Lowballing: A Common Phenomenon in Consultancy - Essay Sample

Introduction

Lowballing has become a common phenomenon in consultancy. The term lowball is used to refer to an offer given by a buyer which is usually below what the seller was asking. In the case of the auditing and consultancy, it is a quote given by the potential client that is usually lower than the service provider or the consultant is willing to charge. It is the tactic of giving a false estimate of something as the buyer to get the lowest offer (Twin,2019). It works best when the buyer has an upper hand, giving them a negotiation room.

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Lowballing has been feared to have negative effects on both the client and the auditor. However, when the auditors use the lowballing pricing strategies, the fee structure enables the client management to make some value-improving decisions in the firms. Editors need to be careful since it tends to make them assign too much confidence to the test results leading to adverse consequences (Fatemi, 2012). This discussion looks at a case study that elaborates on the scenario of lowballing. The case study looks at a conversation between Tim and Ann. This paper looks to evaluate the question posed to Tim and what is the best step to take if one was on Tim’s shoes.

1. Answer the question posed to Tim

The question was “What are you proposing, anyway: a fee that’s at a lower margin than normal or one that’s below the projected cost for this job? Either way, it’s unethical, isn’t it?” from the conversation between Tim and Ann in the case study, the client who is the Diamond Health service, a member of Diamond Group seems to have an upper hand in the negotiation due to the competition. This led to them using the lowballing on the quotation fee. Tim was left with a dilemma on what option to take and thus the question, both options provided were unethical thus they had to grapple with the best solution.

To answer the question, one has to look at the assumptions that every assignment in the consultancy platform has to make a reasonable return within a reasonable time frame. Failure to this, what follows is unfortunate consequences on terms of risks and legal liabilities (Fatemi, 2012). Consultants may get tempted to lowballing fee quotations to clients especially when they want to gain new businesses or even retain an existing client. Chances are after lowball fee quotation, the reality of offering the low fee may come knocking when they have to deal with tight audit budgets. This situation can lead to either offering substandard services, or pressuring the staff to forget the time spent in the audit beyond budget allowance (Leonard, Brooks, & Dunn, 2011). This is the scenario Tim and Ann are in trying to win the client. If they take the option and the audit risk is high, and legal liability is incurred, then the cost will be more than they would stand to gain, and their poor judgment will be exposed.

In any transaction, the professional interests demand that any offer should include a reasonable profit that would derive satisfaction in giving useful services to the client (Leonard, Brooks, & Dunn, 2011). This means that besides any other personal interests, the transaction should have some reasonable profit for Tim and Ann so that they can render the services with satisfaction. Therefore, it will be irrational for them to agree on a deal that will make them pull their weight. Noting there are uncertainties on the issues they are going to meet in the process, taking the deal will mean that they will not have resources to cushion the problems they might get in the process. Taking the lower offer would, therefore, leave them exposed, and might end up giving substandard services due to fatigue, tight budgets, and pressures (Leonard, Brooks, & Dunn, 2011). This would lead to their reputation getting tainted, losing the company in the Diamond group, and to some extent all the six companies.

Considering the dilemma Tim was between the lowering of the profit margin than the normal margin or quoting at a price lower than the projected cost is one complex dilemma. If Tim chooses to lower the margin, it will leave them exposed due to the lack of a cushioning fund in case an unexpected problem arises prompting them to incur legal liability or even financing the extra costs from their pockets. On the other hand, lowering their cost of operating may compromise the quality of the services they might lender. In both cases, it is evident that they will have to work under a tight budget or risk even financing the extra time spent from their pocket (Leonard, Brooks, & Dunn, 2011), which is not only irrational but a sign of weakness in their planning.

In accounting, ethical consideration is a vital aspect in considering the choices one makes. Since the incorporation of the AICPA code of conduct in 1989, financial accounting and auditing shifted from the traditional rule-based framework to ethical principles guided approach (Satava, Caldwell, & Richards, 2006). The fact that Tim and Ann argue that both the options they need to choose from is unethical makes the whole idea of quoting the fee lower than needed a moral issue. Due to this reason, it would be advisable to look for other options that do not pass the ethical principles that should guide them in making the right judgments.

2. What would you do if you were Tim?

Being on Tim’s situation, the best approach would be trying a different approach from the one given in the situation. Lowballing is a common occurrence, especially when dealing with consultancy. This happens because the clients tend to compare the consulting fee to the salary which in most cases seems to be higher than the salaries (Twin,2019). Low balling usually happens in situations where the client has an upper hand and it is used to set up a platform for negotiations.

In the case of Tim and Ann, the competition was a bit high and the stakes seemed lower for them. In this case, the chief financial officer had proposed that Tim and Ann reduce their consultancy fee to lower that the current auditor. Chances are, the client’s current auditor was an employee and in comparison to the number of hours the audit will take, the client seems to have compared the fees quoted by Tim and Ann to the salary paid to the auditor. This is a common case since most of the time the clients tend to value consultancy in terms of hours and not the quality of work.

If I were Tim, I would make the effort of shifting the client’s focus from the amount of time taken to instead valuing the solutions provided (Eshleman & Lawson, 2017). In this approach, I would consider using the reference tactic considering all the other companies under the Diamond group are our clients in the auditing. This would be a milestone in proving that the quality of the work offered will be higher and they will gain satisfaction from the amount we are quoting.

It is only ethical that in the consultancy platform one has to make a reasonable return within a reasonable time frame. This means that the case where Tim was considering Lowering the margins to offer the lowest prices was unfounded (Eshleman & Lawson, 2017). I would have considered explaining to the company the value of the services that come with the quoted prices and not how I came up with the prices. This is because in most cases, the client doesn’t care about the process used to come up with the price but rather cares about solving the problem to give a compelling return on the investment (Eshleman & Lawson, 2017). The fact that they were low balling did not mean that they would not consider offering the contract if they were made aware of the solution being offered, with references to their partnering companies which are existing clients. The tactic that should be applied here would be shifting the client’s focus from the amount they will be paid and the number of hours you will spend to making them focus on what matters, and that is the solution to their problem.

Conclusion

In the consultancy ventures, client low-balling on the quoted prices is a common factor that the consultants should know how to approach. Mostly low balling happens when the client realizes that they are in an upper hand and would like to initiate a negotiation that would favor them at the end. This happens in most consultants since it is only common for investors to measure the costs in terms of time used (Twin,2019). In the case of Tim and Ann, this was a similar case where the client recognized that there was a quite big competition and they had to go to the preferred candidate with a low balling offer.

In the case, there was more at stake for Tim and Ann since they in dire need to bring the deal home for them to get a chance to be in an executive committee. However, due to the competition, the CFO came to them with an offer that promised them a chance to winning them if only they lowered the price to lower levels than what the client’s current auditor was earning. This would lead to them quoting at prices below the recommended margins or underquote the cost below the projected cost of the project. The best approach would be to quote their fee within the normal margin and instead of focusing on winning the customer, they work on changing the focus of the client based on the value of the solution they are offering to the client’s problem.

References

Eshleman, J. D., & Lawson, B. P. (2017). Audit market structure and audit pricing. Accounting Horizons, 31(1), 57-81.

Fatemi, D. J. (2012). New Evidence on an Old Question: Does Lowballing Undermine Auditors' Independence or their Clients' Investment Decisions? Current Issues in Auditing, 7(1), P22-P29. doi:10.2308/ciia-50359

Leonard, Brooks, J., & Dunn, P. (2011). professional accounting in the public interest-post Enron. In Business & Professional Ethics (6th ed., pp. 435-444). south-western: Cengage learning.

Satava, D., Caldwell, C., & Richards, L. (2006). Ethics and the Auditing Culture: Rethinking the Foundation of Accounting and Auditing. Journal of Business Ethics, 64(3), 271-284. doi:10.1007/s10551-005-0556-y

Twin, A. (2019, June 25). Lowball Definition. Retrieved from https://www.investopedia.com/terms/l/lowball.asp