I was recently asked what I thought about value pricing as it relates to professional services firms. The billable hour is typically how firms price their engagements, but the idea of value pricing is gaining momentum and acceptance is growing.
I believe in a competitive market, value pricing would occur naturally. Misinformation from vested interests in the status quo and professional inertia are slowing the evolution of the audit market into one priced on value.
That being said, value pricing is the only way a product like an audit should be priced.
When I’m truly creating value, it doesn’t occur according to the clock. I’m not necessarily in “value production mode” from 9AM to 5PM, Monday to Friday. Eureka moments occur in the middle of the night when I’m getting a glass of water, or when I’m shampooing my hair in the morning.
They follow no schedule, and they take no time to create. They are split-second flashes of inspiration that can transform the quality of an audit, but for which the widely used time-based model attaches no value.
Further, the value of individual audit tests stems from the design of the test, which may take time but certainly isn’t defined by it. Actually performing the test will take time but it is only worth the results it provides. A five hour test may be better than one that takes an hour, but there are no guarantees.
The greatest advantage for firms is growth through retaining current clients and earning new ones through referrals. But a secondary incentive will be growth by retaining the best staff and motivating them to develop professionally and build strengths they’re passionate about into niches.
Value pricing for clients is one thing, but firms will need to push to establish its concepts within an existing culture. There is still a strong belief that hours worked equals audit “production”. The firm that is value priced both externally and internally will get the most out of it.
It’s all the rage these days on accounting blogs – value-based pricing. You’ll see it everywhere, hip accountants (Who’s a hipper accountant than one who blogs? One who blogs about value pricing!) posting missives decrying the historical basis of hourly billing and extolling the virtues of pricing based on value.
What value pricing means to them, is that we should charge for our services based on a basically intuitive notion of the “value” we’ve provided. Sometimes that value is quantifiable, when you identify cost savings the client would not have come up with on their own. (These poor clients, they’re a hapless bunch to the value pricing gang.)
But most of the time it’s like pulling a number out of thin air. What’s the value of creditor-proofing? Is the value the money you save the company that would’ve gone to the creditors? How about due diligence? Surely a percentage of the sale price is the value of that!
You see, value is in the eye of the beholder. Clients will have a different value attached to the services provided than the provider does – it’s inevitable. How about advising a client against a tax plan that could potentially draw the attention of the CRA? (Aside: CRA is the Canada Revenue Agency, our IRS.) If advice is heeded and the attention diverted, where is the value? The amount the client would’ve had to pay after a tax audit?
In most cases (possibly not with the Big Four, I’ll have to consult with my friends one that one) there’s already value pricing in effect. It’s called the “fee quote.” Many of our clients – actually most – request and get from us a quote at the start of whatever work we’re doing for them, typically audits, of how much the bill is going to be. In this way, the “value” of the service to be provided is agreed upon. Isn’t this a better way to do things than generating a figure to represent the value created at the end of the job?
If the job turns out to be more difficult than forecasted, we’ll usually sit down with the client and explain what sort of extra work we’re having to do and why we need to do it. We provide an itemized list of the extra work and the extra time it required. Right the value pricing gang is choking on the bit: “Extra time? Value isn’t based on time! The billable hour is evil!”
Any way you swing it, the fee quote is the type of value pricing that both clients and professional service providers prefer, because it sets expectations at the beginning of the work and it doesn’t expose those despicable timesheets to the client. And timesheets are still very useful in determining the cost to the firm of an audit.
There’s a particular blog that only discusses the idea that accounting firms, and indeed all professional services firms, should “trash the timesheet” and implement “value pricing.”
The basic concept is sound: Timesheets treat the chargeable hour as the measure of the firm’s services’ value, which distorts its true value to the client and further commoditizes the work we do. Value pricing looks at our services from the client’s point of view and tries to determine what the work is worth to them, and pricing to that.
But it just occurred to me that this blog has such a small niche. It’s a firm’s blog, and they’re definitely leading the charge for value pricing for professional services, but I can’t help but wonder if they’re eventually going to run out of stuff to blog about!