bonus: an illustration using two firms, one oriented to both production and marketing.
by august j. aquila
price it right: how to value accounting services
an emphasis on production (billable hours) can have negative consequences for an accounting firm. an emphasis on billable hours causes professionals to focus on internal measurements, i.e., the number of hours charged to a client, and not external measurements such as client satisfaction.
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it also emphasizes the technical aspect of accounting work and keeps professionals from developing a marketing mindset. let’s look at the four negative consequences of a production orientation.
- a production orientation gives the firm an internal rather than external focus. by emphasizing volume, accounting firms are using internal measures to price and evaluate their services and the contributions of their staff rather than letting the market determine the true value of the services they are offering. firms need to change their focus from emphasizing top-line revenue (volume) to bottom-line profitability. to do this, you need to take a value-based pricing approach to your services.
- a production orientation causes the firm to focus on billable hours. using billable hours to price services and evaluate performance creates at least three marketing-related problems. first, billable hours are the antithesis of client service. the natural incentive for accountants is to bill more hours, which results in higher fees, rather than perform the service in the most economical fashion. are you giving a message to your clients that time spent is more important than value provided? for example, in many firms it is not unusual to have several professionals spend time preparing and reviewing a tax return. does each person who touches the return really add value to the process? in most cases, the answer is no. in short, there are often too many accountants assigned to an engagement.
second, billable hours focus on individual performance rather than on teamwork and cooperation. this emphasis may inhibit cross-selling and may even push someone who is not the best qualified person to perform a service for the client. the results of such a scenario include a dissatisfied client, a potential write-off and possibly a lost client or lawsuit.
third, an emphasis on billable hours encourages accountants to drift into services for which they can bill more time but not necessarily at a higher billing rate. these services may not fit the strategic direction of the firm or may not be consistent with your growth or profitability goals. for example, john has certain interests and skills in nonprofit organizations. the firm has decided that it does not want to take any engagements in this area unless the realization is at least 80 percent. john continues to go after this work. he does reach his billable hour goal, but the overrealization is less than 60 percent. the firm feels that john has wasted his time and ultimately reduces his draw. thus, he becomes further discouraged and the firm’s profitability suffers. both john and the firm lose in this situation.
- a production orientation emphasizes the technical aspect of an engagement, thus producing technicians instead of client service professionals. production-oriented firms create and encourage technicians, that is accountants who have excellent technical abilities, but lack key competencies in building client relationships, business development, communication and listening. such staff and partners often develop an employee mentality rather than an entrepreneurial spirit. they either work on business that was passed on to them or they become more comfortable working for other accountants’ clients than going out and getting clients of their own. if this is happening in your firm, you might want to see what you are measuring and where you are placing your emphasis and rewards.
- a production orientation keeps the firm from developing a true marketing orientation. this may be the most harmful consequence of them all, especially if you are using production to determine part of a person’s compensation. emphasis on production has resulted in professionals not understanding marketing and its importance to the firm. such professionals equate marketing with marketing tools such as newsletters, public relations, advertising, seminars and webinars, while failing to acknowledge the strategic value of decisions on pricing, client service and delivery.
for clarification, here’s an example: we have two partners in two firms, and both have the same talents and skills. firm a is production-oriented and firm b places equal importance on both production and marketing to bring in new business. in firm a, the partner’s compensation is based 50 percent on billable hours. in firm b, both marketing and production factor into the compensation formula. at the end of the year, each partner reports on his results. here is how they look:
partner in firm a
1,100 billable hours at $400 per hour. marketing hours: zero. management hours: zero. maximum value to the firm is $440,000, depending on realization and cash collected.
partner in firm b
900 billable hours at $400 per hour. new business brought in: $150,000. management hours valued at $200 per hour times 100 hours: $20,000. maximum value to the firm, depending on realization and cash collected,
| billable hours | hourly rate | new business | management hours – value | value to the firm | |
| partner a | 1,100 | $400 | 0 | 0 | $440,000 |
| partner b | 900 | $400 | $150,000 | 100 x $200 | $530,000 |
in this simplified example, it is quite easy to determine which partner brings more value to her firm. there are always excuses about finding time to market. take a minute to review your firm’s emphasis, its pricing policies and its compensation system.
cure the curse of the billable hour!