Is your accounting firm finally ready to wave goodbye to the beloved billable hour? If so, what are the alternatives to hourly billing? What are the pros and cons of different models? And what challenges can you expect when transitioning?
It’s no secret that clients are becoming increasingly demanding about price certainty and transparency. The traditional time-based billing model has long been a limiting factor for accounting practices in meeting those demands. However, despite all the talk about the pros of switching to a fixed-fee billing model, the reality has been slow to take. In fact, 71.5 per cent of firms surveyed by BRW still charge clients by the hour.
That conservative 71.5 per cent can’t be blamed for their unwillingness to stray from the comforts of traditional time-based billing. There are costs and upheavals in a business associated with changing such ingrained systems. However, proponents of value-based pricing claim a plethora of benefits for both clients and fee earners, which have all been well publicised over the last few years.
What are the alternatives?
Fixed-fee billing is essentially the implementation of upfront agreed-upon prices that take account of the complexity of the client, the tasks, the expertise offered by the firm and the particulars of a specific engagement.
At its simplest, value-based pricing may incorporate the adoption of an a la carte menu of fixed fee tasks or accounting packages. An increasingly common feature of firms is also a flat monthly rate for the continued provision of accounting services within a defined scope.
Can fixed-fee billing work for all areas of accounting?
Trevor Clark, director at Clark & Associates and Focus Growth Strategies, says there’s no reason why accountants shouldn’t price their services in the same value-based manner as other industries.
“We should be able to say, ‘I know this will take me 10 hours and that’s my aim so I’m going to charge accordingly’,” Clark says.
However, some would argue that it’s impossible to accurately predetermine fees for complex, document-heavy projects without reference to time.
Matthew Tol, a chartered accountant and principal who transitioned his firm MTA Optima to fixed pricing in 2007, disagrees.
“There’s no limit to what the basic premise of value-based accounting can be applied, provided the job can be broken down into stages or outcomes, even if they are contingent.”
Transitioning tips and traps
Transitioning to fixed-fee billing is by no means an overnight event. It will take serious planning and commitment, so be aware of these tips and traps.
1. Commit to new systems and new thinking
New systems will need to be implemented at all levels, so ensure everyone is trained and ready, and don’t be tempted to impose old procedures on new technology.
“Unless all of your ducks are in a row, it can be a painful exercise,” Tol says. “You’ve got to have the whole team on board including staff and customers. You need to understand why you are doing it and what has to be done.”
2. Don’t worry about how you’ll measure output
The completion and delivery of work will become your primary measure of productivity.
“The focus must remain on the result that has been achieved by the fee earner. Just because we can’t account for every five minutes of an employee’s time doesn’t mean we can’t assess productivity. Getting the work out is what is important.”
3. Get your pricing right
This is a key challenge for firms, and will require a thorough understanding of your new billing model.
Tol says some firms simply implement the old timesheet model dressed up as a new model.
“They formulate a price for a client based on last year’s bill, but don’t actually have the discussion with the customer to incorporate their version. They haven’t really changed much and they just assume that everything continues the same. This approach fails to incorporate flexibility to enable changes and variations in the engagement where appropriate.”
4. Limit scope creep
Closely related to pricing is ‘scope creep’, which is the performance of work outside of the agreed scope. It effectively results in practitioners working for free.
“If a surgeon, in the course of performing a vasectomy, finds issues with your gallbladder, he doesn’t just remove it for the flat fee of the vasectomy. Practitioners need to be clear about where the scope of their engagement starts and finishes, then have the confidence to say to clients, ‘This issue has arisen, but its outside the scope of our retainer. Do you want us to do it?’ Then you can agree on a price.”
5. Make technology work for you
With prices becoming increasingly competitive, firms who don’t get on board the ‘time-saving technology’ gravy train will be left behind.
Cloud-based accounting software has been labelled a “game changer” by Chartered Accountants Australia and New Zealand. They enable practitioners to perform work more efficiently, which can translate to reduced rates and/or value-added services within your new model.
The road ahead
For firms thinking about making the switch, a well-worn path is developing in the accounting industry toward agreed billing, but it won’t be without its challenges. Do your homework and, if necessary, retain an expert to assist with the implementation.