The article details the fact that a local company Fee Technology Inc. has acquired a patent for “a mathematical process for creating a direct relationship between the prices charged to the cost structure of a business.”
Correct me if I am wrong, it is called cost-plus pricing and the patented process is called multiplication.
Last Saturday evening I received this email from Ken Morrison of Provision Accounting Group in Richmond, British Columbia.
This is definitely an HSD.
Ron,
I am an “older” chartered accountant in Richmond British Columbia (forty years in the business). I have two younger associates (29 and 34) who are preparing to take over. A staff of six for a total of nine. We have been very successful over the last four years marketing (the old guy young guy combo is deadly).
But Nathan (29) found your site and challenged us on the value pricing concept, scrap timesheets etc., we have now instituted the fixed price agreement for all new clients and are going to transit existing clients over the next months. Much of what you advocate we were doing, culling poor clients etc but the fixed price agreement and value pricing is revolutionizing our business.
I personally am for the first time in forty plus years am free from needing to rationalize my pricing to an hourly rate and can price value. It is changing my life.
The one other change I have made is that since we are giving the client a fixed price and a cash back guarantee we are asking for quarterly payments on all accounts. For example, if the fixed price is $5,000 and the year end is December 31, we ask for $1,250 on June 30, $1,250 on September 30, $1,250 on December 31, and the final payment on March 31, which is our latest deadline for completion of the work.
You can imagine how this is reducing our work in progress and account receivable balances.
The old guy is ready to scrap timesheets now, the young guys are holding back.
Thanks for your leading the change.
Ken Morrison
Thanks Ken.
Congratulations and keep us posted on your progress. I can’t wait to publish your Trailblazer case study after you’ve eliminated timesheets.
I’ll be hosting a Webinar for CPA Leadership Institute on Wednesday, August 25 from 1 pm to 2:40 pm (Eastern Time).
The topic is: Cross-Selling: What is Your Firm’s Lifetime Value to its Clients?
You can learn more at the CPA Leadership Institute’s Web site here, and even get a detailed outline of the Webinar, in pdf, here.
This topic takes me back to the late 1980s, when I began to seriously study Total Quality Service, as it was then called by Karl Albrecht in his book, The Only Thing That Matters.
This book had an enormous influence on my thinking (it’s one of my Top Ten Best Business Books), because it was TQS that led me to the study of Value Pricing.
It was an epiphany when I realized that billing by the hour not only generates lousy customer service, it’s also a lousy customer experience. No one likes to be surprised by price.
Studying TQS leads you into customer loyalty economics, and one of the metrics is always “What’s the lifetime value of a customer to your firm?”
The logic being that you need to sometimes ignore the math of the moment and make an investment in the relationship. This is also where the billable hour fails miserably, as pointed out brilliantly by VeraSage senior fellow Paul Kennedy in his essay on why timesheets are damaging to customer relationships and lifetime value.
But I believe there is a more important metric: What is the value of your firm to your customer?
This forces us to think about constant innovation, and offering services that can help customers through the various stages of their lives and business—from womb to tomb, so to speak.
I hope you’ll be able to join us for the Webinar, but if not read the Kennedy essay and any book by Karl Albrecht.
Our Australian colleague John Chisholm wrote about The Australian Legal Affairs Section of August 20th being primarily devoted to the problems and hopeful demise of the billable hour.
All the articles are worth reading, but the one that caught my eye was devoted to Lavan Legal, the Perth firm that is on track to eliminate timesheets in approximately two years.
This is a 200+ lawyer firm. So much for the argument that only smaller firms can achieve this transition.
John also reports that next week’s Legal Affairs Section (it runs every Friday) will also have more articles dedicated to this topic.
Obviously we are nearing a tipping point Down Under.
Another article in Lawyers Weekly on the Perth firm Lavan Legal and its quest to rid itself of timesheets.
Lavan was mentioned in a prior post, which also linked to a local article on the firm.
Dean Hely, the deputy managing partner, said the firm established a pricing committee as of July 1 and is aiming to move away from time-based billing to showcase its innovation credentials.
He also noted:
You do get used to timesheets but the thought of not having timesheets is like the lawyer’s utopia.
Of course Utopia means “no place,” but there are firms out there without timesheets.
I’m not about to claim they are all utopia, but we do know it’s possible.
Another law firm is profiled in this article in The Lawyer:
CMS Cameron McKenna has launched a marketing campaign to promote its alternative billing structures, which include a ‘pay what you think its worth’ option, to clients.
This firm has also established a pricing team.
Since pricing is a separate function, we are big advocates of turning it over to people who are good at it.
Poor pricers should not be allowed to price.
Congratulations to these two firms. More cracks in the dyke of the obsolete billable hour.
A recent video from reason.tv noted the word fair in English has few direct translations in other languages. This was fascinating to me being a lover of etymologies, but it also got me to thinking about the expression fair price.
Take a look at the video and please comment on your thoughts about what is a fair price to you?
Thanks to John Chisholm, some of Australia’s legal firms are taking Value Pricing seriously and establishing value councils, while a few are placing the timesheet on the dust-bin of history.
One of those firms is the Perth firm Lavan Legal, with 20 partners and 200 team members. It has appointed a 10-person pricing committee. As this recent article in The West Australian makes clear, Lavan is planning to trash its timesheets.
John and I have had the pleasure of working with Lavan, and the managing partner, Greg Gaunt, and the deputy managing partner Dean Hely, are both visionaries in the legal profession.
Lavan does major litigation, and although they are still making their way towards pricing this work based upon value, early results are encouraging.
There’s another firm in Perth going down the same road, as well as other firms throughout Australia.
Another firm with an innovative business model is Marque Lawyers, founded by Michael Bradley. I’ve had the pleasure meeting Michael and he truly has a Zen perspective on the practice of law—a refreshing and optimistic point of view about the future.
Michael was recently interviewed by Lawyers Weekly, where he linked timesheets to depression in the legal profession.
Earlier this year in May, The Honorable Wayne Martin, Chief Justice of Western Australia, delivered a speech on the perils of both the billable hour and the timesheet. You can read the Judge’s speech here.
Obviously, something is going on Down Under.
It’s not enough to advocate that firms move to Value Pricing. The timesheet must be attacked as well.
After all, it is the timesheet that is the ultimate cancer, because it is the wrong measuring device for intellectual capital.
Thinking that we are measuring the efficiency, let alone the value, of knowledge workers by denominating everything into hours is simply ludicrous.
It’s the equivalent of arguing that Jonas Salk’s polio vaccine is valuable to the extent of the time it took him to develop it. Or that we could make Einstein more efficient if he had only completed a timesheet. Otherwise, how would we know he was on budget?
With firms like Lavan and others in Australia, true business model innovation is taking place.
By ridding their firms from the hegemony of timesheets, these firms are showing real change is possible, not just lip service about “alternative fee arrangements.”
If you are still are tracking time to justify your firm’s pricing, or to measure the “efficiency of your team,” you are billing by the hour and not doing anything new since timesheets were introduced in 1919 to the legal profession.
You are simply “selling time” just as much as any union employee. The world has changed since 1919.
Real innovation will only come when timesheets are trashed. And Australia may just be ahead of the United States, at least in larger firms.
Congratulations to Lavan Legal, a Trailblazer Firm in the making.
John Shaver of Aries Technology in Knoxville and VeraSage Trailblazer wrote Ron Baker and I about an idea he is noodling:
Since Service Level Agreements (SLAs) were killed earlier this year, we now refer to customer agreements as Knowledge Transfer Agreements (KTAs) since that title is a much more accurate statement of what we really do for customers.
In the spirit of being creative, I’ve come up with a list of KTA levels based on a steakhouse/restaurant theme.
A level: The Palm (average dinner for 2 is $350)
B level: Ruth’s Chris ($200)
C level: Outback ($75)
D level: Golden Corral ($25)
We have a "black card" level as well. It’s called Chef’s Table. One of my high school classmates (Todd Gray) owns a restaurant in Washington, DC called Equinox (which is consistently ranked in the top 5 restaurants in the DC area). Todd has a table that is literally in the kitchen. The normal waiting list for that table is several months. You pay $350 per person (plus wine pairing if so desired) and are served whatever Todd thinks is the freshest and best quality at that particular time. You have no idea what you will be eating; you just know it will be the best.
For about $1,000 (if you get the wine pairing), all you know is that you will be eating something and drinking some type of wine. What a concept!
You might be thinking: how could I ever get a customer to pay for Chef’s Table? For us it means becoming WAY more than just a software consultant/vendor. It means that we must create an incredibly valuable experience for our customers. Just like Todd does at Equinox.
All of our customers are in the small- to mid-sized (SMB) space so some examples of what I consider to be part of a Chef’s Table KTA are:
Assist them with implementing a Results-Only Work Environment (ROWE)
Teach them how to use project management
Reduce their Information Technology costs by moving to Google Apps
Assist them with implementing a strategy to leverage social media
The list is almost endless!
Does anyone else offer their own version of Chef’s Table? And what does your KTA look like?
A Sage Partner and friend of mine, Steve Bond from TAG, sent me an example of pricing options he received from a newspaper. The options were as follows and presented in this exact order:
1 Year Online & Print Subscription $149.00
2 Year Online & Print Subscription $385.39
6 Months Online & Print Subscription $148.34
3 Months Online & Print Subscription $83.74
Two questions: 1) Do you think this was intentional or just haphazard? Why or why not? and 2) Which option would you have chosen?
Note: This post has been altered from its original per a request.
Long time ago you answered my Carthage question and with my current company we tried a few times to sell fixed price packages.
Some clients bite it although many ask us to switch to the hourly rate. What I observe is that it’s easier (read, they’re used to) for the clients to get quotes and compare hourly rates than match and analyze various criteria from different service providers. Sometimes it gets even worse: the client wants an hourly rate but at the same time to cap the SOW [Scope of Work] with the total allowed maximum sum.
That leads to the very same ethical issue when project managers effectively get the red line and mentally the mission to bill the client as close from the bottom to the limit as possible. I tried to put all the cards on the table: propose the hourly-based project plan, come up with the estimation and then bid with the fixed price which is lower? Surprisingly even in such cases some clients ask for the hourly rate motivating that they can easier pass it through the budgeting group and legal.
I’m ready to accept the hypothesis that we run into the clients which don’t understand the value-selling benefits, maybe we don’t articulate enough, maybe they don’t trust the approach for some reason but certainly in our case such clients are majority in our pipeline.
What do you advise to undertake?
Thanks,
[Name Withheld]
Hi [Name Withheld],
I think the last part of your fourth paragraph answers your question.
It’s obvious the firm isn’t doing an effective job articulating its value proposition—by that I mean, comprehending, communicating, and convincing the customer they must pay for value.
Don’t despair, this is common, though not to the level your letter seems to suggest. It’s usually a minority of customers, not a majority as you say.
You need to stop talking about hours completely, and just tell your customers you don’t price that way. It’s unethical.
No client can tell you how to price—that is your decision. Also, your firm doesn’t do timesheets or track time. You have better things to have your knowledge workers do—such as add value and provide outstanding customer service to customers. Then what will the customers say who want to see hours? Force you to do timesheets? Then they aren’t the right customer.
If you’re not willing to do the above, Pricing on Purpose will never become a core competency in your firm. There’s simply too much empirical evidence from all the firms out there that customers love this approach. The push back we get is from firms, not customers. I know this for an absolute fact, since I’ve spent the last four years speaking to customers across all professional firms and they all say the same thing: they want certainty in price, period. It’s how they buy everything else.
Do you have people pricing and selling who aren’t good at it? Then upgrade their skills or remove them from pricing.
Blaming it on the idea that your customers don’t prefer fixed pricing is a cop out and simply doesn’t comport to human behavior and the laws of economics.
The only other thing I can think of is your customers do not trust you; and that’s not a pricing problem. That’s much deeper. I hope this is wrong?
Either you want to do this or you don’t. Your customers are not an excuse.
I hope that helps.
Ron
Of course, we welcome the thoughts from other firms that have made the transition from hourly billing to Value Pricing.
I hope all is well with you and Value Pricing. I’m sure you don’t remember me, but I was in the IT industry for many, many years as a Sage Partner and was in the small Value Pricing group started by Ed Kless.
If you recall, we had the special training groups, one in Windsor Ontario, and others at the Sage conferences, etc. Well I am no longer involved in that industry and a couple years ago decided, at my age, to have some fun and follow my true passion of photography. So for the last year or so, I have been building an infrastructure, upgrading and purchasing photo equipment, building a web site, and off on photo shoots with the intention of building a photo business.
Have you ever applied the VP concept to a photography business? Photography is such an illusive medium in that it is so personal to the viewer. How would one go about perceiving the value and charging accordingly? I’m not sure how or if it could work, but I think there is room for a lot of improvement in how good photographer’s can increase the value of their work in the client’s eyes.
I belong to a number of photo specific forums, camera cubs, etc. and a huge and ever present topic is pricing of custom photography; how customer’s want great photography for very little. Most people have no idea and don’t understand the amount of skill, creativity, training and equipment that goes into being a good photographer and the value that is created in all aspect’s of life and business.
Any thoughts and ideas you may have are welcomed.
Garry
Hi Garry,
Congratulations on following your passion. That by itself is an enormous accomplishment! I toast you for making such a courageous decision, since so many people do not follow their dreams.
Value Pricing absolutely works in the photography business. I know this from working with advertising agencies, who have to buy the Copyrights to photos, sometimes at a very high price!
One of the best strategies you can deploy is to offer your customers options. I’m not intimately familiar with your business, but things like black and white vs. color, who will own the Copyright, for what time period, where the pictures will be taken, etc.
Think about what drives value to customers? There has to be a myriad of things for a wedding gig that you could offer up as a Green, Gold, Platinum, and Black card offering (to use American Express’ offerings as an example).
We have been having incredible success with options, mostly for this reason: it changes the customer’s focus from “Should I work with them/” to “How should I work with them?” That’s a great mindset to get your customer in and block out the competition, making price less of a factor.
Remember, most customers don’t care about, or indeed know, all of the complexities that go into your craft. Nobody wants to hear about the labor pains—we want to see the baby. Make it look easy, but give the customer options, and your value proposition will be distinctive.
You may also find my new book to be helpful, due out from John Wiley in December:
I hope that helps, Garry. Keep me posted on your progress, and again, congratulations for chasing your dreams.
Ron
I met Len Pepe back in 1997 when he was a partner at BDO. Len took to the Value Pricing message like a fish to water, even providing a blurb for the very first edition of my Value Pricing book.
We reconnected recently, and Len has moved to another firm in Boston: CCR LLP. We’ve been exchanging emails on his attempt to implement Value Pricing in the firm.
Most firms have an internal champion that is incredibly enthusiastic about VP, and it’s not always a partner (although Len is).
We understand how hard it is to transition to VP—I like to say the concept is revolutionary but the implementation is evolutionary.
Len recently sent me the following email:
Ron,
Tomorrow I have my Alternative Billing Arrangements Task Force meeting and then I have to report to the Equity Partners.
Do you have any words of wisdom as to:
Other CPA firms that this has worked successfully for in this area— as I know how well it works for Law firms (Jay Shepherd and Chris Marston).
Do you run a simultaneous time system to see where you are with profitability for the na-sayers?
Will it work as well for audit departments as it would for tax departments?
Any insight is appreciated—it’s coming down to putting up or shutting up for me.
Thanks my friend,
Len
Here’s my reply:
Hi Len,
Here’s some Words of Wisdom guided by experience:
If the firm is serious about making pricing a core competency (this is what we mean by Pricing on Purpose), appoint a Value Council and a Chief Value Officer (CVO).
Don’t call it “Alternative Billing,” as billing is always done in arrears, after the work has been performed.
Instead, call it Fixed Pricing (with the client anyway, hence the Fixed Price Agreement term), because pricing is done upfront, before the work begins.
There are literally thousands of firms that have successfully implemented Value Pricing, some of their stories you can find on VeraSage under “Trailblazers.”
There’s a top 100 accounting firm that has also appointed a Pricing Panel and a CVO and has about one-third of its revenue under VP (but it hasn’t gotten rid of timesheets—yet). There are also law firms, advertising agencies, IT and consulting firms where VP is being used.
You can access an article I wrote for the Journal of Accountancy article profiles four Firms of the Future:
You can also access an article I wrote for the Journal of Accountancy on Pricing on Purpose, which also includes 11 Exhibits firms can use to aid implementation.
A simultaneous time system is almost inevitable, because very few firms have trashed timesheets before, or at the same time as, implementing VP.
But between you and me, I do believe trashing timesheets is the only thing that will make a firm better at pricing. As long as timesheets exist, we look back to time to measure price—precisely what we are trying to get away from.
VP will work in any department. In fact, it’s not department-dependent; it is customer-dependent.
I don’t think a firm should allow different pricing based on departments, especially if the customer experiences more than one service. Imagine being billed by the hour for one thing, and given a fixed price for another.
We are doing VP for the benefit of the customer (to give them certainty, a “no surprises” rule), and thus that experience is created one customer at a time, not one department at a time.
Although VP is revolutionary, its implementation is evolutionary—one customer at a time. We always suggest to firms that are serious, but are not ready for a value council and/or CVO to do all of its pricing, the following steps:
Each partner do five Fixed Price Agreements over some time period (one to three months)
No partner gets to price their own work. You have to bounce every price off someone else. I’m a wimp when it comes to pricing my services, but I’m brave as a lion when pricing Len’s because I know how much value Len creates and I hate to see him give it away.
Be vigilant about scope creep and using Change Orders. It’s very rare that any but the simplest engagement is not going to have scope creep. When it happens, you must discuss with the client, and agree upon the price.
The Golden Rule is: No surprises to the client. In fact, many firms offer a price guarantee: if the client ever receives an invoice that was not agreed upfront, they don’t have to pay. This forces us to price everything, no exceptions, before we do the work.
Perform an autopsy (After Action Review) on every FPA done, using the questions from the JofA article above (in one of the Exhibits).
Does that help?
Good luck Len!
Ron
Any other suggestions for a quick-start to VP for Len would be greatly appreciated.
I have read most of Seth Godin’s books and am an occasionally reader of his blog. On June 9, 2010, in a post entitled Hourly work vs. linchpin work, he wrote the following:
You should pay people by the hour when there are available substitutes. When you rely on freelancers you can put a value on their time based on what the market is paying. If there are six podiatrists in town, and all can heal your foot, the going rate is based on their time and effort, not on the lifetime use of your foot.
There is no other way to say it, this is just plain wrong.
Once again, a really smart person has fallen prey to Marx’ Labor Theory of Value. Effort does not have value, results do. The value of a podiatrists healing your foot is based on the lifetime use of your foot. This does not mean that the price is solely based on that lifetime value.
All value is subjective, not objective. Assuming a free market for this service (laughable considering it is healthcare), the “going rate” is not based on the time and effort of the doctor, but what a patient is willing to pay the doctor, period. Increased supply does bring price down, but not because any change in time and effort.
Hat tip to Jay Shepherd for pointing out the Wall Street Journal article, “Raise Your Prices!,” which Ed wrote about yesterday.
I finally read all of these articles this morning. They are all excellent, but one in particular stands out: “The Myth of Commoditization,” by Michael Schrage, a research associate wtih MIT’s Media Lab.
As readers of VeraSage know, we vehemently disagree with the notion that any product or service is a commodity. It’s a cop-out.
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