All of us have, at one time or another, taken our cars to a mechanic, perhaps for a tune-up, for example. What happens? Do you hand your mechanic a blank check and instruct him to fill it out when the job is done? Hardly. You get an up-front quote on the price of the job.

Let us assume you return to your office and two hours later the mechanic calls and informs you that during the course of the tune-up he noticed a fuel injection problem that needs immediate fixing. Once again, he quotes you a price and allows you to make the decision whether or not he should continue with the additional work.

Selling Additional Services: The Right Way and the Wrong Way
Welcome to the change order. The reason mechanics do not suffer from the level of pricing disputes that we CPAs do is that mechanics inform the customer before the work is done of the price of the additional services that were outside the scope of the original work estimate. They involve the customer in the decision and gain their ego investment on the marginal services.

You can imagine what would happen if the mechanic fixed the fuel injection problem - without informing the customer ahead of time - and simply asked for additional payment when the customer picked up the car. Not a very effective strategy to cross-sell additional services, is it?

Yet this is precisely the practice many CPA firms engage in. And then they wonder why the customer is unwilling to pay the additional price or disputes the amount of time the additional work required. Worse, the lowest levels in the firm - usually staff accountants - unilaterally forge ahead and perform the additional services needed, even though they are outside the original scope of the engagement.

In effect, they commit firm resources without the authorization (or involvement) of the customer - and usually without the knowledge of the manager or partner on the engagement. That is not an effective strategy for successful customer-relationship building, and it also seriously inhibits a firm's ability to engage in value pricing.

Customer Buy-in Is Essential
Ideally, every engagement a firm performs should have a scope clause wherein the responsibilities of each party are clearly delineated. With and audit, for example, the firm may detail that the Prepared by Client (PBC) schedules are to be completed by a certain date.

If the firm personnel arrive at the customer's office and they are not completed, or are completed inaccurately, the staff people need to inform the manager or partner on the engagement immediately - certainly before any work is performed. This will give the manager the opportunity to discuss the deficiency with the customer and allows customer input on how to rectify the problem. Perhaps they need more time, or maybe they are understaffed and would be willing to pay the firm to complete the assigned schedules.

Think back to the mechanic example. Who possesses the leverage when he calls to inform you of the fuel injection problem? He does, because your car is already on the rack for a tune-up, and unless you are a skilled mechanic you will likely authorize him to fix the other problem(s). The moral: Always set your price when you possess the leverage.

Change Orders Indicate a Climb up the Value Curve
One of the greatest advantages in using a change-order policy for all scope changes it that they point out value pricing opportunities. If you have contractor customers in your firm, you are well aware of the fact that many of them will submit low-price bids in order to secure the job and then sit in their offices and pray for change orders to arise - that is where they make their money. For CPAs, change orders usually involve value-added services that can command a premium price, because your Fixed Price Agreement has already covered the basic, compliance-type services (tax returns, tax planning, financial statement audits, reviews, compilations, etc.). In other words, change orders have "value pricing," written all over them and should be priced accordingly.

Another advantage to using change orders it that they lend themselves to innovative value-pricing strategies. Since the majority of change orders represent value-added services over and above the basics, customers are more receptive to contingency pricing, percentage pricing, or even retrospective pricing (where you perform the work and let the customer decide how much it was worth). Sounds radical, but it is not - if you understand that the ultimate arbiter of the value we CPAs provide is the one who is paying our bills: our customer.

Changing Orders Overcome the Three Pricing Emotions
Change orders also conquer the three pricing emotions discussed in "Write Downs and Price Psychology." To review, those three emotions are: (1) price resistance (sticker shock), (2) price anxiety (buyer's remorse), and (3) payment resistance (unwillingness to cut the check). The change order handles each one almost effortlessly. You overcome sticker shock because, before you do any work, you have the opportunity to educate the customer as to the value of the additional service. You allow the customer to make the all-important price vs. benefit calculation - which is essential, if they are to understand the true value of what you are doing for them. And keep in mind that they will not simply judge your minimal price for the change order but will look at the relative price to them (e.g. how much would it cost for them to do the work internally or perhaps not do it at all?). CPAs need to pay far more attention to the relative price (to the customer) of their services not just the "sticker price."

You can easily overcome buyer's anxiety with change orders because you have involved your customers in the decision-making process and gained ego investment from them. If you say it, they can doubt it; if they say it, it is true. Once a customer authorizes your firm to proceed with a change order, he or she has made a commitment to abide by its terms. And - by and large - people will behave consistent with the commitments they make.

Finally, payment resistance is overcome because you have set forth the payment terms in the written change order. Some firms require payment up front, others may offer 30-day terms, payment in stages, or upon completion. It really does not matter how you structure the terms What matters is that you give the customer a say in those terms - these terms are a significant negotiating chip that too many firms simply give away. If you want to completely overcome payment resistance, have the customers set the terms themselves. Who would dispute terms they established?

And, if you think that change orders are only done by mechanics because state laws require them to do so, think some more. Why should CPAs wait for a state law to be passed in order to engage in a practice that has such salutary effects on them and their customers? Part of what it means to be a professional is that we regulate ourselves, and do not sit around and wait for a governmental body to instruct us on business strategies. It thoroughly baffles me why change orders are not widespread in our profession. Yet, I know of only a handful of firms that use them on a consistent basis.

Still to Come
In two weeks, I will provide a sample change order and discuss several different pricing strategies that can be used in conjunction with them.

For the CPA profession, the idea of change orders is one that is long overdue. I cannot think of a more powerful technique to overcome the three pricing emotions, set price for marginal services when you possess the leverage, and receive premium prices for the value you offer. The fact the profession does not use change orders is indicative of its unwillingness to shed its parochial blinders and look outside of itself to learn from others successful practices that obviously work. And - especially with all of our new competitors - there is no better time to improve our business strategies than right now.