Articles

Taking risks

Accountants who take the risk of agreeing prices on all jobs before they begin will have happier clients, better efficiencies and increased profitability, says John Haylock, BankLink's Practice Performance Manager.

Risk fascinates me. It's a concept that is so important to so much of what we do, yet it is so often so poorly understood. By learning more about risk and its impact on our businesses and customers we can achieve much better outcomes.

Regardless of what type of business you are in, being in business is about taking and managing risks. It is about taking calculated risks to provide better services or products than competitors. It is also about taking risks away from customers and then mitigating those risks within the business.

There's even an economic theory which describes the importance of risk. Boehm-Bawerk's Law says: "Existing means of production can yield greater economic performance only through greater uncertainty; through taking greater risks."

What this law means is that to improve the performance of a business you have to try something new and different. This may be a new product or service, or it could be the way you provide that product or service. In doing such analysis it is very easy to focus on what it is you provide to your customers – the product or service. While this is important, the key insight is to also focus on how you provide your products and services to your customers. That's where there is real opportunity to stand out from competitors.

Customers hate taking risks with their hard-earned money. They want a business to provide them with exactly what they want, when they want it, and in the way they expect it. Customers want absolute certainty. They want the business to take the risk away.

But many business owners also hate taking risk with their business. So they push the risk back on to their customers and do not provide the certainty customers want.

The result is unhappy customers with little loyalty.

In accounting practices an obvious example is the way most accountants set the price after the job has been completed and the hours involved have been added up. This takes away the risk of the job taking much longer than expected and the accountant taking a loss on the job. It also places the risk back on to the client, who enters into a transaction not knowing what the price will be.

Generally, clients don't like this as the risk causes anxiety. Clients want to know what the price will be before the job is started as that is how most businesses operate. Clients want certainty from their accountant.

There is a great story about the absurdity of pricing after the event written by American lawyer Kevin Pratt. Here is an excerpt quoted from Ronald J Baker's 'The Professional's Guide to Value Pricing'.

The Denver lawyer stepped up to the airline ticket counter and asked to buy a ticket for a flight to Chicago. "No problem," said the clerk, "but before I issue the ticket, I should remind you of the new way we charge for tickets. This year we have adopted a 'basic rate' of three dollars a minute for our flights. The clock starts when you check in at the gate and stops when you pick up your luggage...we call it a 'basic rate' because we sometimes adjust that rate up or down if the flight is very empty or very full...we may multiply that rate if our expert pilot finds a tail wind."

The astounded lawyer choked, "But how much will this trip cost me? How do I know you do not slow down on purpose? How do I know your bill will be correct?"

The clerk stared down over the end of his nose. "I can see you're not familiar with the complexities of airline work. There are so many things we cannot know in advance – the winds, traffic delays, the weather, the routing. Airlines are a business, and we have to make a profit to stay in business. Now do not worry, we're very honest and sensitive about all this billing business and I am sure you'll be pleased with our fully itemised bill when you get it."

We wouldn't accept this type of pricing from an airline. Yet this is exactly what so many professionals expect their clients to accept.

Yes, it is risky to put in place a process of agreeing prices on all jobs before they begin. But implement the process properly and you will not only have happier clients, the process will drive you to be more efficient and make more money.

This article first appeared in The Journal. It is reproduced with the permission of the NZICA.