by Barry Brownlow, 1998
Auditing: A Journal of Practice & Theory, published by the American Accounting Association
Summary
Cullian's (1998) argument proposes that specialization can provide competitive advantages to smaller firms. This assumption raises interesting questions, the most important of which is - under what circumstances or conditions could a smaller firm with fewer resources obtain a higher fee than a larger firm with greater resources? A logical extension of this argument indicates significant potential changes in the public accounting profession. One change to be considered would be the industry's value-pricing model which may be at odds with the established value-pricing model of most other markets. Should the public accounting industry rectify its value-pricing model to conform to established models in other industries? Those firms that make the required adjustments first will be rewarded with very significant profit and expansion opportunities. The key is to be one of the first.
SPECIALIZATION AND A NICHE PUBLIC ACCOUNTING PRACTICE
Cullian's (1998) paper echoes the Elliott and Pallais (1997) hypothesis that small firms can compete with Big 6 firms nationally without price reductions. Further, Cullian concludes that greater market share is related to higher fees, an observation that requires more research. This avenue of investigation might reveal the relationship between market share, fees and profits as they are affected by a niche practice (such as the one discussed in the paper). These correlations also give rise to a consideration of the size of the niche market selected and a firm's ability to dominate.
Empirical evidence from the field will be integral in establishing any lasting value-pricing model corrections to be made in the public accounting industry. Our firm's experience has provided interesting observations from the field environment given that our strategic plan entailed developing a niche market for our services centered on the dynamic needs of a set of particular client profiles. Entrepreneurs represent one particular focus group within that niche with company sales in the $2 million to $20 million range; these companies manufacture products for the export market. Our research indicates that members of this client base choose our firm's services primarily because we represent value to them. Consequently, our pricing structure relates directly to our clients' perception of that value. In essence, higher value estimations mean higher prices.
Continually differentiating ourselves from our competition has resulted in a net reduction of the number of firms we compete with for clients' business and, more importantly, has freed us from the strategy of price cutting. Taking the broader view, this extremely effective approach has positioned us in a "specialty" market making it difficult for the client and the prospective client to compare us directly with the competition - be it a firm our size or a much larger one. On this basis, it would be difficult for Professor Cullian to determine if we charge higher fees than the competition - a matter of comparing apples to oranges.
An analogy of our strategy parallels consumer decisions. If you were shopping for a blow drier at Wal-Mart and saw five similar models along a shelf, on what basis would you make your purchase? Price. Product producers in this scenario can only compete on price to gain your business. Conversely, our approach would entail distinguishing our product from other blow dryers and thereby changing the purchase decision. We would want the consumer to make a purchase decision based on what he or she was looking for in a blow drier and we would offer just that product; price would not enter the decision-making process because our product would be distinctive.
The expertise that we have developed is valuable only because it is readily applicable. We have created Client Driven Practice ToolsTM both to allow us to understand our clients' needs while allowing our clients to connect our capabilities to their needs. It is difficult to overstate the importance of these tools, an important aspect of a process that revealed two important trends: (1) clients are willing to pay for what they value and (2) delivery costs actually decreased as our volume within a niche increased. These developments occurred at a surprisingly rapid pace, the result of a strategically designed process that involved the following parameters:
1. The client profile we choose to serve defines our specialization;
2. We identify problems common to our ideal client profile;
3. We work with the client to solve these problems;
4. Our solutions define our expertise and value for the client.
Example
Maintaining focus on important business factors is a problem frequently experienced by entrepreneurs. With a new client service called Holding a Mirror To ManagementTM, we respond to the entrepreneur client's focus requirements and ensure that first things get done first. Over a very short period of time, fees for this new service have rapidly increased by more than 100 percent based largely on our ability to add value from the client's perspective. During that same period of time, service delivery costs have decreased in excess of 40 percent due to process efficiencies.
There were a number of factors instrumental to our development as a firm in these areas. The opportunities presented as a member participant in the subcommittee of the AICPA's Special Committee on Assurance Services combined with our advisory role to the CICA's Task Force on Assurance Services provided regular access to a pool of academics and, perhaps more importantly, to individuals in public practice who are committed to improving the profession. As well, we found further support for our strategy in Market-Driven Management by Fredrick E. Webster Jr.; Webster's analysis of the significance of the Profit Impact of Market Strategy (PIMS) Project was of primary importance. PIMS grew out of McKinsey and Company's consulting project completed in 1969 with General Electric's strategy department where the fundamental determinants of competitive strength and business performance were identified. Moving from General Electric, PIMS evolved into what we know as the Strategic Planning Institute. In our own experience, PIMS has become increasingly relevant to our profession, the first principle of which was critical to our strategy:
In the long run, the most important single factor affecting a business unit's performance is the quality of its products and services, relative to those of competitors.
Webster (1994) observed that firms with the most favorable (profit) performance were those that were able to dominate a complete market niche and not the entire market. Domination, in terms of superior quality, paired the advantages of high price/high margin with that of lower costs associated with increased volume. In the experience of our firm, the measurement of superior quality was a judgment made by our clients vis-à-vis other firms. It was this preoccupation with our clients' perceptions of our quality that emerged as the driver for enhancing the Client Driven Practice ToolsTM mentioned earlier.
Further observations on the effectiveness of this approach have come by way of our recent involvement with the Canadian Institute of Chartered Accountants. We worked with a pilot group of small public accounting firms to assess the affect of the introduction of Client Driven Practice ToolsTM on their practices. Interestingly enough, we noted a number of situations where practitioners offering a blend of traditional services and value-added services tended to not segregate the fee to the service, resulting in underpricing or failing to price at all the value-added service component.
Further Research
Existing research should be expanded to include the perspective of the fee-paying client. Because we are entering a phase of new assurance services, the most important focus is the client perspective. A firm should ask specific questions in order to identify exactly what the client needs. In turn, those requirements influence the services offered and the client's perception of a firm's ability to offer a customized service package.
Questions should include:
1. In the client's opinion, what is the value of Thomas Havey & Co.?
2. Why do they buy from Thomas Havey & Co. and not from their competitors?
3. What problems have they encountered that Thomas Havey & Co. has been uniquely qualified to assist them with?
4. Is there something special in the way that Thomas Havey & Co. delivers their service that makes them more valuable to the client?
This information would prove helpful to other practitioners in two ways:
1. Most importantly, you could identify the circumstances under which a smaller firm with fewer available resources could obtain a higher fee than a larger firm with greater resources at their disposal.
2. The ability to sell your message would be improved. Survey results and empirical research based on clients' perceptions improve data quality and decrease possibilities for misinterpreting information. Research focusing on the client point-of-view can go far in reducing interpretations centered around questions concerning the market share of smaller firms, the competitive selection process, the union role in auditor selection and the bundling of service fees within total audit billing.
Potential Changes in the Public Accounting Profession Value Pricing Model
As consumers in our personal and professional lives, we make endless decisions based on what appear to be intangible factors. Many of us may prefer to purchase a premium-priced beer produced by a micro-brewery over a less expensive label from a large North American beer maker. We may also patronize a small freight carrier that we perceive to meet our local needs all the while knowing that per pound mile, we are not doing things in the most economical manner. Motivations for these and countless other decisions are perplexing and at times appear to defy analysis. Why do we pay these higher prices? Is it because we have a preference for smaller companies? I do not think so - I, for one, enjoy shopping at Wal-Mart. The logical conclusion is that consumers pay more for products and services because they believe they are better. In markets other than public accounting, smaller companies respond to their customers' needs and wants with products and services that are differentiated for their smaller niche markets, thereby enabling them to maintain higher prices. The bigger company is usually forced into offering a product that is less differentiated in order to supply a larger, more competitive market where lower average prices determine purchases.
Most of us would agree that the public accounting profession has created a market that behaves in exactly the opposite manner. Larger firms offer more value-added services and charge higher prices, while smaller firms, which have more flexibility and opportunity to distinguish their service packages, usually offer fewer differentiated services and then respond to heightened competitive pressures with lower prices.
Based both on Cullian's (1998) research and our own firm's experience, we may conclude that the value-pricing model of the public accounting profession could well be on the threshold of a change to the model common to other markets. Those firms that make the required adjustments first will be rewarded with very significant profit and expansion opportunities. The key is to be one of the first.
REFERENCES
FOOTNOTES