value pricing lets you be super-efficient and still make money.
by rob nixon
when a partner of an accounting firm says to a colleague or team member:
“i want more billable hours out of you” or
“i need you to get more time on the clock” or
“your utilization/productivity is low – fix it”
…what are they saying?
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they are basically saying that the individual is not performing, when in actual fact they may be. the individual you are “performance managing” may actually be super-efficient, however, the traditional business model says that he or she is not.
the traditional business model of an accounting practice (not a business) is to put time on the clock for a client and then based on the hourly rate of the individual(s) doing the work this will determine the price. when you say you want more time on the clock from the person, typically bad behavior starts to enter the equation. team members go slower, they pad timesheets out, they make mistakes, they go hunting for issues, they double/triple check everything and basically spend more time than they need to.
don’t you think it’s amazing that when you say to an accountant “you’ve got $5,000 worth of billable time on this job” and just like magic the job comes in at around $5,000? you see, accountants fill the available time with what work they have to do.
let me make it very clear: if you are pricing in arrears and driving more billable hours, then this is a very bad thing. you are not promoting efficiencies. you are promoting inefficiencies.
if you continue to price in arrears and you do decide to get efficient then what happens is the price either goes down with the new efficiencies or you end up doing more work for the same amount of money. not a good look!
being more efficient is the way to go, however you must price the project up front if you want to capitalize on the investment you have made in being more efficient.
the diagram below shows you the new profit model for a modern and progressive accounting firm.
here’s how it works:
step 1 is the old model. you put time on the job (input), you have charge rates (input) and the price pops out the end as an output. you are promoting inefficiencies and write-offs. stop doing this immediately.
step 2 is part 1 of the new model. you price up front (sometimes for the same amount), you get as efficient as you can and take time out of the job (in this case 5 hours taken out) and the average hourly rate (in this case $250) pops out at the end.
step 3 is part 2 of the new model. you “value price” a new project (in this case $3,000) to the same client, you use the “saved” hours (in this case 5) to deliver the new project and the average hourly rate (in this case $600) pops out at the end.
step 4 is the outcome of 2 and 3. your new fee to this client is $8,000, the time taken is still 25 hours and the average hourly rate is now $320.
imagine if you did this across your entire firm. imagine taking your average hourly rate (or net firm billing rate) from $200 to $320. what if your firm did 10,000 client hours? your previous revenue was $2,000,000 and your new revenue for the same 10,000 client hours is $3,200,000. the difference ($1,200,000) is mostly profit. are you excited yet?