Three Ways to Effectively Manage Fee Pressure
Pressure to lower fees has consistently appeared as one of the top challenges facing small- and medium-sized practices (SMPs). In each of the last three IFAC Global SMP Surveys, it has featured in the top four challenges—and it is expected to be the same in 2018. Various factors will affect fees charged, including the type of service provided and circumstances of the entity (e.g., size and issue complexity). Countries may also have different legislation or regulation specific to certain services.
Members of the IFAC SMP Committee recently discussed fee pressure with representatives from around the world who providing their own experiences, tips and good practices.
There is a risk that fee pressure may directly impact the viability of some SMPs, which may be unable to continue operations or decide to only provide certain services. For example, the Financial Reporting Council’s Key Facts and Trends in the Accountancy Profession reported that the number of registered audit firms continues to decrease in the UK and Ireland—falling by 5.1% in 2015/16 compared to 4.6% in 2014/15. The number of registered sole practitioners has also reduced by almost 37% between 2003 and 2016.
In Tunisia, audit fees are fixed and the scale depends on the number of employees, revenue and company assets. In principle, this creates marketplace transparency and prevents audit fees pressure. However, it also creates a lack of competition and tender opportunities, as well as the inability for firms to be able to increase audit fees. For example, firms are unable to increase fees to reflect difficulties auditing highly complex transactions or issues with the engagement, such as delays in the provision of client information. This may directly impact audit quality.
In France, legislation establishes a range of the number of hours for firms to spend on an audit—with some exceptions on certain public companies and complex audits. The range depends on the financial figures of the company. However, the hourly rates can be negotiated without any restriction. Under this system, firms can compete within the range of hours and with the hourly rate. This gives more flexibility to competition and guarantees a minimum level of fees. However, it can also lead to “low-balling” when firm’s offer lower fees for the first year to attract clients and increase them in subsequent years.
Downward fee pressure can also have ethical implications. The International Ethics Standards Board for Accountants’ Ethical Considerations Relating to Audit Fees Setting in the Context of Downward Fee Pressure highlights the fact that one auditor quoting a fee lower than another is not in itself unethical. However, there may be threats to compliance with the fundamental principles of professional competence and due care in the IESBA Code of Ethics for Professional Accountants if the fee quoted is so low that it may be difficult to perform the engagement in accordance with applicable technical and professional standards for that price.
The IESBA publication importantly highlights the role of other stakeholders (e.g., management and those charged with governance) in ensuring that financial considerations in relation to audit fees do not drive actions and decisions that impair audit quality. It should be recognized that high-quality audits are an essential part of properly running an entity’s business and the audit should not be viewed as merely a cost to be minimized.
Of course, pressure to lower fees is not just restricted to audit—there are also concerns related to accounting, compilation and tax services. And the solution cannot come only from regulation. Professionals—especially SMPs—need to develop the skills and adopt the strategies to cope with pressure to lower fees.
Negotiating Higher Fees: Demonstrating and Communicating Value
As highlighted in a recent article, “Communicating Value and Quality with Price”, when entering into fee discussions it is important to focus on value and meeting the needs of the client, not on price. The price should only be the last element of any negotiation. Value must be first—if there is no value, then there is no price.
Three key factors for firms to effectively manage fee pressure relate to the client relationship, the quality and expertise provided and utilizing technology.
Research indicates that SMPs’ relationships with their clients are often long-term, personal and based on trust. Practitioners have an in-depth knowledge and understanding of their clients and are, therefore, well-positioned to provide a range of services. Knowing the client means understanding their business affairs, what motivates them and listening to their pain points, vision and long-term plans for the business and its needs. One of the best ways is through a client questionnaire. The IFAC Guide to Practice Management for SMPs includes examples that can be used as a basis.
What do clients want?
- Accessibility: Partner availability whenever, wherever
- Initiative: Proactive, forward-looking ideas and suggestions to assist the business
- Timeliness: Punctuality and deadlines achieved
- Comprehensive advice: Relate and communicate to management in a way they can understand
- Choice and control: Options to choose from
- Improved relationship: More than just a transaction
SMPs have a clear advantage by being able to build strong relationships with clients at the partner level, which should be used as a selling point and one of the reasons supporting the fee charged. When a level of relationship is achieved, price becomes less of an issue because the client appreciates they are getting sound advice from their trusted adviser.
The art of conversation—that is, the need for clear and regular communication—is vital to a successful, and on-going, relationship. It helps build a closer relationship, increase client retention and efficiencies. Staff satisfaction can also increase by developing relationships with client contacts.
This relationship is two-way. Firms need to spend time proactively assessing and managing their clients. For example, clients can be classified based on the fee level, number of services utilized, payment of bills, recovery rates and enjoyment working with key staff. This ranking may allow the firm to focus its efforts on the most valuable clients and consider special pricing arrangements that apply in different circumstances. For instance, pricing structures could vary depending on the service type or number. For example, preferential pricing or a staged payment plan may be considered for clients who utilize a large number of services. In addition, as highlighted in Avoiding Baker’s Law: Bad Customers Drive Out Good Customers, at times it may be that the price isn’t wrong, the customer is!
Quality and Expertise
The service provided has to be high quality. This should be reflected throughout clients’ experience with a firm—from the initial proposal, onsite interactions with all staff and final service delivery. Ultimately, if the client finds value in what is delivered, they will be willing to pay the appropriate fee. Practitioners need to leverage trust and promote relevance.
Given client’s focus on output and results, the time a firm spends delivering a service may not be relevant. It is widely recognized that time-based billing is an outdated approach for certain services and value pricing is increasingly popular. But it remains important for practitioners to maintain documentation (e.g., timesheets, checklists, reviews) in order to support the level of fees charged. The information may also be useful for future service proposals.
Practitioners need to demonstrate their expertise, which can be a differentiating factor for the fee level charged. By developing sector- or industry-specific knowledge and expertise, practitioners can provide real added-value to their clients. For example, when presenting figures in a client meeting (rather than just through e-mail), the firm could provide publicly available benchmarking information and utilize the data differently with graphics to provide real insights that help distinguish the service provided.
Utilizing Technology=Faster Delivery of Services, Better Cost Management
Leveraging technology is critical to managing a successful practice and delivering client services. Firms must invest in technology to improve service and optimally manage costs. For example, this may include:
- Arranging virtual meetings with clients to facilitate face-to-face communication without travel or additional time costs.
- Investing in the cloud to facilitate access to client records 24-7.
- Purchasing and training staff on data visualization tools.
- Designating a high-performing junior staff member to follow tech trends and inform the firm about possible future opportunities and challenges.
- Establishing virtual offices to enable staff to work remotely and effectively manage their work-life balance.
The Global Knowledge Gateway includes a number of other articles, videos, and resources on these topics.
- Pricing on Purpose: How to Implement Value Pricing in Your Firm, Parts I-III
- Tomorrow’s Firm and the Role of Value Pricing
- How to implement value-based billing