Bob Graff is a retired PricewaterhouseCoopers partner living in South Korea. He worked in the Systems and Process Assurance practice (SPA). It was called CAAG in 1986 when he first started doing technology consulting for clients. He has been associated with the Korean practice since 1995 until his retirement last year. He is currently lecturing to the next generation of Asian business leaders at Solbridge Intl School of Business, Daejeon, Korea. This guest post was written exclusively for re: The Auditors.
The Problem with Value
One of the factors which lead economies to repeated brinks of disaster is the pursuit of value. Not that the pursuit of value is wrong, but rather when the definition of value is not shared by the concerned parties inappropriate professional behavior results.
Much has been written and fingers pointed at examples such as banker’s bonuses, underwriter’s creation of dubious investment instruments, auditor’s failure to fulfill their responsibilities and, outright fraud. Generally, one is lead to believe individual self interest motivated the actions, or lack of, of those individuals involved.
While it is understandable we view such actions in terms of greed, this reasoning leaves us with only regulatory and punitive actions by which, through fear of detection and punishment, we attempt to ensure an environment where we can trust the actions of others. Quite frankly, regulation and penalties have proven to be ineffective (or we would have solved this by now). What is needed is a new approach. Not to replace post-event regulation and punishment but to augment them with inducements to encourage the behavior we desire.
As human beings we look for single solutions to complex issues. I do not believe there is a single solution but, there may be a common issue.
I believe the root of the problem lies in our unquestioning acceptance of the term “value”. A quick internet search on the term value will lead to at least a dozen different branches where value is defined and yet we use the term as if it were mutually and universally understood. I believe this common acceptance is unwarranted and in fact creates the undesirable situations mentioned above. Let me propose a definition of value. “That which moves us toward our goal(s) has value. The degree of value is determined by the priority of the goal and the extent to which we move toward it.”
Let me use the auditor /client relationship as an example of how the lack of a shared understanding of value can lead to inappropriate behavior.
The auditor/client relationship is initiated through the RFP – proposal process. In this process the client states requirements and the auditor responds with an understanding, solution, and pricing offer. From this point forward the relationship is tainted and the seeds for inappropriate behavior are sown. Why, because in almost all cases the framework of the relationship is now based on the stated requirements and price – not the desired goals and anticipated value of the service.
This is inadequate because the client has defined the requirements in terms of what they see to be the solution to a problem not in terms of what their goal(s) are. The auditor further compounds this by replying in terms of solution (not outcome) and attaches their goal in terms of price.
A number of issues follow.
Changes in the client’s goals change the adequacy of the stated solution (or realization the initial solution was inadequate) and the auditor is forced to expend additional resources to achieve a changed solution. (They may choose to accept this increase or add additional charges to compensate.) In this case, the client does not really understand the auditor’s position as they believe they contracted for a goal achievement (value) which has yet to be delivered.
In another case, clients fail to see the value in the delivered service and look to maximize their investment in the relationship by asking for “value-added” service. The auditor responds by delivering beyond what was stated in the contract, typically by performing services which they believe the client will value. But again, without a clear understanding of what the client values this effort will be haphazard at best.
At the end of the day both parties feel unsatisfied. For the client (the more basic the service, such as audit) the lower the switching cost and higher benefit from cost shopping other firms. However, the auditor has now made an investment in the client and will take steps to retain the relationship and money stream. From this point forward the risk of a downward behavior spiral expands. As once the auditor demonstrates flexibility in service or cost the client will push to find the limits.
Most of us in the profession have witnessed this dynamic with frustration. I have heard many professionals question the value of their service, driving them to cling to regulation, methodology and, technique rather than search for the value they deliver.
What can be done?
If misunderstanding value is contributing to the problem, an improved understand of goals should lead to improvement. But how to achieve this improved understanding?
The client is not likely to initiate additional effort without demonstrated benefit. But the auditor does stand to gain from an improved understanding of goals and so, it will be the auditor who must make initiate this process.
Here are some common sense steps auditors can take:
- Enter a dialog with the client prior to responding to the RFP. Go beyond understanding the stated solution to seek out their goal(s). What is the outcome they want? Few, if any, clients want a new system, audit, or survey just to have it done.
- Align your proposal to the client’s priorities and goals and find where you have common goals (yes, your goals are important too.). Some of the most enjoyable and successful engagements I have participated on were those where we had common shared goals (i.e. SOX implementation or SAS 70 attestations).
- Start proposals with a clear value statement. What goal will the client be closer to at the end of the engagement. This will lead to better scope creep control, expectation management and project success. As a test, take a current proposal and count how many pages are devoted to the project value and how many are spent describing technique and methodology. (What priority does the client place on your process vs. his goal achievement?)
- Have periodic status update meetings, not focused on % solution complete or solution problems, but rather on goal achievement.
With a clear common understanding and communication of the goals and values desired a significant step would be taken to ensuring the mutual behavior desired by all shareholders.