The Great Debate, Part 2: The Case for Value-Pricing

18  Reasons to Trash the Timesheet. Next, read The Case for Timesheets.

Value-Pricing or Hourly-Billing: Which works better and why?
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By Ed Mendlowitz

If you've read the "The Case for Timesheets," you might think I couldn't live without timesheets.  But I know many firms use their timesheets differently than I do.

But first:  The business model of not using timesheets recognizes there is a new way accounting services are being delivered to clients and so we need a new way of managing the accounting firm.  This new model is explained and charted excellently in a logically understandable book that I highly recommend which is From Success to Significance: The Radical CPA Guide by Jody Padar.

Based on the partners and firms I know, most use timesheets only for billing and determining staff “bonuses,” which are substantially based on “excess” hours, rather than exceptional performance and client service.

Working long hours on a client does not equate to effective value transference.  Because of this, I believe these partners are short-sighted and actually do not understand how to fully run their business.  I have used timesheet information as a valuable tool to great success.

However, today I want to trash the timesheet and present my reasons for value-pricing.

The Case for Value-Pricing

1. Timesheets are an excuse for poor management and oversight by managers and partners.  Using timesheets for many partners replaces a closer hands-on management and awareness of what the client is getting based on what they need.

2. Timesheets foster a compliance mentality rather than a service and value providing mindset.

3. When the only thing timesheets are used for is billing, staff and partners become less aware of the purpose of what they are doing and more concerned with the “hours” spent.

4. There is a tendency to reward staff who work high hours greater than staff with low hours, irrespective of the quality of the work done.  For instance, an error-prone staff person would usually work more hours than one that does not make errors. Also, the error-making staff person is seen working late, while the more effective staff person goes home earlier since they do not need to make up the time to correct errors.  That late-working staff person is wrongly considered more diligent and a better team player.

5. The client with the error-prone staff person would be billed a higher amount on a time-based billing system.  This is just not right and it doesn’t make sense.

6. It's simply not logical to base staff bonuses on hours worked rather than on the quality of the work, the results, or the value conveyed to the client.  I know those timesheet advocates will disagree with what I just said because, as one of them might say, of their “close and diligent management of the work done and value conferred.” But I am willing to bet that their “close and diligent management" is a myth.

7. Using timesheets for any reason confuses the staff and partners and turns the focus away from staff performance and delivery of client value.  Timesheets create the fences around which thoughts are contained and ideas cannot percolate freely.

8. When timesheets are used, everything is “on the clock.”  No matter what partners say, every minute, or tenth, or a quarter of an hour gets recorded.  Clients do not like being billed for off-the-cuff discussions or telephone calls. Such billing practices inhibit free-thinking discussions and calls.  The last thing I want is to have a client not call me because they are watching the clock.  It is important to make clients aware that they will not be billed for phone calls, unless it is a prearranged meeting to discuss a substantive matter.  I feel so strongly about this my most recent book is titled Call Me Before You Do Anything.

9. Quoting hourly rates when a client is relatively unsophisticated or has a fairly standard issue doesn’t work.  Clients will use professionals they feel are experienced in a matter.  It stands to reason that if the accountant is experienced they should have an idea of what it would take to deal with it, so a fixed fee quoted beforehand should be pretty easy to do.  Telling a prospective client your rate is $300, $400 or $500 an hour and that you don’t know how many hours it would require does not work, at least for me and the people I speak to.  What are you afraid of – quoting too much or too little?  If too little, then what is the harm?  It is a new matter and whatever you receive will go to your bottom line.

10. Clients don't buy hours. When was the last time a client engaged you saying they wanted to buy so many hours?  What they want to buy are solutions to their problems and the security knowing they are in the good hands of a professional that will look out for them.

11. Sometimes it requires some investment to determine the fee.  So in many cases I ask to see the prior tax returns or financial statements, brokerage account statements, contract or whatever document can help me understand the issue and get a sense of what is involved.  Sometimes I ask to visit the premises or meet with others involved in the matter and even bring other partners with me.  After I have a sense of the issue, the scope of the dollars involved, and the importance or value to the client, I am able to come up with a pretty good fixed-fee or value-price.  Sometimes there is some give and take, but not outside the realm of what I initially quoted.  I am also very careful to delineate the services we will perform and the client's responsibility, duties, collaboration, and assistance.  If the scope starts to drift from the agreed-upon parameters, it is called to client’s attention and a new or separate fee is agreed upon for the extra work.  This is similar to Ron Baker’s change order.

12. Once, a long time ago, I did a special consultation for a client and charged him $12,000 based on time.  Immediately after I finished that project a second client called with the same issue.  The time came to $6,000 which was billed and paid.  Right after that, a third client had the same issue and the time came to $1,500 which was also billed and paid.  Doing this today I might still do the initial project on a time basis.  If it were initially on a fixed fee, I am not sure the results would have been as good since I would have more closely stuck to the original project as described by the client. But I actually exceeded the scope and did a much more thorough job that included potential circumstances that were not anticipated either by the client or me, but which developed while the research was being performed and also during the report writing.  Seeing the result, I was prepared to justify the time, but it never came up and we were thanked and promptly paid.  Today the second and third clients would be quoted a fixed fee somewhat similar to what the first client paid.  Over the years, this project was replicated a dozen more times and fixed fees were quoted based on the charge to the first client.  I learned, but I needed a little reflection and an unshackling of my mindset regarding the supposed integrity of strict time-based billing.  I suggest that if your fee arrangement is strict time-basis and you do not discuss the pricing for special projects before starting, you are locked on that basis.  However, regardless of the fee arrangement, you are never precluded from suggesting a fixed- or value-based price before you start an out-of-scope special one-time-only project.

While agreeing upon a fixed price in advance is a good way to set prices, there are some situations it cannot be done, or where it just won’t work. And for those, I would keep time records.

13. Value-pricing is not value billing. Value-pricing is where a fee or price is determined prior to any work commencing and where the project and objectives are clearly defined and the value to the client is clearly understood.  Value-billing is where the bill is presented after the work has been completed and is based upon what the accountant thinks the value to the client is. It is a unilateral expression of value, while the value price is a collaborative endeavor.

14. I like to try new things and search out ways to add value to a client.  When I am on a time-basis, I make myself accountable for the time spent and the results, and I usually need to explain why I exceeded the parameters of the engagement without first discussing it.  On a fixed fee I have the leeway to try new things or to look in areas that weren’t contemplated.  I know that special work needs a “change order” but sometimes I like to explore new areas, not knowing if our search will yield a successful solution.  Many times we have come up with extraordinary results and, while we weren’t specifically compensated at that time, it resulted in substantial additional fees going forward.  Time-billing thwarts experimentation.  Of course, if you are on a time basis and you have a client that will pay whatever you bill them without question, then you also have the freedom to try new things, but those clients are few and far between.

We are who we are in some respects because of our experience.  If we ignore the experiences from new or unusual things it is no different than not having had the experience.  If we are smart enough to recognize the new, then we can grow – not dramatically, but somewhat.  It is the sum of the somewhats that shape us and, in my case, has allowed me to have a successfully fulfilling and fun-filled career.

Two cases in point:

  • One occurred around 1978 when a client received a bill for a nice round amount from his attorney and the client asked me if I thought it was reasonable.  It was high and I said that. The client asked me to call the attorney and find out the basis for the amount.  I called and asked to get an accounting of the time, and the attorney said they did not keep timesheets, but when they billed a client such as mine for the prior year they looked at what they did, the service they provided, their responsiveness and what they felt the value was to the client and then came up with what they thought was a reasonable fee.  I told this to the client, he thought about it for a couple of seconds and then said it seemed reasonable and he paid it, and never questioned that attorney’s bill again.  This was the first time I interacted with a client who paid a bill that was not specific or itemized but that was deemed fair.  I learned from this experience.

 

  • The other case is the many accounting firms that do not review the time-run other than to prepare the monthly bills.  The time-run is a treasure trove of information, some of which I referred to in "The Case for Timesheets," and for which I could write a very long article or mini book about, yet many do not use it as such.  That is wasted or ignored experience.  For those using timesheets, now is the time to consider alternatives and to create new experiences for themselves.

This column has primarily been concerned with the pros and cons of using timesheets and the billing benefits of not using them, and I think that this is a perfect reason to consider not using timesheets.  Timesheets frame the discussion.

15. Timesheets are obsolete. They are a drag on practice growth, management, and innovation.  Most service businesses do not use timesheets but many professional firms are locked into them.

Physicians, dentists, veterinarians don't use timesheets, yet their services are fully managed, overseen and billed for.  Hospitals and large medical groups employ hundreds and even thousands, and that is done without timesheets.  No one who works in a restaurant, bowling alley, car dealership (except the mechanics), construction contractor, waste management company, movie theatre, production company, a rock group, a church or house of worship, not-for-profit, or a governmental unit keeps timesheets.  Neither do investment managers, authors or movie directors.  Timesheets are not pervasive except in the small world of certain professional service firms that are still mired in the timesheet model

Let me close with a glimpse of the future but also the present reality for many forward-thinking accounting firms, or as Jody would say, "radical" firms.

16. Technology has changed the way we provide services to clients.  When I started my career I would spend a day at a client's office writing up their books a week or two after a month ended.  Today the books are maintained in real time as a byproduct of the accounting and bookkeeping process.  Yet, there is still work for accountants. We just don't do the bookkeeping work anymore.

17. Instead, we provide insight to clients based on our analysis, checking and reviewing the reports generated instantly by the client’s own systems. And we use what we see to project, predict, alert and strategize.  We provide critical thinking that takes us minutes rather than hours.  Should we bill for the minutes and go broke?

18. A better model is the annual relationship price, based on value-added. In this method, have various team members versed in the client’s affairs provide their insights on a regular, real-time, basis.  The amount of time we spend is not relevant – the results are. And that's the value provided.

Let’s face it, everyone – the client and us – has instant access to the records.  We are armed with valuable perceptions we can provide to our clients.  Billing by the minute is totally ridiculous. An annual all-inclusive price or relationship fee is the better business plan.

Likewise, measuring staff performance on their value to the client and relationship is the more appropriate way for that.  As Jody Padar says in her book we are not selling a service; we are selling a solution.

There's much more to say about pricing and billing, but that's enough for now on timesheets and value-pricing.

Next, read The Case for Timesheets

 

 

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3 Responses to “The Great Debate, Part 2: The Case for Value-Pricing”

  1. Ed Mendlowitz

    Howard and Richard,

    This is a good topic for a future posting.

    For now, if you email me at emendlowitz@withum.com your tel number, I will call you and tell you how we did it.

    We did it and it worked GREAT and with a minimum of added time or effort and speeded up our cash flow by a month.

    — Ed

    Reply
  2. Richard F. Spinmeyer

    I have to agree with Mr Marx above.

    The system Ed suggests — with all due respect — is an onerous burden to implement.

    Now, if you want to come to my office and spend a day showing me how it’s NOT an onerous burden, then I’d be happy to pay you – a percentage of the net new income minus the cost of the hours we expended in implementing it, minus the clients we lost.

    Is that a bet you’d want to take? Would you want to take a day with us at no charge up front?

    Are you really ready to put your money where your mouth is?

    Reply
  3. Howard

    Mr. Mendlowitz, We would all just LOVE to charge whatever we want (or whatever we think – and the client agrees – our work is worth).

    But you’re leaving out the most important problem for us, or, my firm, at least.

    And that is, How do we make the transition? How do we start that conversation? And what does the engagdment letter look like?

    Thank you for your Great contribution to the profession.

    Howard Marx CPA

    Reply

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