All's well with the US economy - not so fast say CPAs

Profile picture for user gonzodaddy By Den Howlett March 31, 2016
Summary:
Value based pricing is the way forward for professions seeing their 'bread and butter' come under the threat of commoditization. But it's far from easy in an economy that is struggling out of recession.

In the run up to the end of tax filing season, CPA Trendlines has produced a survey of 700 US accounting practitioners that clearly demonstrates significant differences in the way the US economy is impacting both clients and CPAs businesses. There are clear geographical factors which should not surprise for a country as large as the US or with such a diverse economy.

business confidence
Business confidence - via McKinsey

This is in sharp contrast to other reports that say there is little wrong with the US economy generally, but is in line with a McKinsey report about business confidence in Q1 of 2016 in the context of the global economy.

The CPA survey is illuminating across multiple fronts. On the one hand, it seems that the general trend towards value based pricing for non-commodity services is working moderately well, but on the other hand there is clearly pressure across the board to drive down prices for commodity services like general tax filing.

One surprise in the report was that CPAs are consistently reporting that the cost of software is rising, along with the cost of labor as competition for well qualified seniors intensifies. It is not clear whether CPAs are able to balance those rising costs against value delivered but if not then my view is that they have yet to figure out how to scale online services and either automate or push functions back to the business owner. The report also highlights a broad trend to increased rates/prices following a long period of post recession stagnation.

There is some confusion in my mind about what is really going on. The CPA survey talks about price hikes in rates but then I see this quote:

CPA Dave Murray at his eponymous firm in Troy, Ohio, is pushing through "significant increases." He says, "Our firm is increasingly being paid for our knowledge." "Yes," he says, value pricing is becoming an important success strategy. "When it's worth more to the client we charge more," he says. And he does it all while maximizing profit margins and retaining clients. "We have a consistent flow of new clients and we no longer have to discount to get them to come in," he says.

'Worth' is a very different measurement to rates but then i don't know any professional who sticks slavishly to the timesheet value. In fact it has always been a mystery to me why CPAs get bent out of shape on rates when bills are almost never compiled from the timesheet but upon what they think the client will pay. As an  aside, Murray's optimism is good to hear from a part of the US that was especially hard hit during the recession. Having said that, I shall be attending PowerPlex in a few weeks' time and will sense test against how Plex customers in the region are finding the economy. But how about this on the topic of rates?

David Reitblatt at DBR CPA in San Antonio, Texas, says, "We are increasing the rates for our grandfathered clients that are well below standard billing rates."

CPA pricing trends
CPA pricing trends Q1 2016 via CPA Trendlines

I wince when I hear these kind of words. Readers who know me from a past life will also know that I believe CPAs and other professional accountants should consider commodity work as something akin to an automated factory production line. It should all be fixed price work that is geared towards maximizing volume. Despite what some might think, there is good money t be made from this approach and especially if the practice can focus on vertical markets where the potential for benchmarking and the development of industry expertise works towards building a value based practice.

This is where services like Intuit and Xero can help considerably with their learning algorithms that auto-allocate expenditures. Some CPAs turn their noses up at this, saying that the potential for serious error is high. I argue that monitoring for anomalies serves two purposes:

  1. Ensuring adequate compliance.
  2. Discovering opportunities to both educate and inform clients in a value added context.

My take

The journey towards value based pricing in the professions generally started a long time ago. I was using that method back in the 80s and 90s but then I came from an industrial background where the thought of selling hours made no sense to me because the only way you can grow a business is through bodying up. Those were the days when automation was hellish hard.

SaaS provided the technical underpinning to both help develop the frictionless enterprise from the CPAs perspective while allowing for commoditization of non-value add services. That trend started around 2007 and while I saw a smattering of practitioners and new forms of practice spring up in the UK during the 2010-12 period, the same could not be said for the US, where the legal framework and types of work normally undertaken were and, to a large extent remain, different.

Having said that, the debates around hours and rates versus value continue. But I am encouraged to see the kinds of conversation that Trendlines is surfacing as indicative of a new future for a profession that has long been under the cosh. My hope is that professionals take this opportunity for new found largesse to invest heavily in automation technologies as their way of clearing the path to true value add.