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The Boomer Bulletin - 2012
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Is Your Firm Ready for Value Pricing?

Posted By Drew West & Ken McCall, Monday, May 7, 2012

This article was co-authored by Drew West of Deltek and Ken McCall of Boomer Consulting, Inc.

Effort Based vs. Value Based Pricing

Think about something that you recently bought.  It could be as simple as a pair of jeans or as exciting as a new car.  Did you care how much effort went into making the item?  How much labor went into growing the cotton or making the steel?  How elaborate were the distribution channels, or how much mental energy went into the marketing campaigns?  No, of course not!  What you cared about was how much value you placed on owning the item compared to the price it took to acquire it.  If the value (in your mind) equaled or exceeded the price, then you were happy to make the purchase!

What you have just experienced is an illustration of the difference between effort based pricing and value based pricing.  The hours, energy, and other expenses of production didn’t drive your acceptance of a "fair” price.  Your judgment of the fairness of the price and your willingness to pay it was governed by your perception of the product’s value.  Given the choice, your clients will respond to your pricing of accounting services in just the same way.

Goals:  Increase Revenue and improve profitability

An accounting firm is first and foremost a business.  And, like any business, it must grow and prosper in order to service clients, provide a career for employees, and a financial reward for the owners.  Properly managing the firm means continually seeking ways to increase revenues and improve profitability.  Pricing strategies must be designed to support these goals.  One critical question firms must address is:  which pricing strategy best supports growth and profitability?  Is it a traditional effort based pricing structure which computes rates times hours?  Or, is a better strategy based upon the client’s perception of value and willingness to pay a set price for it?  In order to avoid competing on price for commoditized services in the face of a wider array of competitors, more and more firms are evaluating value pricing as a model for the future.  Industry leaders including large firms such as Kennedy & Coe, LLC (Kansas) and smaller ones like Lawhorn CPA Group, Inc. (Tennessee) have already made the move.

It’s not the goal of this article to justify the reasons for adopting a value pricing strategy or even to outline the specific steps to get started.  That requires a more in-depth treatment of the topic than a brief article can provide.  If you wish to explore the reasons and methods, please review The Boomer Advantage Guide to Pricing for Value1.  There you will find everything you need to get started in a value pricing program.  Perhaps, though, your firm is already considering adopting a value pricing strategy but you wonder if your processes and technology will support it.  Let’s explore the ways in which you can align information and workflow to ease your transition to value pricing.

Keys to Success in Value Pricing and How to Manage Them

Virtually every accounting firm uses some form of time and billing software to track time and expenses.  Traditionally, this has been used for billing purposes.  The problem is, these kinds of "back-office” systems are typically disconnected from "front-office” engagement delivery and client management systems. This unnatural divide makes it hard to see the current margin on in-process engagements– work must be completed and "in the books” before final margin is known.  While hindsight may be okay for hourly billing, value pricing requires more visibility & better control over work-in-process.

As you move to value pricing, this typically means a practice-management approach that connects front-office engagement delivery with back-office financial control.  Key capabilities to look for include integration among multiple modules, which allow data sharing and all-around visibility for reporting.  Capabilities like staff scheduling and job tracking for workflow control will make your management tasks easier.  Some of the ways in which you can use your Practice Management solution to assist you in value pricing are outlined next.

Communications.  In order to be successful in value pricing your services, you must have frequent and meaningful communications with your client.  The client will tell you what he or she needs, but you must be listening and monitoring all the communications which go on between your firm, your staff, and the client’s business staff.  A good Client Relationship Management (CRM) program is a must to monitor these contacts.  Some firms will invest in a stand-alone product such as Microsoft CRM, while others will opt for one integrated into the Practice Management system.  Either way, you will need a method of tracking all the emails, phone calls, and other conversations that any member of your firm has with any member of the client’s business.  Mining those conversations may well reveal a need that you are well positioned to address.

Accurate Estimating.  One of the frequently voiced objections to a value pricing strategy is the fear of underestimating the cost of the work, and thus reducing the profit from the job.  Here again your Practice Management system should provide the answer.  Assuming you have done some similar job in the past, either for this client or another, the ability to analyze data from across the firm and draw meaningful reports will give you the information you need to set the appropriate price.  

Disciplined Costing.  One of the robust topics of discussion regarding value pricing is whether or not to keep timesheets.  Some thought leaders and firms advocate doing away with them, since you have established the billing price through negotiation.  Others argue for keeping them and recording time for cost accounting purposes.  For those who opt to keep track of time on the job, your Practice Management software is designed to do just that.  

Effective Control.  Once the job is underway you will need a means of tracking progress, ensuring that the right resources are committed to the job, and that milestones are being met.  Remember that it is important to use Change Orders to adjust the agreed upon price if additional work is added to the scope.  Accounting firms use a variety of workflow tracking and resource allocation programs to accomplish these tasks, but you may find them available in your Practice Management software.  Seamless integration between these workflow monitoring tasks, time entry for cost accounting, and staff availability will ease the burden of keeping your work on schedule, on time and on budget.  

Efficient Invoicing.  A properly written Value Pricing Agreement (your engagement letter for a value priced engagement) will specify the terms for payment.  If the service is ongoing it’s common to use monthly or quarterly billing, or progress billing if the engagement is of shorter duration but still complex.  Any good time and billing system will handle these tasks, but a far better solution is one that is fully integrated with your general ledger accounting.  A system which will seamlessly issue invoices, post them to client records, accept payments using paperless electronic banking, and update your financials all while tracking the effort expended for cost accounting purposes will reduce your back office work and improve your profitability!

Obstacles to Overcome

There will inevitably be obstacles to overcome in shifting to a value pricing strategy.  Some of them are real while others mostly perceived.  Some may come from your clients, but many more will be voiced by reluctant factions within your own firm.  Some will claim that you’ll be unable to price the job accurately, while others will highlight the risk of "scope creep” – more work added while the job is in progress.  Or, they like the level of control they believe they get from closely managing hours billed.   We have already examined many of these obstacles and how a fully integrated Practice Management solution can help overcome them.

A final challenge will likely be simple reluctance to change.  Clients will often be the first to get on board because they see the value in knowing the costs and benefits of your service.  It is a function of leadership to ensure that partners, managers, and staff within the firm buy in and support the value pricing strategy.  Good leaders don’t let foot-draggers keep the firm from making progress.

Next Steps

Hopefully by now you have decided that at least some applications of value pricing might be good for your firm and may be wondering if you are properly positioned to give it a try.  What steps should you take now to get started?

A good starting place would be to review your management support software.  Consider, for example:

  • Do you have the ability to accurately plan a value priced engagement?
  • Do you have full visibility into past client contacts, staff availability, and data analytics which will help you accurately forecast the cost of an engagement?
  • Do you have sufficient workflow control measures which will allow you to track progress and identify early if you are behind schedule or over budget.
  • Do you have seamless integration between invoicing, collection, and financial reporting?
  • Do you have the ability to produce clear and concise management reports that will aid in partner level decision making?   

None of these items by themselves will ensure a successful entry into value pricing, but trying to do it without them will make the project much harder than it needs to be.

Getting started on value pricing probably sounds like a big step, and it is.  But, if you want to raise revenues, improve profitability, and avoid the trap of competing on price consider another of the industry-leading firms who have joined the value pricing movement.  Good luck!

1Pricing for Value, A Boomer Advantage Guide.  https://boomer.site-ym.com/store/view_product.asp?id=303102 (Use code VPGuide100 for free download through June 30, 2012)

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