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Billable hours are a cornerstone of the accounting industry. For decades, the system has provided a clear and transparent way to keep track of who is doing what. Firms simply tracked each hour worked and then billed clients according to an established rate. The system allowed a fair profit margin, it could be justified by cost, and it was profitable. Best of all, it worked well for most firms. That is, until it didn’t.
Somewhere along the line, clients began to realize that they weren’t all that concerned with how many hours it took a client to perform a task. Similarly, they realized that the value of the service provided had no real relation to how much time was spent on a project. In short, when clients found themselves on the other side of a lengthy bill, the rationale behind billable hours seemed to go out the window.
And it’s not just clients raising concerns about this archaic system. As author and consultant Ron Baker explains, the billable hours scheme also limits an accounting firm’s income. As more firms begin using cloud-based software to automate tasks, there is less work that firms can charge for. And because hourly rates have not increased faster than our productivity, income is suffering. As a result, firms are no longer seeing billable hours as their partner in crime, but as the enemy.
And research backs this up. According to Professor André Spicer of the Cass Business School in London, there are a number of reasons why billable hours are akin to “making square pegs fit into round holes.
It’s simple math really. If a firm gets paid by the hour, the more hours they bill, the more money they earn. The problem with this setup is that firms have an incentive to fudge billable hours with larger clients. In fact, Professor Spicer found that “Senior partners with high charge-out rates often overestimate the amount of time work takes them, while junior employees with low charge-out rates often radically underestimate the amount of time work takes them.” In short, there’s some sneaky math going on here.
Similarly, billable hours sets up a problematic incentive scheme, whereby employees are judged based on the number of hours they work rather than the problems they solve. This is particularly unfortunate for employees such as parents or those with other commitments that prevent them from working such long hours. Even for those who are able to work well into the night, it’s not sustainable and burnout is a frequent occurrence. In this case, it’s a lose-lose situation for both clients and employees.
When budgeting for new projects, accounting firms need to lean heavily on past experiences to know what to expect. However, this assumes that the new project will proceed similar to the previous one, thus resulting in a flawed budgeting process from the get-go. When unforeseen circumstances arise, clients often find their bill increasing beyond their expectations leading to headaches all around.
When you get right down to it, the billable hour does not really account for the value that you provide to your clients. Things such as innovation and great customer service cannot be measured in time—despite the fact that these are skills that factor heavily into the value of the service you provide—making it difficult to put a true price on your services.
So if billable hours are the root of so many issues, what’s the alternative? For many firms, that alternative is value-based pricing, which involves setting a fixed price for a service based on the value it creates for the client. In other words, it puts the focus on the needs of clients first and then works backward. Firms can work with clients to understand their goals and put together pricing packages accordingly. As value-pricing advocate Ron Baker explains, when presented with different options, clients can decide what their price-value trade-off is and make a decision accordingly—just as they would when purchasing any other service. In many cases, clients are even willing to pay a premium price for the certainty that comes with value pricing.
Think of it this way: You would never agree to purchase a plane ticket if it cost you $4 per minute. You would expect to know the costs upfront and not simply absorb extra fees if your flight was delayed by a half hour. This is because buyers don’t judge prices based on time, but based on the quality of the service, brand reputation, and a host of other factors. Buyers expect to know costs upfront and by implementing value-based pricing, accounting firms can take the same approach.
And it’s more than just a numbers game. Value-based pricing also allows firms to put the needs of clients first and subsequently helps them to foster deeper relationships with those clients. When "the clock isn’t ticking,” clients are less inclined to rush through meetings or phone calls just to save a few bucks. In turn, firms can spend more time on problem-solving, innovation, and customer service without the fear of not getting paid accordingly.
While there are plenty of reasons why accounting firms should adopt value-based pricing, one of the biggest reasons is because the next generation is already over billable hours. As the kids would say: billable hours are “canceled.”
As CPA Garrett Wagner of the accounting firm Thaney & Associates explains, “One of the biggest factors driving away millennials from our industry is the deadlocked focus by firms on billable hour goals for their people.” He notes that the structure of the billable hours model leaves many millennials feeling undervalued, as their feedback is simply based on this single metric. For many young accountants, their strengths lie in increasing efficiencies and adding value through strategic innovation—services that don’t fit into the billable hours model. As a result, Millennials are (quite rightfully) frustrated by a system that does not measure the true value of the services employees provide. Put simply, the future isn’t billable.
It seems obvious that value-based pricing is the future of the accounting industry, but that doesn’t mean that billable hours are going to go down without a fight. For many firms, moving away from billable hours means changing the very way a firm captures its revenue source—a terrifying prospect. To help mitigate this fear, Peter Ambrosiussen, Managing Partner of Ambrosiussen Accountants & Advisors, suggests still using billable hours as an internal reference to figure out your pricing structure. While this may take time, it helps to ensure you are covering your costs in the short term. Long-term, he suggests measuring effectiveness on a completion-of-work basis, rather than billable hours.
However, there is another, more personal hurdle, that can prevent firms from making the switch. Many CPAs are uncomfortable with selling themselves and fear that they aren’t worth more than their hourly rate. As Thomas Taylor, CPA and founder of T2 Consult, notes, “Team leaders, when left to their own devices, will often quote lower than they would if they were using hourly rates because they feel ‘I can’t possibly ask for that much money.’” While these feelings are valid, accountants need to feel confident in their abilities and begin thinking of their work as more than just a commodity. Accountants provide knowledge, assistance, and customer service to their clients, and all of those things bring real value to their clients.
While there will always be a place for billable hours—particularly for clients who prefer a range of pricing options—firms are in need of alternatives that meet the modern demands of both clients and their staff. Value-based pricing not only fills that void, but also helps to usher the accounting industry into the twenty-first century.