Apples and Oranges

Several years ago we discontinued using time sheets as a basis for doing our billing, and began pricing our services based on our conviction that the amount of time committed had absolutely no relationship to the value of the service being delivered.

We define ‘billing’ as determining the amount to be charged based on hours worked as summarized in time sheets after the service is provided, while ‘pricing’ is determined and agreed upon prior to the service being provided. In our profession, billing is typically predicated on the amount of time committed to the project which obviously bears no relationship to the value of the service. Further, billing is in my opinion, generally unethical. (While that is another discussion, I’m happy to have it at any time with anyone.) Pricing (determining value) does present some difficult administrative problems for accountants. In his post How Should Professionals Scope Complex Jobs Ron Baker offers some suggestions from a joint presentation with Chris Marston, to help service professionals more effectively propose on multi-dimensional engagements. We have very successfully used this approach in many proposals and learned some additional lessons in the process.

When we make a presentation (which we always do in person with the decision maker) the inclination is to provide a comprehensive proposal for all of the services we have identified that the client might need because we believe in giving ‘over the top service’. Most firms who ‘bill’ however do not include peripheral services because of course they can’t estimate their invoice until after they’ve provided the service and know how many hours they have accumulated. The difficulty has been that no matter how hard we pound the table and point out that our proposal is more comprehensive, the decision maker(s) are frequently focused on the total dollar amount only. Consequently in comparing our proposal to others, they are comparing Apples to Oranges.

There are a variety of reasons this happens, but typically it’s because the buyers are an audit committee who don’t see the value only the cost, while the beneficiary of the service – the cfo’s / accounting departments / ceo’s – see the value. What has worked well in overcoming this is to propose on ‘phase 1’ only (say the annual audit), and then once the confidence has built, the ability is apparent, and the service level is established and they are impressed with it, we can submit a change order for the additional services.

As an example last year we were engaged by a mining company to edit their 10K. We proposed at $10,000 for the editing alone, which was about what any other firm would have charged, and what it was worth to the client. We knew they had accounting issues, a registration statement to file which would foment SEC comment letters, a tax return and a potential divestiture. Had we proposed on all of that at once we would have had zero chance to be retained because they were looking for something much less. Not to mention we couldn’t have guessed at the ‘value’ to them. That client has paid us much more in the past year for a variety of additional services. The lesson learned. It’s important to propose on what is being asked for even if you identify many other needs. You can fill those later.