Moving from traditional hourly billing to value pricing has been the subject of hot debate for years with most firms reluctant to change. However, as accounting firms turn to machines to increase efficiency and consulting services to grow profits, value pricing suddenly makes more sense.
Imagine taking a long-haul flight and being charged for each hour of your journey. Imagine that flight makes an unscheduled stop and takes twice as long as originally planned and then you receive a bill for the total duration of your flight. How would you feel?
Hourly billing is still the norm in the accountancy profession. And it’s easy to see why. This traditional method of pricing is simple to use, easy to track and it’s what everyone knows.
However, the client can be left in the dark about what the final price will be, and the quality of service isn’t factored into the bill.
Is value pricing the future?
Switching to value pricing, where firms offer a price based on the estimated value of the service they are offering, would seem a common sense approach, but unfortunately it’s not that simple. The problem is nobody has worked out how to do this effectively in accounting, or if they have, they are keeping quiet about it.
If value pricing is the pricing strategy of the future – and 77% of respondents said this is likely or very likely in a survey by IFAC – then the profession hasn’t exactly been quick to embrace it.
Back in 2013, IFAC ran an article entitled “tomorrow’s firm and the role of value pricing” which was published with IFAC’s permission by Praxity, the world’s largest alliance of independent accounting and consulting firms.
In the article, Andreas Noodt, Partner at Praxity participant firm FIDES and former German Representative in the Small and Medium Practices Committee (SMPC), quizzed Ron Baker, value pricing evangelist, best-selling author and founder of the VeraSage Institute.
Ron, who is known for his quest to “bury the billable hour” and “trash the timesheet” put forward a compelling argument for the value pricing model, claiming that traditional billing encourages firms to accept low-value clients and inhibits innovation. The great thing about value pricing, he said, is the focus on effectiveness and outstanding service rather than efficiency, adding: “Professional Knowledge Firms need to start pricing upfront for everything they do, period. No more excuses.”
Pressure to change
Fast forward to today, and value pricing is firmly back on the agenda. The Big Four are signalling a move away from hourly billing as they become increasingly digitalised, using machines capable of processing vast amounts of data in seconds, and investing in artificial intelligence. There is also a continued trend towards business advisory services which is a strain on resources or an opportunity to drive profits depending on who you talk to.
Ron Baker says firms are “going to have to embrace” value pricing sooner or later because machines are taking a fraction of the time to complete tasks, putting pressure on the traditional pricing model. “If you charge by the hour and you can do this in tenths of a second, you are going to take a major hit.”
He claims hourly billing is inhibiting transformation, not only in terms of rolling-out new technology like cloud-based accounting but in developing more of an advisory role where value is king.
The problem I see here is it is very difficult to turn an accountant into a consultant. This is because consultants are paid for questions and accountants are paid for answers
So why is it taking so long for accounting firms to embrace value pricing? Ron blames the ageing nature of the profession, claiming that two thirds of the American Institute of CPAs (AICPA) are eligible for retirement. He also cites a fear of change. “What we are talking about is a business model change. It’s a daunting task and they just don’t want to do it.
However, Andreas Noodt, while remaining a keen supporter of the value pricing model, says the problem is that value pricing is proving difficult to implement throughout the whole firm:
The idea is great but I still think it’s very difficult to adopt value pricing in practice in the pure teaching of Ron. At FIDES we have been working on this and have achieved some progress but there are still obstacles that we have yet to overcome.
Andreas stresses that pure audit services are difficult to price by value in a heavily competitive environment. Thus, most audit engagements are tendered and fixed fees are used. This is combined with the fact that most clients perceive less value in an audit. He says the challenge for auditors more and more is to “make the value of audits clear in the mind of the client”.
A major stumbling block, Andreas says, is audit enforcement institutions continue to look for hourly billing.
We have to document how much time has been incurred and billed for. In this sense, you can often exclude auditing from value pricing. Furthermore, it is difficult to have audit work bundled with other work, although bundling would be a way forward
However, value pricing does already exist in a less radical form than that proposed by Ron Baker. In Germany, for example, key aspects of the work of accountants, especially tax compliance and compilation work, have long been subject to a public fee ordinance in which fees are prescribed within in a bandwidth linked to the value of revenue and balance sheet figures.
Higher value services
Value pricing is yet to be applied with higher value services like tax structuring (consulting) or certain advisory services in Germany. Andreas explains that one of the difficulties lies in scoping a project. “Very often, it’s difficult to see the end of the tunnel in a consulting project, especially given the enormous complexity of German tax law. Where the necessity of repeated scope change in complex consulting projects makes it difficult to apply pure value pricing, billing by the hour at higher rates that reflect the value of the project is often the easy way out for the consultant. This way, the consultant builds in a higher margin of the value for the client instead of undergoing the exhaustive exercise of amending scopes, which is often not possible in time critical projects and annoys the client.”
Commenting on the trend towards consulting packages and digitalisation within the profession as a whole, Andreas says:
Packages with consulting represents a way forward in terms of value pricing, and audits and new technology will definitely be something to consider in the future if the obstacles can be overcome, but many firms are far away from this
Even if value pricing is not yet fully embraced, greater focus on value is a positive step forward according to Andreas, who adds “talking about value with the client improves their perception and esteem of our work and helps achieve higher fees.”
Death of the billable hour?
Donny Shimamoto, founder of management consulting firm IntrapriseTechKnowlogies, says it’s possible to move to value pricing without eliminating timesheets. He recently suggested the key is to change management mindset so that performance is not judged solely on billable hours.
I define value pricing simply: ‘Pricing a service at a rate that reflects the value of the service delivered’. My firm applies this definition to hourly and fixed-fee engagements. Our standardised hourly services are billed based on the perceived value of the service
The idea of continuing with timesheets is dismissed as “absurd” by Ron Baker. He says timesheets are a constraint, adding: “By the time we see something on a timesheet, it’s no longer manageable.”
Three years after Praxity investigated the role of value pricing, the debate is still raging and set to intensify as the profession adapts to industry trends. Perhaps Ron is right when he says: “The death of the billable hour and the timesheet is maybe not within reach, but within sight.”