This is the second deep dive in our Enterprise Value Model series. If you missed the introduction from Brian Blaha, start here: Five Levers That Separate Firms Building Enterprise Value from Firms Talking About It. The first lever, Top-Line Growth, is here.
Every managing partner watches revenue. Fewer watch margin with the same discipline, and that's a mistake. Revenue gets attention because it's so visible. Margin is quieter, and it determines how much of that revenue actually converts into profit, and ultimately, enterprise value.
Take two firms with identical growth rates. One firm's growth is accretive to margin: it's coming from high-value, profitable advisory work, and it builds into something a buyer would pay a premium for. The other firm's growth is dilutive to margin: low-value, transactional work that adds revenue without adding value, and the firm ends the year bigger but no more valuable.
Same growth. Different businesses. The difference is the margin, which is why it earns its own place in the Enterprise Value Model, alongside top-line growth rather than beneath it.
I've spent decades on both sides of this question, first building a firm and later advising others on how to build theirs.
Margin is a positioning outcome first, and an accounting outcome only after the fact. It's earned upstream, in decisions made long before an invoice goes out, many of which don't look like pricing decisions at the time they're made. Those decisions show up in four places over and over: pricing, engagement management, operational leverage, and service mix. They're all different expressions of the same decision.
Ask most firms how they set rates and you'll hear one of two answers: they benchmark against what competitors charge, often through an association or alliance, or they apply a formula, billing at some multiple of a professional's fully loaded salary.
Both feel like discipline. Neither has much to do with value. Firms price the person doing the work, not the value the client gets from it. In doing so, they're leaving opportunity on the table.
Twenty years ago, trusted-advisor relationships were far more common among middle-market CPA firms. Consolidation has changed that. Larger, PE-backed platforms have absorbed lower middle market firms and moved upmarket, leaving a vacuum in the middle market. The relationship itself is the same one it's always been. It's simply become rarer.
A similar dynamic has played out in the medical world with the emergence of concierge medicine. Concierge medicine is expensive because availability became scarce, not because the doctors suddenly got better. Patients pay a real premium for a physician who's actually there when they need one. The advisory relationship a strong CPA firm offers today is the same product in the same kind of market: scarcer, and still priced like it isn't.
In my experience, the biggest barrier here is firm hesitation, not client resistance. I've spent the better part of the last year convincing firm leaders they shouldn't be afraid to charge what this relationship is worth, and most of the resistance comes from partners who've never asked.
Firms capturing that margin do more than improve their own profitability. They build the kind of business buyers value differently from a commodity compliance practice.
Pricing and scarcity are the first two places that philosophy shows up. The next two, scope and cost, are where it either gets defended or quietly given away.
Two moments show this same habit in real time, and most firms let both slip past them.
The first is scope creep. A firm agrees to a price for an engagement, then finds the client didn't hold up their end: books aren't tied out, schedules aren't ready. Instead of repricing the engagement, many firms absorb the extra work at no additional charge to the client, and the margin on the engagement quietly evaporates. The work grew, the fee didn't, and no one made a decision about it.
The second is value billing. An eye surgeon performing a retinal operation might work an hour and bill $25,000, because the value of that hour to the patient is enormous. Firms create moments like this constantly, whether it's sourcing capital for a client, delivering an IRS audit with no change, or saving an M&A deal. Value billing prices the outcome the client received; too many firms price these engagements like routine hours and share in none of the upside they created.
Both require the same discipline, and it starts before the engagement does. Scope the work properly up front, and walk the client through the parameters so everyone shares the same definition of what's included. Put it in writing: engagement letters that allow for change-of-scope billing and value billing from the outset, rather than terms you try to renegotiate mid-project when it's too late.
But the letter is only the setup. The real discipline is having the conversation at the moment you identify a scope change - not absorbing it quietly and hoping to recover it later. The firms that protect margin here are the ones willing to say, in real time, "this has moved beyond what we scoped, and here's what that means." A well-written engagement letter gives you the right to that conversation. Having it is what actually captures the margin.
Outsourcing taught the profession this lesson once already. An accountant earning $80,000 domestically and an equally capable accountant earning a fraction of that abroad can do the same work. Firms that put this model to work captured real margin from the gap.
AI is the same test arriving faster. It creates opportunity, in lower delivery cost and faster turnaround, but it doesn't create margin on its own. Whether that opportunity becomes margin is a pricing decision, not a technology decision. When cost drops and price drops with it out of habit, margin stays exactly where it started. Pricing discipline, not AI adoption, will determine who actually captures it.
As with outsourcing, competitive pressure will influence how much of that margin any single firm retains. But firms that begin by pricing to value rather than to cost will have more room to protect it as the market evolves.
There's a second question worth asking, too: what happens to the capacity that efficiency frees up? Lower delivery cost and faster turnaround don't just create room in the margin - they create room in the day. The firms that get the most from AI won't only price it well; they'll reinvest the time it returns into the things that actually compound value: deeper client relationships, more advisory conversations, and the prospecting and business development that most firms never have the capacity for. Efficiency captured as margin protects the business. Efficiency reinvested in higher-value work grows it.
The last lever is service mix, and it's the one I've seen prove itself most directly, because I've lived it.
When I ran my own firm, we built a significant advisory practice alongside our core CPA work: wealth management, payroll, retirement plan design, HR consulting. Those services sat in a separate entity, and a share of their profits flowed back to the CPA firm each year as pure profit, with no offsetting cost against it.
When we sold the firm, the buyer didn't want those advisory pieces, so we sold them separately. That's when something surprised us.
Our CPA firm, the largest business we owned by revenue, was the least profitable business we owned.
Firms have to be intentional about where they grow: prioritizing higher-margin service lines, building depth in niches that command better economics, and favoring recurring revenue engagements over one-time projects.
Growth that lands in the wrong mix can make a firm bigger without making it more valuable. Building that mix doesn't require the same path for every firm: new service lines can be built, bought, or, for smaller firms, shared through a referral relationship structured for a commission. The direction is the same regardless: advisory work carries margins compliance work rarely matches.
Pricing philosophy, scope discipline, the response to falling delivery costs, and service mix all flow from the same question: does the firm price its costs, or its value? Firms that default to cost end up with margins that never move even as revenue does. Firms that price to value build something a buyer sees as structurally different, not just larger.
Revenue can be acquired, but margin has to be designed, upstream, long before the invoice goes out.
Firms that consistently build enterprise value do more than sell work well. They decide, deliberately, what their work is actually worth.
Next in this series: Technology Enablement, the third lever, and why the tools a firm adopts matter less than whether the firm has built the capacity to use them.
Winding River Consulting works with professional services firms building the pricing discipline and service mix that turn growth into real enterprise value. Schedule a conversation with me at gshamis@windingriverconsulting.com to explore where your firm's margin actually comes from.