Perreault−McCarthy: Basic
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Companies, 2002Huntoon & Balbiera, P.C.The partners of Huntoon & Balbiera are having a serious
discussion about what the firm should do in the near future.
Huntoon & Balbiera, P.C. (H&B) is a large regional
certified public accounting firm based in Grand Rapids, Michi-
gan—with branch offices in Lansing and Detroit. Huntoon &
Balbiera has nine partners and a professional staff of approxi-
mately 105 accountants. Gross service billings for the fiscal
year ending June 30, 2001, were $6.9 million. Financial data
for 1999, 2000, and 2001 are presented in Table 1.
H&B’s professional services include auditing, tax prepara-
tion, bookkeeping, and some general management consulting.
Its client base includes municipal governments (cities, vil-
lages, and townships), manufacturing companies, professional
organizations (attorneys, doctors, and dentists), and various
other small businesses. A good share of revenue comes from
the firm’s municipal practice. Table 1 gives H&B’s gross
revenue by service area and client industry for 1999, 2000,
and 2001.
At the monthly partners’ meeting held in July 2001, Pat
Hogan, the firm’s managing partner (CEO), expressed concern
about the future of the firm’s municipal practice. Hogan’s pre-
sentation to his partners appears below:
Although our firm is considered to be a leader in municipal
auditing in our geographic area, I am concerned that as munici-
pals attempt to cut their operating costs, they will solicit
competitive bids from other public accounting firms to perform
their annual audits. Four of the six largest accounting firms in the
world have local offices in our area. Because they concentrate
their practice in the manufacturing industry—which typically
has December 31 fiscal year-ends—they have “available” staff
during the summer months.
Therefore, they can afford to low-ball competitive bids to keep
their staffs busy and benefit from on-the-job training provided by
municipal clientele. I am concerned that we may begin to lose
clients in our most established and profitable practice area.*
Ann Yost, a senior partner in the firm and the partner in
charge of the firm’s municipal practice, was the first to respond
to Pat Hogan’s concern.
Pat, we all recognize the potential threat of being underbid for
our municipal work by our four large accounting competitors.
However, H&B is a recognized leader in municipal auditing in
Michigan, and we have much more local experience than our
competitors. Furthermore, it is a fact that we offer a superior level
of service to our clients—which goes beyond the services nor-
mally expected during an audit to include consulting on financial
and other operating issues. Many of our less sophisticated clients
depend on our nonaudit consulting assistance. Therefore, I
believe, we have been successful in differentiating our services
from our competitors. In many recent situations, H&B was
selected over a field of as many as 10 competitors even though
our proposed prices were much higher than those of our
competitors.33The partners at the meeting agreed with Ann Yost’s com-
ments. However, even though H&B had many success stories
regarding their ability to retain their municipal clients—de-
spite being underbid—they had lost three large municipal
clients during the past year. Ann Yost was asked to comment
on the loss of those clients. She explained that the lost clients
are larger municipalities with a lot of in-house financial ex-
pertise and therefore less dependent on H&B’s consulting
assistance. As a result, H&B’s service differentiation went
largely unnoticed. Ann explained that the larger, more sophis-
ticated municipals regard audits as a necessary evil and usually
select the low-cost reputable bidder.
Pat Hogan then requested ideas and discussion from the
other partners at the meeting. One partner, Joe Reid, sug-
gested that H&B should protect itself by diversifying.
Specifically, he felt a substantial practice development effort
should be directed toward manufacturing. He reasoned that
since manufacturing work would occur during H&B’s off-sea-
son, H&B could afford to price very low to gain new
manufacturing clients. This strategy would also help to
counter (and possibly discourage) low-ball pricing for munici-
pals by the four large accounting firms mentioned earlier.
Another partner, Bob LaMott, suggested that “if we have
consulting skills, we ought to promote them more, instead of
hoping that the clients will notice and come to appreciate us.
Further, maybe we ought to be more aggressive in calling on
smaller potential clients.”
Another partner, John Smith, agreed with LaMott, but
wanted to go further. He suggested that they recognize that
there are at least two types of municipal customers and that
two (at least) different strategies be implemented, including
lower prices for auditing only for larger municipal customers
and/or higher prices for smaller customers who are buying con-
sulting too. This caused a big uproar from some who said this
would lead to price-cutting of professional services and H&B
didn’t want to be price cutters: “One price for all is the profes-
sional way.”
However, another partner, Megan Cullen, agreed with
John Smith and suggested they go even further—pricing744 Cases
*Organizations with December fiscal year-ends require audit work
to be performed during the fall and in January and February. Those
with June 30 fiscal year-ends require auditing during the summer
months.
Table 1 Fiscal Year Ending June 302001 2000 1999Gross billings $6,900,000 $6,400,000 $5,800,000
Gross billings by
service area:
Auditing 3,100,000 3,200,000 2,750,000
Tax preparation 1,990,000 1,830,000 1,780,000
Bookkeeping 1,090,000 745,000 660,000
Other 720,000 625,000 610,000
Gross billings by
client industry:
Municipal 3,214,000 3,300,000 2,908,000
Manufacturing 2,089,000 1,880,000 1,706,000
Professional 1,355,000 1,140,000 1,108,000
Other 242,000 80,000 78,000