Asked to name the biggest challenge currently faced by small and medium-sized practices (SMPs), the largest number (27 per cent) cited pressure to lower fees. This was followed by keeping up with new regulations and standards (26 per cent).
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While the profession has always faced various degrees of fee pressure – in certain areas more than others – the ongoing economic malaise has likely contributed to increased concerns about fee pressure among many SMPs.
Likewise, many small and medium-sized entity (SME) clients are faced with pressure to lower prices of their products and services (equal-third biggest challenge faced by SME clients in the poll). They are continuing to look for ways to reduce costs, so it’s not surprising to find SMPs facing demands to negotiate fees or cut prices while also maintaining the quality of services for which they are known.
For various reasons, this heightened fee pressure threatens to become the new norm, lasting long after the global economy has recovered. First, clients may be determined to keep their bills down and may feel that all professional services, including legal and accounting, may not warrant the fees paid before the economic downturn. Second, globalisation and the benefits of lowered costs from outsourcing to cheaper offshore contractors may prompt clients to demand a share in the cost savings. Third, technological advances mean software can perform some tasks that once required trained human judgement, again leading some clients to expect to share in corresponding cost reductions.
Regardless of whether downward pressure on fees is a temporary phenomenon or more permanent, maintaining the quality of services provided in the face of ongoing fee pressure is essential, not only to the reputation of individual SMPs but, in the long run, to the reputation of the entire accountancy profession.
The following tips should help SMPs to react to this pressure while preserving the quality of professional services rendered.
Tips for coping with fee pressure
1. Adopt new approaches to pricing
For some service offerings, like business advisory, the hourly billing model may place a strain on the practice. Value pricing – which sets prices primarily, but not exclusively, on the value, perceived or estimated, to the customer rather than on the cost of the service or historical prices – may be part of the solution to alleviating fee pressure. Special prices could be offered as an incentive for clients to order a wider range of advisory services. Persistent and widespread under-pricing, however, will impair the perceived value of the service over time, so such practices should be avoided. Packaging more desirable services together with essential but less desirable ones can also be a useful way of getting clients to focus on the concept of comprehensive service provision rather than on hourly charge-out rates.
2. Stress to clients the value of services offered
SMPs should regularly communicate the value of their services so that their clients appreciate the benefits of the services they receive. Articulating this value to clients may help mitigate fee pressure. The ability to communicate value is an important part of value pricing.
3. Focus efforts on your most valuable clients
SMPs should evaluate which clients are the most valuable and then focus their efforts on serving those clients. For non-audit services like business advisory, tax and accounting, practices might wish to implement different service levels (basic, premium, and so on) to suit different categories of clients and price accordingly. This technique, referred to as yield management, is widely used in the airline industry to price seats. Ensuring a proper amount of capacity is allocated to various client segments, while offering a differentiating value proposition within each segment, is an essential element of implementing value pricing strategies. In some cases, it may pay to move away from less profitable clients.
4. Leverage technology to improve processes and lower costs
SMPs can implement process improvements to maintain profitability in the face of stagnant or declining fees by maximising the use of technology. For example, cloud-computing solutions offer the possibility of delivering services like payroll and bookkeeping for less cost. And, simple choices like using email instead of regular postal services and Skype instead of telephone or in-person meetings can also help lower costs. Practices may be in a position to pass on a portion of the cost savings associated with IT efficiencies, which will likely be well received by clients.
5. Re-examine the practice’s service offerings
SMPs should consider whether they can add value (and hence fees) with additional services for little extra cost or provide the same for less cost. For some, specialising in niche markets or services might be worth pursuing to set the practice apart in the marketplace. For others, providing a broad range of advisory services and offering value pricing (see previous point) may prove profitable.
6. Find cheaper sources of supply
Many suppliers, for anything from internet service to computer hardware, may offer benefits to new clients that warrant switching providers. Competitive pricing and choice in suppliers may have improved considerably since the practice chose its suppliers and, therefore, warrant a fresh review.
7. Tackle overheads
SMPs should seek to minimise waste and make the most efficient use of resources, both human and environmental, including workspace, energy and consumables. Similarly, practices should seek the most efficient use of staff through improved distribution of workloads, ensuring adequate planning and supervision of engagements and delegating work to the appropriate levels. Flexible working hours may enable the practice to avoid staff redundancies, which can erode morale and may make it difficult to recruit new staff as and when conditions improve. Shifting more routine work onto more junior staff can help cut costs but, without adequate guidance, could also diminish the quality of the end result and consequently impair the practice’s brand. Therefore, staff assignments need to be managed carefully.
Copyright © August 2012 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC. Contact permissions@ifac.org for permission to reproduce, store, or transmit this document.
