what is most fair?
by ed mendlowitz
call me before you do anything: the art of accounting
back in 1980, i got a pretty large client and quoted a fixed annual fee to start, which would cover the routine regular work.
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after about three months i was asked to suggest some methods of compensating highly paid managers and to present them at a meeting in two weeks. i put together a memo with a few suggestions. when i showed up for the meeting, there were four other “groups” who were given the same assignment. one was the client’s law firm, one was the personal accountant for the client’s lady friend (who later became his wife), another was an insurance agent and one was an employee benefit plan specialist.
i felt blindsided. while i became extremely nervous, the only one i was really concerned about was the other accountant. i did not look at the others as a threat because it would reasonably be expected they were experts in this field, but i did not want the other accountant to outshine me. as it turned out the client accepted all five of my recommendations, along with one from the insurance agent.
on some level this was extra work – even the submitting of the recommendations should have been billed because i was part of a “contest.” but it all happened so quickly i really did not have time to consider how or how much i would be paid. the client asked me to flesh out my suggestions with all the details listed and then had me meet with a graphic designer who was going to dress it up. in the meantime, i was told my proposals would be presented at a meeting at a california resort with the management group (about 50 people) on a sunday morning in three weeks and that i would be expected to arrive sometime friday and get to know some of the people then and on saturday.
after i made my presentation, i received a standing ovation. a few weeks later i met with the client and said i would like to discuss my fee. he asked what it was and i said it was quite high, giving him the amount. he agreed that it was high but said he did not want to spend any time discussing it and i should give the bill to the controller. i received the check three days later.
considering everything i did – the time requirements, my needing to drop everything to attend to this project, the trip, and the drawing on every morsel of experience i had – i do not know how i could have set fixed fees in advance for each facet of the project. in retrospect, if i had quoted a fee for the initial proposal, knowing the client, he probably would have told me to skip it because he already had other people working on it. once i started there were defined projects at each step of the way, but they were all parts of the overall goal of presenting it to the management group in california. while there i played golf with the controller and two other people. (p.s.: my score stunk, but i got a birdie on one of the par-three holes. that i will never forget.)
also, i spent the entire saturday night after dinner in my room rehearsing my presentation, was a nervous wreck, felt intimidated with the group, and hardly slept that night. what fee would i have set in advance for that?
after that, my fee became a strict time basis fee with the initial monthly billing continuing, but with six-month time bills being submitted and collected within days. i traveled all over the world for this client, got involved on his behalf with some very interesting projects, grew professionally, met some very influential and well-known people, and the fees made him my largest client by double for many years until he sold the business to an nyse-listed company, for which i handled the negotiations.
to this day i don’t know how i would have been able to set fees in advance for each of the many things i did. at the end of the day, the client felt the value was there and i was fairly compensated.
4 responses to “when time-based pricing works”
scott j malof
personally, i’m big on context. in ed’s case, 1980 was a ways back……..50 years.
i’m guessing that ed was a young man and a young professional with much less “real world” experience with a project of this type.
today, with 40 years of experience, my suspicion is that ed would be much more comfortable and capable of proposing a fixed price quote, or fixed price range quoted for the advisory service he provided 40 years ago.
he would also be much more capable of identifying the way-points of the project and their price tag to the client as gerard suggests above.
also, and again i am guessing, today ed would address the pricing question upfront and not wait to spring the surprise invoice on his client after all the work had been completed.
lastly, one needs to add in the advances in technology today, and the time consumption (if one were to base the fixed price/fixed price range on time) would be much much lower than it was 40 years ago. again,
i believe context is all.
an experienced cpa-advisor today can and should endeavor to provide a fixed-price or fixed-price range quote for most consultative services.
my firm calls them fpas, fixed price agreements. of course, there are exceptions, always.
one exception to the fpa that i can think of would be an irs examination for obvious reasons.
but, irs exams are rare indeed these days, at least in my practice.
nevertheless, an experienced cpa-advisor should address upfront the fixed price or potential fixed price range to the client of representing the client in an irs exam, or with most any other advisory service that the client requests.
ed mendlowitz
my response to scott, gerard and frank. first, thanks for the nice comments from gerard and frank.
as to scott, the situation in the column was 40 years ago and i have learned a lot in these 40 years, for sure. to place the situation in context, and in relooking at it, i should have told the client after i was engaged to do the roll-out of my plan that there would be added billing and it would be on a time basis, with no estimate possible other than i would do the best job possible in the most timely manner. i would not have “negotiated” a fixed or value-based fee, and when i was ready to bill him, i would have the same meeting i had.
today, with my 40 years added experience, all i would do differently would be to alert the client to expect an added bill. my neglect then was to not alert the client of that, but i got lucky in that my client was a sophisticated business person in a service business (employing over 400 people with offices in major cities throughout the u.s.) if time permitted, i would have provided progress billing or if i had a better idea of the scope or had doubts about getting paid, i might then have asked for a retainer. probably today, in the same circumstances, i would estimate some fee and ask for a retainer.
however, no estimate would have been close. the client hired a graphic designer to work with me for my presentation and had it vetted by numerous people, my partners assisted me in developing what i came up with, i left new york very early on a friday morning for a flight to san francisco, and then rented a car and drove to carmel, had to be “charming” and mingle the rest of friday, ditto on saturday but i also played a round of golf, and spent all night in my room “rehearsing.” the meeting was 8:00 am sunday and i was the main reason why the 50 people came to carmel. i received a standing ovation when my two-hour presentation was finished and spent the rest of the day hanging out with the people at the meeting and got home at 7:00 monday morning and monday was shot for me.
btw, my monthly retainer was $1,500 and the added bill was $95,000, and these are 1980 amounts. by way of background, i had a successful accounting practice then and the wall street journal wrote about our success in 1981, i knew my way around clients, pricing, billing and collecting but i also am smarter now [i should hope so] and would have done only one thing different which is to advise the client of an extra billing…which is not an inconsequential thing.
pricing, billing, and collecting is a major issue and must be handled carefully, deliberately, and promptly. it is important to not be locked into one method and try to fit every client into that mode. rather, the goal should be to determine the proper price, billing, and collection method that will work for each client and sometimes for each assignment you do, before you start. i am sure what scott does works well for him as what i do works well for me. my articles share my experiences so that my colleagues can see different ways of handling similar things.
thank you for your comments and i appreciate them. all the best.
ed
frank stitely
a lot, if not most, of what we do as advisors is impossible to foresee. trying to price these services into a monthly fee is impossible and we would normally lose our backsides through under billing and scope creep, which is inevitable and desirable from a client service standpoint.
gerard a. mchale jr
in virtually all consulting type engagments one must go to time based billing. to go to a firm-fixed-price almost ensures disaster. too low and the professional is not compesated fairly, too high and the client is not treated fairly.
typicaly, because no client wants to sign a blank check for an unknown amount, we approach this area in two steps – the first being what a refer to as the bluprint phase, explaining to the client that we are being asked to “bid or propose on a house for which no blueprints exist”. we than begin this phase by suggesting a relatively small fee for an investigative stage which allows us to better uderstand the scope of what is being requested and probably, as importantly, forcing the client to think through the various phases to be undertaken and the results to be achiened at each phase. at this point we will give an estimate, and i emphisize “estimate” of the relative time that might be involved in each phase, issuing detailed monthly bills and, where it becomes evident that initial time estimates were overly optimistic or pessimistic, advising the client, along with revisions to our estimates. since this is done monthly there is an opportunity to evaluate the billing process and cost/benefit analysis in basically a “real time”.
no one wants “billing surprises” so this gives an opportunity for continued client envolment in the process.
gerard a. mchale, jr. cpa, cff