How Should Accountants Price Advisory Services?

Pricing your fees and knowing how to calculate or create a price is still a heavily discussed topic for accountants, bookkeepers and other professional services businesses in 2019.

At Ignition, we're passionate about helping our customers and users not only price profitably, but the price in a consistent and scalable way, that allows anyone in your team to sit down with a client and confidently talk about your fees.

Once you've scoped the work, it's our job to make sure you win the client and integrate the client into your firm seamlessly.

For today's topic, we want to challenge you to think about "How Should Accountants Price Advisory Services." Whilst Accountants have been advising their clients on compliance work for years, there is a growing trend of firms offering business advisory on the back of real-time data and reporting now available through the popularity of cloud accounting solutions like Xero and QuickBooks Online.

We're very fortunate to have partnered with John Thompson FCA MABP of F3C Advantage for this very discussion.

Before we hand over to John, we think it's important you understand that pricing your fees is an evolving journey in your firm, not a one-stop destination. We encourage you to review your fees every 12 months, and we're working on hard making this easier to manage inside Ignition.

If you're ever unsure or you'd like to speak with someone about your pricing or how to price, your Ignition account managers are available to work with you and have the conversation at any time.

Now with all of that said, it's over to you John, talk us through "The essence of advisory".

"There is a lot of stuff and nonsense talked about advisory services.

Accounting firms including firms that are new users of our Complete Advisory Service (CAS) often ask us for guidance on how best to price advisory services, and of course, the answer is “well that depends”.

Before we talk about pricing Advisory let’s start by being very clear about what Advisory really is and what is needed to deliver Advisory successfully.

OK, let’s get into our helicopters and take a look at the big picture, to make sure we can see the whole forest and not just a few trees. Now, looking down from our helicopter, let’s keep it simple: what is Advisory?

It’s all about the clients. And, clients consistently tell us that what they from Advisory:

• For us to show them that we understand them and their businesses
• For us to bring them new ideas and suggestions; to be proactive
• For us to be in it with them for the long haul – to demonstrate that we care about them and are committed to them.

We found that the best definition of Advisory is helping clients to:

• Preserve and improve personal success
• Protect and develop business success
• Plan to achieve the success they want

And, when we accountants help clients, we are facilitating INSIGHTS to INSPIRE clients to INNOVATE and make changes.

This is the essence of Advisory. It’s all about the clients, it’s all about client-centric advisory services.

Ok, so that’s cleared up what Advisory is. Now let’s consider "How to deliver Advisory successfully."

A good process enables leverage, scale, consistency and quality control.

Most successful businesses will have Standard Operating Processes (SOP), regardless of industry-sector. Whether you’re conscious of it or not, services like Tax and Accounts will have their own set of SOPs.

They may not be formalised, but we know the process that needs to happen in our practice for preparing accounts or handling a tax return for each and every client. Advisory needs to be approached in exactly the same way.

Now let's talk about "How do we price advisory services?"

Pricing for Advisory is no different to pricing for any other work we do for our clients. We have a number of choices involving:

1. Charging Rates

• Normal
• Premium

As we know, most firms operate with each of their staff charging a fixed hourly rate, regardless of the type of work being provided. The hourly rate is related to the seniority of the person rather than the value of the work. This is not client-centric. Why should we expect a client to pay more for hearing a partner say that two plus two equals four, rather than a manager saying the same thing?

Some firms have introduced different rates for different types of work. Most CAS users regard the advisory work they undertake to be a premium rate service and will therefore operate with an increased hourly rate. Surveying CAS users showed that firms are comfortable with an advisory charging rate of 120% to 125% of compliance rate. Some however are much more bullish and are charging 150% or more.

We often find that the firms just testing the water with Advisory will start with a normal compliance charging rate, or a small premium, before gaining confidence and increasing the premium rate over time.

The limitation of all charging rates of course is that they are based on our perceptions as the service deliverer rather than the perceptions of the client or service recipient.

More on how to overcome these limitations later.

Success fees are also gaining momentum in the industry, but are nearly always a “bonus” on top of normal or premium rates, rather than as a fully contingent fee. They are very common in M&A work but less so with other services.

With the sale of a business, firms will typically charge an entry fee to take on the project, followed by further fees for achieving certain milestones such as valuations, preparation of Information Memorandum, beauty parades and then finally completion. Percentages of the value achieved for the seller are common in line with increased percentages of the final price achieved.

Success fees for Advisory are usually simpler than this and normally revolve around helping the client to grow the bottom and/or top line, or alternatively the value of the business based on formulae such as EBITDA with multiples.

The “bonus” is typically a percentage of profit or EBITDA above a certain level of “par” performance. The monthly fees are agreed to achieve “par” and the “bonus” paid for exceeding this.

There are of course some grey areas about what is allowed and not allowed and if the client is an audit client, but the large firms seem to successfully circumvent any issues. So, with a little care this should not stop you engaging with your clients with a success fee if you wish to do so.

Sometimes you will be asked to undertake an initial advisory project either as a one-off piece of work or in advance of moving the client to an advisory package, or indeed in addition to an advisory package.

Advisory Projects should be priced as premium work and can of course include success fees. They should not be priced as normal work or compliance work.

It is unusual for a client to purchase a single discrete service from us. Clients will nearly always sign up to a package of services. Having worked on the other side of the fence, both in the large corporate machine and in SME world, this is certainly what I have experienced and indeed expected. The one-stop-shop concept may not be wholly true of every client/practice relationship but it is not far from being so.

We are all familiar with a basic compliance package of annual accounts preparation, corporation tax returns and directors tax returns supplemented by payroll, VAT and company secretarial plus bookkeeping and so on.

The choice for Advisory Packages is whether to include with the compliance package, as a combined bundle, or to introduce as a second separate package.

Before looking at the benefits of each let’s be clear about the basic Advisory Package. Referring back to the Essence of Advisory at the beginning of this blog, the basic Advisory Package is:

• Initial Planning Day (or half days)
• Quarterly progress, implementation and review meetings (regular scheduled meetings)
• Annual Planning Event

This basic package creates an Advisory recurring income stream and a planning cycle from which additional project and consultancy work will be leveraged, typically including tax and MIS work, among others.

An enhanced Advisory Package could include Profit Improvement, Risk Management and Team Development sessions. For some clients, monthly meetings will work better than quarterly meetings. However structured, regular meetings focusing on the clients plan and their priorities is the key.

The main benefit of providing the client with a combined package is that there will be one monthly invoice and it will reinforce that there is a single client-centric relationship. When the initial package has been a compliance package there is a danger that pricing principles will have been set that now need to be flexed to allow for the greater value of the advisory package.

With the right processes in place to change the emphasis of the client relationship to one of future focus and future success, it is possible to migrate a proportion of existing compliance clients to become advisory/compliance clients. Feedback from our CAS Users indicates that £2 to £3 advisory spend can be leveraged from £1 compliance spend.

Separate packages can be used to establish a different pricing relationship with the client, particularly where the compliance package is, or has been, under significant price pressure.

Establishing premium rate pricing for Advisory can provide opportunities to revisit the compliance package pricing.

For new clients, you will have even greater flexibility. We encourage CAS Users to target new advisory/compliance clients and consider whether compliance-only new clients are something they will ever choose to accept. Sometimes by design, but more often than not by accident, firms will attract Advisory only clients.

Some firms focus on building rapport with prospects and opt for a “we don’t want to talk about your accounts, tell me about yourself and your family” approach. They then broaden the discussion into talking about what’s important to the prospect in terms of financials and non-financials. CAS has specific tools designed to do this. The whole thrust of the conversation with the prospect is focused on helping and supporting the prospect to plan for the success they want, whatever that means to them.

This can result in the prospect wanting to engage their services, only to drop the bombshell that they are paying very low fees to their existing accountant for compliance-only services. In this situation, you can either discuss with the prospect leaving their existing compliance services and engaging with your advisory package or alternatively talk about a combined package priced in accordance with your pricing principles.

Don’t be afraid to build a portfolio of advisory-only clients. This can become a Trojan Horse for you where over time, your client will upsell themselves and will ask you to “do everything,” which allows the pricing discussion to be led by your existing pricing arrangements, not by the pricing of their existing compliance providers.

In all pricing discussions with clients (and prospects) it is important to remind yourself that you are seeking to achieve a balance between the value you are delivering and the value the client perceives they are receiving.

From your perspective, why would you charge the same fee for a positive outcome of £1,000 for the client compared to an outcome of £100,000? From clients’ perspectives, what is good for one client might just be ‘ok’ or even failure for another. One client may regard increasing profits by 10% year on year as good, whilst another would view that as failure against their minimum acceptable profit growth of 15% per annum. This is value or perceptual pricing, or as we prefer to call it client-centric pricing.

Client-centric pricing acknowledges that charging different clients different prices is not only good for your profits but also essential if you want to treat clients with the respect they deserve. It is essential to acknowledge that they are all different with varying goals and aspirations.

Understanding the person or people you are talking to is perhaps the most important pricing variable of all, which is why with CAS we have several tools designed to help the client clarify what is important to them, so that you are able to fully understand their drivers and thus provide them with the help they need and want, at the appropriate price for both you and them.

Client-centric pricing that recognizes and responds to the different value perceptions of individual clients and seeks to match the outcomes you want with the outcomes the client wants will help you establish the client as a relationship client as opposed to a commodity or transactional client. Relationship clients will pay more and value your help and support.

As I said earlier, we are often asked by new CAS Users for guidance on how best to price Advisory Services and of course the answer is “well that depends”.

It all depends on how you are currently pricing the services you are offering, on how comfortable you are introducing premium pricing, whether you want to use success fees, whether you intend to use packages, whether you are prepared to acknowledge that all clients are different, whether you want relationship clients or transactional clients, and whether you will adopt client-centric pricing.

And remember, it is important to value yourself and what you deliver, or nobody else will.

My name is John Thompson and I’m an expert on how to deliver advisory services and build an advisory led practice, having done so and helped others do so for approaching 20 years now.

I run F3C Advantage and we work with accountancy practices of all shapes and sizes that want to get serious about developing Advisory Services, by providing the client-centric advisory delivery platform called CAS – the Complete Advisory Solution – and by supporting them with their training and development.

Firms we work with have transformed not only themselves and their practices with CAS but also the lives and fortunes of many of their clients.