BobHarper wrote:

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Shaun - two questions from your statement "value of our time based on the hours invested":

1. Do you think the more time you spend on something the more valuable it is?

2. When you buy things who determines the value? You or the seller?

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Time has a value, that is the start point in any calculation of cost.

This value based approach divorcing itself from time is similar to the beyond budgeting model that scraps budgets... But yet they are still there but the author tries to make you think of them differently (a rolling budget and working to variances is still budgeting no matter how you dress it up) #1.

The fundamental building block that you cannot get away from is that to determin a price you must determin a base cost and that cost for service based industries is in the time that we spend on the task.

Anyone who does not consider the cost of their time for the hours invested must have skipped several important modules in their management accounting studies.

The second qeustion that you ask (the above response was more general) asks who sets the price, the seller or the purchaser.

Real chicken and egg type question there to which the only answer is that its actually a bit of both.

You work out your cost based on hours and then add any risk based factors to the calculation.

The client will know what they are willing to pay and they may know the market rate for given tasks.

The key is that both of you come to the table with a figure in your head that you have set. You must know what you want and what your minimum quote is in order to yield the profit that you are looking for above your perceieved costs.

You cannot just guess at whether you are going to come away with a profit or even that you are going to come away better off by taking a higher bottom line project.

Lets take a very simple example.

Imagine that you can fill all of your available time with work.

Two clients come along. One wants to employ you to work on a project for £10,000 but the work will take 100 hours. Someone else wants to emply you for £5000 and the work will take 25 hours. The hourly rates on those are £100 and £200 respectively.

That means that you have an opportunity cost available for 75 hours which if you could fill that time with work paying more than £100 then you would be foolish to accept the £10,000 contract.

The key there is that you did your calculations based on your time.

Taking another example, lets imagine that a client wants to employ you for £10k for 1000 hours worth of work and another client wants to employ you for £10k for 500 hours worth of work.

Again, a no brainer. The first is likely to come in under your minimum that you would work for and would be rejected. The key though is that you related the project to the time that it will take and you priced that time.

That also answers your first point about do I think that more time equates to more value. 

Shaun.

#1 I am not deriding the work of Hope and Frazer which is excellent but rather saying that the change in thinking is not quite as fundamental as they would try to imply.

edited for spelling and typo's only.

-- Edited by Shamus on Monday 26th of November 2012 10:57:04 AM

Don't worry Bob, I never expected an appology. I know your're not that type of person.

Think that you got the third line slightly wrong but I understand what you meant to say.

You do now see though my point that time based costing is the basis upon which the value pricing concept is built.

Time for service / knowledge based industries is the fundamental building block. People may not value my time but they value my knowledge... In time based chunks.

The value pricing concept can attempt to divorce itself from it's basis no more than one could argue that a house is not well organised a pile of bricks.

I can see your concept and your argument but I think that we may have to agree to disagree as this is a circular argument. There is a truth to the value of knowledge line but time based billing gives that knowledge a definable value. Basing the billing on the value of the information alone is too much of an intangible variable.

Unlike your list I would however not dream to deride those who choose a different form of pricing in order to put forwards my own approach.

Time based pricing works and I do not see any of the points in the list as being true of accountants who are bound by an ethical code to their clients and for the benefit of the profession.

As with the sheep video I think that this list was somewhat ill conceived.

If I saved one person £500 and another person £5000 I would charge the same on the assumption that the two took the same time based effort.

If the £500 took more time than the £5000 then they would pay more for my services.

To charge fee's on any other basis would be to charge on a contingent basis which again is against the ethical code of practicing accountants (That's why you would never see qualified accountants advertising "no tax saving, no fee" services).

At the end of the day the money is the clients, not mine.

Mine is the expertise they need to retain what is already theirs by right and not mine to take without proper justification. #1

I suspect that the value pricing concept is being somewhat tyre levered into our normal costing where it lives more comfortably on the project based costing side of the fence.

Even on that side my basic costings would be based on time although in that instance the actual quote may be in relation to the value of the project to the client.

Project pricing though is quite separate to our standard pricing and the list was aimed squarely at comparison to standard tasks performed by an accountant such as compliance work.

I don't do timesheets, that would imply employment (actual or deemed).

I think considering that comment that you might slightly misunderstand my idea of time based pricing. My clients pay for the work which, if necessary, I could justify based on the time that I have spent on it (Such has to date not been queried by any client). However, my clients pay a fee for my services, they are not billed on a number of hours worked as that is only calculated for the basis of my costing and pricing.

Shaun.


#1 Worth noting that being brought up in banking one thinks of money as stock. I like to believe that such sentiment is shared by all within my profession. It certainly is amongst the chartered and chartered certified accountants that I know.

I must here emphasise again.

That is contingent pricing and against the ethical code.

You cannot charge based on saving as such would be a self interest threat to ones objectivity.

If you look at the situation and feel that the client would not benefit from your advice for the price that you would charge then you would not take on that client unless such was only part of a package of work for that client which overall would be mutually beneficial.

BobHarper wrote:

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...but even if they were not it doesn't make time/cost based billing right.

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 Are you really saying that there is only one billing model that is right and thats yours?

Kris took the second bit, I'll take the first.

The CIMA document is taken directly from the IFAC code of practice.

I direct you to sections 120.1 and 120.2

120.1 The principle of objectivity imposes an obligation on all professional accountants not to
compromise their professional or business judgment because of bias, conflict of interest or the undue
influence of others.

120.2 A professional accountant may be exposed to situations that may impair objectivity. It is
impracticable to define and prescribe all such situations. A professional accountant shall not perform
a professional service if a circumstance or relationship biases or unduly influences the accountants
professional judgment with respect to that service.

To offer contingent fees is a direct self interest threat to objectivity (if you do not make a profit for the client then you will not receive any money).

See discussion of self interest in relation to contingent fee's in sections 200.4 and 240.3.

Where a secondary principle breaches a fundamental principle the breaching of a fundamental principle will take precedence.

Our objectivity in all matters must not be in question.

Such advocacy is what created situations such as Enron and Worldcom where accountants at the behest of client management manipulated facts to show profits where there were non.

Such ethical guidlines as section 120 are there to prevent that ever occuring again by ensuring that accountants objectivity is not threatened by overfamiliarity, advocacy and management decision making on behalf of clients.

My feeling is that the only way that a contingent fee could ever be deemed acceptable is where a client's fee's are totally insignificant to the practice so there could be no arguement that there was any threat to objectivity.

However, if one's business model is built on a core of contingent client fee's then no amount of safeguard could protect against the self interest and advocacy threats to objectivity and independance.

BobHarper wrote:

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when you've been doing something a long time it can be harder to take on new ideas.

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Thats time share sales tactics (or is that fractal ownership this week?). lol

We take on new ideas all of the time, we also carry around lots of alternate ideas with us. What we don't do is jump to different ideas without thinking through the repurcussions.

It wouldn't be much of a show without you though Bob.

Because one client would be more advantaged than the other does not make the alternative correct.

You are not costing the client money. If that were the case you would not accept the client as it would not be to their adantage for you to represent them.

To use percentage saved as a basis would see the same work paid at different rates. If anything does that not make value based pricing worse in that you will be attracted to represent the clients for whom you can achieve the best return.

If I had the time to represent only one of those two clients the value of the return that I could achieve would not come into the equation beyond ensuring that they would be better off using my services than not.

The return of £500 to one client may be just as important or perhaps even more so than the £5000 to another but if only one client could be represented my method would take that into account whereas yours would favour the higher return combined with the likelihood of achieving that goal.

@Shaun - I know time based pricing is simple and it works but there is no way it can be said to be the best way to price. Both you and Kris do not use pure time billing because you know it is fundamentally flawed. At best you have found a workable compromise.

Your criticism of Value Pricing is now "you will be attracted to represent the clients for whom you can achieve the best return" is more of a positive statement. But, what Value Pricing does get you thinking about is how you can maximise the value to every client.

@Shaun - I do not start with I have X time and want to generate Y in revenue. I come from the position that I have X knowledge and want to deliver Z value so I can capture Y share for me

You and Kris may want a pricing model that is best for you, I come from what's best for the client first.

@Shaun - I don't think we are in a service industry so time is irrelevant. I prefer to think of bookkeepers/accountants as knowledge workers and perhaps that is fundamentally the difference between us.

Now hold on a wee minute Bob. Where have I every said I have a pricing system to suit me and not my clients. I happen to know that my model is exactly what my clients want. It stands to reason really. My clients come first as they are the most important thing in my business. I wasnt going to say it, but I will, in my pricing model is better than value pricing. Before you argue why, it's obvious. I can explain my system in a simple paragraph. You have trouble explaining your in, I've actually lost count of how many, threads on the subject.

If you are convinced it is so good and we're all so wrong, fine. But your attitude stinks.

Kris

Wayhey, an innovation competition...

-- Edited by kjmcculloch83 on Wednesday 28th of November 2012 02:53:10 PM

Bob, you do know that you are really beginning to sound like some kind of religious fundamentalist, don't you?

lol Kris,

got visions of Bob running into a packed meeting of real accountants (#1) now with C4 strapped to him.


Bob,

you seem to be confused that I was agreeing with you?

on the Clients don't care how long it takes, that bits not true at all.

The longer a task takes (#2) the more it costs us so the more we have to charge the clients want cost effective solutions within generally quite tight timeframes.

And we're back to everything is tied to time.

Its the fundamental building block for service industries (which we are), you cannot get away from it. To try is to attempt to build a house without foundations.

Bookkeepers, accountants (management and financial) and consultants in the financial services sector all think about what is best for their clients but they do their costing (so by association pricing as one is the root of the other) based in their time whether that is directly or indirectly.

Shaun.



#1 I've adopted a new term. Real accountants as opposed to Traditional accountants as the existing terminology used would give too much credence to the term alternate accountant as though that is somehow better. Just feel that the new term emphasises more the reality of the situation and redresses it.


#2 We are talking about genuine time here, not training time. Some tasks such as an IT consultant applying a fix may take much longer than the client initially envisages due to complications such as the issue not actually being where it appeared.

The key is that the clients perception is based on the time taken to complete the task. Even if the client perceived matters in terms of a fixed cost the consultant is still costing their time based on the hours taken to complete the task.

Value pricing would say how much is that solution worth to the client but clients do not think in terms of worth they think in terms of the lowest cost for the end they need. Even if tricked into believing that they had moved away from time based pricing the consultant is still thinking in terms of the cost of the solution in terms of their time regardless of how the client perceives matters.

Value pricing, like lean and agile is just another fad that is making someone a living on the lecture circuit but in the real world it is not a real solution as under the bonnet service based costing (and by association pricing) can never be anything other than time based.

@Kris - time has nothing to do with value and people only pay a price if they perceive value...otherwise the rock next to a diamond would be worth the same as the diamond.

BobHarper wrote:

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@Kris - time has nothing to do with value and people only pay a price if they perceive value...otherwise the rock next to a diamond would be worth the same as the diamond.

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Just need to answer this point after saying we should leave it. This, i believe, is your fundamental flaw. You are comparing a product and a service. Products are very rarely based on time alone, for a number of reasons. We are service providers, not product sellers. You cant touch what we sell. Kris

I doubt it.

Oooo look, an advert for Guild Wars 2.

@Amanda - the point is that if you don't start by asking the client what they want you will not know what to focus on. Time based billing (fixed or not) puts the client second.

For me, this is the problem with the profession, it doesn't innovate it just gets more efficient.

This is reducing fees so each bookkeeper/accountant will be forced to deal with more clients. This will mean there will be less bookkeepers/accountants and what we do will be pretty insignificant as technology gets smarter.

Old ideas die slowly.

BobHarper wrote:

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@Shaun - if you believe your clients buy time then I assume you think they would be happy for someone else to do their accounts because they just buy the time it takes?

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If my clients feel that another accountant provides a better more cost effective sollution for them then they are free to leave.

My clients pay my company, my rate, for my time.

As mentioned previously the rate is set based on the time a task takes but the client is billed  on the basis of the work performed.

For example, a client would pay for preparation and filing of period end accounts (say (#1)) £450 (plus VAT).

They would not be billed 12 hours @ £35 (plus VAT).

The time just forms the cost basis upon which we determin the price.

Conversely if I hit problems, internet issues, a query that I needed to resolve in relation to the work. I have already factored that into the price which has been set by combining my time based costing and market rates for the work performed.

The key is that before you set a price you must have an idea of the cost and that is based on multiples of the scarce resource which in our case is our available time.

In the above example my hourly rate is £35 but if everything went to plan I would actually take £37.50 (£450/12) assuming that nothing went wrong.

I would also be looking at improving on the 12 hours to further increase my hourly average. My aim is at least a 10% time reduction per client per annum combined with rises of no more than the rate of inflation for the same level of work. Isuspect that such will become increasingly difficult to achieve as time goes by as there is only so much productivity improvement that one can implement before the service begins to suffer.

Considering the above I will have :

(a) fulfilled the client expectation of performing the work within initial quote.

(b) the quote will have been based upon costing my time

(c) I would be looking always for ways to improve my own productivity to increase the deemed hourly rate.

(d) As my quote is based on time there would be no preference in my quote shown between a business with a turnover of £10,000 and one with a turnover of £100,000.

That last one is particularly important as by showing every client the same level of attention one is more likely to still be their accountant as they grow (which well advised micro businesses do tend to do).

Perhaps now you are able to see why the initial list caused such offence at the implication that accountants do not care about their clients.

Shaun.

 

#1 depends on the time that I estimate that it will take to service the clients requirements.

BobHarper wrote:

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@Kris - the "if it ain't broke" attitude doesn't lead to best in anything.

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XP was "improved" to Vista....  Says it all really!

Shamus wrote:

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BobHarper wrote:

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@Kris - the "if it ain't broke" attitude doesn't lead to best in anything.

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XP was "improved" to Vista....  Says it all really!

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 Or Windows 7 to Windows 8 would be a better analogy