The billable hour has long been the gold standard in the accounting profession. But in 2015, with technology and younger professionals’ results-driven outlook influencing the profession at a rapid pace, is it time to reconsider other options, to weigh the pros of a new system to prepare forward-thinking firms?
Enter the world of value-based pricing, the system that disregards the hourly charge and conclusive fixed prices in favor of pricing the worth and working relationship between client and customer, which, in recent years, has been gaining momentum in the profession.
At the forefront of this pricing revolution is Ronald Baker, founder of the professional education think tank the VeraSage Institute, author of six best-selling books, and radio host of the VoiceAmerica program, The Soul of Enterprise: Business in the Knowledge Economy.
For those unfamiliar with the system, Baker summarizes the win-win goal of value-based pricing thusly: “Let’s say you were hiring a landscaper. The first one says, We’ll do whatever you want for 40 bucks an hour;’ sort of like the billable hour. The second one says, We’ll do all that for $100 a month.’ OK, well that’s more interesting — they’re more focused on the output. The third one says, You’re hiring a landscaper because you don’t enjoy doing this. We’ll take care of this and make sure everything is beautiful and fix anything that needs repairing. You’ll be the most beautiful house on the block.’ Now, which one are you going to pick and pay the highest price to? The one focused more on outcomes. Which one has the highest value and most in the mind of the customer?”
While the outcome of value-based pricing is surely desirable, naysayers cite a myriad of obstacles in the way of implementing the system, starting with having to completely overhaul the way the firm charges clients from the ground up. But the exact opposite is true, according to Baker: “I think it’s not so much learning the new skills of pricing and thinking of how this business model is different — it’s the unlearning that we have to do,” he said. “There’s such orthodoxy in the profession: I was taught in 1984 that I sold time. Thirty years later,
guess what we’re still teaching young accountants in the Big Four and the Top 100 Firms? That unlearning is very, very difficult — to change the paradigm in a profession. It’s very much like changing the paradigm in the scientific community — it can take decades, if not longer.”
This reluctance is noticeable among professionals and might even be inherent in the profession. Joey Havens, executive partner at Top 100 Firm Horne LLP in Ridgeland, Miss., and a proponent of a more value-based approach to pricing, said that there are a lot of factors holding professionals back. “There’s great risk in our minds,” he said. “We are focused on our present revenues that are tied to time [and] we see less risk in hourly billing. Accountants, in general, resist any form of conflict and when we must sit down to negotiate fees, it’s something we prefer to avoid. We are terrible at project management — we’ve had little training in that and we’re not accustomed to properly planning things. That’s why we have a lot of fees billed to clients after the work is done — I call it, Bill and duck.’ And the majority of our partners do not have strong negotiating skills. We haven’t spent the energy to determine the right messaging to establish our value — we typically undervalue what we do.”
Baker asserts that firms already have the means to try a value-based approach, thanks to the system’s unique focus on the individual and their goals. “[Firms] started experimenting with it and that’s relatively easy to do with a partnership,” he said. “You can try this out on your own clients. We suggest that this is a one-client-at-a-time movement because you’re pricing the customer, not the services.”
The true merit of value-based pricing, according to Baker, is that one isn’t constrained by the time limits inherent in the billable hour in achieving a goal; the value given to the client is the desired goal (so much so that during negotiations, Baker suggests the customer should hold 80 percent of the conversation, and the consultant only 20 percent.)
When firms look to charge based on the result for the client, with their wellbeing and satisfaction at the forefront, results have no limit. “One of the things I like to talk about is that what separates a professional from other types of workers is that a professional’s responsibility is producing an outcome, not delivering a series of tasks,” he said.
“I think that the billable hour and the time sheet atomizes everything into six-minute tasks and that’s not professional. We need to be focused on the outcome. I think the level of trust [both internally and externally] increases, not to mention you’re focused on maximizing value, rather than minimizing time or hitting budget — you’re focused on the outcome to the customer, and that’s better for them, and in turn, is more profitable for the firms.”
“The quality of life improves, corroboration within a firm improves,” Baker continues. “If I ask you a question on a client, the first question is going to be, What’s the charge code?’ If you’re not constrained by that anymore, now you’re willing to help me, so the teamwork, the knowledge-sharing, greatly increases when you’re no longer looking at the clock. There’s more innovation, more creativity, more experimentation. Better, deeper relationships with your customers that are really focused on their outcomes.”
HAS THE TIME COME?
Furthermore, the question of a more value-based approach might be less a matter of “if” than “when.” With a younger, more tech-oriented generation of professionals entering the field, the pricing landscape might change more quickly than one thinks.
“I think we have three hard trends that will require people [to rethink how they] price their services, whether it’s value pricing or not,” said Havens. “First, technology is automating lots of what we do; it’s getting faster and faster. Time will be less and less relevant in the future and we can’t slow down [that] transformation. Second, we’ve got to change how we work to be successful with succession of our firms. Our personal lives and work lives are quickly becoming integrated, led by Gen Y. There’s going to be less emphasis on time, and more emphasis on results. It’s so different from what made firms successful in the past. And third, the cost of business is going up — margins are shrinking, and that requires firms to capture more value.”
And while the current incarnation of value-based pricing might not prove to be the definitive answer for a complete billing overhaul, the advantages that the system offers are more than enough to serve as a jumping-off point. “This is all about the quality of life,” Baker said. “I’m not doing this just to pump more money into partners’ pockets; I do this to improve the posterity of the profession. No one joined this profession to bill the most hours and have their worth measured in six-minute increments; I find it dehumanizing. I truly do believe that the only time spent should be in prison. It has no bearing on the value of what we do as knowledge workers.”
“One of the great benefits of value-pricing is listening to what the client really values,” said Havens. “We find [internally] that we understand the client better, our negotiating and communication skills get better, and we become better project managers. In the end, we provide more value and results.”
Baker tells an anecdote about two Australian doctors — Dr. Barry Marshall and Dr. Robin Warren — who proposed that ulcers were caused by bacteria, not stress, as was previously thought in the medical community in the 1980s. The doctors struggled to present their case or have others believe them, despite the fact that the two were right and eventually went on to win a Nobel Prize in Medicine for their efforts in 2005. “Now, that’s a scientific-evidenced based community, something based on empirical evidence,” said Baker. “So how long is it going to take accountants to make this [pricing] change? I think it’s measured in decades, and it probably won’t happen in my lifetime [but] I want the CPAs to change it.”
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