Features
6 May 2015 09:39am

How much are services worth?

How do you decide how much services are worth? By time spent? The professional skill required or by the weight of paperwork involved? Peter Bartram looks at the move away from billable hours

When Lucy Cohen, commercial director at accountancy practice Mazuma, set up a new limited company accounts and tax returns service for small businesses, she decided to charge for it by the weight of the paperwork.

Who would have thought, even a few years ago, that an accountant would be selling her services in the same way a greengrocer sells bananas? Up to 1kg of paperwork costs a Mazuma client £199. As much as 10kg weighs in at £999. Cohen believes her approach is unique.

Accountants are knowledge workers. Time is the wrong measuring rod. It's like plunging a ruler in the over to determine its temperature

Ronald Baker

There are siren voices that suggest charging for accountancy services by time – traditional hourly billing – has had its day. Accountants, these voices purr, should assess the value the client puts on the service they receive and charge accordingly. The high priest of “value pricing” is a Californian accountant turned think-tank guru and radio talk-show host called Ronald Baker. His mission, he says, is to “bury the billable hour and timesheet” once and for all.

Baker, who founded the VeraSage Institute, says: “Accountants’ business model is fundamentally flawed because the world has changed.” He argues that accountancy clients don’t buy time – they buy “outcomes”. So accountants need to re-engineer their business model, including the way they price.

He says: “Accountants are knowledge workers and you can’t measure the value of knowledge work by the time it takes. Time is the wrong measuring rod. It’s like plunging a ruler into the oven to determine its temperature.”

The key to understanding the concept of value pricing is that the value of an accountancy service is determined by the client who receives it. To take a simple example, a company whose tax affairs are in apple-pie order may put a lower value on tax advice than a company whose tax affairs are tangled and finds it has HMRC inspectors bearing down upon it.

Baker’s argument is that if accountants understand the value the client puts on delivering the desired outcome, they can price their service to reflect that. He reckons that between 5% and 7% of accountancy practices in the English-speaking world have adopted some of the principles of value pricing as described in his books on the subject, the latest of which is Implementing Value Pricing.

One of Baker’s UK disciples is Mark Wickersham. He started his own accountancy practice in the 1990s. “For the first couple of years, I never made much money,” he recalls. “Clients thought the services were expensive and I got frustrated.”

Then he read one of Baker’s books, was seduced by the arguments, and switched from billable hours to value pricing. “I got significantly different and better results,” he says. “I found it was easier for clients to say ‘yes’ and buy, even if the price was higher, because I was giving them the certainty of a fixed price upfront.”

Wickersham later sold his practice and now spends his time spreading the gospel of value pricing through consultancy work, motivational speaking and books such as Effective Pricing for Accountants. Last year, he conducted a survey of 725 accounting firms. He discovered around 10% of them were using value pricing principles.

One practice that has advanced some way down the value pricing road is ReesRussell, a 10-person practice in Witney, Oxfordshire, which is a member of the UK200Group. Partner Jonathan Russell says that because a large amount of their work is on compliance jobs, such as accounts or tax filings, there are market rates for much of it, so the firm’s model is a hybrid of time and value pricing.

Clients receive a fixed price based on the amount of time to deliver the service. But, adds Russell: “I may flex the price up and down depending on the need of the client.” For example, if a client appears in the middle of January urgently needing tax returns completed by the end of the month, then the price may be flexed above the standard rate. He draws a comparison with the Uber taxi app which adopts “surge pricing” when demand is high.

However, there are still plenty of accountancy practices that believe hourly billing has a future. One of them is Carter Backer Winter, a London-based firm with 18 partners and 120 staff. The firm uses a mixture of hourly and fixed price billing but managing partner Peter Winter admits: “The majority of my work is on hourly billing.”

Winter says that different kinds of work lend themselves to alternative billing methods. Hourly billing is fine for consultancy and ad hoc advisory work. Fixed-fee billing is good for compliance, such as tax returns and annual accounts filings, often a staple of smaller practices. Audits are increasingly the subject of competitive tenders.

He argues that hourly billing is far from dead, but that clients now more often look for certainty about what they will have to pay. And when the competition is hot, and the client is sensitive about fees, there is a tendency to undercharge. “Partners will undertake work and just not charge for it,” he says.

One of the big drivers behind the soul-searching over billing methods is clients’ wary eye on fee rises and value for money – a tendency sharpened during the downturn. The halcyon days of the 1980s and 1990s, when clients took their bills and paid up without moaning, are long gone.
“There is now quite a bit of resistance on the part of clients to fees and fee increases,” says John O’Donnell, a practice consultant at ICAEW. “Many clients will now be looking for a fixed-fee quote for two or three years.”

We couldn't ask people to count the pieces of paper they were sending us, so weight seemed the obvious way to do it

WBut another driver is the way so much accountancy work – especially compliance – has become commoditised, a trend stimulated by more widespread use of technology. Turning accountancy services into a commodity also puts a premium on the processes that are used to deliver them.

“We’ve spent years getting our processes right to make sure that we can deliver services profitably,” says Mazuma’s Cohen. “It’s not as easy as it looks.”

Cohen keeps control by reviewing a set of tight key performance indicators that show how work is flowing through the firm. For example, every piece of client work that comes in has to be booked, processed and returned to the client within five working days. Any phone call or email from a client that arrives before 4pm must be answered the same day.

The idea of basing fees for a service on weight came when Cohen realised that the time taken to do the bookkeeping for a small company or contractor was usually proportional to the amount of paperwork. “We couldn’t ask people to count the pieces of paper they were sending us, so weight seemed the obvious way to do it,” says Cohen. The service is for clients who don’t want advice and support – just a set of accounts and corporation tax return at the end of the year.

For clients who want a fuller service, Cohen offers a fixed-fee monthly service. She admits that taking on clients for a fixed fee is a risk when there is no certainty how difficult it will be to service their needs. But Mazuma now has more than 2,000 clients, mostly with turnovers under £250,000, and profit averages out over them.

“We only market to people who are most likely to fit the structure we’ve got,” says Cohen. “We basically train clients to give us clean paperwork on time so we don’t have to chase them. We discuss all this during the sales process and if we don’t think people are a good fit, we tell them that they won’t get the best out of our service.”

Darren Fell, managing director of Crunch Accounting, is another accountancy entrepreneur who believes the future in the small business and sole trader accountancy market lies in offering fixed-fee services.

Crunch has 6,500 clients for its online services, which harness the power of cloud computing, with a further 300 signing up every month. Typically, client turnovers are up to £500,000. “With a fixed price service, you’re looking to deliver volume – you need to offer all the features a client needs but be sure you can make a profit on the fixed price,” says Fell. “Some clients can be an utter nightmare, but it’s our job to solve all the problems. It’s important that you can scale up the service as it grows.” Crunch now has 140 staff including a specialist team of 30 software engineers.

From their lofty height, the Big Four accountancy firms have begun to sniff the air and think about their future pricing policies. KPMG recently announced its small business accounting service – part of its Enterprise strategic investment scheme – which includes accounts preparation, bookkeeping, payroll, VAT and corporate tax returns from £150 a month — a price threshold way above the entry level pricing of £60 a month at Mazuma and £64.50 at Crunch Accounting for similar services.

“We want to be the clear choice for all privately-owned businesses from formation through every stage of their development and growth,” say Simon Collins, KPMG’s UK chairman.

O’Donnell believes there will be further changes to the profession’s pricing models in the years ahead. To a large extent, the change will be driven by what clients want, he says. What seems clear is that the historic one-size-fits-all hourly charging approach is giving way to a variety of different ways to price.

O’Donnell says accountancy firms need to consider pricing as part of their forward business strategy. “There are a lot of complex situations to consider,” he says. “Different pricing models may work for different clients and different services.”

Pricing accountancy services like bananas may not be the only unusual innovation to come.

HOW OTHER PROFESSIONS PRICE

Other professions are also trying out alternatives to hourly billing. “Both clients and professionals are dissatisfied with the hourly billing model, but everyone is struggling to come up with something better,” says Professor Laura Empson, director of the Centre for Professional Service Firms at Cass Business School.
It’s not easy because – as Empson points out – any kind of pricing structure for professional services needs to give at least a nod to the role of time in service delivery. “To divorce price from the time spent on a task would be nonsensical,” says Empson.
But there is another problem – firms across many professions don’t always have an accurate grasp of the amount of time staff spend working on different projects. There is a “double distortion”, says Empson.
First, staff don’t acknowledge how much time they have spent on a job. Secondly, senior managers shave back the price when putting the final bill together in order to keep clients happy.
It all happens because the spectre of tougher competition is hanging over most professions and they must change their charging structures to deal with it.
Consider management consultancy, for example, where hourly billing used to reign supreme. A late 2014 survey showed that 71% of clients now prefer to be charged on a risk/reward basis – where the fee is linked to achieving pre-defined key performance indicators.
But few consulting firms have switched entirely to this way of working, says Fiona Czerniawska, author of Buying Professional Services and co-founder of Source Information Services, which researches the consultancy industry.
“Most firms use a mixture of risk/reward and more traditional fixed price, and time and materials contracts,” she says. “It’s really only the big firms that can offer substantial risk/reward deals – where a high proportion of fees might be at stake – because they have the financial muscle to back it up.”
Architects are another group of professionals who have felt the stiff breeze of change in their charging structures. Traditionally, their fees would have been based on a percentage of construction costs – depending on the project, usually somewhere between 4% and 10%. But that’s now almost entirely abandoned, says Adrian Dobson, head of practice at the Royal Institute of British Architects.
Now architects are more likely to charge “resource-based fees” calculated on the basis of a seven-stage “plan of work,” which takes a project from brief to client handover. The architect will look at the time and level of staff likely to be used at each of the seven stages to calculate costs, then add a mark-up and perhaps an uplift to reflect value added in the project.
It is a similar story in other professions ranging from law through advertising to investment banking. Clients used to sit back and accept hourly fees as part of the pain of doing the job. Not now.
“Clients don’t understand why they have to pay so much money for work that seems to have taken an unnecessary amount of time,” adds Empson.

Peter Bartram

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