November 2015 Articles

Value Based Pricing for Professional Services

Wednesday, November 11th, 2015

Way in the back of the room, a young man in a crisp blue suit, raised his hand.

“Do you know how we make money?” he asked.

I was in the middle of one of my favorite topics, teaching attorneys how to increase their productivity by more effectively managing their time.

The crowd got real quiet because he was addressing the pink elephant in the room.

I responded with – “Thanks for having the courage to ask the question everyone in the room wants answered. Why would anyone want to get more work done in less time when most are incentived to bill for as much time as possible?”

This is an extremely important question – with no easy answer. However, we’ll discuss how to make this happen.

The Current State

Today, the majority of legal and accounting firms (referred to as “professionals” for the remainder of this piece) follow the same business model.

Get a new client, provide them with a billable rate, bill them as many hours as possible, and if they complain about your invoice, write down a portion of the charges.

Truth be told, no one likes this model.

Clients hate the idea of engaging with a $350 an hour professional who indicates that the fee will be “however long it takes.” In addition, these same clients are well aware that most professional’s compensation is tied directly to the amount of hours they bill.

NOTE: I’ve worked with hundreds of professionals over the years. To my knowledge, not one of them has intentionally delivered work in an inefficient manner just to increase their fees. However, this doesn’t mean that the current model is the most effective method for delivering these services.

Many professional services firms are frustrated by the fact that there are only two ways to grow revenue – Increase the amount of hours worked or the billable rate.

In 2015, the problem for these firms is made worse by 2 unrelated factors.

First, younger professionals (millennials) don’t typically have the same career goals as previous generations. They are very interested in work/life balance and are more likely to walk away from the big payday if it means a 70 hour work week.

Second, technology is commoditizing most professional service industries. By that I mean, it’s easier than ever to understand who delivers the exact service needed, compare prices and pit providers against one another in a bidding war. This competition depresses the average hourly rate and will only get worse as low cost providers (typically in foreign countries) get better at delivering their services in the US.

Shifting Paradigm

Maybe, it’s time to consider a different approach?

Instead of putting up with the status quo, I’d challenge you to consider the following question – What if I could charge for the value I create, rather than the number of hours I work?

I know what you’re thinking – Thanks for pointing out the obvious. What are you going to talk about next – how to eat whatever I want and lose weight?

In understand that charging for value instead of hours has been an elusive pipe dream for years.

However, the demographic/technological changes are forcing the industry to move beyond dreaming about value based pricing and work towards making it happen.

It’s Not Going to Be Easy

Let me state the obvious – this is not going to be easy. In fact, it’s going to be one of the biggest challenges your firm will face.

I’ve heard many of the standard objections…

It’s impossible to know how many hours a project will take. What if I guess low and end up losing a ton?
My clients haven’t even mentioned this idea. Why would I want to risk introducing a controversial new concept to a stable relationship?
Accountants/attorneys have been keeping track of their time in 6 minute increments for thousands of years – getting them to change behavior would be impossible.
What if my competition points out all that could go wrong with this approach and my clients agrees.
If I were running a large firm, I would look at these legitimate doubts and be very tempted to declare – “This challenge is simply too big.”

Your peers within the firm will push back the hardest. Next, many of your clients will be skeptical assuming this is simply another attempt to line your pockets.

As I mentioned, it’s not going to be easy.

Walk Before You Run

Because the challenge is so significant, I recommend you take a very careful and slow approach that follows these key fundamentals.

Customer First – If your motivation behind making this change is simply to increase the bottom line, you‘ll struggle. The goal of this (and just about any) effort should be to bring more value to the customer. This focus will ensure you have the right conversations both internally and externally.
Understand the Data – Before you do anything, take the time to carefully detail the services that are a good fit for value based pricing (e.g. – simple contract reviews) and those that aren’t (e.g. – complex M & A transaction). In addition, put together a list of the clients who would be a good or bad fit for the initial conversations about this new approach. Keep in mind some clients (those that use you sporadically for small projects) may never be a candidate for this change.
Be the Leader – In the professional services industry, you’re either a commoditized vendor sitting and waiting for the next “project” or a trusted advisor. Assuming the latter role will allow you to have meaningful conversations about a change in your approach. You can then advise the client that considering value based pricing could help them effectively budget for legal services and efficiently utilize resources.

Start Small – Pick a small project and see how it goes.
Reflect and Adjust – Once the project is completed analyze the effort to understand the profit margin, the effectiveness of your team and most importantly – the satisfaction of the client.

I am fully aware that there are thousands of details left to be addressed before you do anything.

Changing the way you value and bill for your services is one of the biggest challenges you’ll face as a firm. It

To paraphrase a former president – I feel your pain.

Before you push this conversation to next year’s partner meeting, remember that it’s not 1995.

Today, the marketplace evolves at a pace we couldn’t have even imagined 20 years ago. The organizations that grow will be those that embrace innovation in its many different forms.

Get out in front and lead.

Help your clients perceive your firm as a valuable provider of services that help you to grow.

C.J. McClanahan

  • Twitter
  • LinkedIn
  • Digg
  • Technorati
  • Facebook
  • StumbleUpon
  • Google Bookmarks
  • email
  • RSS
  • FriendFeed