Categories
Auditing

Value creation mode isn’t just from 9 to 5

I was recently asked what I thought about value pricing as it relates to professional services firms. The billable hour is typically how firms price their engagements, but the idea of value pricing is gaining momentum and acceptance is growing.

I believe in a competitive market, value pricing would occur naturally. Misinformation from vested interests in the status quo and professional inertia are slowing the evolution of the audit market into one priced on value.

That being said, value pricing is the only way a product like an audit should be priced.

When I’m truly creating value, it doesn’t occur according to the clock. I’m not necessarily in “value production mode” from 9AM to 5PM, Monday to Friday. Eureka moments occur in the middle of the night when I’m getting a glass of water, or when I’m shampooing my hair in the morning.

They follow no schedule, and they take no time to create. They are split-second flashes of inspiration that can transform the quality of an audit, but for which the widely used time-based model attaches no value.

Further, the value of individual audit tests stems from the design of the test, which may take time but certainly isn’t defined by it. Actually performing the test will take time but it is only worth the results it provides. A five hour test may be better than one that takes an hour, but there are no guarantees.

The greatest advantage for firms is growth through retaining current clients and earning new ones through referrals. But a secondary incentive will be growth by retaining the best staff and motivating them to develop professionally and build strengths they’re passionate about into niches.

Value pricing for clients is one thing, but firms will need to push to establish its concepts within an existing culture. There is still a strong belief that hours worked equals audit “production”. The firm that is value priced both externally and internally will get the most out of it.

Categories
Business

Emerging markets are exciting, but risky

I’m in full study mode now, preparing for the final exam on the way to a Chartered Accountant (CA) designation here in Canada.

I wrote a case yesterday about a company that needed a certain high tech piece of equipment to compete in a globalizing and consolidating industry, and was considering two opportunities.

They could either directly purchase the equipment and stay in Canada, or buy a state-owned company in a South American country who already had the piece of equipment.

Buying in Canada would cost more initially and the projected return of the South American option was significantly higher as well.

The critical point of the case, however, was the riskiness of investing in the country. There was no privately-owned land in the country, and there was no guarantee the company wouldn’t be appropriated by the government later.

Also important to understanding the case was that the bank wasn’t likely to approve the needed financing without some kind of a collateral, and the assets in the South American country weren’t good collateral, for the reasons noted above.

Sound like a country you’ve heard of? Made me think of Venezuela and Bolivia. And it made me wonder how much investment those two countries are forgoing to pursue the dream of a “socialist paradise.”