By Jim Boomer, CIO, Senior Consultant, and Shareholder, Boomer Consulting, Inc. and
Drew West, Product Marketing Director, Delteck
Imagine arriving tired and weary, late at night in a strange city. You hail a taxi for what you hope is a quick ride to your hotel. But with no knowledge of the area, you have no idea how long the ride will take or what the final fare will be. Isn’t it unsettling to watch the meter tick up and up, while you just hope you have enough cash when you finally reach your destination?
While CPA firms may see little in common between themselves and taxi drivers, hourly billing basically takes our clients for a faithful ride in the backseat. Just like you in that unfamiliar taxi, clients have little idea about the path we take to deliver the end product, or how long it will take. Wouldn’t an agreed upon price up-front make both sides more comfortable entering into a transaction-whether it’s a cab ride across town or business advisory services?
Fixed Fees | A Balancing Act
Yet many firms long attached to hourly billing feel uneasy about the risks of fixed-fee pricing. Even firms sold on the merits of switching still face internal resistance, fueled by the mindset of sticking to “how it’s always been done.” Yet with timely access to the right information, firms can confidently turn to fixed-fee pricing to reduce risk on both sides of the relationship, increase trust and gain a competitive advantage. Any firm considering fixed-fee pricing must consider both the advantages and the risks.
- Stand Apart. In a profession dominated by the almighty hour, why not use fixed-fee pricing to set yourself apart? As one firm that has made the leap puts it, “Those who are different, inspire!”
- Increase Client Confidence. In fixed-fee pricing, fear and uncertainty are replaced by confidence. Clients are involved in establishing the price – and the ceiling is known and accepted by all.
- Generate Cash. Billing schedules made against milestones lead to consistent and predictable cash flow.
- Fund Your Work. Many fixed-fee arrangements receive an initial portion (or all) of the fee up front, ensuring you the leverage of cash-in-hand before the work starts.
- Collaborate. The accuracy required of a fixed-fee approach mandates a scoping discussion – a great opportunity to understand client needs, and often leading to additional services above the original scope.
- Grow Trust. Regular client discussions, proactive offers of additional services, and up-front pricing deepen clients’ trust in you, your firm, and your services.
- Costly Pre-Work. The benefit of increased client collaboration could be offset by the amount of time it takes – potentially at the expense of other billable work. Don’t underestimate this, and ensure your pricing or margin covers this effort.
- Scoping Accuracy. Fixed-fee pricing thrives on absolutes – not ambiguity. Engagement letters must clearly define the scope of what you will do and, just as importantly, what you won’t do. Inaccurate estimates can also lead to low margins or lost revenue if you could have earned more by hourly billing.
- Staff Discipline. You can’t rely on hourly billing to cover work outside the original scope, so the entire staff must understand the importance of change orders, and be trained to use them.
- Financial Administration. Internal financial administration must accommodate the revenue recognition differences between fixed-fee and hourly billing models. Don’t underestimate time and effort possibly needed to modify financial systems to handle both approaches.
- Widespread Adoption. Fixed-fee pricing represents a major cultural shift and must have the complete embrace of your firm’s senior leadership. Their strong support cascades to staff buy-in at all levels, since every role is an important contributor to the success of a fixed-price model.
Project Management Required
Breaking free of hourly billing means confidence in your engagements – confidence driven by accurate status of projects, appropriate guidance for your people, and knowledge about what works. For this kind of project management, your practice management system should deliver visibility into information, control over people and their work, and insight into the results.
Practice management systems with the following attributes provide the information you need to price, staff, manage and deliver successful fixed-fee engagements.
- Visibility. Visibility is all about the past, present and future. To scope accurately, you want easy access into past work and results, to ensure all the firm’s critical data is easily accessible – from either a single environment or a tightly integrated system. Present status is key – you want to know immediately when engagements are off schedule or budget, so look to dashboards and alerts to provide margin, utilization, or realization KPIs to partners and all involved staff. Looking to the future, effective resource planning means knowing who’s currently available, and their future capacity. Connect constantly-updated staff availability to the sales pipeline of fixed-fee engagements, so you can effectively plan resources.
- Control. Control is about guiding engagements to the profits you expect. Don’t take on costly inefficiency; make sure your invoicing and billing has the flexibility needed for fixed-fee pricing – such as automatic invoicing triggered by progress milestones. Of course doing this means progress has to be accurate, so once again look to your practice management system to enforce prompt collection of the hours spent on each project. Finally, control how people are treated. Ensure your practice management system fairly measures each resource’s true contribution, and accurately calculates realization or utilization targets – so staff working on early phases aren’t penalized if revenue is realized at the end of the engagement.
- Insight. Insight is going beyond the simple visibility of facts and status, to having true knowledge. Practice management systems that combine information together are good at providing knowledge, because people then have a path to connect outcomes back to the decisions behind them. Put in a much better place for deep analysis of past activity, the single set of historical data in a good practice management system helps consistently determine appropriate scope-of-work, accurately estimate costs, and even evaluate the historical effectiveness of involved staff. As insight gets increasingly deeper, fixed-fee engagements become easier to accurately scope, and increasingly less risky to deliver.
Making the Leap | Some Recommendations
You’ve weighed the benefits and challenges and you’re ready to make the leap. What are some initial steps to take as you head out on your journey?
- Gain Buy-In. Ensure the entire team is on board – you’re impacting culture, and that’s no small undertaking. Before diving in, conduct strategic planning sessions to gain consensus and set a roadmap for implementing fixed-fee pricing that includes initiatives, responsible parties and due dates.
- Evaluate Readiness. Assess your ability to access the information you need to effectively manage projects. Ready your practice management capabilities to support the firm’s fixed-fee approach.
- Switch Your Pitch. Focus engagement letters on value creation. Move important risk-mitigation language to an addendum to the mai
- Select Early Adopters. Look among your top clients for those using multiple services – and with entrepreneurial spirit. Pricing is an art not a science – so be ready to adjust to their feedback. You’ll also gain confidence and skill as you get more engagements under your belt.
- Package and Price. Bundle your services and price these packages for monthly billing. Give your clients pricing options based on ranges – like small, medium and large bundles. This can increase margins and monthly cash flow.
- Target Clients. Define your target client in terms of ideal monthly fee and your acceptable minimum monthly fee. Beyond fees, consider other criteria like:
- Are they willing to take our advice-are they coachable?
- Will they refer us to other clients that meet our defined criteria?
- Will the client increase our capabilities?
- Respect – do we respect the client and do they respect our team?
- Does the client appreciate our services and promptly pay bills?
Instead of sitting lost and worrisome in the back of a taxi in an unfamiliar city, you now have a roadmap to take on fixed-fee pricing. Will you maintain the status quo and march in step with the rest of the profession? Or will you break out into the fixed-fee pricing model proven by innovative firms to deepen client relationships, increase revenues and improve profitability?