Switching from billable hours to value billing can’t happen overnight, but in the long run can offer benefits to accountants and clients.
By Nina Hendy
Many practitioners and practice staff actively dislike the humble timesheet, but it’s hardly likely to be booted out in favour of value-based billing anytime soon, concludes practice guru Greg Hayes FCPA, chair of consultancy Hayes Knight.
Hayes, whose firm conducts regular client surveys, estimates that only a quarter of his respondents are actively using alternative billing methods, such as value-based pricing.
“On balance, value pricing can have a place in a modern practice, although it is limited in its application across different service lines,” says Hayes.
He believes value-based billing, “used in an appropriately smart and professional way can make sense, [but] used without appropriate controls and thinking it can be dangerous”.
Why value pricing is the new billable hour
While there are pros and cons to ditching the timesheet, progressive firms are reaping the benefits of a different approach to billing, such as increased profitability, being able to reward staff with above-market rates, and “a recognition that time cost method, while safe and conservative, is not appropriately aligned to superior service quality,” notes Hayes.
While the “whys” of moving to an alternative billing system seem straightforward, it’s the “how-to” that is problematic for many.
How one firm transitioned
Slowly and surely and surely seems to be the best option.
Melbourne-based accountancy ATM Consultants began transitioning to value billing two years ago.
Partner Stephen Jones FCPA says it has ended occasional client quibbles over fees and in the long term will be an easier process to manage. While the process will take a couple more years to complete, he expects it to be more profitable.
“Value pricing makes sense,” Jones declares.
“If I shop for a pair of pants, I know what they cost before I buy. Charging by the hour doesn’t maximise profit. I wouldn’t go into a shop and ask the person behind the counter to work out what the pants cost to make and then ask to be charged a bit more – so why would I do it with the service we provide?”
Value pricing is now fundamental to the firm’s mindset, Jones says.
“Rather than thinking we’ll prepare a set of financials for a client and charge a few hundred dollars, we’re communicating the benefits of implementing a new financial strategy that might save them $5000 over the course of the year and charging a larger fee.”
ATM Consultants’ transition to value billing started with straightforward services such as ongoing end-of-year accounts and regular financial processing.
“We achieved value billing by telling existing clients we wouldn’t raise the fees they paid for our services [over] the previous year and locked them into a monthly direct debit payment,” Jones explains.
Direct debit, he adds, keeps clients on the books month after month and avoids an annual lump sum fee.
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The engagement letter
According to Jones, the first step is to prepare a letter to clients explaining the value billing process. He says including a table with boxes ticked is a good way to outline services offered.
ATM Consultants has divided its categories of service into different business life stages, which he notes has opened up important conversations around service expectations.
“The engagement letter is really important, particularly to avoid scope creep with clients,” he emphasises.
“The problem is clients often expect more than what’s included in the service you’ve agreed to provide.”
A well-worded engagement letter can not only help to better communicate services to clients, it means clients receive greater transparency on what they will get for their dollar.
Adds Jones: “We always try and give clients three different options when it comes to price, which helps us in a few ways.
“For one, sometimes clients want to pay for the bronze level service and think they’re going to get the gold level. They might call up and ask for additional services from you, thinking it’s been detailed in the engagement letter, when it hasn’t.”
How implementing value pricing can help your staff get more done
ATM Consultants plans to increase its prices over time.
“Our longer term view is to keep compliance costs to clients at a minimum, but add more services where we can charge a value-based fee,” Jones reveals.
So far, the move has been well received.
“We’ve had to go through the process of re-educating existing clients about the new payment-for-service structure we’re working under,” he says, “and when we get a new client we prepare a written proposal that clearly sets out the service offering.”
Track your hours
Key to a successful move to value pricing is to transition incrementally and in order to accurately assess costs, to keep track of billable hours.
“Certainly early on we were running over time and had to accept the costs involved in that, but we’re improving,” Jones says.
However, he admits the shift takes time and warns that firms should expect some trial and error.
“There are still areas of the business we find hard to put a price on,” he concedes.
“We really don’t know at the time of engagement how long the service will take and therefore what the costs will be. It takes time to implement and adjust the pricing as we analyse our time sheets.”
What you should know about client engagement letters