The politics of pricing

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Are fixed fees the answer to accountants’ charging dilemmas, or do they present new problems of their own? Sally Percy investigates

Illustration: Peter Quinnell

As anyone in business knows, working out how much to charge for your goods or services is a perpetual conundrum. Charge too much and you risk losing customers; charge too little and you might not break even. It’s a difficult balance to strike at the best of times, but the present economic climate makes the challenge even harder. Deciding what the price of your services should be – and how you charge for those services – is one of the most important decisions that you can make when you run your own practice. So you need to do your utmost to get it right.

The majority of accountants either discount or don’t increase prices because they are afraid of having a difficult conversation with clients

Charging per hour has long been the tried-and-tested billing model for the accountancy profession, and with good reason. The principle is that the fairest and most transparent way to recompense someone is by paying them for their time – hence the model is also used by a range of other professionals from lawyers through to IT contractors.

Traditionally, the hourly rates charged by accountancy firms tended to be calculated on the basis that a third of the fee would cover salary costs (hence it would vary according to the seniority and expertise of the staff member), a third would cover overheads and third would be profit. While this breakdown does not necessarily hold true now – the percentage of the fee needed to cover labour has increased, for example – it helps to explain why the charge-out rates of some Big Four partners are more than £1,000 an hour.

So far, so good. Except that from the client’s point of view, charging per hour does not necessarily seem that transparent. After all, they are not sitting in your office, watching over your staff while the work gets done, so they don’t know how efficient or otherwise your practice is. There is also the risk that they will be presented with a bill that is far larger than they expected at the end of the job, which is a sure-fire way to lose their business.

The fact that clients increasingly perceive accounting work as a commodity that can be delivered just as easily by one firm as another helps to explain the rising popularity of the monthly fixed-fee charging model within the profession. An accountancy firm will typically offer a menu of options that might include accounts preparation, bookkeeping, payroll, tax returns and VAT returns, all for a set monthly fee. The fee will often vary according to the size of the client’s turnover and how many transactions it does.

Magic Accounts, a Birmingham-based practice that has two directors and 10 staff, offers fixed-fee packages for sole traders that start from £21 a month. Prospective clients who are shopping around for a new accountant can take advantage of its user-friendly online quote service to get an estimate of fees. The firm introduced the monthly fee package at the start of 2011, seeing it as a way to work more efficiently and provide better client service. Laurence Collins, Magic Accounts’ managing director, explains that prior to rolling out fixed fees, issues would arise where the firm may have prepared accounts for a client while the client took responsibility for its own payroll and VAT. But as the clients weren’t accountants, they often made mistakes that the firm needed to rectify. “We tended to find that whichever bits we weren’t responsible for were often where the problems lay,” Collins explains.

Elaine Clark, managing director of CheapAccounting, is also a firm advocate of fixed fees. She started out as a sole practitioner in 2007 and has since franchised her business into a network of 22 practices. As you would expect, CheapAccounting does what it says on the tin and its website, cheapaccounting.co.uk, sets out a clear list of monthly and annual fees for businesses of every size. Central to CheapAccounting’s low-cost proposition is the fact it offers cloud-based Clear Books entry software as part of its monthly fee. Around 70% of its clients do their own bookkeeping using the software and they also upload their bank statements online. The firm then charges for extra services, such as providing references.

“I believe clients should have full visibility upfront before they sign on the dotted line,” explains Clark. And she points out that the certainty of regular income has obvious cashflow benefits to the firm, too. “The monthly fee means we’re not carrying risk, we don’t have huge lock-up and we get paid for the work before we do it.”

Collins says that a fixed-fee monthly service enables Magic Accounts to be more proactive about helping its clients to manage their tax position. “There’s nothing better than being in a position where you can prove to the client that you’ve saved them money.” The client also has the comfort of working with a firm that is familiar with every part of its business and it usually has a smaller accountancy bill, too. Collins says the average saving that a client makes when they switch to his firm is 37%.

Not everyone is a convert to fixed fees, however, and predictions of the imminent demise of charging per hour appear to be premature, since many firms still successfully use this method. Peter Hollis, chairman of ICAEW’s practice committee and founder of Sheffield firm Hollis and Co, favours hourly charging because it “automatically rewards efficient and organised clients”.

He says the risk with fixed fees is that: “Clients that lean on you heavily enjoy you at the expense of the light users. Efficient clients subsidise those that can’t be bothered.”

Staff complain that they can’t do the job within the price. They cut corners or they don’t book time. So you don’t know the profit or loss on a particular job

Charging per hour also suits sole practitioners with niche expertise. Peter Rayney, a specialist in the tax affairs of owner-managed businesses, bills per hour (and occasionally on a per-job basis) at a rate that reflects his experience and the risk he takes by giving advice. But he usually gives his clients an upfront indication of what his fee is likely to be “so there are no surprises”.

Hollis and Co also provides upfront estimates to clients before any work is undertaken. “I scrutinise all the bills and nobody starts a job without doing a budget at the start of it,” Hollis explains. “If they can’t stick to the budget, it’s generally because the records aren’t up to scratch. So we give the client the option to do more work or to pay us to do the work.”

John O’Donnell, a practice consultant with ICAEW, has noticed a definite trend of accountancy practices moving away from charging per hour towards fixed fees. But he points out that there are risks attached. “It has an attraction in that the client knows the fee for the work,” he says. “But it’s important to be clear about what advice is incorporated in that fixed fee. You can get a client phoning you up very frequently and taking up more time than you ever envisaged.”

Phil Shohet, a director with practice advisory firm Kato, highlights some other issues. “Staff complain that they can’t do the job within the price,” he says. “They cut corners or they don’t book time. So you don’t know the profit or loss on a particular job.”

Collins acknowledges that some clients need their hands held more than others. “There are reasonable people and there are unreasonable people,” he says. “We’re getting good at managing that. You just have to be fair and transparent.” Nevertheless, he still believes that the benefits of offering a fixed fee service outweigh the disadvantages.

Surprisingly for a profession that is so closely associated with money, many accountants prefer to avoid talking about it. “The majority of accountants either discount their prices or don’t increase their prices because they’re afraid of having a difficult conversation with clients,” says Andy Raynor, the former CEO of RSM Tenon and now non-executive adviser at mid-tier firm HW Fisher.

Indeed, accountants often pride themselves on not increasing their fees as they see it as a way to retain clients over the long term. But this, according to O’Donnell, is a dangerous route to go down. “Clients should expect your fees to go up so that you can cover your costs,” he says. “You need to get into the habit of increasing your fees because if you haven’t increased your fees for a few years, it becomes very hard to put them up.” He also argues that by doing this, accountants are setting a good example to their clients.

Firms that do opt to use a fixed fee service need to put considerable thought into their pricing at the outset and set up processes to ensure that staff do not dedicate more time to the work than they should. When Magic Accounts planned its fee structure, it looked at the different components of its service and worked out what it should cost to deliver them. It also has internal controls in place, including timesheets, to monitor how much staff time is spent on jobs.

Then there’s the sensitive issue of actually getting clients to pay up. “Clever firms get their clients to sign the accounts and the cheque at the same meeting,” notes O’Donnell.

But ultimately accountancy, just like any service, does not just come down to price. “People confuse costing and pricing,” says Raynor. “Using hourly rates might help you find out what it will cost you to do the work, but it’s nothing to do with pricing. Pricing is created from the expectations of the market and your client, so think about how you affect that. It’s about sales, negotiation, customer experience and even the timing of the bill.”

So whether your practice opts for fixed fees, rate per hour or another method of charging [see box – Alternative billing options], the important thing is probably not what you do, but how you do it.

Alternative billing options

Added value
A firm can charge out partners with specialist skills at a higher “added value” rate that takes into account the partner’s specific expertise and the fact they are performing a service that is particularly valuable to the client. This might be appropriate for advisory work such as tax planning, for example.

Contingent fees
These are typically used where a transaction is due to take place. The accountant will only be paid if the deal goes ahead. It is important to undertake a proper risk assessment in these circumstances and, where possible, secure a commitment fee upfront, followed by a success fee.

Defined outcome
Payment is made according to results. For example, securing a tax or VAT refund for a client, means the accountant will get to keep a share of it – perhaps as much as 25%. But it is important that the accountant isn’t too greedy in these circumstances – or they could lose a long-standing client relationship.

Fixed quotes
When the biggest accountancy firms tender for a large audit, they will put in a bid based on factors including the amount of work that needs doing, how much it will cost them and how much the client will be prepared to pay for it. As a result, prices can vary widely.

Milestone
This method of billing is already used by some accountancy firms and is suited to more valuable jobs, such as large audits, that will require significant upfront investment in staff time. By billing the first half of the fee at the initial planning stage and the second half when the audit report is signed, the firm ensures that it has covered many of its costs before the audit has even started.

Mix and match
It is possible to charge a mixture of fees – for example, hourly or job rates for existing clients and fixed-fee packages for new clients. This can work, although it results in a more complicated billing process.

Work in progress
Some firms do bill for their work in progress on a monthly basis as a way of ensuring steady cashflow throughout the year. The difficulty with this method of billing is that the firm is issuing many small bills and expecting the client to pay for work that has not yet resulted in a tangible outcome.

Sally Percy
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  • Comment by Peter Cook

    One of America's astronauts, I firget which, asked what he thought of on blast-off, commented that he reminded himself that everything in the craft had been made by the person who submitted the lowest tender. If you see what he is getting at, it is logically irresistable that fixed price tenders for audit work should be prohibited. In the final analysis, you can only get the price down by doing less/cutting corners which is the road to more Enrons, more Robert Maxwells, more BCCIs which is just what this profession doesn't need. In case someone thinks the answer is less audit but smarter audit, smart audit involves thinking time. The person who doesn't think too long is going to get the job! Not good.