[IMGCAP(1)]Five years ago we made a change to the way my firm billed for support.
Like most accountants and consultants we had been invoicing clients on an hourly basis. Also, just like the other consultants I was growing tired of working an endless number of hours for which I was ultimately only able to collect a fraction of the true time spent.
For the most part, hourly invoicing worked just fine—for the customer.
The problem is that while we quickly answered many client questions, the years of experience it took to develop the knowledge to answer the questions accurately and promptly were not being fairly compensated.
In other words we were eating time and we encountered these types of attitudes toward billing by the hour:
* If a question was quick—no matter the difficulty or time saved—the call should not be billed.
* If it took us an hour to remotely connect to the client due to IT problems, then the extra time should not be billed.
* When the question was deemed of sufficient importance, then the response should only be billed at the lowest hourly rate that we offered any client and only in five-minute increments.
* If the call involved any additional time for managing other resources—such as calling the technical support department or research—all that extra time was our problem and the client should only be billed for the actual talk time on the phone.
* No matter how valuable our project management time was, clients flatly refused to pay.
* No matter how valuable an initial meeting was, clients flatly refused to pay.
* If the issue that the client was having trouble resolving was related to a software bug, the client refused to pay and justified it as something that the software publisher should compensate us for.
Five years ago we stopped billing hourly for support calls, and then a year ago we stopped billing hourly for anything. All of our consulting work is provided on a fixed-fee basis.
This is a price the client knows ahead of time and can either agree to or select a different (less costly) option. We don't invoice any other way, and our clients either accept that and remain clients or they leave and pay another consultant for a fraction of the hours that they consume.
How did we manage this transition from billing hourly to billing on a fixed-cost basis?
How many clients were lost in the process? When I first set out to implement fixed-cost support for our firm, I caught myself making exceptions. When I'd go to meet with a new client and they would ask about support, the conversation invariably steered back to why they couldn't pay hourly.
At first I was unprepared and found myself making exceptions, too many exceptions. The clients who insisted were soon granted an exception and allowed to pay hourly. My entire plan to convert clients to fixed-price support was in danger of unraveling.
Thankfully the light bulb went off and I realized that when I went to visit these clients and the subject of fees was brought up (which always occurred), it was critical that:
* I was prepared and had a printed copy of our support agreements. Before, I was just visiting clients and winging the explanation of what they'd receive for their annual fee.
* I had an additional option for clients who had different support needs; I developed a "small, medium, large" menu of fixed-support options.
* I limited the offer to one of the three fixed-price support options and did not retreat to offering to bill hourly.
This worked like a charm. Yes, customers still asked to pay hourly. But they accepted that we only provided support in one of three plans—all of which were paid in advance and fixed in cost. Once I started going into meetings prepared. I never once reverted to hourly billing for support.
Managing the transition of clients from hourly to fixed billing was surprisingly easy. We just stopped offering an hourly option. Clients accepted this, and when presented with our three options for support, they picked the option that most closely matched their needs.
There was some falloff of clients who left. Those clients typically were only paying for an hour or two of work per year (and often arguing about even being billed for that small amount). The end result is that the clients who stayed more than made up for the clients who left.
Most consulting firms don’t make the up-front effort to fully implement fixed-pricing concepts and instead put their efforts into “why they can’t implement them.”
One of my clients selected an option that was over three times higher than we would have priced the project hourly ($14,000 vs. $ 4,000). Their reason for doing so? They explained they were more comfortable knowing that we would be on-site for the entire duration and would manage all aspects of the project. In short they wanted to pay more —given the option.
This client has just returned for another upgrade of their system and the pricing option was similar. More importantly, they selected the “black card” (highest service level) price.
Pricing is hard. There’s no magic bullet to compute a fixed price. We’ve made mistakes—but never to the extent that we lost a lot of money. Because all of our customers have an ongoing recurring service relationship with us, I’ve always considered the lifetime value of a customer to be more important than the profit from any one project. (Note: If we don’t feel there’s an ability to help a customer on a long-term recurring basis, we generally decline the work.)
There’s no better feeling than being able to devote whatever time it takes to complete a project without worrying that you need to run from a customer’s office because the hours are starting to add up and the bill would be too high if you stayed longer.
I believe that businesses need a trusted resource to provide candid experienced feedback when selecting or improving their existing technology. I do this by surrounding myself with smarter people with varied experiences who aid me in providing that feedback—even if it doesn’t result in a sale.
Making the change from billing for every hour to billing a fixed price for a project is hard work. It's also work that makes the business of servicing clients more enjoyable and profitable for both client and consultant. The client is no longer watching us like a hawk while we're on-site. In return we're free to manage the work so that there's only one outcome—total client satisfaction.
Wayne Schulz is the founder of Schulz Consulting. He began his career working for two professional service organizations and managing their consulting divisions. He has been active not only with the implementation of Sage MAS 90 and MAS 200 ERP software but often is engaged to help clients design or evaluate their current accounting procedures.
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