The billable hour is dead!

Or it should, be according to business guru Ron Baker and others. 

But it lives on. Buoyed up by years of habit and entrenched thinking.

Ron is a writer and radio host and one of the founders of Verasage, a US think tank committed to researching and promoting best practice in professional firms. I first came across Ron when I went to my Institute’s conference for accountants working in practice just before starting my own practice 16 years ago. The other speakers at the event were pretty forgettable and Ron stood out as the one with the most radical and authoritative message. His delivery was good too. Confident in his subject and put across with a dry humour, laced with anecdotes. His brilliant book, ‘The Firm of the future’, co-written with Paul Dunn, is 16 years old now but still feels fresh and innovative and full of great ideas.

So in my own accountancy practice I have tried to avoid timesheets from day 1 and reject invoicing customers on an hourly basis. I say ‘tried’ as I haven’t always been imaginative enough to avoid returning to the dreaded billable hour. 

Ron and his acolytes advise pricing based on value. Start with the price and the hours expended and other internal costs really shouldn’t matter to the customer.  Although sometimes it does. Occasionally when I quote a price a customer will want to know how long the project is going to take or afterwards (very rarely) they may ask to see a time log. Maybe for some people their perception of value is still based on how long it took to deliver it? As customers we don’t ask that about cars or the latest iPhone but in some cases we do it seems about professional services.

Value Pricing’ as the term goes is, ‘The highest price a customer is willing to pay for a product or service’. 

Wow! What business wouldn’t want their customers to pay the highest price for their product or service? The important phrase here is ‘willing to pay’. In value pricing both the seller and the customer are happy as they have achieved what is valuable to them.

Lets be clear. This is not about over-charging. In accountancy firms some services like monthly payroll and a basic tax return might be 'commoditised' and the price standardised and set by the marketplace. For more complex advisory work or for a bundle of services where a customer's requirements and perception of value are unique, value pricing can be a win/win for the seller and the buyer.

Getting back to why I occasionally fail with this and revert to the billable hour. It tends to be on projects which are ‘open-ended’ and you don’t quite know what is going to be involved or how much effort and time will be expended. An example might be a tax enquiry going back several years. Under value pricing you would quote a fixed price to achieve certain results and offer appropriate guarantees. I usually ‘bottle it’ and quote an hourly rate and the prospect is invariably happy. Value pricers would argue that the prospective customer is looking for a solution and certainty and a fixed price would be more attractive than an open-ended bill based on time spent on the project. Next time this comes up I will try to be braver and see how I get on.

The accountancy sector is slowly changing and more firms seem to be moving away from timesheets and billing based on these. There are even software products which help firms set prices based on their own set of rules. I have tried these and I couldn’t get on with them. Although I set the rules, the price the software churned out didn’t necessarily agree with my judgement of the where the value point was for my prospective customer or for me. It felt like I was passing the pricing decision over to a machine.

That’s not for me although I can see the benefits of standardisation and rules for pricing. 

But going back to the definition of value pricing, “The highest price a customer is willing to pay...’. How can software decide that unless it is very clever software indeed? 

Value pricing seems to be an art rather than a science.

A dance between the seller and the prospective customer. For the seller to establish the needs and wants of that prospective customer and then address them with a compelling proposition with service guarantees, a certain outcome and a price which reflects the value delivered.

I will be sticking with my judgement for pricing for the time being but who knows, with the progression of AI maybe the machines will take over before too long.

That really would be the death of a salesman or maybe, more accurately, the death of a value pricer

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