Breaking the paradigm is all about breaking the current mold and developing a new way of thinking. When it comes to pricing accounting services, it's now time for accountants to embrace a new model.Most other professionals don't charge by the hour - real estate brokers, physicians, life insurance agents, stockbrokers, business brokers. While lawyers still do, they have developed many different types of billing arrangements with clients that accountants could also use.
Let's face the fact that there is an inherent conflict of interest between the client and the service provider when it comes to billing by the hour. For the client, the value for the fees paid is the most important thing. For the service provider, the billable hour is the most important thing.
Every time you work with a client, an exchange takes place. You provide a service and the client pays a fee for the value of the service received.
Value, like beauty, is in the eye of the beholder. From the client's perspective, the amount of time that you spend does not translate into more value. Value is the measurement of the benefits that a client perceives as having resulted from a service. Value can be economic, psychological, emotional or convenience.
In order to put a price on value, you need to find out what the client is willing to pay for the perceived benefit. This requires that service providers think in terms of benefits to clients, not services delivered or the amount of time that it took. First, understand the client's needs and expectations, and then price your service for the value of the benefit, not the time. Pricing needs to be discussed up front, not after the service is provided.
Happy with standard rates?
Most firms do not realize 100 percent of their standard rates. Partners may discount their work from 5 percent to 40 percent, or even more. While most firms today would be happy to get their standard rates, they are probably still underbilling their clients in many cases.
According to the MAP handbook: "Time charges at standard rates should only be the starting point for determining the amount to be billed. The real criterion is the value of the service to the clients. Too often this is recognized only negatively by billing at less than standard rates. Actually, standard rates should not represent a maximum that can be billed for services; rather, they should represent a minimum."
If you are going to break the existing paradigm, keep the above quote before each biller.
So, how do you bill more than standard?
Just having this quote posted around the office won't in itself change much. Breaking paradigms requires much more work. First, educate and inform owners on the negative impacts of being production-oriented. This orientation:
* Causes accountants to produce more chargeable hours by constantly reinventing the wheel (this kills efficiency);
* Forces them to focus on revenue, not profitability;
* Makes them hoard work and, consequently, they do a poor job of delegating;
* Causes them to focus on the technical aspect of the work, and not on client needs;
* Inhibits the creation of more efficient ways of producing services; and,
* Has accountants focusing on individual performance, rather than on team performance.
2. Know your services
All professional services can be categorized into one of four types of services:
* Commodity - where the service provider is hired on price. This constitutes the majority of all work in any given market (60 percent).
* Brand name - where the service provider is hired on the brand name of the firm (for example, Fortune 500 companies traditionally asking the Big Four for audit bids). Firm size and reputation are important for this work, which accounts for 20 percent.
* Experiential - where the service provider is hired for her experience. This is a higher-risk venture for the client, and needs a service provider with credentials. It averages around 16 percent of work.
* Unique - service provider is hired because he has experience working in a particular situations. This often involves crisis situations, where clients pay whatever it takes to solve the problem, and is only about 4 percent of the market.
Know what your service mix looks like, and make sure that you are getting a premium rate for experiential and unique services.
3. Know why and when clients buy
Clients buy a service to satisfy a particular need. Offering a low-cost estate plan will not get people who do not need one to pick up the phone and contact you. There are five states of client readiness to purchase a service. It is only in the last three that a client will take some action:
* The client has an unknown need, and thus no interest and no action in your service.
* The client has some awareness of their need, but it is still not an issue for them.
* The client now realizes that it is becoming a problem; it is becoming an issue, but there's still little action taken.
* The client sees that it is becoming a threat; it is now an issue, and the client plans to take action.
* The client realizes that it's a crisis; they must take action immediately (for instance, the client gets a notice from the Internal Revenue Service, a major shareholder dies, or the client loses a major account).
Make value billing a part of your practice
Most firms are already doing some type of billing not related to hourly work - fixed fees, contingent fees, commissions for investments, etc. Some firms currently use dual or multiple-billing rates for different types of services.
To help your firm break its current pricing paradigm, use the Firm Pricing Questionnaire (see box) as discussion points at the next owners' meeting. Value billing is good for you and your clients. You will improve communication with clients, have fewer billing issues, engagements will be handled more effectively and efficiently, and profits will increase.
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