Moving from Hourly Billing to Value Billing
by Jaime Campbell, CPA, Tier One Services –
November 21, 2017
A critical machine was broken in a manufacturing plant, and the company was bleeding cash by the hour. Since no one could fix it, an outside expert was called in. The expert inspected the machine, drew a red circle around a component and left. The team rushed to the circled component, saw the issue and fixed it — and the plant was producing again.
When the invoice arrived, the manager was incensed and exclaimed: “Fifty thousand dollars! You were here for five minutes! I want an itemized invoice.” The expert provided one:
- Drawing the red circle…$1
- Knowing where to put the red circle…$49,999
Value billing — everyone’s talking about it. But why move from something easily measurable to an intangible puddle of risk? Read on to find out where the advantages are, how to mitigate the risks, and how to deploy people, processes and technology to make it work.
Why: Uncaptured Revenues
If you believe that the only way to generate more value is to spend more time, you’re missing out on the arbitrage of expertise. If you have a pro who can reveal $50,000 of savings or revenue opportunities in 15 minutes, you’re stuck billing for only 15 minutes. “Well,” I hear you say, “That’s why pros have higher billing rates.” But what billing rate is going to match finding $50K in 15 minutes? If a client gets a 10x ROI in your services, you’d have to sell your client on a rate of $20,000 per hour. Good luck with that.
Although this is a dramatic example, it’s a true story and illustrative of the revenue lost when a firm’s expertise is ultimately underpriced because of hourly billing.
If your firm pays its practitioner team flat salaries, then there is also an opportunity to even more deeply align incentives by allowing value-based engagements to form a bonus pool where the firm’s gross profit targets are exceeded. An hourly engagement creates a misalignment of interests between the client and the firm, and that leads neither to delight nor profit.
Hourly rates also increase the risk for the client. This results in downward rate/invoice pressure or unfavorable payment terms, such as after-the-fact invoicing and contracts without a personal guarantee. There are ways to mitigate those risks, though, and moving to value-based billing makes greater revenue and cash opportunities available because those who bear the risk also get rewarded.
If your firm is bold enough to shoulder the risk by using a value-based model, then you can enjoy the rewards including eliminating receivables and getting powerful testimonials for making an observable, measurable difference in your clients’ financial lives.
Value billing necessitates practitioners who reliably deliver quickly and accurately the first time, with less time required for quality control activities. You’ll also need people skilled at sussing out value at each end of the engagement: closers who can calculate the value of the potential engagement, practitioners who can highlight the value upon delivery, and an account manager who can check in with the client to crystallize the perceived value when a milestone has been reached.
An engagement’s value always comes down to time, money and risk. Work with the client to determine what’s at stake. Translate time into money, and move from gross revenues down to net, then to the percent of the net target for which your engagement makes a contribution. Let your client come up with the percentages, but ask questions to help them come up with the numbers. Factor in your client’s desired ROI in your firm’s services.
Arbitrage is created with deep, broad experience and technology. Make sure your entire team is masterful with the tools of our trade. Examples include:
- Making templates
- Mastering keyboard shortcuts
- Learning techniques to reduce three days of monthly work to 30 seconds of monthly work
- Using video communications and screen sharing technology to reduce or eliminate travel time
Whether your firm’s value proposition is peace of mind, saved time or a healthier cash position, value billing can be both exciting and rewarding for all players.
This article appeared in the November/December 2017 issue of New Jersey CPA magazine. Read the full issue.