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.