Law firms are doing it. So are ad agencies, actuaries and consulting firms. But should accounting firms follow their lead in adopting the trendy value-pricing model?
Ron Baker, founder of professional firm think tank VeraSage Institute and one of value pricing's most vocal advocates, believes they should. In fact, he has already helped some firms make the transition, contributing to the roughly 7 percent of accounting firms in the English-speaking world that he says have switched from the traditional time-billing model. "[Time billing] is a dying model, a suboptimal business model," he said. "It leaves a lot of money on the table and doesn't allow firms to capture the fair value of creating for clients."
Value pricing, in contrast to billing clients by the hour after services are completed, is an upfront discussion about what that work will be worth to the clients. It is "critically important that both [the firm and the client] profit," said Michelle Golden, a senior fellow of VeraSage and president of professional firm consultancy Golden Practices. "If it is worth it [for the firm] to do it, and [the client] agrees, that and only that is truly the value price."
"Time is irrelevant to price. Though firms could abolish timesheets, it's a rare firm that's going to be interested in getting rid of timesheets right away." Golden acknowledged. "Firms are hooked on timekeeping because of their focus on productive-hour goals and realization metrics. The importance of hours is inflated. There are better ways to plan, manage, and charge."
Firms already deviate from time-based charges, she explained. Fixed pricing, usually relegated to audits, can be leveraged as a first step to value pricing. Golden recommends offering multiple fixed-price options instead of a single fixed price.
“Your lowest price can be that bottom price you’d offer with your single price, but strip out some value when you go that low," she said. "And add two options at higher prices. People can’t buy premium offerings if they never see them.”
Going through the exercise of adding and removing value to create different options builds confidence in your new approach, she continued. Then discussing the options with clients teaches the basics of how to conduct value conversations and most importantly how to get to the heart of what’s important to the buyer.
Golden gave an example: After budgeting that an audit would cost $24,000 based on the number of hours it would require, a firm might have to adjust this proposal to $19,000 to be competitive. "When a customer hires a firm at $19,000, the firm is annoyed at taking a $5,000 loss, and the firm goes into the job already annoyed, and with low morale. Partners tell the staff, 'We're really tight on this budget, so keep it to the bare-bones minimum and don't go the extra mile.' When you're not going that service mile, it creates a vicious circle. The customer is not thrilled, they don't refer [the firm], maybe they don't rehire them, and the firm has to go market more."
By offering packaged alternatives, Golden said, bad feelings can be eliminated on both sides of the negotiating table. "The whole profession is dragging itself down with this lower-than-everyone pricing," she continued. "We can heal that by pricing better."
According to Golden, pricing better means the ability to offer more choices. In her example, a full-service option could be offered at $24,000, a "stripped-down" version at $22,000, and the really stripped-down option would remain at $19,000. These different levels should never compromise ethics or audit standards, she stressed.
In addition to firm apathy, Golden believes this approach also circumvents what she has coined the "bill and duck."
"It's [wrong] if a firm agrees on a fixed price, tracks time, goes back late, and then bills clients for extra time," she said. "It happens all the time and creates a huge mistrust with the client. [The firm] issues a bill and prays to God the client pays without calling them. It's a terrible practice; dishonest and unfair."
AREA OF EXPERTISE
Baker would argue the inherent unfairness of valuing time at all.
"The billable hour has to go," he said. "The more important symptom -- the time sheet -- is the wrong measurement for value. The time sheet is keeping the profession mired in the mentality that it sells time. Until firms get rid of it, they won't be excellent at pricing or develop a core competency in pricing. Hours don't equate to value -- nobody goes into a Porsche dealership and says, 'Can I see the time sheets on that?'"
The success of value pricing is contingent on firms creating a dedicated pricing department, Baker added: "Most CPA firms let all partners price, whether it's their own client or not. I'm a firm believer that not everyone is good at pricing; if you're not good at pricing ... study it and go to educational events. ... Most firms have some people that are terrible at it, are wimps. This costs firms a lot of money and destroys client relationships."
Firms in transition need adequate time for pricing education and training. Baker has seen the process, for two-to-four partner firms, take anywhere from three months to two-and-a-half years. "When you turn [pricing] over to a group of people that are good at it, it's a big change -- one of the most difficult changes," he said. "Partners don't like to give up that authority. Other partners hate it and just want to be a great CPA. In partnerships that don't, it creates havoc and they want to take their ball and go home."
Kansas-based accounting and consulting firm Kennedy and Coe avoided this dissension by setting up, with the help of Baker, a panel that reviews pricing for any engagements expected to be above $20,000.
Kennedy and Coe chief executive Kurt Siemers does not downplay the difficulty of the firm's conversion to value pricing, initiated four to five years ago and now "60 percent" accomplished, with the last 40 expected to come in the next year-and-a-half.
"Our most experienced staff, members and managers struggled with it -- it was a huge, huge change," Siemers recalled. "It requires you to give up the paradigm you've lived with for 30, 40 years; the only way you've ever done anything. There are a lot of tentacles that require us to think differently to do any of it well. Until individuals moved themselves to believe it was the right way to do it, they struggled. The younger staff who didn't have that paradigm adapted to it very quickly."
NOT YET TIMELESS
While defenders of that paradigm remain, many in the profession find themselves moving toward value pricing with one eye still on the clock.
"You can't have value billing without knowing what you're worth," said Fred Lindsley, president of Sunshine, N.C.-based practice management and time and billing provider ImagineTime. "We make decisions about how to spend our time, but when we make those decisions, we need to be informed about what we're doing -- we can't just go on our intuition. Sometimes it's going to be right, but most accountants implement bad psychology in their billing. Their fears and expectations of clients control the price."
While any billing process will invite client and provider discrepancies over cost, Lindsley believes tracking time is the most disciplined means of defense. "The people that talk about doing away with time, what they're really saying is they don't want conflict," he continued. "When you send an invoice to a client, you detail each hour out. ... People think you're otherwise attempting to appeal to ego and not addressing fundamental problems. I need to know cost or I can't even value bill."
Value-pricing purists, on the other hand, argue the mutual benefits of upfront pricing. "In a perfect world for us, [our firm is] doing something [for the client] only we can do, and the price would be a higher percentage value we're contributing to them than if every firm could bring that [service] to them," said Siemers. "Part of the whole process in terms of value pricing is you don't price the service as much as look at the value to the client; every client has their own perception of what that value is. It's easier to understand in the consulting world than the compliance world, but it does exist in the compliance world."
Baker would agree. "Once you move over to [value pricing], billable hours become superfluous and can't compare. You're working differently, more collaboratively, and sharing knowledge when you don't say, 'What's the charge code for that?,' when you don't ask for help because of an hour on file. All that goes away and the focus becomes client value. It becomes an obsession. And I can't think of a better thing to be obsessed with than creating value for a client."
*Some of Michelle Golden's quotes have been edited from the print version of this story for the sake of clarity.
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