Heffron | What is cheap and what is good value?

What is cheap and what is good value?

Accountants daily published an interesting article earlier this week about the ATO targeting low cost SMSF auditors (http://www.accountantsdaily.com.au/breaking-news/8339-ato-targeting-low-cost-smsf-auditors-says-superauditors).

(And then with irony that must have been deliberate, there was an ad about an offshoring conference right in the middle of it in the on-line version I read!)

It got me thinking though – if the ATO really is targeting particular suppliers on the basis of cost, it’s presumably because they don’t think it’s possible to do the job they expect to be done at that price.  I wonder how they decide that without knowing how that cost is achieved? And when is a low cost supplier worrying rather than just a sign of great efficiency innovation?

The article makes some good points – including the fact that the “headline rate” isn’t the only cost to weigh up when looking at any supplier.  If the low cost is achieved by skimping on the job, the new ATO penalty regime makes that a dangerous strategy for everyone – the auditor, accountant, adviser and trustee.

However, low apparent costs can come in many other ways – none of which are inherently evil, they just require a clear understanding so that any arrangements are approached with all eyes wide open.

One approach mentioned in the article is loss leading / cross subsidisation.  A fixed price across the whole client base means that some funds are effectively overpaying for the audit and others are underpaying.  Or extending this further – if the cross subsidisation is occurring across multiple services, it may be that one is cheap because the profit is actually made elsewhere by providing other services to the same clients.  As anyone with any fixed price services will know, this presents challenges for both the business and the client.

For the business – how do you ensure that the gap isn’t too wide or doesn’t encourage behaviour that undermines the model?  (If Service A is cheap because the business is depending on the client also buying Service B, what happens when people stop buying Service B?  And if a service is provided at a fixed price to clients with vastly different circumstances, how do you ensure that the cross subsidisation doesn’t result in significant self selection and the business only ends up with a “complex” client base – which it is now woefully undercharging?)

The risk to the trustee is that the supplier will eventually change their practices.  For example, in the fund administration arena I can think of several suppliers who simply stopped providing Service A (from the example above) in isolation – it could only be purchased with Service B.  They did this to guarantee that overall the client was paying what the business considered to be the “right” price, it was just expressed in a way that made it appear more attractive to the consumer.

Another approach not mentioned in the article is financial subsidisation more generally.  This is unlikely in the audit field but common in others such as fund administration.  A low headline rate is supported by extensive additional fees on the various products that must be used as part of the service.  The risk for the trustee is that they don’t read the fine print and don’t realise what they are paying altogether which can often result in an overall cost that is much higher than the headline rate.  But assuming they are fully informed, many trustees might consider this a perfectly appropriate way to pay for the services they need.

Sometimes low prices come from a very narrowly defined service – in the fund administration arena, it might be that the low rate only applies if the fund has investments drawn from a very specific list.  Or by restricting the service promise to preparing the fund’s financial statements and tax return but anything else (eg dealing with the auditor or ATO when there are problems) is an additional cost or not provided at all.

Finally, low cost can simply be a function of great efficiencies leveraging:

  • Low cost (often offshore) labour;
  • Great technology;
  • Great reductions in the costs associated with acquiring new clients (the classic argument for volume discounts – it is far more efficient to get many clients from one source than the same number of clients from multiple sources)

or all three.

Now a low price for THAT would just be good value.