March 1, 2022
Your firm prides itself on its technical expertise and client service. You recruit the best employees you can find and invest heavily in their training and development. You instill a culture of excellence in every area of your practice. You’ve even built several niches of industry expertise in order to create a distinguished market position.
Despite your efforts, fee pressure is constant in the marketplace, client retention remains an ongoing issue, recruiting and retaining future partner-caliber employees is difficult, and succession is considered by many, including you and your partners.
Consolidation may appear to solve the problem for a short while, but it won’t fix the structural misalignment within the industry in the long-term. A conflict has developed between the natural operating structure of the accounting industry and the operating structure which the industry is unintentionally adopting because of market pressures.
In the 1995 book The Discipline of Market Leaders, Michael Treacy and Fred Wiersema explain that every successful company positions itself as a leader in the marketplace through one of three value disciplines: Product Leadership; Operational Excellence; or Customer Intimacy. Every company must have a base level of competency in each discipline as a price of market entry, but must lead with only one of the three disciplines if they are to truly succeed.
Whichever value discipline a company or firm selects, it must align its entire organization around that discipline, including its operational and organizational structure, management and strategic development, systems and processes, branding, people, and incentives, among others. If any components are misaligned with the selected discipline, the organization will struggle to reach peak performance.
Product leadership is marked by the frequent introduction of new products or services, typically with relatively short product lifespans and always cutting edge in order to keep their customers engaged in their brand. Notable examples include Apple, Tesla, Callaway, or Nike.
Operational excellence is marked by the ability to compete by being the low cost producer--and therefore the low price provider--in the marketplace. That is achieved by leveraging a heavy investment in the standardization of systems and processes, creating efficiencies throughout its supply chain, and scaling the business to create barriers to entry. Companies in this value discipline compete successfully on price and do not require personal relationships with their customers. Examples include Amazon, McDonalds, or UPS.
Customer intimacy is marked by the ability to understand the individual customer/client at a deep level, providing customized solutions to individual client issues, a high-touch client relationship, and flexibility to provide quick response time for special requests. Companies that adopt a customer intimacy value discipline are not the low-cost producers and therefore cannot create sustainable growth as the low-price providers. Rather, they differentiate themselves on the above relationship factors and use such qualities to command premium fees for their products and services. Examples include Nordstrom, Lexus, or Goldman Sachs.
Of the three value disciplines, product leadership has the least relevance to accounting firms, as CPA firms are typically not designed to be introducing new services on a frequent basis. At first thought, operational excellence might seem to be the key value discipline for accounting firms because of the standardized processes that firms can develop and scale for audits and tax returns. To succeed, however, this value discipline must allow the firm to create market differentiation. Since accounting firms are so highly governed by industry standards and regulations, it is typically not feasible to create competitive advantage based on operational excellence. Furthermore, the supply chain of accounting firms is primarily its workforce, which is a highly competitive market. So it is unlikely that any firm will be able to create sustainable advantage through a lower cost workforce than its competitors.
That leaves customer intimacy: the natural value discipline that accounting firms should be cultivating. It doesn’t require a big investment in product development, systems, processes, or supply chain other than the investment it is already making in order to be competitive. It requires a different mindset and a new approach to creating deeper relationships with clients.
The conflict in the CPA industry today is that the market is forcing the profession into an operational excellence value discipline by its constant pressure for lower fees, which conflicts with the customer intimacy discipline that is aligned with the natural operational and organizational structure of the profession. If that misalignment is present in your firm, you will likely encounter lower profitability, and higher client and employee turnover, than you could achieve with full alignment.
What’s the solution? The CPA profession must shift the market perception back to the days when CPA firms were viewed as business consultants as much as auditors and tax preparers. That’s when intimacy with and service to customers was the rule, price was not the deciding factor in selecting a firm, client retention was high, and it was actually very competitive for prospective employees to even be considered for hire in a high-quality CPA firm. What can CPA firms do today to change their individual market positioning? Firms that can provide “value-growth” services to their clients will be able to preserve their customer intimacy value discipline in the face of market pressures.
Value-growth services are designed to help clients maximize their future value. The process begins with an enterprise-wide assessment of the client company, in order to gain a full understanding of its strengths and weaknesses. The assessment is followed by a multiyear relationship of advising the client on initiatives to strengthen its ability to support long-term sustainable growth and reach peak performance.
The process can be incredibly transformative to the client’s growth, profitability, and overall value, while generating substantial new revenue streams for the CPA firm and fulfilling the customer intimacy value discipline that will help to align the firm’s market position with its operating systems.
Consider the widely published customer relationship hierarchy below. Most CPA firms and, indeed, most consultants, live in the bottom half of the pyramid as value-added suppliers. Even though they meet or exceed client expectations and their clients are satisfied with their services, they remain on the defensive and must continually compete on fees. This is where companies that follow an operational excellence value discipline can thrive, but not CPA firms. It’s a terrible place for professional service firms.
At the top of the pyramid are the most trusted advisors, those who have the loyalty of their clients. Firms that live there are not on the defensive and no longer face price as a critical factor. The only barrier to CPA firms moving to the top of the pyramid is their reluctance to do so. All it takes is the willingness to move slightly outside of your comfort zone, and open up your client conversations to include all of the functional areas of their business. Your client’s perception of you will quickly change to that of a broad-based business advisor rather than a commodity service provider.
Firms that embrace a value-growth approach to their clients will win market share, build client loyalty, reduce fee pressures, become more profitable, and provide a unique employee experience. It solves the firm’s major problems of today, improving profitability as well as client and employee retention, and also the succession problem of the future. Although it may require some investment of time and resources to establish a value-growth services practice, the investment is likely far less than the annual costs associated with replacing lost clients and employees, and it has the potential to double the annual revenue generated from any particular client compared to audit and tax services alone.
Clients need, and are seeking, value-growth services, and such services are a natural fit for CPA firms. The market opportunity is wide open, and the time is now.
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