By August J. Aquila
Price It Right
Before you announce new pricing policies to your clients, it is critical that you and all the partners in your firm embrace the new pricing philosophy. The entire process begins with the following:
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- The firm's willingness to make some changes
- An analysis of existing engagements and the economic impact that a different pricing strategy will have on the firm
- A review of how the firm is currently delivering and producing its services
- The firm’s overall relationships and communication style with its clients
Here are some of the impediments to implementing alternative pricing methods. I'm sure that you will be able to add several more to this list.
It seems that the reasons not to change almost always outnumber the reasons to change. That is quite easy to explain. Change is painful. It interrupts the daily routine, the old and comfortable work habits that partners and staff have developed. Change is also stressful. It creates uncertainty. We not sure whether the change will be for the better, especially if we are one of the pioneers of the change. Once you start making changes in the firm, it becomes difficult, if not impossible, to keep making the same excuses for excessive write-downs, extended accounts receivable and so on.
The major concerns I have heard whenever I have recommended making significant changes follow.
- We have been doing it this way for so many years, why would we want to do it differently now? In short, this is pure inertia on the part of the partners. My normal response to this barrier is: "Can you imagine preparing tax returns today the same way you did them 10 or 20 years ago?" Everyone, of course, answers, "Well no." And, some even say, "But this is different." Is it really different?
- I know what I'm doing now; I won't know what might happen if I change my pricing methods. Yes, you do know what you are doing now, but methods become obsolete over time. Unfortunately, the only way many of us will change is when the pain of not changing becomes greater than the pain of changing. But we do not necessarily have to wait until we get to that point. Change is frightening for all of us, including me. Let's accept that as a fact. If we don't change constantly we will only be left behind, professionally and economically.
- I am a dominant billing partner in the firm who has been justifying my high compensation based on billable hours; what do I do now? Such an individual may fight tooth and nail not to make any changes. Changes would definitely weaken this individual's power base within the firm.
In addition, not only would the political power of this partner be threatened, but also his personal security. We all know partners who claim to have more billable time than anyone else in the firm, in fact, some even claim to have more billable time than the entire firm! If you were in that partner's shoes, how would you feel?
- Why do you want to change what has gotten us to where we are today? The answer is that there are countless companies and products that failed to change with the times and are no longer in existence. Older partners will fight younger partners. It may appear to be the "Young Turks against the Old Guard.”
- How will we change our compensation system if we make these changes? Since most firms heavily compensate partners based on billable hours, what will be the new measurement? There already exists a trend in the profession to get away from using billable hours as a key measurement and move toward fees collected. Too many partners have been paid solely on their billable hours and not on what they actually collected. Forget billable hours and put your emphasis on actual dollars that you bring into the firm.
The following are just a few ideas on how to change your compensation system to get your partners to accept the new billing paradigm.
- Make sure that each partner has an annual cash collection goal unrelated to billable hours, and track and report on a monthly basis.
- Set a goal for the percentage of engagements that are not done on an hourly basis. During the first year, you may just want a goal of 25 percent and then increase it every year thereafter until you reach your target.
- Track monthly the number of engagements by biller that are done on an alternative billing method and provide monthly reports to the partner group.
- Track the net profitability of engagements by partners on a monthly or quarterly basis.
There will be other concerns raised among the partners in your firm. To help overcome these concerns, you might want to use the following points to bring your partners up to your readiness level. Some basic reasons to make this change, or at least to move in the direction of adopting alternative pricing methods, are as follows:
- During the past 20-plus years American industry has learned that it can run "lean and mean" if it focuses on profitability and not production. The change from the hourly billing method to an alternative pricing method will increase profitability.
- Other professional service firms that have made the changes noted above also have noticed increased client and staff satisfaction as a byproduct of this change of attitude.
- If we increase efficiencies, we will increase profitability. Most services offered by an accounting firm are repetitive, even those that do not fall into the so-called compliance area. The strategic planning consulting engagement that started out as a one-of-a-kind engagement soon develops into repetitive work. And once this happens, that work can be systematized.
- Firms that are not constantly innovating will fall behind those that are. Accountants don’t have to look too far to find examples. The Big Eight became the Big Six and eventually became the Big Four. Only a handful of the largest United States companies in 1900 are still on the list today. Gone are General Motors’ Pontiac and Oldsmobile divisions; Ford no longer makes Mercury. Chrysler is now owned by Fiat. Change may be the only constant in our dynamic environment today.
- Perhaps the most important reason is that a change in pricing methods will address the clients' changing needs and their growing sophistication. More clients are shopping around than ever before. And the clients are not shopping for price, they are shopping for service and value.
To help the partners of your firm see the advantages of making alternative pricing a reality in your firm, ask them to complete the client fee audit below. It will help you determine whether or not a different billing method on a specific engagement would have been more profitable. If you can demonstrate in dollars and cents what could happen, you are more than 50 percent of the way toward convincing them to change.
Note: If more than one professional serviced the client on the engagement, ask each one to write out the answer to these questions and then compare them. You will be surprised to read the different perceptions of each service provider.
Client Fee Audit
1. What value did my efforts bring to the client on this engagement? Specifically identify the value you brought to the client. _____________________________________________________________________________________________
2. What could I have done to better serve the client? _____________________________________________________________________________________________
3. Was there a way to better manage this engagement?
4. Was there someone else in the firm who could have handled this engagement more profitably?
5. If I had the opportunity to do this engagement again, would I use the same pricing method? If you answer no, which method would you use?
6. Was I able to obtain any new engagements from this client? In other words to what extent did I cross-sell other services?
7. Are there any procedures or systems that were developed for this engagement that can be used in the future? If yes, describe:
8. Did we employ a technology or process that could be used again? Yes____ No____ If yes, please describe:
9. Did I ask the client for a testimonial letter that highlights the value we provided? Yes ____ No____ If no, why not?
10. The fee billed to client under existing method was: $_________
11. Fee billed to client under alternative billing method would be: $_________