Do you know or even believe you can improve job profitability? Do you view those ‘write downs’ as lost revenue as well as cash that does not find its way into your bank account? If you do, does that motivate you to do all you can to improve job profitability?
Quick summary thus far – If you keep on doing what you have been doing, you will, most likely, keep on getting the same results. Why walk with a limp, when you could run? If you are not fully recovering today, what will you do to change your performance?
In our first article we looked at the manager approach to budgeting and the fact that managers tend to be optimistic budgeters. We then looked at how managers should create a budget on which they can deliver and then…deliver on it. My recommend is that simply put: Managers are responsible for budgeting and delivering on budget. Partners are responsible for agreeing the price. To review this first article – visit here.
Let me first of all share two essential insights:
- One way of reducing time on a job is to not increase charge rates. Wrong. It is always important to raise your charge rates annually. Maybe biannually if inflation in your country is greater than 10 per cent. If you do not increase rates then you have, more than likely, consigned yourself to never recovering that increase.
- The next way of reducing job cost is for time not to be charged. Wrong. It is important to recognise that your time management system is NOTHING more than a Retail Costing System. You need to know the full retail cost of providing your service. Where appropriate, you would surely stress the importance of keeping full and accurate costing records to your clients. Then, my advice here is ‘to do likewise’. It is 100 per cent mission critical that you know the true full charge (retail) cost of each client service. Two reasons – you will, hopefully, be motivated to improve recovery on your client and, secondly, you have a clearer understanding of the cost of serving such clients – good for future pricing for new clients.
Key Points: There are two common occasions when typically time is not charged. (1) When there is too great an emphasis on recovery rate and people say such things as “I can’t possibly charge that time to … [name of client]. And (2) when work is taken home this time is not always fully charged. See this case study:
Case study: Jennifer (name changed)
Jennifer is an audit manager in a globally branded office. During a Margin Mastery training programme, she opened up and shared with everyone that she was working every workday evening, Saturday and Sunday and not charging any of the time. The reason? You’ve guessed – she felt there would be negative consequences if she did not deliver the job within the firm’s recovery standards. Jennifer was, I think, about 28 and I could see she was married. In that moment the thought that went through my head was to wonder what impact this was having on home life. At that moment there was a ‘Me Too’ the origins of the Me Too movement? I jest! All the other 20+ managers attested to the same story. All of them
Worldwide I find there is a high level of turnover in audit managers in the profession. Yes, I understand there is not just one reason but stress relating to making budget and working long hours, are certainly key factors.
Key Point: Staff continuity, especially at manager level is an important factor in job planning, staff management, efficiency and recovery. Clients also like to have continuity at senior level.
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THE PRICING VARIANCE
Improving your job margin is not down to just one factor. Neither is it down solely to either managers or partners. So, in these articles we will unpack components of how to improve job margin.
What is your process/approach to quoting for a new client? Fixed price? Fee range? Hours taken? This last one is definitely a 20th century practice that needs to be upgraded. Is this approach applied consistently across your accountancy business? Is your approach working?
Here are a few Key Pointers that may assist in securing an improved price.
Key Pointer 1: Avoid the trap of quoting less than the previous accountant.
I often tell it like this that clients don’t leave because the cost is too high, they leave because the value is not high enough. So, quote less than the previous accountant and is there not a possibility that the client might think there is no way you can deliver on your protestations of a higher level of service at a lower price?
Key exception: Maybe, just maybe if you are taking on an audit from a Big 4 firm you might shave the cost a little. However, they are more than likely leaving because they want a more personal service.
Remedy – if you feel you cannot increase the price, keep the price the same but focus on delivering the service the client is asking for.
Key Pointer 2: Avoid the trap of a ‘forever price’. How many times have I seen a situation where the price in the first year becomes the baseline for ongoing years? The only adjustment is, perhaps, a price rise that is at best a few base points above inflation.
Remedy: Include in your engagement letter, or better still a separate letter that does not contain all the technical requirements imposed on us all, a sentence that while you, subject to Key Pointer 3 below, reserve the right to adjust the price after the first year. There is an old statistic that suggests the average length of time serving a business client is 7 years. Whatever, it is important to avoid having a job that in retrospect was under quoted. There are few people who enjoy working on a client that is loss making. The risk is that service levels may not be as high as either you or the client would wish or expect.
Key Pointer 3: Some time back I read an interesting book on professional firm pricing by Stuart Dodd’s entitled ‘Smarter Pricing, Smarter Profit’. Stuart was formerly the Global Pricing Director for Baker Mackenzie, the law firm. His book is focussed on the legal profession but there are many transferable principles for accountants. However, it is not the content of the book that I wish to highlight but Stuart’s job title.
We met for a coffee one day in Starbuck’s near to his office at London Bridge. I left with an idea – what I think is an important one – so allow me to share.
Let’s imagine a firm with 6 partners and I meet with each one of them and ask them to give me a quote for my 20-person engineering company. Having told them about my business and answered all their questions I ask each partner for the price to finalise my accounts, perform an audit and complete the company tax work. What is the likelihood that I will be given the same price from each partner? Answer – slim to none!
I have conducted this very same survey at many of my in-house partner workshops. The responses I receive range from X to 3X. My conclusion? We accountants do not quote consistently and often quote low in order to gain the client. We also still tend to price on time – but that is for another series of articles. The key lesson to follow…
Next time – In the next issue due out at the beginning of March I will share an approach that I learnt from listening to Stuart that will eliminate this problem completely. And that is a solution you will not find in his book! See you next time around.