The Cost Leadership Model is not Profitable
The overall cost leadership model is not a profitable strategy for accounting practices for four reasons:
- Practices with no staff where the principals do all the work have low revenue. There is only so much fees revenue a principal can bill if they are doing 100% of the client servicing, practice marketing, and practice administration by themselves.
- Practices that want to achieve high revenue must employ staff – there is no way around this fact. As employment awards and conditions are fixed legal requirements they put a floor under employment costs so that it is very difficult to reduce these costs materially below your competitors. For sure, improvements in staff productivity and outsourcing of work (to contractors in Australia or overseas) can reduce costs and improve profitability, but they don’t create material cost advantages.
- With labour costs being fairly fixed, reducing the selling prices of services, results in the predictable outcome of reduced revenue, and decimated practice profitability.
- For service businesses low pricing does not generate substantial new customers and revenues (like it can do when selling products). This is because potential customers associate below market prices of intangibles such as services with below market quality so steer clear of these businesses.
For accounting practices currently operating with the overall cost leadership strategy all is not lost, and they can improve performance by making some changes. Firstly they need to increase the prices of all their services from below market to market prices. This will result in the loss of some clients, but overall revenue will rise, and the hourly income generated by the principal will be substantially higher. A practice increasing their prices by 20% across the board may lose 10% of their client base. This is a wonderful result as the practice ends up doing 20% less work while making 8% more revenue. Importantly, the freed up time is available for training and providing value added services (at still high prices) to select practice clients.