So why are they still billing by the hour?
That's what Ron Baker wants to know.
Ron is the founder of VeraSage Institute, a think tank dedicated to teaching a concept called “value pricing” to professionals around the world. He's been doing a lot of thinking lately about the notion of value. To wit:
What does the billable hour imply? It implies that your time — not the knowledge you offer your clients, but your time — is what's valuable. And Baker believes that in today's professional services firm, that type of metric is obsolete.
“(The billable hour) misaligns the interests of the CPA and the client,” says Baker. “The CPA's incentive is to bill the most hours, but the clients don't care about the hours; they want the work done right. Customers want outputs and results. … Tracking the input in terms of hours says nothing about the value of the output.”
Baker's pricing model emphasizes value over time, and he calls those who are using it “firms of the future.” Really, though, there's nothing futuristic about them. They've merely done enough forward-thinking to get rid of an antiquated pricing model and replace it with one that makes sense.
Let's think of it another way — this time, in terms of efficiency vs. effectiveness. According to Baker, firms that charge by the hour are models of efficiency, but they're nowhere close to being effective. You know who's effective? Organizations like Google, where employees are expected to spend 20 percent of their time — or one full day a week — experimenting with innovative projects. Some of those projects go nowhere. Some end up setting the world on fire. The point is, Google's employees never know which ones will work until they start playing.
That's horribly inefficient, but in the long run, it's tremendously effective. And it's the kind of example professional service firms should be following. Forget about your time, says Baker. Instead, create value and charge accordingly.
I could try to make sense of this all day, but Baker is way more eloquent on this subject than I am, so let's listen in as he talks about value pricing and firms of the future in this MACPA podcast.
What do you think of Baker's ideas? Let us know, then check out these related resources: