By now most accounting professionals are aware that the concept of hourly billing – reliance on timesheets for capturing billable (and non-billable) time – is regarded as an outdated pricing structure for service delivery businesses. As accounting professionals, we are told we should replace hourly billing with value-based or value-led pricing. While I definitely agree that Value Pricing is the right pricing structure, I believe that activity tracking is critical to successfully implementing the new model.
My Value Pricing Journey
My own Value Pricing journey began in 2013 when I attended SleeterCon (now Accountex USA) in Las Vegas. At that conference I heard Ed Kless (Senior Fellow at VeraSage Institute) speak. What he said really had me thinking. Yes, I got it, value pricing is the way to go forward. The concepts made sense. I left that session determined to do something. I left that session determined – and did nothing. I didn’t know where or how to start.
Twelve months later I was back in Vegas at SleeterCon 2014 to see what more I could learn about Value Pricing. This time I had an agenda: To walk out of there with an action plan on how to introduce Value Pricing to my bookkeeping practice and to my clients.
The reality, however, was that I still wasn’t comfortable with the “how to” of Value Pricing – there were aspects of the discussion, specifically around the removal of timesheets, that I didn’t agree with.
What I did understand is that there are three key pricing models:
- Hourly Pricing
- Fixed Fee Pricing
- Value Pricing
Since they are based on actuals, the first two models are easy to implement. Bill for time spent, or calculate a price based on cost and mark-up. Calculating a value price is much more arbitrary, however. I wanted to be able to approach Value Pricing in a way that took away the guesswork.
A Twofold Value Pricing Model
To achieve this, I developed a view of the Value Pricing model that is twofold:
- To produce a risk-free, scope-clear, calculated pricing proposal for the prospect, and
- To incorporate processes for internal business analysis.
1) Developing a calculated pricing proposal
A calculated price has the following characteristics:
- It accounts for Cost,
- It has an allowance for GP,
- It incorporates Risk Management, and
- It contains an addition for determined Value.
For Value Pricing to work well it is important that the above points are incorporated into any strategy. An effective strategy must eliminate the guesswork of calculating a price based on value. The strategy should enable a value price to be generated that is consistent and comprehensive – each and every time.
2) Incorporate internal tracking and analysis
As I see it, being able to calculate a value price is only part of the Value Pricing model story. The second part of the model involves internal business processes around tracking and analysis. It is this aspect that requires monitoring of time.
Internal business processes include the following:
- Delivery management,
- Client change management,
- Risk management,
- Individual team capacity monitoring,
- Overall team capacity forecasting, and
- Development of performance review systems – practice, price, and team
The monitoring of each of these internal business processes is achieved by the tracking of budgeted effort against effort used. Simply put – this is the time allowed to achieve the required tasks, time vs. activity. Effort is tracked back to an item of scope and to the person fulfilling that role. Being able to define the effort required involves a Discovery Phase.
Before a Value Pricing package can be determined it is critical to get to know the prospect. This Discovery Phase is where systems around analysis and scoping are used to develop a deep understanding of the prospect and to further the understanding of the complexity of the work for which you are expected to provide a solution. Once that understanding has been reached, a value package can be prepared for presentation to the prospect. This preparation is called the Solution Development.
The Solution Development enables pricing for profit – part of the pricing strategy. To prepare a solution development, the scope (activities) around the requirements as understood during the Discovery Phase are documented. Scope analysis requires an understanding of required effort against activity. This clear defining of scope is where the internal business processes commence.
The team executing the delivery needs to be very clear around scope and the effort permitted in order for them to be able to complete their work. Each team member can then undertake their role around the job expectations. Their deep understanding of the client scope of engagement means that they know when the job is no longer within scope. They are able to be attentive to scope creep and as such, to trigger an alert. This scope creep instigates a Change Management process and should be seen as an opportunity to sell additional value to your clients.
The tracking of effort has thus far enabled our team to be confident in their role and assists management in identifying instances where there is a potential for profit bleed and to quickly stem that flow.
The next internal process revolves around risk. Each prospect discovery needs to identify the potential for risk. When an accounting or bookkeeping practice moves to Value Pricing, the onus on delivering the agreed scope is entirely on the practice. Risk to an engagement includes issues like client reliability, response time, and commitment – each of which can affect service delivery and engagement profitability. The measure of risk is understood as Contingency. Contingency is a buffer of time on items of scope fulfilled by certain team members. Unused contingency is a direct injection of profit to a practice’s bottom line.
The tracking of effort enables management to monitor when effort pushes into contingency. This is acceptable, however not necessarily desirable.
An understanding of the allowed for effort in a client engagement means that capacity can be managed. Capacity Management uses the concept of a full time equivalent (FTE). Capacity Management is about both the individual and the team.
Each team member has capacity measured as a partial or full FTE. Being able to associate an engagement back to budgeted effort means that the team members assigned to that client have their personal FTE availability reduced. The available FTE of each team member contributes to the total practice FTE capacity. Tracking the available capacity of a team member enables monitoring of their ability to take on additional work. Monitoring the FTE of the practice as a whole means that the critical point for engaging a new team member can be identified. What can be measured can be managed.
Performance & Pricing Review
The final internal processes hinging on the tracking of effort are around performance review systems. Practice, price and team are all areas that need to be measured and reviewed.
A business with vision and goals is a business geared for growth. To track growth, there must be measurable components. The practice needs to review practice performance against internal growth targets, as well as to understand the profitability of an engagement – is the client engagement being fulfilled within scope or is the effort required to fulfil the scope greater than expected? Is contingency used? These are all measurable because expended effort is monitored against budgeted effort.
It is critical to perform a pricing review in order to check that your delivery price is in line with scope, changes in CPI, and the value you are delivering to your client. A thorough understanding of the required effort of the engagement is a precondition for a pricing review.
The goal of Team Performance reviews is to measure and enhance work performance and personal development. To judge work performance, it’s necessary to pose and answer the following questions: How well has the scoped work been completed? Is it completed within budgeted effort? Has any of the contingency been used?
If activity is diligently tracked against budgeted effort, you can measure whether the engagement is being met or not. Meeting or coming in under budgeted effort is the cream of good service delivery. How you choose to use this cream within your practice is entirely up to you. Keep it within the business or give back to the team. Being able to measure performance means you can make choices based on calculable metrics.
Track Activity and Effort – Not Time
The use of timesheets within a practice to track billable activities is definitely not the answer. A modern practice can be effectively managed by actively tracking activity and effort. Without this process a practice is only guessing about practice capacity, won’t achieve optimal team capacity, is missing value add opportunities, and will not have the necessary metrics in place to conduct internal reviews.
For many value pricing advocates, timesheets with an emphasis on tracking all available hours may be anathema. Tracking effort to support business growth, however, is key to a successful practice.