Golden Practices Blog

Selling Profitable Work When the Fee-Squeeze is On

The chatter everywhere in the accounting world surrounds what a hostile selling environment we're in. It was bad 2-3 years ago and it isn't any better today. Hand-wringing CPAs are convinced there's nothing they can do.

But there is.

You really can break free of the low-price wars. But there are a few things you'll need to do. And they take practice. To get started, check out this article (shared with AAM's permission).

PDF: Selling Profitable Work When the Fee-Squeeze is On

It's the Oct feature article for Association for Accounting Marketing's Growth Strategies magazine, and it is a nod to the type of content in my next book: Pricing to Win. Landing the Right Work at the Right Price. 

Would really love your feedback and your questions. They'll help me know what to address within the pages of the book! Thanks!!

 

 

Trusted Advisors Don't "Surprise Bill" if They Want to Stay Trusted Advisors

Just had an interesting experience with my daughter and my "very highly trusted" dentist.

My phrase is in quotes because CPAs and lawyers frequently tell me their clients don't mind their surprise after-the-fact hourly bills because their "clients trust them." I'm sure they do. Just like I have always trusted my dentist.  

I've trusted my dentist because a) he's a really good guy, b) his office staff is nice, and c) he has always priced me fairly. Sound familiar?

He's not the cheapest in town, but he's reasonable, especially in light of my being a private-pay patient whereas other dentists sometimes charge inflated (as they would for insurance) prices even for private pays.

This recent experience has caused my past unquestioned level of trust to shift to a more skeptical trust. It's because I was surprised with a post-treatment bill that was about 50% higher than I thought the visit was worth.

I don't want this to be seen as one of those gripey, sour-grapes posts. Rather, I want to illustrate how someone whose bill I've never, ever questioned became someone whose prices I will now inquire about in advance—how someone who hasn't been a price-sensitive buyer, is now going to behave like one.

The dental appointment was for a non-emergency—my daughter's baby tooth, loose for a couple months, was still not coming out. I inquired whether it was something they needed to check out and they said to come on in, they'd take a look...

I trusted them to advise us well so I didn't ask obvious questions like, "is there any reason we can't just let nature take its course?" and, once she was in the chair, they rapidly took action to remove the baby tooth. They numbed her and she wiggled her own tooth out.

Presented with the sizable bill at the end, I had that awful, awkward feeling you have when you know that if you'd had alternatives, you would have chosen one. In other words: trapped. I had to write a check for something I'm pretty sure I would not have bought if I'd had the price in advance.

As a result, my dentist has lost some of my trust. Not enough to make me switch today. But enough that I will now be asking how much things will cost before I commit. And they'll probably begin to view me as one of those annoying fee-sensitive clients.

And the irony is that this check was the smallest one I've ever written to them.

At the root of the problem (sorry, couldn't resist) is that I disagreed about the "worth" and I had reason to question the "need."

A simple conversation with me before proceeding would have prevented my shift from very trusting to skeptical. Discussion could have clarified need, created context for me and my daughter (risk, comfort, peace of mind, convenience), and solidified the worth to me of his price. Or it would have given me the ability to choose: "not today...let's give it a week or two and we might be back."

CPAs and lawyers, it's the same for you! Just because clients seem to trust you even though you've surprise billed them in the past, it can all change on a dime.

Have you ever quickly jumped in and fixed a problem, and then decided to bill your client later for the fix, confident it'll be obvious to them it was worth it? Don't be so sure. It's pretty high-risk behavior.

Think: what's the right thing to do here?

Buyers deserve control of their purchases. Very key is that we, as buyers, also need context to gain a sense of true value—to decide "is it worth $x?" My daughter's visit might have been worth even more than they charged if they'd discussed it with me. But that's not what happened. I felt held captive. And underinformed.

A really awesome example of context is found in this little story "What a Dead Squirrel Taught Me About Premium Pricing" from Fast Company today. (Paying $125 sounds awfully good next to $20K, or next to not using your beloved porch.) 

Keep the trust high. Provide information. Provide context. Provide choice. Giving the gifts of personal control and sense of worth to your buyers will keep them trusting you forever. 

(Image courtesy of waldenpond on flickr. And hat tip to Chris Farmand for the dead-squirrel story)

Stop Billing and Ducking, Start Pricing With Options

"Bill and duck" is a term I coined a few years ago.

In the case of CPA firms, billing and ducking is the process of proposing a price (as with an audit), and later billing an extra amount that the client didn't preapprove. The "bill and duck" practice is acting on a temptation to capture result of scope creep combined with a lack of communication.

The scope creep can take a couple forms. Either the original (usually time-based) budget for the work was higher than the price a firm proposed (to get in the door, the firm reduced their price to some amount below budget—probably a number close to the prior-year auditor's fee), or else "other issues arose."

Most commonly, these "other issues" are pinned on the client for not being ready when the job starts. And further blamed on "staff not telling partners before proceeding with the work." (These are actually both the firm's fault, which I discuss in "Retraining Clients When You've Taught Them to Abuse You.")

Billing and ducking is just ugly. So are write-offs. There are better ways.

When a firm wants to get in the door, a low price will often do it. But do yourself a favor and make sure of two things:

1. Scope better. Be very, very, very, very clear about the scope of work—both with the client and with your team.
2. Offer options. By offering options, you can show your lowest (walk-away) price, but you can also move most buyers up.

The scope needs to be the specific definition of what is included your work at each price. And even what isn't.

The typical hours budget is internal and inadequate for scoping. What we're looking for in pricing is scope definition that matters to the buyer. The generic "scope" or "approach" section found in most firm's proposals is so canned and vague that it is usually inadequate. Clarity is important, and by presenting options side by side, buyers can easily see what is not part of your lower prices. 

This perspective was challenged in a post on Accounting Today written by Edwin Kliegman called "Value Billing versus Low-balling Your Competitors." In it, he refers to an example in a prior article I was quoted in called "What Price is Right?" 

In the context of what I've written above about better scoping and offering options, I'm sharing a clarification of the example mentioned in the "What Price is Right?" piece. It expands on detail that space didn't permit in the article. I also posted this as a comment to Mr Kliegman's piece:

My point in the article is that firms are presently just proposing (for example) a $19K fee knowing that, internally, their budget for the audit will be $24K. They are presently low-balling and fully intend to do the $24K (or more) of work. Or worse, they are bidding the work at $19K to get in the door, and then later turning around and billing the client extra for scope creep (partners often say they don't even know about it until they see it on the WIP).

This happens more often than not. I call this "billing and ducking," which significantly destroys your client's trust in you (even when they do pay the surprise bill) and, in many cases, is downright unethical because clients should approve the work before it's done or not be billed for it.

Instead of the firm going in knowing they will be losing money on that work, or practicing a bill-and-duck method of attempted cost recovery, what I am recommending is that firms more wisely scope and price their work--to not take a loss, yet still be able to offer an in-the-door price.

When stripping out value from the original scope (in other words, create an economy-class offering), the firm can prevent a loss on the low-cost work. Value stripped might not even mean less auditing, it might be the timing or the method of payment (pay in advance, for instance, and receive the lower fee).

The firm, side by side with that, can also offer other options. The original scope and terms might become the midrange option, and a premium option might be added as well.

I assure you, clients never "laugh their heads off" at choices. They like them. It puts them in control which is right where they belong. Further, it changes your conversation with them from "will I do business with XYZ firm?" to "how will I do business with XYZ firm?"

And behavioral economics shows that people tend to go with the middle option or up. That's why three options are better than two.

As an aside, in my comment on Edwin's article, I also clarified two other common misunderstandings that I observed reflected in the articles. One is the difference between a "fixed price" and a "value-based price." The other is the use of the term "value billing" which needs to cease because there's no such thing. Here's why: 

It's important to note that none of this approach is "value pricing" at all. It's merely "fixed pricing."

Fixed pricing is when you commit to a certain price for a certain scope of work. A "value price" is never based on the seller's inputs that include time, efforts, or costs.

Value prices are based on the tangible and intangible results or outcomes for the buyer, and should only be employed when the buyer agrees that the worth is there for them to pay that price and when the seller agrees that the worth is there for them to do the promised work.

Lastly, some consider this semantics, but we (at VeraSage Institute) never call it "value billing" because billing is done in arrears whereas "pricing" always occurs in advance and is quite intentional.

We believe these definitions provide important distinctions that are helpful in clarifying the obvious confusion surrounding pricing practices.

Daylight Savings Time and Your Lost Billable Hour

A Facebook friend said today that she misses her hour. (I miss mine, too.)

It got me thinking about billing by the hour and what someone actually does when he or she works into the wee hours on one of those Saturday nights when an hour is lost (or gained). 

I then remembered with great fondness a terrific blog post I read years ago by The Anonymous Lawyer:

Saturday, April 02, 2005

This is a terrible day. Every year it frustrates me. For no good reason, tonight at 2 A.M. we lose a billable hour. Daylight savings time is ridiculous. Individually, it's not a big deal, but think of it on a firm-wide level. That's hundreds of billable hours. Gone. Without a trace. And don't tell me we get them back in October when the clocks turn the other way, because by October everyone forgets about the debt they incur back in April, and just uses the extra hour to sleep. It's a useless waste of valuable time, and I hate having to tolerate it every single year. Definitely on the list of things I will change when I become chairman of the firm.

Jeremy Blachman's satirical blog about life in Big Law is a riot. You can read about The Anonymous Law Firm here. Is it really fiction? You decide. I think he left law and went on to write books. It's easy to be happy for him...

Ready to Join Firms Who Are Breaking Old Business Models?

Changing workforce mentality, evolving customer/client needs, and transparency of service are shining big, scary spotlights on many of the flaws in the professional-firm business model of old. 

Some problems inherent in the traditional business model are:

• Running firms as democracies instead of visionary businesses precludes innovation and differentiation because decisions result in the common-denominator option that so often comes from "concensus"
• Micromanagement so typical in today's firms doesn't inspire people to do their best work and perpetually decreases morale
• Butts-in-seats or 9-5 culture that doesn't work very well in today's business climate
• Billing customers for work after the fact instead of offering them certainty in price

If you'd like to learn how to break free of these and many more symptoms of a business model that somehow survives (definitely not thrives!) despite its detriments, join VeraSage Institute's educators at one or more of these upcoming events! 

Firm of the Future Forums in Australia - March 2012

Details and tickets available at this special event website for dates as follows:

• Hobart - 2 March
• Melbourne - 5-6 March
• Brisbane - 12-13 March
• Sydney - 15-16 March

The events are organized by VeraSage Senior Fellow John Chisholm (John Chisholm Consulting) along with five enlighted friends of VeraSage: Matthew Tol (Mta OptimaChartered Accountants), Michael Bradley (Marque Lawyers), Michael Stewart (Integrity Wealth), Matthew Burgess (McCullough Robertson Lawyers) and Steve Major (Trusted Authority Partners). 

VeraSage Las Vegas - June 2012

Immediately following the AICPA's PS/Tech & AAM conference (10-13 Jun) VeraSage will host 2 separate but related programs in Las Vegas at the Aria! (The AICPA hotel room rates will apply) 

• Wed, 13 June, 2-6pm
  FREE event open to anyone and will feature Ron Baker, CPAs of various firm sizes who've led their firms through these business-model changes, and will culminate with a live THRIVEcast! Join us for this special edition of the popular podcast series during which Jason Blumer and VeraSage Fellow (& stand-up comedian) Greg Kyte will grill interview Mark Koziel of the AICPA and Tom Hood of Maryland Association of CPAs. For a hint of what they might cover, see Greg's February Accounting Update (video below) tackling the recently released AICPA's CPA Horizons 2025 report.

• Thu, 14 June, 8am-6pm
  Program (not free, pricing TBA soon) features back-to-back plenary sessions led by VeraSage Founders Ron Baker and Dan Morris and Senior Fellows Michelle Golden, Ed Kless and Jay Shepherd in the morning. Dynamic workshops follow in the afternoon covering the subjects of Setting Price & Scope, Conducting the Value Conversation, Project Management, and Managing People in a Timeless Firm. Registration will be open to anyone and details will be available soon. 

• If you'd like to be notified when registration opens, email me with "VS-LasVegas" in your subject line!

 

 

Specialists, Are you Charging More Yet? Why Not?

Being known for providing specialized services is powerful form of branding.

And the whole point of branding is to increase profits through being able to command premium prices.

CPA firms are good at developing specialities, but most totally miss the boat on leveraging the speciality when it comes to their pricing. Even when their capacity is full!

The two key situations that set you up for raising prices are a) being a specialist and b) being at or very near capacity! These perfect price-raising opportunities are too often overlooked. 

Don't leave all that money on the table! (and the amount left unsold doesn't EVER show up on the balance sheet!

Many thanks to Rick Telberg for inviting me to speak my mind on this topic that had just been raised during the Lessons From the Legends panel at last week's Winning is Everything conference. I wanted to grab the mic and shout it out right there! :) 

Tired of Competing on Price? Be Different.

Firms have a problem and it's a marketing problem. Marketing 101 taught us that Price was one of the 4 "Ps" of Marketing. Funny that most firms don't "let" marketing stick their noses in the pricing strategy and process.

Firms seem to think marketing and pricing aren't related. But they are. 

Yesterday, Seth Godin picked on accountants in his post "We're the Same. We're the Same. We're the Same." He refers to their websites and says:

Sometimes, we try so hard to fit in we give consumers no choice but to seek out the cheapest. After all, if everything is the same, why not buy what's cheap and close?

Did you "hear" that? Seth explains that we CAUSE buyers to compare us on price, alone. And he is exactly right.

When marketers are tasked with building websites, or anything that has to do with positioning, partners are prone to killing innovative ideas that would lead to true differentiation. Instead, they want the assurance their peers would say or do "that"—they want PRECEDENT. They want to know what their competitors are doing. They want "best practices." 

Guess what??? If someone, ANYone, is doing it, it's not different. 

On May 17, Rick Telberg posted 12 Hot Growth Tips for CPA Firms that mentions some of what I'll be talking about June 9 at the AICPA Practitioners Symposium. Here's a snip from Rick's post:

“Without other distinguishing factors that buyers can readily see and know, clients resort to looking mostly at price for making their decisions,” she says. “This, in turn, drives down the firm’s revenues, which impacts the attitudes of those performing the work.”

Furthermore, “Without high enthusiasm for the engagement, customer service is not at its highest and this, in turn, reduces the quality of the customer’s experience, which makes them less likely to rehire the firm, and certainly less apt to refer the firm to others.”

“It’s a vicious circle,” she says. “Ironically, while the opportunity for firms to articulate and convey their distinctions via the Internet is more ripe than ever and costs almost nothing, especially relative to advertising, it is unfortunate that most firms are reluctant to embrace the advantages that the social media and an improved Web presence afford them.” 

 Pricing too low has deleterious effects on morale of everyone involved.

Here's a diagram I developed to illustrate the cycle.

What do you think? Does this convince firms to let marketing into the pricing conversation?

Does it compel firms to look at better, more visible ways to show their distinguishing characteristics (i.e. their PEOPLE)? 

Will firms be more to exploring what social media can help them achieve if they really understand how much it can help them in these other ways? 

Top 100 Firm (and Others) Prove Value Pricing Skeptics Wrong

For all the professionals who say that firms will never trash timesheets and move to value pricing, guess what? You can no longer say that. Four anomaly CPA firms who have proven you wrong are featured in Journal of Accountancy. (look for the print version soon!)

Still not excited? What if I told you one is a TOP 100 CPA FIRM!? Yeah, thought that might get your attention...

Okay, truth is, there are actually hundreds of firms that have been operating without timesheets (not just four), and many, many more using various methods of value pricing, yet still clinging to their beloved timesheets.

But the fact that a Top 100 firm is "tipping" is major news. And that Journal of Accountancy is now acknowledging the successful adoption of new operating models is also pretty huge. Though the article is organized and officially authored by Ron Baker, it mostly comprises case studies and quotes directly from the featured firms.

The Value Pricing movement is growing. Watch the talent flock to these "No Timesheet" firms!

The four featured firms are:

• Harrex Group

• Kennedy and Coe LLC

• Mark Bailey Co. Ltd.

• Snyder & Company

Changed 10/23: JofA changed the link to the article so I've changed the link above accordingly.

A New Value Based Law Firm (alt: What Pat Lamb is Up To)

Legal blogger and friend Patrick Lamb has been noticably absent from his blog lately (he promises to return when he remembers how to login write).

His absence isn't surprising when you learn what he's been up. Effective today, Patrick launches Valorem Law Group (valorem being latin for value) in downtown Chicago. The firm's placeholder website (at www.valoremlaw.com) will go up later this week.

Pat has been leading Butler Rubin which has stood out among similarly sized firms for its ability to compete with the big guys as a powerhouse litigation boutique. Pat is a believer in value pricing -- something Pat has demonstrated his curiosity and passion about on his blog, In Search of Perfect Client Service, but his collegues wouldn't go where Pat wanted to go with regard to VP.

In his own words, he describes the situation and his motivation to start Valorem, "...while many changes were instituted, the firm remained committed to working by the hour, and like other firms, its hourly rates continued to escalate with no end in sight. [He believes] that fees should be fixed, margins managed, and that performance should be a key factor in pay,"

I'm very happy for Pat who, along with two equally passionate members (and one more coming in April) starts this innovative new firm. They also begin with one full-time contract lawyer, two paralegals and an administrative assistant.

On a call with him yesterday (while he pretended to be sad about getting out of was distracted from moving into his new space) he told me about the 1920's era building they are moving into on Wacker with like-sized offices for all, lots of open collaborating space, a mock courtroom, and an edgy, high-tech set-up. Can't wait to see it!

You can read about his changes on Pat's Linked In profile.

Let's keep our eye on this firm; it will be one to watch as these lawyers set some precendent on the course toward the Firm of the Future. Happy 2008 Pat!!

Matt Homann on Fixed Pricing in Advance

Matt Homann on why he, as a lawyer, moved to fixed pricing. This is from an interview for his profile in ABA Law Practice Magazine

LPM:  How did you come by your understanding that a better way to practice law was to stop flogging hours?

MH: If necessity is the mother of invention, my inability to keep great timesheets was at least one of the motivating factors in my looking for a different economic model for my practice.

I also realized that I could never recoup any investment I made in becoming a more efficient lawyer unless I raised my rate or charged for the work I did differently.

Raising my rate was out of the question because as a young lawyer in a small community, my hourly rate was in essence capped by the amounts the other lawyers were charging in my town. Instead, I decided that if I were able to charge a flat fee for the work I did, then any benefit of becoming more efficient at delivering it had a direct impact on my bottom line.

Another unexpected benefit was that I could charge more for the work and that clients—happy to know the price of the work up front—were more eager to pay.

Gary Boomer on Pricing for Value

I've got to hand it to Gary. He wrote a brief but meaty article that appears in the Oct 8 Accounting Today (on-line at WebCPA "Pricing for Value") about intellectual capital and firms innovating to price on value captured for clients, and not efforts.

In his article, Gary writes: 

People create intellectual capital, yet many firms allow that intellectual capital to leave when people leave. They don't even account properly (from an economic sense) for intellectual capital - they expense it. They should take the time to package, name and differentiate unique processes. Much of what firms "give away" is what the client really values.

He's so right.

Gary goes on to list several steps to take to start thinking and operating in this newer, better way. Numerous firms really are doing it. Others who are thinking about it wonder, "how."

Select a "value champion" for your firm...This person should communicate frequently with clients and determine their perceptions. More importantly, she should understand each client's dangers, opportunities and strengths...By doing so, it is easier to provide services that clients perceive as valuable. (Many of these have less risk and greater margins than compliance services.)

Assign an intellectual capital task force. This team should inventory intellectual capital, then document, name and package it so that the firm can train to unique processes and price on value, rather than hours multiplied by dollars.

Reach outside the firm for help. Don't continue to let old paradigms limit value and profitability. Even though people mean well, it is what they don't know they don't know that costs them - and limits their growth and value. Get coaching, read and educate yourself.

Define the profile of your firm's ideal clients and filter out those who do not fit it. The plans, people, processes, technology and pricing that got you to this level will not enable you to transform into the emerging industry.

Embrace a training/learning culture. In such a culture, everyone learns and everyone teaches. It is a two-way street. Thorough training encompasses much more than technical continuing professional education - it also includes soft skills, as well as technology.

My friend and fellow VeraSage Fellow, Tim McKey (from Baton Rouge, LA) says, "I'd rather sleep under a bridge than go back to billing by the hour." If that doesn't convey how much of an improvement value pricing is, I don't know what will.

Gary says, above: "Reach outside the firm for help."

On Monday, Oct 22, in Las Vegas, meet and hear from Tim McKey and many others who have taken the path Gary describes (including me).  If you really are curious about "how" you need to be in Las Vegas.

At least 7 or 8 VeraSage Fellows (from Accounting & Law) and several employees of these Fellows' firms will be there. The night before and the evening of the 22nd, many of us will be hanging out at a Rio lounge to talk with attendees.

It's a rare opportunity to have a whole bunch of "converts" in one place. Do come! And pick our brains.

Spend the day at the Rio with VeraSage. Seriously, it's only $129 (just to cover room & A/V costs...not to make $$). (Rio room nights Sun and Mon are about $100.)

Go here to sign up:  https://www.onlineregistrationcenter.com/register.asp?m=187&c=53

Gary, I hope you'll come, too!

Marston's On Fire With 'Why Professionals Don't Get It'

My always controversial friend (and fellow VeraSage fellow) Chris Marston musta had an extra shot of espresso on Thursday...he was heated!

30-something Christopher Marston runs Exemplar Law Partners, the Boston law firm touting "no hourly bill, no hourly bull--law practice the way it should be."

He not only graduated from the relatively new schools of value pricing and blowing up the partnership model, he is breaking new ground daily in both of these areas. He shares his thoughts regularly on his Inside the Firm of the Future blog.

In keeping with his 'take no prisoners' blogging style, Chris' latest post, "Top 10 Reasons Why Professionals Don't 'Get It' When it Comes to Pricing and Service" doesn't sugarcoat how he really feels about most of the legal profession (much applies to accounting, too).

Abrasive? Yup. But well worth the read. Chris makes several valid points.

Resolve to Improve Profitability

Want to be more prosperous in 2007? If you're really ready to move the needle on your firm's profitability, this post is for you.

The most impactful way is to implement Value Pricing. And recognizing that you may not be ready to abandon billing by the hour, that's fine, you don't have to jump in the deep end of that (wonderful) pool just yet...but keep reading because this one action will help your improve profits no matter how you price:

Get a Handle on Scope Creep: Use Change Orders

If you bill by the hour, do you ever have write-offs? Time you "can't" bill? My bet is that you do. Sure, some of that time stacks up because it took, in your own judgment, more time than it "should have" to do the work, so you don't charge it to your client.

But what about all that time that accumulates because of unanticipated work you did either (a) thinking that it would be "just a tiny amount, no big deal" but...it grew or, (b) you didn't know about it because somebody else did it, or (c) you just didn't take the time to call the client to discuss this "extra" work before you started doing it and so you feel bad charging them later.

As you should. It's unauthorized work, right?

After all, You wouldn't appreciate being charged for something you didn't know was coming, either. Sometimes we bill it anyway, but each time it is a risk met either with understanding or annoyance. Usually annoyance. Clients leave over this stuff.

The hardest thing, in my mind, about Value Pricing (which we do here) is the same, exact thing firms that bill by the hour struggle with. Change Orders.

Firms tend not to use them much because it doesn't SEEM as detrimental at the time when you have the hourly cushion to fall back on. Plus, Change Orders mean that you must actually think through any extra work you are about to delve into, talk with the client FIRST to discuss "what it might take" and then receive PERMISSION to proceed.

This may be called a "change order," "work order," "revision of scope," or "new project" and it is a crucial part of successfully managing a customer's expectations. This should be a formal and regular process in your organization.

Skipping this step is a costly mistake. It either costs you in collections or it costs you in client relations.

An irony I see is that practitioners sometimes become ANGRY and RESENTFUL of their clients as they begin to gripe about unexpected billings. "Oh, they are fee sensitive," we hear. Or, "they don't appreciate how hard we worked for them." Sometimes decide this makes them a "bad client." And firms fool themselves into believing that the client's imminent departure is good for the firm.

HUH?? This is a problem on the service provider side. It's an expectation problem. It's really bad for the reputation. And it kills a potential referral pipeline, to boot.

Without trying to quantify the cost of a damaged reputation and lost referral revenue--both big numbers, to be sure--let's just focus on the proportion of write-offs that can be recovered by checking scope creep once and for all.

Most firms seem to have WIP write-offs of 10-20% of gross. Most firms we work with tell us that about a third of this is efficiency related...they just ran up more time than they should have. The other 2/3 is truly money left on the table for failing to talk to clients in advance of additional work being performed.

One $8M dollar firm we know that had a staggering $2M in WIP write-offs for 2005 is confident that well over $1M could have been kept if they'd had a handle on their scope creep because most of it was work that was outside of their very clearly defined engagements. They are fixing this and you can, too.

How? Step up project management and communications:

1. think through what IS and is NOT included in your project before you start it -- I cannot over emphasize the importance of this step
2. talk to everyone involved in the project at the outset to be sure everyone completely understands #1
3. create the expectation internally that anyone performing work not first approved by the client is putting the both the client relationship AND the firm's financial health at serious risk
4. put in place an appropriate communications channel to assure that associates and staffers bring to the attention of their supervisors/managers/partners any potential changes in scope
5. be sure the the person with client relationship responsibilities has enough information to set the client's expectation about the financial or other impact of this change
6. contact the client and get approval (written is always most appropriate) before tackling the work

I bet my 2007 revenues that if you take these steps, that your existing projects will be more profitable. And a lovely side benefit is that they lay excellent groundwork for Fixed Price Agreement work should you move to that model somewhere down the road.

In the event you'd like to read more about other ways to improve profits, see my previous post, Profitability Through Pricing.

Best Wishes for Greater Prosperity in 2007!

How to Know When You REALLY Get Value Pricing

My colleague Ron Baker has a great post on the VeraSage blog today. He writes:

How can you tell when someone really understands—at a deep and meaningful level—something as complex and multifaceted as Value Pricing? I struggled with this question for years, since professionals follow radically different learning curves, with some "getting it" almost immediately, others take years, while others never understand it at all.

Is there one telltale sign? What's the common BFO—that Blinding Flash of the Obvious nearly everyone experiences once they finally see the light?

Read Ron's post to learn how those of us at VeraSage can tell when someone really understands how the price they charge relates to the value their customer perceives.

Measuring What Matters

Those who've read me for awhile probably know that I'm a strong supporter of the writing, research and theories of my brilliant colleague at VeraSage Institute, Ron Baker.

Well, he's done it again. One of the messages Ron has been delivering to professional service firms, since long before I met him in 1999, is that timesheets measure the wrong stuff in professional service firms.

"If I don't use timesheets, how will I know how much to charge?" That's the first question we PSFs ask Ron, literally, every time he speaks. 

The next question asked is:

"But if we don't use timesheets, how do we 'measure' productivity?"   

People argue: "I cannot manage my people if they don't fill out timesheets--I won't know what they are doing."

There are several issues at hand in answering these questions. First, let's admit that there is a successful business or two out there that, without timesheets, seems to inspire and intellectually stimulate their human capital to be highly effective. That's the bottom line firms want, too, right? Effectiveness.

Then there's the question I have: if using timesheets to manage people helps us to be better managers, why are there so many partners and managers with very poor people management skills? (Could it be they are letting timesheets be the 'managers' in lieu of them?)

And, last time I checked, timesheets tell someone what somebody else did yesterday (lagging indicator). Not what they should be doing tomorrow (leading indicator). Shouldn't management focus on directing future results more than reading about past inputs?

Further, in a value pricing environment (one in which we aren't considering hours as a factor in price) we need to assure we are delivering value to our customers in accordance with the expectations we set and the prices we ask. To accomplish this, we need a means of assuring we do the 'right things' (usually client-oriented things as opposed to our own 'realization') to meet those expectations.

So how do we make sure we and the people we manage are doing the "right things tomorrow"?

We must align individual efforts with the goals of the firm which, for optimal firm success, should be aligned with the objectives of the client and establish Key Predictive Indicators for the firm's success through meeting customer expectations and needs.

Ron's newest book entitled Measuring What Matters to Customers: Using Key Predictive Indicators covers this in excellent detail, yet it's an easy read at only 200 pages. You can buy it from Wiley at VeraSage Institute's preferred pricing. (If you don't see -15% applied at checkout, enter code aff15 in the Promotion Code field and click the Apply Discount button.)

Ron's other books including three FREE PDF books can be found at VeraSage's website. The PDF books are: Trashing Timesheets, Burying the Billable Hour (on the move to Value Pricing) and You Are Your Customer List (on customer selection and DEselection).

Full disclosure: I am a Senior Fellow of VeraSage Institute but I do not benefit financially from the organization or any book sales.

The Safety Net of Hourly Billing

Allison Shields has a really good post on shifting from hourly to fixed pricing. Think about how her paragraph, below, illustrates a way in which hourly billing has become a serious "safety net" -- but at the expense (literally and figuratively) of the client! And not without negative impact on your client relationships, too.

"Often lawyers [sub: accountants] take on a case without fully investigating or exploring not only the facts surrounding the matter, but the client's specific expectations and values. One advantage of changing the pricing structure is that these longer and more detailed conversations will likely help lawyers pre-qualify clients better, alert them to potential problems earlier, and help them weed out ‘nightmare’ clients before they become a headache."

Skipping these important conversations and the subsequent thinking about project depth and scope is only made possible because hourly billers know they usually won't "lose" no matter what since they'll bill what it actually "takes."

This lack of communication on the front side results in our lack of understanding/planning and the high likelihood of our client being "surprised" with an unknown bill amount (usually higher than what we or they would have anticipated) is an absolute service faux pas.

Of course this shift of all risk to the client (from us) means the client loses in every way because they go into the project even more blind than us. Some clients will certainly object to the final price, but with hourly billings, you won't know until AFTER you've done the work--when you're on the defensive and they've received the benefits of your service. Some "nightmare" clients wouldn't be nightmare clients at all had they been given the opportunity to make a more informed purchase in the first place.

Allison also makes some strong points about setting up more complex projects in phases or stages and determining/articulating the value of the work you are doing as opposed to our typical default conversation about "how long it takes."

Without discussing project scope/intensity and value up front, you cannot possibly set expectations. If you cannot set them, you sure as heck are going to have a hard time meeting them!

Think about this:

With many legal and accounting services, the client is facing unknown processes (or at least processes outside of their comfort zone) with unknown--an largely unguarantee-able--outcomes.

Shouldn't the client at least be able to count on a pretty well-defined price (at least phase by phase) and clear communications from the professional, in advance, about the same?

Hourly billing's 'safety net' has encouraged professionals to withhold the few assurances you can actually provide to them.

Pricing Innovation?

Did you see that Hellman's mayonaise has modified their "quart" jar?

Despite years of hearing claims (by accountants) to the contrary, maybe accountants have figured out a way to apply examples from the product world to their own practices...

Taking a cue from Hellman's Mayonnaise, who recently redefined the quart as 30 ounces instead of 32, the approach is simple. Hours are now 54 minutes long instead of 60.

Echoing Unilever, Bill Billum said, "At DOB&H we have always taken great pride in offering the highest quality services at reasonable and fair prices. Recently, inflationary pressures have brought about by the increased costs of our people. Rather than raise our prices, we chose to slightly reduce the size of the hour."

Enjoy this post (in its entirety) from my clever colleague, Ed Kless: Dewey, Over, Billum & Howe Innovates the Accounting Profession

Pricing from the Master

The Firm of the Future is here.

Ron Baker, the most advanced thinker on Value Pricing for the professions, will be here in the St. Louis area for a full day presentation on "Shift from Hourly Billing to Value Pricing" on Sep 27. Whether a member or not, you can hear him through the Missouri Society of CPAs (his message is just as applicable for lawyers!).

No, I don't get a commission...just love to see people moved by Ron's teaching...

If you really want to delve in to Ron's stuff, on Sep 28, he is teaching on Trashing the Timesheet!

Ron is author of six editions of Professional's Guide to Value Pricing (newest: CCH, 2005); Firm of the Future: A Guide for Accountants, Lawyers, and Other Professional Services (Wiley, 2003); Pricing on Purpose: Creating and Capturing Value (Wiley, 2006) and the upcoming Measure What Matters to Customers (Wiley, Oct 2006).

For more on his books including discounted purchase, visit VeraSage Institute where you can also download free PDF booklets on several of his topics (see bottom of linked page).

Cheap. It's the New Expensive.

Just combing through some of my gazillion Bloglines posts and saw some common thread between these two posts on The Business Innovation Insider blog by Fortune.

You've no doubt heard about New York Knicks basketball player, Stephon Marbury, marketing his new basketball shoe at an amazing price point...less than $15. But did you know the current average price for a suit in the US is less than $125?

Innovation? Commodities? You decide.

What the $100 suit can teach you about innovation

and

A premium athletic shoe for $14.98

What does this mean for professional service firms? How will you innovate for all price points and still feel great about what you are selling?

Some firms are doing it--it's a powerful strategy.

Defining Value

  With all the discussion going on about value pricing, at least half of the articles and posts on the subject seem to be seriously missing or misapplying this VERY key point:

That which goes into your product (time, materials, etc) has NOTHING whatsoever to do with its ACTUAL value to the buyer.

My VeraSage colleague, Ron Baker, posted "The Fundamental Economic Assumption" from which I quote (bolding for emphasis, and bracketed words, are mine):

Three economists, from three different countries, developed the theory of marginalism and created a revolution: William Stanley Jevons [1835-1882], from Great Britain, Leon Walras [1834-1910] from France, and Carl Menger [1840-1921] from Austria. Here is how Menger defined the true source of value in an economy in his book Principles of Economics, published in 1873:

Value is...nothing inherent in goods, no property of them. Value is judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men...The value of goods...is subjective in nature.

The determining factor in the value of a good, then, is neither the quantity of labor or other goods necessary for its production nor the quantity necessary for its reproduction, but rather the magnitude of importance of those satisfactions with respect to which we are conscious of being dependent on command of the good. This principle of value determination is universally valid, and no exception to it can be found in human economy.

The significance of this shift in thinking cannot be over-emphasized, especially since it hasn't happened yet among most professionals.

A coat is not worth eight times more than a hat because it takes eight times longer to make it. [RATHER] its producer is willing to invest eight times more labor into producing a coat because it is worth eight times more to a customer. [Think About That!]

You'd be willing to pay almost anything for a gallon of water if you were dying of thirst in the desert, but much less if you're washing your car. Water would have a negative value to you if it flooded your basement, as you'd have to pay to have it removed.

Value is dependent on time, place, context, and subjective judgments [OF THE BUYER] that cannot be precisely calculated. We are ruled by our theories, whether we admit it or not.

The labor theory of value is endemic in the cultures of most professional service firms, and it is past time to replace it with the subjective theory of value. We owe an enormous debt of gratitude to the Marginalist economists—let's start to repay it by at least catching up with their thinking and teachings on the true source of value.

Let's stop blabbering about billable hours being related to value. It's an idea from the day before yesterday. An idea whose time has passed.