweet spot to pursue with this model.
In the customized product model the buyer pays a premium price for a tailored service. This is, by definition, less efficient so you need to charge more and serve fewer buyers. There are plenty of buyers willing to pay for this, especially when you are a perceived specialist in your service area AND within their industry sector. That’s the “worth” sweet spot for this model.
CPA firms have a gaping wound. They frequently try to customize at the same time they try to productize. More on that in a moment.
Can you run multiple business models at the same time?
A business can successfully operate different business models at the same time. But beware: don’t expect to operate them the SAME way. This is where most of our firms get it wrong at first.
The two typical CPA-firm models above require distinctly different skillsets, value propositions, go-to market strategies, cost structures, KPIs, and management practices, thus are vastly different business models. Where we get into trouble is that we frequently mix the models.
In management meetings, we say we want (and we reward) “standardized” yet we constantly customize. To be customer-friendly, we say we want customized and we want to be “true business advisors” yet we force people into metrics and KPIs that suit a standardized model. Have you been in these meetings? I have and they aren’t pleasant.
Maximize your different business models
Instead, the team for each service you deliver would “pick one” model they operate under and make it excellent by fully leveraging that model’s success factors.
Minor customization of standard is possible but draw a line in the sand and stick to it. Know—as a service department—exactly what you will and won’t customize. For example, in a CAS practice, limit yourselves to supporting a tech stack that makes sense for your client base, skill set, and with which you can be most profitable. Don’t try to work across every accounting platform. Departing from the stack consumes resources and erodes margin. To price this work, establish fixed prices (unique to the buyer) stating any appropriate variables as “pre-priced add-ons.”
Minor standardization of custom is possible, but remain flexible and reward and value constant re-invention. Don’t beat people up for innovation time. And don’t ever charge for this high-value work by the hour, base your prices on the worth of the work. Instead of relying on time spent, teach your people how to plan their tailored projects well by creating core templates from which you expect to tailor and depart. And communicate frequently with customers before and during the sale to manage expectations and prevent scope creep. (I teach techniques for this in my “how to price consulting work” course discussed at the bottom of this Advanced Pricing Methods® page).
Avoid straddling that murky middle
We cannot maximize our potential when we operate these distinctly different business models somewhere in the middle without solid commitment to either. If your organization has both, recognize the ways in which they are competing models with different success factors. Don’t plug them both into a single management approach with the same success metrics. Run these distinct business types appropriately and effectively and watch your firm grow.
Which industry niches* should we grow? Are we true specialists in an industry? How do we prioritize our niches for human and monetary resource allocation (staffing, training, marketing, recruiting, etc)?
To help determine the best answers, a friend and I decided to come up with a litmus test of sorts to help you vet:
Are we currently just dabbling in a niche or do we demonstrate true specialization?
Is our niche too “people dependent” (if someone leaves, is it at risk)?
We have multiple niches and limited resources. Which niches most merit our energy and dollars?
What considerations are important besides present size and profitability?
Do we have what it takes to achieve the niche growth we envision?
How can we be more realistic in our growth expectations for a niche?
With the collaborative brain power of a great friend, I’ve put together a tool: the Segment Scorecard (spreadsheet) to guide you as you assess and compare the health and viability of your firm’s current industry segments. Here’s how to use this information and tips for how to communicate about it.
I use a freeway analogy (explained below) so these are factors to consider when weighing which segments to accelerate and which to just “cruise” for now.
GO: Niches that score highly across the board merit having more resources (people and money) budgeted toward growth than those that don’t.
NO GO: Niches are unable to build without someone a manager or above who is extremely passionate and able to be fully dedicated, and at least moderately knowledgeable. Hard stop until such person is in place. If you’re considering hiring that person, make sure there is strength in most other areas first.
PEDAL TO THE METAL
I often use the “freeway” analogy because it creates more comfort with the concept for those whose industries are not on the immediate “to accelerate” list. As firms embark on strategic planning and have to make choices about where to allocate their limited resources, I have them envision each industry as a separate car on a freeway. All the cars are presently moving, some a bit faster or slower than others. The desired outcome is a realistic CPA-firm growth plan that’s considered which cars to put the pedal to the metal on.
The reality is that firms don’t have sufficient resources to accelerate ALL the cars SIMULTANEOUSLY so you’ll want to make the most informed decisions about which 1 or 2 cars should “floor it” AND be absolutely clear that this doesn’t mean a full stop for the rest… it means the rest continue to cruise along at their appropriate relative speeds until the it’s time to let the accelerated cars to cruise on their new-found momentum, and allow some other cars to surge ahead.
When strategic planning which involves a large number of firm owners and decision makers, the typical scenario is that everyone feels his or her car is one the firm should put heavy resources into and they can view receiving lesser resources as a lack of confidence in the practice leader or lack of commitment to the industry. In many cases, there’s been heavy (and heated) discussion about profitability or lack thereof when talking about resource allocation. Profitability is important, but there’s much more to consider. Let people see the totality of considerations and where their industry fits in the firm’s growth plan.
Whether flooring it or cruising it, each industry needs a growth plan. Whichever category the industry falls into, let the factors inform your plan. There will be no perfect niche.
The factors within this scorecard create visibility and awareness around potential improvement areas. Consider the first scorecard as a baseline against which the industries will benchmark themselves in the future. Design growth plans to include actions that elevate the industry across these factors: heighten expertise (thought leadership and industry involvement) and breadth of relevant services (R&D, CPE), inspire passion and leadership, improve internal economic performance (usually by both pricing better and managing to a better-defined scope!) and increase the representative client base. Doing these things puts the niche well on its way to a strong enough foundation for the niche to “floor it” in the future.
PARK IT OR OVERHAUL IT?
In strategic planning, the goal is seldom to pull a car off the freeway and park it, but sometimes a breakdown can happen whether you intended it or not. Periodically, it’s wise to consider early on (before the breakdown) if a car should be garaged. Indicators for permanent removal might be: no one at present to commit to leading it (and being both passionate and accountable for leading it), or no successor for a soon-to-retire leader; a shortage of team members to serve the niche with appropriate passion (major turnover among CPA firms is underway as I write this); or other hard trends** that indicate a niche is facing decline or disruption (like buggy whip manufacturing once cars came along).
The alternative to permanently dismantling the niche is to rebuild it! Is there a way to salvage some parts and leverage what you have into a more viable, more exciting, and more relevant area of practice. Or perhaps narrow the scope of the industry served for example reducing “manufacturing in general” to “food manufacturing” or “medical durable goods” knowing that demographic hard trends are excellent in America for both of those categories of manufacturing.
*Note: for the purpose of this post, whenever I use the word “niche” I specifically mean a customer’s industry that you serve, NOT a specialty service that you provide. CPAs commonly blend the two such as classifying “employee benefit audits,” “SEC audits,” “wealth management,” or “family office,” as industries but they are service lines. The industry is who you provide those services to… employee benefit audits or SEC audits are performed for companies across just about any market segment such as food manufacturing, agriculture, or aviation transportation. Private sector would technically be the industry for high wealth customers, with the “high wealth” part being the relevant “market segment” demographic you serve within the private sector. Demographics add another layer to an industry target.
I keep reading how buyers across all sectors are “demanding discounts” and it’s easy to see how this creates strain and pressure for us to do the same. Fact is, CPA firms are a relatively low-margin-high-volume industry that, when billing by the hour, already writes off about 20% of WIP. Shockingly, that’s the equivalent of a day a week of “free” work (average realization rate of US firms is roughly 80%). We can do better! But I’m not going to talk further in this post about why hourly billing is a bad idea, or that realization is a bogus concept. I’m going to talk about what to do when someone asks you for a discount.
My point about profit margin is that you don’t have much wiggle room, and sometimes none, to do the current work for less money. And to agree to do the same work for less damages your price integrity! So please don’t go there. Whenever you change the price, you’ve got to change the deal. Period.
First, don’t panic if customers ask to negotiate price—even if they ask for discounts. This is actually GREAT news because it opens the door to discuss what they value and what they don’t. To do this most effectively, you’ll want to change the conversation from “what you do” (your inputs) to “what they get” (their outcomes). In other words, what goals, objectives or ideas of theirs are advanced as a result of working together.
Stakeholders satisfied so that… Expansion so that… Securing more capital so that… Streamlining the business so that…
It’s the part after “so that” that reminds the buyer (and you) about the worth of their investment in you. That’s contrary to what we default to in defending our hourly fees which is justifying the activities and inputs that lead to simply satisfying the stakeholders, aiding expansion, getting more working capital, and developing processes to streamline. Your activities don’t matter much. The “so that” is what very much matters. It’s the purpose of the work.
Take this opportunity to move those customers from open-ended hourly billing with unfortunate surprises to a fixed-price agreement where you both know exactly how much they’ll pay and when. Wouldn’t you like to have more predictable revenue? Probably almost as much as they’d like more predictable expenses.
Learn to offer multiple “package” choices (aka options). Through developing options, you’ll define scope parameters. Say you have a range of $3-6k in mind; options permit you to clarify what must be exactly “so” for $3k, and what considerations elevate price to $6k. People love choices. Even when we have to buy an annoying necessity (like tires or insurance… or tax help), simply having some choice empowers a sense of control. Businesses who’ve lost all control from recent events will especially appreciate this!
When it comes to options, “three” is the magic number. With current customers, it’s best to show goodwill with one option that’s actually less than they now pay, a middle option that’s closer to their current spend with you, and one that’s higher but you’ll need to make the ROI clear.
For all three prices, tie them back to the “so that” and you’ll find the conversation about worth is much more satisfying, and nowhere near as painful as a conversation about hours.
Final thought… if it truly doesn’t make sense to spend the energy to develop options (it’s usually worth it, though!) you can change the deal another way. Changing the deal can be something besides the actual work you perform… it can be the level of included access to you and your team, timing of the work, or even payment terms—maybe shoot for 1/4 down to 100% up front in exchange for a slightly lower price.
Two things this pandemic has taught us are that we have to be more creative in how we view things, and we have to be more flexible. It’s time to apply those to how we position our work and price it.
We’re seeing some really big strides in the business (and revenue) model shifts in the accounting profession. At this writing, FIVE of the US Top 100 largest CPA firms, and several Top 200 firms, are currently instituting Fore’s Advanced Pricing Methods℠. These brave large firms are on the very front end of the innovation curve: the pace at which new ideas are spread or diffused.
In her recent article about Changing the Business Model, INSIDE Public Accounting’s editor Chris Camara did an amazing job summarizing what’s happening, why (what’s driving changes), and some of my thoughts on how you can get started on a new pricing approach.
Here’s a snip (click on article thumbnail for the full piece):
Within the last few years, firm leaders have begun accepting that a new revenue model is inevitable, spurred by the rapid introduction of time- saving technologies. Since fewer hours mean reduced WIP-based billings, firm leaders are implementing – or at least investigating – different revenue methods that capture each solution’s worth, not the time spent on it, which is irrelevant as far as the client is concerned.
The impact of work speed on traditional billing is already being felt, says River. One East Coast firm, for example, implemented data analytics and reduced time spent on one aspect of audit from five hours to about 15 minutes. If an hours-X-fee system is used, the time reduction across hundreds of clients means a serious revenue deficit, River says. Another example is an IPA 200 firm that implemented Lean Six Sigma techniques and a workflow product that reduced tax preparation time up to 50% in some cases. Without another revenue model in place first, even after adding clients, they had a $900,000 shortfall between their 2017 and 2018 WIP.
If you’re interested in more “how to” check out my half-day workshop on Nov 5, 2019 in Indianapolis at the 2019 PRIME Symposium. This workshop is open to the public and is limited to 50 guests. Contact firstname.lastname@example.org for details!