In a late-2012 poll conducted by IFAC, pressure to lower fees was identified by practitioners as one of the biggest challenges facing their small- and medium-sized accounting practices (SMPs). For some service offerings, like business advisory, the traditional hourly billing model may place a strain on the practice. Value pricing—which sets prices primarily, but not exclusively, on the value to the customer rather than on the cost of the service or historical prices—may be part of the solution to alleviating this pressure.

Ron Baker is known for his quest to “bury the billable hour and trash the timesheet.” Along with six best-selling books, he founded VeraSage Institute, dedicated to helping professional firms become “free and independent from the tyranny of time.” Andreas Noodt, member of the IFAC SMP Committee and practitioner at FIDES, a German Praxity member firm, recently caught up with Ron for an interview. This article introduces the concept of value pricing; future articles will look at the “how to” of value pricing.[1]

Andreas Noodt: Ron, you’ve been pursuing your worldwide quest to bury the billable hour and timesheets for the purpose of pricing for over 17 years now. What changes have you seen in that time?

Ron Baker: Overall, I’m encouraged by the progress we’ve been able to make. We are trying to diffuse a new theory into the accounting profession, which is measured in decades—sometimes centuries, as with germ theory in the medical profession— so I’m encouraged, while admitting we have a long way to go. At least the billable hour and timesheet are now on the defensive.

Andreas Noodt: In your latest book, Implementing Value Pricing: A Radical Business Model for Professional Firms, you propose a new business model. But first let us understand your definition of a business model, and your criticism of the traditional firm business model.

Ron Baker: A business model is how your firm creates value for clients and how you capture a portion of that value, so it’s inextricably linked to your pricing strategies. Throughout my accounting career, I was taught the following business model, which I think of as serving “The Firm of the Past”:

                        Revenue = People Power x Efficiency x Hourly Rate

There are several problems with this theory. First, once firms pass breakeven, it gives them a false sense that any revenue is good. Consequently, they accept low-value clients, taking up a firm’s precious capacity, and preventing it from reserving capacity for its most valuable clients.

Second, the way most firms were built in the last century was by leveraging people hours—the pyramid structure. As technology arrived––especially when the computer hit the desktop––the pyramids began to flatten. Most firms, however, still put revenue before capacity, always playing catch-up to the workflow and client demand. This inhibits innovation, client service, investments in CPE [continuing professional development] etc.

Third, most firms focus on efficiency by measuring utilization rates and billable hours. Yet, if you study statistics going back seventy years, you’d find utilization rates and billable hours are within a very tight range. So, whether firms are using a quill pen or a laptop computer, they can charge only so many hours in a year. The theory also compels leaders to believe efficiency is the talisman of running a profitable firm. This is demonstrably false. I’m sure the buggy-whip manufacturers were a model of efficiency before they were replaced by the automobile. What if you are efficient at doing the wrong things?

Last, the hourly rate. The profession has taught approximately three generations of accountants the only thing they sell is their time. This is nonsense, for a very fundamental reason––no client buys time. How can you sell something the client doesn’t buy?

Andreas Noodt: In what ways is your new business model different? Why is it better?

Ron Baker: The old model doesn’t explain why firms are successful, nor does it offer viable alternatives to leveraging the critical success factors in an intellectual capital economy––it is suboptimal. The new business model for “The Firm of the Future” is more optimal:

                        Profitability = Intellectual Capital x Effectiveness x Value Price

This theory has many advantages over the old one. First, rather than focusing on revenue, the firm is forced to think about the profitability of each client. Not all clients are created equal. Many firms could stand to lose up to 40-60% of their clients and they’d be more profitable.

Second, “Professional Knowledge Firms” (PKFs) don’t sell hours. They create and sell—and their clients buy—intellectual capital (IC). This is a far broader view than thinking about leveraging people and hours. Apple and Microsoft didn’t create the wealth they have by pricing by the hour, and I doubt Steve Jobs and Bill Gates kept a timesheet. Third, “The Firm of the Future” will focus on effectiveness, not efficiency. There’s not much the average firm can do to squeeze another 15-20% efficiency from its human capital, which is based on fallible human beings after all, not machines.

If you study surveys of how clients select—or fire—their accountants, efficiency and price is never mentioned. It is almost always because of outstanding service, or lack of service. You can’t provide outstanding service if you are focused on nothing but billable hour quotas and tedious efficiency metrics.

Last, PKFs need to recognize they are businesses, which have prices, not hourly rates. You’d never fly an airline that tried to charge you $4 per minute—and sent you the bill based on the flight time after the flight. PKFs need to start pricing upfront for everything they do, period. No more excuses. Fortunately, in thousands of PKFs around the world—in all sectors, from advertising agencies to law, accounting, and IT firms—this is beginning to happen.

Andreas Noodt: Would you elaborate on the concept of intellectual capital and discuss it in the context of accounting practices?

Ron Baker: A firm’s IC consists of three components: 1) human capital—its people, comprising 80% of developed countries wealth, according to the World Bank; 2) structural capital—its systems, proprietary software, checklists, resources, etc.; and 3) social capital—clients, vendors, suppliers, referral sources, alumni, alliances, etc. These components are the real levers of profitability in any PKF, not hours. Moreover, only the structural capital is owned by the firm—PKFs are the ultimate asset-less organizations.

IC is what economists call a non-rival asset—meaning you can transfer knowledge and it doesn’t diminish (you both now have it). In fact, it grows in usefulness as more people possess it and add to it. In contrast, a rival asset can only be used for one function at a time—if I give you the tie off my shirt, now you have it and I don’t. A billable hour is a rival asset—we can only do one thing at a time. This is a very limiting source of leverage around which to build a business model.

Andreas Noodt: How would you respond to those that claim that what you describe has limited global applicability, it being suited more to the likes of North America, the UK, and Australia?

Ron Baker: While I accept that the accountancy market and prevailing cultural, legal, and business norms vary from country to country, I am sure practitioners everywhere can relate to IC and recognize the increasing globalization of the market for accountancy services. When it comes to the finer points of implementing the new model, in particular value pricing, then we may find some differences.

At VeraSage, we believe this model is superior to, and will eventually supplant, the old model. Eliminating the billable hour and timesheets may not be within reach, but it is definitely within sight.

Meeting Highlights and Podcast

The ultimate objective of governance is to ensure the creation of sustainable organizational success and stakeholder value; these are the core elements of every organization that strives to be competitive and sustainable over the long term. Governance in an organization should, therefore, be about more than a compliance exercise designed with the sole purpose of satisfying regulatory requirements. Instead, good governance affects the entire organizational cycle of strategic planning, resource utilization, value creation, accountability, and assurance. Such a holistic approach ensures that governance is not “bolt on” but “built in”—integrated into all aspects of an organization.

Integrating Governance for Sustainable Success, a new report from the Professional Accountants in Business (PAIB) Committee of the International Federation of Accountants (IFAC), analyzes, through illustrative case studies, how professional accountants in commerce, industry, financial services, education, and the public and not-for-profit sectors support their organizations in integrating governance into the key drivers of sustainable organizational success.

The report uses the key drivers of sustainable organizational success, previously identified in Competent and Versatile: How Professional Accountants in Business Drive Sustainable Organizational Success, as the building blocks for integrating governance in all aspects of an organization. The report also includes illustrative case studies from around the world to provide an analysis of how professional accountants in business support their organizations in integrating governance into these drivers.

Since professional accountants in business are typically involved in the planning, implementation, execution, evaluation, and improvement of governance in their organizations, they are critical to integrating governance throughout an organization. In addition, many professional accountants in business have a responsibility to provide objective and accurate information and analyses to support all of these activities, and may have overall responsibility in governance areas, such as external business reporting. This puts professional accountants in an excellent position to ensure integration of governance throughout an organization—into its very DNA.

Presenting at “The G-20 Agenda Under the Russian Chairmanship,” a high-level public-private sector conference organized by the Institute of International Finance in partnership with the Ministry of Finance of the Russian Federation, International Federation of Accountants Outgoing CEO Ian Ball called on Russia to use its G-20 Presidency to strengthen global financial stability by supporting adoption and implementation of International Public Sector Reporting Standards (IPSASs).

In particular, Ball called on the Russian Presidency to:

• Create a better understanding of the need to significantly enhance the quality of accounting by governments;
• Urge the Financial Stability Board (FSB) to adopt IPSASs as one of the core sets of standards; and
• Direct the FSB to research the effectiveness of different institutional arrangements for fiscal management and governance.

As early as 2007, IFAC stated that it “is concerned that the standards and regulations governing sovereign issuers are not of sufficient quality to protect investors and ensure the stability of capital markets.” Consistent with its past submissions to the G-20, IFAC calls for urgent research and action to address this critical, but neglected, component of the international financial system. The G-20 should actively encourage the adoption of accrual-based accounting and budgeting by governments and public sector institutions, which will promote greater transparency and accountability in public sector finances and allow for monitoring of government debt and liabilities for their true economic implications.

About IFAC
IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 173 members and associates in 129 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

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The International Federation of Accountants (IFAC), the global organization for the accountancy profession with members and associates in 129 countries, opened the nominations period for the 2013 IFAC International Gold Service Award today.

Established in 2010 and presented annually, the IFAC International Gold Service Award recognizes outstanding contributions to the global accountancy profession, including protecting the public interest; exemplifying professional conduct and ethics; exceptional quality of work; and/or contributions to a particular accountancy project or initiative. Past recipients of the awards include such luminaries in the accountancy and finance profession as Professor Mervyn King, Sir David Tweedie, and Professor Stephen Zeff.

Candidates for the IFAC International Gold Service Award may or may not be members of the accountancy profession and contributions may or may not have been made through IFAC.

Nominations from IFAC member bodies must be submitted to the IFAC chief executive officer by April 1, 2013, and consist of a completed nomination form, available on the IFAC website, with a cover letter explaining the nominee’s credentials signed by the president and/or chief executive, or their equivalents. Additional supporting material is welcomed, but should not exceed two pages. Nominations received in a format other than the nomination form will not be considered.

The IFAC Nominating Committee will also identify and recommend candidate(s) for this award. The Nominating Committee will review the nominations, make the necessary inquiries, and recommend candidate(s), if appropriate, to the IFAC Board, which will make the final selection(s), if any, during its meeting in September 2013. The IFAC chief executive officer will notify the selected candidate(s) in writing, and the IFAC president will present the award(s) at the annual IFAC Council Meeting, to be held November 13-14, 2013, in Seoul, South Korea.

About IFAC
IFAC is the global organization for the accountancy profession, dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. It is comprised of 173 members and associates in 129 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

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An erratum to the Call for Nominations for Boards and Committees in 2014 regarding nominations to the International Public Sector Accounting Standards Board (IPSASB) was made available today.

The Call for Nominations contained an error when it was first published on January 15, 2013. The number of vacancies on the IPSASB for 2014 was incorrect—there will be five vacancies on the IPSASB in 2014, including at least one vacancy for a public member. The Call for Nominations originally indicated four vacancies and no vacancy for a public member.

Consequently, the deadline for submitting nominations for the IPSASB for 2014 has been extended to April 5, 2013. The erratum, which provides updated information regarding vacancies, qualifications, and deadlines, is available on the IFAC website.

We sincerely apologize for any inconvenience this error might cause.

About IFAC
IFAC is the global organization for the accountancy profession, dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. It is comprised of 173 members and associates in 129 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

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In This Issue:

1. SMP Quick Poll—December 2012 Results and Year-End Report

STANDARDS AND REGULATION
2. IAASB Consults on Audit Quality Framework
3. Boards Seek Input on Strategy Development
4. Input to IESBA: Responding to a Suspected Illegal Act
5. IFRS for SMEs Update

RESOURCES AND REPORTS
6. Engagement Quality Control Reviews: Practical Considerations
7. Third Edition of Practice Management Guide Now Available
8. Business Reporting Processes Guidance
9. New Translations of SMP Guides

MEETINGS AND EVENTS
10. Upcoming IFAC SMP Forum
11. Next Committee Meeting and New Members
12. World Congress of Accountants 2014 to be Held in Rome; Sponsorship Opportunities

1. SMP Quick Poll—December 2012 Results and Year-End Report

The Nov.-Dec. 2012 IFAC SMP Quick Poll showed that the smallest accounting practices and their clients remain cautiously optimistic, despite concerns over continuing economic uncertainty and, in some cases, overly burdensome regulations and standards.

After keeping up with new regulations and standards, three issues related to the health of the economy—attracting and retaining clients, pressure to lower fees, and rising costs—topped the list of challenges faced by SMPs. Similarly, respondents indicated that their small- and medium-sized entity (SME) clients are most challenged by regulations, followed by economic uncertainty. Respondents generally expect little change in business performance in the coming year; however, slightly more SMPs (5 points more) indicated they expect business to improve in the coming year compared to those who said the same at the end of 2011. They expect this growth primarily to be driven by revenue from new clients.

The year-end 2012 poll was conducted in 17 languages from November 21 to December 31 and received 3,767 responses. IFAC wishes to thank the many member and regional organizations that helped with translation and distribution of the poll. See the full report, which includes notable variations by region and size of practice in addition to selected trend data based on previous polls, in the SMP Committee area of the IFAC site: www.ifac.org/SMP. Also, listen to SMP Committee Chair Giancarlo Attolini’s podcast interview with Accountancy Ireland on key highlights from the poll.

STANDARDS AND REGULATION

2. IAASB Consults on Audit Quality Framework

The International Auditing and Assurance Standards Board (IAASB) has released for public comment a Consultation Paper, A Framework for Audit Quality, seeking input from all stakeholders. Through the proposed framework, the IAASB aims to raise awareness of the key elements of audit quality, encourage stakeholders to explore ways to improve audit quality, and facilitate greater dialogue on the topic. The SMP Committee will submit a comment letter and encourages individual SMPs to comment as well. The comment deadline is May 15, 2013. See also the At-a-Glance Summary.

3. Boards Seek Input on Strategy Development

The International Ethics Standards Board for Accountants (IESBA) is conducting a strategic review to develop a new strategy and work plan for 2014-2016. It is seeking the views of interested parties on key issues to address and their relative priorities as part of this strategy and work plan.

To contribute your views, participate at IESBA 2014-2016 Strategic Review Survey. The survey will close on March 15, 2013. Individual responses will not be made public.

At the International Auditing and Assurance Standards Board (IAASB) meeting in Brussels, the board discussed, among other projects, the development of its future strategy, including the stakeholder survey that will form part of its strategy development. See the relevant agenda paper and IAASB Meeting Page for more information.

4. Input to IESBA: Responding to a Suspected Illegal Act

The SMP Committee submitted a comment letter to the International Ethics Standards Board for Accountants (IESBA) on its Exposure Draft (ED), Responding to a Suspected Illegal Act, which closed on December 15, 2012. The IESBA will consider the significant comments from the nearly 70 responses received on the ED at its March 2013 meeting.

5. IFRS for SMEs Update

International Accounting Standards Board (IASB) member Darrel Scott has been appointed chairman of the SME Implementation Group (SMEIG), replacing Paul Pacter, whose term at the IASB ended last year. The SMEIG supports the international adoption of the IFRS for Small and Medium-sized Entities (IFRS for SMEs) and monitors its implementation. The SMEIG met on Feb 4–5 in London. See the Meeting Page to learn more.

RESOURCES AND REPORTS

6. Engagement Quality Control Reviews: Practical Considerations

An Engagement Quality Control Review (EQCR) is an important component of an audit firm’s overall audit quality process. The staff of the Transnational Auditors Committee (the executive arm of the Forum of Firms) recently released an Information Paper, Engagement Quality Control Review: Practical Considerations, that illustrates the more judgmental elements relating to an EQCR to help practitioners evaluate and enhance their own processes for conducting such reviews. The paper states, “SMPs may very well apply a less comprehensive EQCR that covers all the requirements of the ISAs and ISQC 1.” SMPs are encouraged to refer to the Guide to Quality Control for Small- and Medium-Sized Practices for more guidance.

7. Third Edition of Practice Management Guide Now Available

The third edition of its Guide to Practice Management for Small- and Medium-Sized Practices (PM Guide) is now available. The comprehensive guide covers a broad range of topics to help practitioners effectively market, manage, and grow their accounting practices. The new edition of the guide features improvements in content and functionality, including new and updated material on value pricing, knowledge networks, social media marketing, building a business advisory practice, and cloud computing. The tables of contents of each of the eight standalone modules are now cross-linked to improve navigation, and the lists of further readings at the end of each module have been updated. See also the Companion Manual for ways that professional accountancy organizations can use the guide to benefit their members, and links to additional practice management resources from IFAC, its member organizations, and other sources.

8. Business Reporting Processes Guidance

The IFAC Professional Accountants in Business (PAIB) Committee has developed new International Good Practice Guidance to help professional accountants in business work with their organizations to enhance business reporting processes. Principles for Effective Business Reporting Processes discusses 11 key principles for evaluating and improving business reporting processes, which are complemented by practical guidance outlining the critical arrangements that need to be in place for effective business reporting. The guidance is designed for organizations of all sizes, structures, and sectors, as all organizations need to produce high-quality reports.

9. New Translations of SMP Guides

New translations of the SMP Committee’s three comprehensive guides have recently been released. To access these, filter by language in SMP Publications & Resources: 

• Guide to Using International Standards on Auditing in the Audits of Small- and Medium-Sized Entities in Arabic, Dutch, Latvian, Slovak, and Spanish
• Guide to Quality Control for Small- and Medium-Sized Practices in Italian
• Guide to Practice Management for Small- and Medium-Sized Practices in Italian and Spanish

MEETINGS AND EVENTS

10. Upcoming IFAC SMP Forum

The 2013 IFAC Small and Medium Practices (SMP) Forum will be held in Kampala, Uganda, on June 5, 2013, and jointly hosted with the Institute of Certified Public Accountants of Uganda (ICPAU) and the Pan African Federation of Accountants (PAFA). Each IFAC member organization may send up to ten delegates, who should be those responsible for SMP/small- and medium-sized entity (SME) affairs at their organization. Registration forms will be sent to IFAC member organizations closer to the event. If you are an individual member of an IFAC member organization and wish to attend, please register your interest with your organization. More information will be posted at www.ifac.org/2013SMPForum as it becomes available.

11. Next Committee Meeting and New Members
The SMP Committee will next meet February 18–19 in New York. The committee welcomes new members Dawn McGeachy-Colby, Katharine Bagshaw, and Subodh Agrawal, and technical advisors Eddy Wong, Makokha Wanjala, Ken McManus, and Gail McEvoy.

See bios for all SMP Committee members on the committee’s website: www.ifac.org/SMP.   

12. World Congress of Accountants 2014 to be Held in Rome; Sponsorship Opportunities

The next World Congress of Accountants (WCOA) will be hosted by the Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili (CNDCEC) in Rome, Italy in 2014. Themed 2020 Vision: Learning from the Past, Building the Future, the 2014 WCOA will be held November 10-13 at the Auditorium Parco della Musica. More than 4,000 professionals from all over the world will convene at this can’t-miss IFAC event, held every four years. WCOA 2014 will look back to explore the evolution of the accountancy profession and forward to showcase innovations that will shape the future of the profession. 

 The WCOA also affords an unparalleled opportunity for organizations and firms to share their projects and visions with the world by taking advantage of one of our carefully crafted sponsorship packages. There are numerous options so you’ll be able to select the one that best suits your organization’s unique strategy and goals. For more information, please contact info@wcoa2014rome.com or Dimarco@wcoa2014rome.com. 

The revised International Education Standard (IES) 1, Entry Requirements to Professional Accounting Education Programs, is intended to protect the public interest by both establishing fair and proportionate entry requirements—which help those individuals considering professional accounting education make appropriate career decisions—and ensuring that requirements for entry to professional accounting education are not misrepresented.

This strategy and work plan sets out the vision, strategic direction and corresponding work plan of the International Federation of Accountants’ (IFAC) Professional Accountancy Organization Development Committee for the period 2011-2014. This vision exists within the context of the current and anticipated environment in addition to the perceived needs of Professional Accountancy Organizations (PAOs) in emerging and developing countries and their country contexts.