Practice Management Small Business

To Successfully Implement Value Pricing, Track Activity

Written by Diane Lucas

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concept of hourly billing – reliance on timesheets for capturing billable (and non-billable) time – is regarded as an outdated pricing structure for service delivery businesses.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:

  1. Hourly Pricing
  2. Fixed Fee Pricing
  3. 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.

Value Pricing

A Twofold Value Pricing Model

To achieve this, I developed a view of the Value Pricing model that is twofold:

  1. To produce a risk-free, scope-clear, calculated pricing proposal for the prospect, and
  2. 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.

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.

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.

Service Delivery

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.

Contingency

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.

Capacity Management

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.

 


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About the author

Diane Lucas

Diane Lucas is passionate about helping business owners and industry colleagues simplify their businesses with systems that are effective and innovative. Diane’s passion for the accounting industry has helped her to excel in her field. Diane was attracted to explore the world of cloud solutions when Intuit introduced QuickBooks Online to Australia in 2013.

She became the first Australian Certified ProAdvisor of QuickBooks Online, and soon after became a Member of the Intuit Trainer/Writer Network. Further recognition of her skills was received in 2015 when Diane became the first Australian to make the Top 100 ProAdvisor list. This accolade had previously only been open to USA Intuit ProAdvisors. As recognition of the growing international momentum of the QuickBooks Online software, nominations were opened up to Global Advisors. Diane has been a Top 100 ProAdvisor the last three years and in 2016 was The International ProAdvisor of the Year. Further recognition of her achievements are the Australian Accounting Awards, and the Women In Finance Awards – Diane won the 'Bookkeeper of the Year' category in both events in 2017.

Diane's business, Direct Management, specialises in helping to "Simplify Business" – specifically using cloud-based solutions wherever possible. That is why Direct Management is known as "the Bookkeepers Accountants want you to use." Helping small business owners and operators learn how to effectively use technology in their business is paramount to creating business efficiencies. Diane operates a training room from the Direct Management office where businesses can come to learn more about using their accounting software more efficiently and apply these learnings to their own businesses. Diane’s passion for cloud technology as a tool to enhance business processes has prompted her to create a Facebook group called "Cloud Storm." Cloud Storm is a platform where financial professionals and software partners can come together to learn from and assist each other. It is software agnostic, and as the name suggests, only about cloud-based software and financial industry businesses interested in transitioning to the cloud.

Diane can be reached at Twitter.

2 Comments

  • Thank you Diane. In 1983 when I went into business I did two things, I tracked the time I started on a tax return and the time I stopped and reviewed the return in that time frame and gave the client the information and received my payment and booked next year’s appointment. I also received a price list from a reputable tax preparation service and used the application of the fees per return to calculate the possible fee. I compared the two. I used my then billable rate per hour to determine how much the return cost would be if I charged on that vs per form. I charged the higher of the two. As time went on and my billable rate per hour increased, so did my form costs. Eventually I did away with the hourly rate and just used the form cost with a provision now, for computer fees. I call this value pricing. I then kept a spreadsheet on the amount of time spent with and on the client’s work and the price I charged. I was amazed at the math. My billable hour when all was said and done was five times what my billable hour would have been. I do not issue invoices, people pay upon completion of the work. I have no accounts receivable. Value pricing on Accounting work (there is a very thin line between bookkeeping and accounting). Accounting involves analytical features while the review of the financials are being pre-viewed and bookkeeping is frequently, forgive me, data entry and if it is correct in its assumptions, makes the analytical issues easier. I have not yet found a greater than 75% accuracy feature in data entry in the final analysis. Of course judgment always enters into it.
    Value pricing on the accounting for us is harder and I usually end up with write downs for redundancies because of the analytics.
    Great article and I will share it.
    thank you again,

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