Last week I raised what may be argued to be two straightforward questions on LinkedIn Pulse and promised to answer them. They are:
What is the difference between an economist, accountant and a finance professional?
What is the difference between cost, price, value and worth?
Before I reply, I will share it is rare to respond correctly, which is both the challenge and opportunity that prompts me to share this post and write Equity Value Enhancement ("EVE"). No, B.S. I do want you to buy the book or take the time to review the first few chapters for free. You'll then see why it was important to capture and share what 1200 engagements in 25 years has taught me. In short, the top 1% have mastered two principles of leveraging human capital and managing risk by investing in unique knowledge and relationships.
I digress. Remember in high school that there were A-students, B, C and so on?
Auto insurance and repair businesses know that we can't all be "great" drivers even though when asked most respond they are. In the business world, there are those who push themselves to strive, question and answer. There are those who show up having earned the right to practice their profession and those who "dare greatly" to make their own paths instead of following others.
Let's take the practice of law. Having worked with hundreds of attorneys, there are varying competency levels and personalities as there are disciplines. So, a solid generalist may be ideal for some matters; whereas a trust & estate litigator may be preferred in others. The layperson might understand the two differ, but we can't assume this is true. They don't know what they don't know.
Let's take the practice of accounting. Many use the general term accountant or CPA; however, within their profession, there are those whose discipline is primarily business and/or personal tax returns; others that focus on audits; and others are compliance oriented.
The point is that not only are there gradients of ability, but also specialization.
Not all are great students or drivers or service professionals. Now consider, the amount of resources owners expend working with existing professionals and those vying to secure business away from these relationships.
If owners see these services as necessary does this equate to their having value or are they expenditures that come down to rates and commissions paid? The provider will always justify s/he is receiving a fair amount (akin to that we're all good drivers). However, if other providers can render the same services or relationship "quality" at the same levels, no differentiation is provided.
In fact, by negotiating fees when clients/prospects may not have a full understanding of what is being received frames the discussion of the offering as a commodity. (What question would a patient likely ask a heart surgeon even if the patient does not perform surgery? Is it cost or success rate?)
Providers can end up compounding the "fees/rates" issue as they are easy measures when they are sourcing other needed services they're unable to provide. Give witness to the "not enough detail to determine scope or complexity" inquiry of "So my client needs 'X', what will it cost?" This all too common exchange occurs because most fellow professionals do not or will not take the time to genuinely understand what constitutes a quality deliverable from an "adequate" one. The real fear of god issue is what is the impact on the client and when will it present itself, such as an audit or dispute?
Then there is the issue of synergies. Most advice is ad hoc, one-off, technical, tactical, transactional. Each profession based upon its own orientation may see a solution. The age old analogy of describing different body parts of the elephant, while never ensuring all looking at the same animal may have differing and conflicting vantage points. This, too, is all too common owner predicament, which compounds the frustration and hesitation to act. Think inefficient at best and ineffective at worst.... and that assumes all are competent professionals. Is it any surprise the prospect/owner wants to minimize what s/he's paying?
So, what the 1% does that is different from others is know the answers to the two questions above. They require a strategic ("holistic") approach that aligns advisors and owners, which forces them to play an A-game, which includes collaboration and cohesion. The owner will always be willing to pay a premium for receiving something above the rate and/or commission as the return of value that is provided far exceeds that amount paid. The provider's success becomes the owner's success as is the converse benefit to the provider.
The above links are for a reference guide that is replete with knowledge nuggets and these optics from both owners and advisors. Who better than a Strategic Value Architect to build this tool so owners and advisors can add value?
As the quote from Warren Buffet above indicates and Oscar Wilde admonishes the trap of 'knowing the price of everything and the value of nothing'.... now the layperson can answer (needless to say the above discussion provides indications of what happens when the differentiation can be made).
COST is what is considered and the benefit of what an alternative would have given. PRICE is the amount paid in return for goods and services. VALUE is the measure of the benefit believed to be gained from the goods or services for which one is willing to pay, which may or may not be its WORTH. (A simple example is if it cost $0.15 to produce a jug of water and it was sold between a price of $0.75 to $1.25 would you pay $1.25 if it was the only selection available? What's its value if you hadn't had any fluids in three days and would you be willing to pay $10.00? How about if that gallon was poured into a pool of water and it was the difference between drowning or not?)
ACCOUNTING is concerned with the gathering, reporting and analysis of business transaction data according to the principles of relevance, timeliness, reliability, comparability, and consistency of information or reports. The social science of ECONOMICS studies the production, consumption and distribution of goods and services through the behavior of people, companies, industries and nations to evaluate and quantify why they're doing what they're doing. The science posits that capital should always be invested in a way that will produce the best risk-adjusted return. Whereas, FINANCE actually figures that process out as it reflects investing decisions and risk management. It is concerned with the time value of money, rates of return, costs of capital and optimal financial structures. This recent Yahoo Finance piece is an example.
So, here's the thing. Care to guess which profession performs the most business and equity valuations and which profession requests it? It's not Financial professionals. These practitioners tend to perform two to four per year. If we assume mastery equates to 10,000 hours as a minimum and three valuations take about 100 hours; then mastery would take no less than 100 years. Yet, it is common practice for advisors and owners to make a retention selection on the criteria of fee. This reminds me of the Best Western commercials where the well slept guest feels good enough to be a surgeon.... just that he's not. And second to ourselves and families, what is the most valuable asset owners have?
This type of issue has incalculable consequences and lays business owners bare to consultants and advisors who may be well intentioned simply because the time to at least distinguish what "good" or "great" is strains commitments of time and importance. That is in part why EVE is a timely book (Pulse Post received 2,000+ views) as the largest number of business owners are baby-boomers and most have no idea their susceptibility to the fee versus value received equation.
Now the reader understands why some advisors are paid for performance and why some owners grow $50 to $500 million companies. They leverage human capital while managing risk. It's simply not financial and tax engineering alone.