We have all heard the phrase, “you get what you pay for,” and then we have all had times where we overpaid for what we got. When it comes to paying for professional services, you encounter this situation even more often. Starting with law firms in the 1970s, the professional services industry developed the idea of the billable hour as a way to price services. Hourly rates were promoted by the industry as a way to keep pricing for professional services aligned with economic changes (as well as keeping in step with physician salaries). Lawyers began to compete on lowest price, regardless of experience, client service, or results.
Billable hours proved easy to track, provided minimal administrative burden, and were easy to explain to clients. At the end of a month or at the end of a project, a client received a list of hours and rates and was expected to pay for those hours, regardless of the value delivered. It was the client’s responsibility to determine the value received for those hours and costs, and then reconcile that value back to the invoice. If a project scope changed mid-way, or if an engagement simply took more time than expected, clients were surprised by the price they had to pay, service providers were frustrated about scope creep, and everyone was unhappy.
The billable hour is an invoicing mechanism. By itself, it has no value and generates no results for clients. The value comes from the outcomes from those hours. Simply put, value comes from results. Confusing value and results with hours has resulted in unfortunate outcomes, such as:
- Clients paying for hours with no value, deliverables, or results attached to them (How many times have clients been expected to pay for time training the new staff on the job, downtime for equipment failures, or rework?).
- Firms incentive to drive hours into projects, regardless of their results (like mandatory billable hour goals of the last decade which were used to determine promotions and bonuses).
- The “surprise!” invoice due to scope changes or scope creep (even with agreed upon caps on fees, clients can be left wondering exactly what they’ve paid for).
The end result is that clients carry all the risk in a project—they must manage their professional services firm’s hours and work to match those hours to the results received. Clients are expected to pay for hours incurred regardless of value, if the agreed upon deliverable was received, or if timelines were met on the project.
In our firm, we are working towards more transparency in professional services fees. We’re doing this through a mechanism called Advanced Pricing. Through Advanced Pricing, we directly match the value we deliver to the fees charged. We set our price in advance and clearly agree upon scope. This pricing model shares the risk of an engagement with both the service provider and the client. Because risk is shared, we must collaborate with our clients to ensure that we understand their business model, together discussing their wants and needs, rather than informing them of their needs or making assumptions based upon on the last project. Advanced pricing provides options to clients to select the services, level of engagement, and results they desire in order to achieve their goals.
As a result, clients only pay for what they need and the value they receive, not the hours. We have found that this process empowers clients and requires our team to really understand what is important to our clients. We believe so strongly in the importance of delivering value that we include a service guarantee in our Advanced Pricing engagements: if a client is unsatisfied with our services, they only need to pay what they think is fair. This guarantee is a powerful reminder of our role in providing solutions and results.
We believe that sharing the risk for deliverables and outcomes results in better projects and better long-term relationships. This risk sharing results in better quality products, delivery, and improved commitment to deadlines. We have all agreed to the pricing in advance and any inefficiency in the process will be at the cost of the service provider. Advanced pricing incentivizes the service provider to stay on their toes. It helps us continuously think, to work smarter, to innovate, and to deliver value with speed and precision.
Because the scope is agreed upon with our clients in advance, our teams are focused on only the projects or results agreed upon. If there are additional needs, we price those separately to provide full transparency in each step of the engagement. The clarity of scope and transparency means no surprises at invoicing time.
At HORNE, we believe it’s our responsibility to educate our clients about all the ways professional services work can positively impact their operations and opportunities. Yes, we can and do price differently from most firms. We empower our clients by allowing them to share in the decisions that impact their results. We seek to truly understand what is important to you and deliver results that are timely and meaningful. We use Advanced Pricing to share in the risks and are personally invested in our client’s outcomes. With HORNE, we’ve made it our goal to be sure you get exactly what you pay for.
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About the Co-Author
Ann Cleland is a partner at HORNE Cyber where she oversees all aspects of cyber assurance services. Before joining HORNE Cyber, Ann served as a government services partner where she led the government services practice in Texas. Ann’s depth of knowledge in assurance covers service to a variety of clients in both external and internal audit capacities including governmental A-133 audits; and in industries as diverse as real estate, healthcare, nonprofit, retail and manufacturing.