I get asked this question quite often and I’m fully aware of the motivation behind it. By that I mean those people who do not want to let go of time-sheets ask it because it is a really tough situation to deal with as a practical matter and therefore they feel that it’s too hard so let’s stay with timesheets. And then there are the people who do want to get rid of timesheets and their motivation for asking is “because it is a really tough situation to deal with as a practical matter” so they’re looking for practical guidance.
The response I give is, if you want to hold onto your timesheets just do that and forget about the value pricing conversation. But if you do want to find another, and probably much better way of focusing your people on value creation, then I suggest that you borrow an idea from Steven Covey and start with the end in mind (the second habit of successful people.)
In other words, have a conversation with your client about what’s at stake or what the opportunity. Not only does this build credibility and establish empathy it gives both parties an opportunity to start to get a handle on the scope of the engagement which in turn gets the client to better understand the nature of the role you will be playing and the value you will be contributing to the his or her “desired” outcome.
This conversation is the first step in Ron Baker’s eight step process for Implementing Value Pricing which I consider to be a must read if you’re interested in this issue. If you don’t have a copy click on the link and when it arrives turn immediately to Part V where he explains how to implement value pricing.
After being asked the lead question I referred it to Reed Holden who is another guru in the pricing arena …. his recent book Negotiating With Backbone:Eight Sales Strategies to defend Your Price and Value is well worth reading. I read the first one of his (written with Mark Burton) years ago and loved it. It’s called Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table. Reed’s response to my question is:
Ric: With regard to your question about value-pricing in unknown accounting contracts—that’s actually a very difficult thing to do. You don’t know what you need to do and the client doesn’t know what their real needs are. Many clients have trust-based relationships with accounting firms and just trust them to treat them right.
We’ve increasingly seen clients use what we call “Poker Playing” to pit a preferred accountant against another firm to drive the prices down. You seem to be concerned about an area that really isn’t about value but about determining who owns the risk in the engagement—you or the client. Of course, you would prefer the client owned the risk and the client would prefer you did.
As to the broader question of determining value in what you do for clients—it is possible but it takes considerable digging with the client and often you can’t really do that until after the work is done.”
Reed also kindly gave me permission to share an article written by his colleague, Mark Burton, on pricing in Professional Service Firms which you can download by clicking the following link. It’s called OutsourcedServices
Now, to a tough question with an easy answer. What about clients who bring small jobs to you? How do you price them without timesheets?
Here’s my answer” don’t take on clients who only have small jobs because that’s rarely a good use of your time, it will serve to keep you and your firm hanging around the bottom end of town, the nature of the work will be so lacking in mental stimulation you’ll find it hard to attract and retain talent, your premium pricing options will be few an far between because small jobs are usually “transactional” rather than “transformational” in nature which is where price sensitivity is highest.
But if you really must take on this work, the other strategy is to price it at what Ron calls a “pump fist” price if for no other reason than if you did a thorough activity based costing exercise on these jobs I’ll bet the price would be way higher than you’re probably inclined to charge based on your past experience with traditional time-based pricing.