The challenge of margin squeeze By David Smith on Feb 7, 2020
As part of our online collaboration network sessions, we benchmark the firms in the group. One observation that comes from this activity and also with working with other firms more generally is that many firms are seeing a squeeze on their margins. That is, salary costs are rising faster than the fees are increasing. The hunt for talent is partly to blame as a bidding war on salaries occurs to attract and retain the star performers.
However, many firms are reluctant to lift pricing. Many are reporting greater price resistance than in the past, although, it is also the case that many practitioners are reluctant to have pricing discussions with their clients.
Firms (or partners within firms) that are moving to agreed fees upfront, who also tightly control the scope of the work that will be done, seem to be doing better on the margin front. One reason is that if they can do the work more efficiently, the benefit of doing so is wholly received by the firm. Under time-based billing, some or all of the efficiency gain is often passed back to the client.
Whether or not you have implemented upfront agreed fees you should have a policy of lifting prices by a minimum percentage each year. That should at least be CPI but is probably more appropriate to set a minimum increase linked to increases in salaries.
So there is work to be done in most firms to have more courage to lift pricing. I often see in many firms that same fee being changed year in and year out often with write-offs being incurred. Every year pricing for every client needs to be assessed taking into account their changing circumstances, how easy it is to work with them and the past profitability of their work just to name a few criteria. A discussion needs to occur with each client about pricing and how you can work together more efficiently for mutual benefit. If the gap between the current charge and the appropriate fee is too big you may need a policy of closing the gap over a two or even three year period. If the client cannot accept the need to lift pricing you need to question whether this client is an appropriate customer for your firm.
Then a focus is needed to work on efficiency. In most firms when I ask about their processes I’m often told that they’ve been in existence for aeons. Every firm needs a regular assessment of its processes to ensure:
- Clients are providing complete and accurate information as efficiently as possible
- Software to prepare workpapers, accounts, tax returns etc is fully utilised. Over a long period, I have recommended that there needs to be a “champion” for every software application in the firm who ensures, as far as possible, the firm is making optimum use of automation opportunities and that staff are fully trained.
- Processes are redesigned to capitalise on automation and unnecessary steps are eliminated. How close are you to running a paperless firm? Perhaps this should be a target to drive process improvement. Many of the software suppliers are more tightly moving data between their applications. Are you capitalising on all these opportunities to reduce data entry?
- Staff are well briefed before they start the job. Expectations about deadlines and hour budgets are set. At the end of the job a review occurs, that provides feedback and assesses overall performance to determine how the job could be done better in future years.
Product and service mix should also be considered. Higher margins can often be achieved on advisory work. Many firms on time-based billing have implemented a second higher rate for advisory work. Other firms apply value pricing principles when setting prices for fixed fee arrangements.
Whether or not ongoing margin squeeze will continue to be a challenge, a focus on efficiency and how work is priced just makes sense. It is difficult to make time to do these things when, for many, there is a shortage of labour. However, a failure to do so heightens the danger of being stuck on that treadmill with no escape.