Date: 19th June 2014
Last week we investigated how tradespeople can calculate charge out rates based on a cost perspective. This week we look at alternative approach called Value Based Billing. Value Based Billing is being adopted by many professional service providers, including by us here at Findlay and Co.
Value based billing refers to a method of pricing based on the total value of the services provided to the client, rather than the number of hours it takes to complete the work. Hourly billing assumes that what you are selling is time, when in reality it’s skill, expertise, innovation, and the service you provide.
A new book by Ron Baker Implementing Value Pricing outlines a seven-step programme to replace timesheets and hourly billing (this excerpt is from Implementing value pricing by John Haylock from the Chartered Accountants Journal.)
This is where the price is determined before the costs – not the other way around as it is with time-based billing. Once a price is determined, the role of a business is then to deliver the product or service to meet the specifications as expected by the customer and earn a profit. This focus on price first encourages innovation and investment to both reduce costs and provide a higher level of service.
Don’t price in isolation. A value council is a process of involving a team of people in pricing jobs and defining the value provided. This leads to better understanding of pricing issues, consistency of implementation and appreciation of value provided by customers. The value council is lead by the chief value officer.
According to Baker, FPAs codify “in a plain-written agreement what services will be performed, the price, payment terms, scope of services, and the responsibilities of both parties, as well as other clauses that help the firm communicate value and reduce customer risk.”
FPAs encourage bundling of services which in turn leads to the inclusion of higher value services and the development of even closer relationships with customers. FPAs can’t include every service that will be provided or accommodate every set of circumstances. So when the unexpected occurs and additional or different services are required these should be documented in change orders. The price for these additional services also needs to be agreed upfront.
This involves matching the scope of services to be provided with the allowed time and agreed price. Top quality project management is important even with time-based billing. It is essential with fixed pricing, as a practice would quickly go out of business if costs consistently exceeded prices. A rigorous capacity-planning based workflow management system is required to provide the necessary level of project management.
Firm-wide Baker suggests measuring turnaround time, innovation revenue (i.e new services) and customer loyalty and referrals. These measures lead to greater focus on what is important to customers. This encourages an outward looking firm. In contrast, time-based billing leads firms to an inward focus.
These KPIs cover factors such as customer feedback, effective listening and communication skills, risk taking, innovation and creativity, delegation skills, coaching skills, continuous learning skills, pride, passion, attitude and commitment. These factors are not as easy to measure as some more traditional key performance indicators but are ultimately more important.
Carrying out a review after each job allows knowledge to be captured so that it can be shared within the firm, developed further and used again with other clients.
It requires time and commitment to change from time-based billing but the rewards are worth it. Your clients will have certainty and will want higher value service from you. Your team will have clear performance specifications and a greater focus on delighting your clients. And your practice will be more profitable and have better cash flow.