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Value pricing? Don't kid yourself

2nd Mar 2014
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Many thanks to Mark Lloydbottom for sparking an interesting debate on fixed-fee billing. We used fixed fees for most new work, it is what clients expect, and frankly it's what I would expect too if I was engaging an accountant.

This debate inevitably moves on to the issue of value pricing, and at that point I find most accountants lose their way. Fixed fees are easy - set a scale or menu of prices and let clients take them or leave them. You define the value, largely based on what your other clients are willing to pay, which I suppose is as good a place as any to find a benchmark for "value" in the eyes of a typical client. But it fails to properly account for the circumstances of each client as an individual. 

This works well enough with commodity-type compliance services, where you should have enough experience to know what is a reasonable fee for a typical set of accounts or tax return. But when you come to advisory and consulting work where the outcome is less clearly defined it's difficult to work from a fixed price list - or if you do, it's a list of hourly rates! This is the point at which those of us who offer fixed prices for everything - including what one commentator referred to as "unscopeable" work - simply result to negotiation and guess work. We have to feel our way with the client, try to tease out where they perceive the value to be and then try to put a realistic price on the corresponding service that we're offering, and maybe negotiate down to a figure that's mutually acceptable.

But what our clients say to us time and again is that they don't want any surprises. They want to agree fixed fees at the start of the year and know that everything is included. That's why all our fixed fees include unlimited telephone calls and emails (although not meetings - only a specific number is included in the price, although I may even relax that one in future). Any why not. When you last bought a car or white goods, did the salesman say to you "before I tell you the price, could you tell me how many times you expect to call us for after-sales support, and how often you will be coming back into the store with questions?" "Why?", you would obviously reply. "Because we need to build extra phone calls and enquiries into the price." I don't think so.

I know why accountants would ask that question though - because phone calls take up staff time, and in their hearts they still think they are charging for their time. Many firms that use only fixed fees still keep time sheets - because, they argue, they serve a use for staff management. Maybe so, but I think they ALSO hold them back because subconsciously a timesheet makes everyone think that they are selling hours. Why do you charge more for some accounts jobs than others? Because those jobs take longer. And you're telling me that the higher fee reflects a higher value to your work? The logical conclusion is therefore that if your staff are incompetent or inefficient, Mr Client will value their work more highly and therefore be prepared to pay you more.

Here's my challenge to you: in my opinion, sole trader, partnership and limited company accounts each have a pretty narrow range of "values" as far as clients are concerned, irrespective of the size of the business (let's say, at least up to the compulsory audit limit). Producing a set of company accounts from a set of Sage data ought to cost the same whatever the size of the company. After all, the trial balance looks similar in every case, it's just that the numbers are different. Maybe the company turning over £1 million can afford to pay more than the company turning over £100,000, but does that mean they value the accounts more? How about if they have a really good year and increase scales to £1.5m - will they overnight suddenly feel that their accounts are 50% more valuable?

Think about it.

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Replies (13)

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By David Winch
03rd Mar 2014 10:45

Eminently Sensible

Thank you to The Practitioner for putting things so straightforwardly.

Clients want certainty, from the outset - And they want value.  You deserve a share of the value you help to create.  You don't deserve to be paid just for showing up.

David

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By justsotax
03rd Mar 2014 10:58

I would tend to agree..

although in preparing a set of accounts for 1.5 mil turnover rather than say £150k....its arguable that there are likely to be more as it were outstanding points/queries....and perhaps a little more 'auditing' of the numbers to minimise any errors made on inputting.  That said...the more phone calls you have...the more opportunities will inevitably pop up.

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By User deleted
03rd Mar 2014 13:50

What a load of tosh!

"Producing a set of company accounts from a set of Sage data ought to cost the same whatever the size of the company. After all, the trial balance looks similar in every case, it's just that the numbers are different."

Please never let this person near a set of limited company accounts!

There is SAGE data and there is SAGE data;Are there no FRS's. UITF's, CA 2006 etc. etc.

Unless the client company, which for most on here isn't the case, has a competent accountant maintaining SAGE then it is not just a matter of lifting a TB from SAGE to final accounts, and to even suggest this shows an incredible level of naïveté!

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By justsotax
03rd Mar 2014 14:06

To be fair

I think that this is aimed at those accounts records that have had a 'reasonable' level of care and attention.  Although playing devils advocate...I have seen quite the opposite happen....large fee (value priced not time billed) for mgmt. accounts where essentially a few minor tweaks were required to the competently completed accounts data.....so I guess it works both ways....

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By ShirleyM
03rd Mar 2014 19:09

To be fair ....

Just my opinion, but Value pricing seems to work for the accountant, rather than the client. 

If the client perceives a high value, then they pay higher fees. If the client perceives a low value, the accountant is likely to turn down the work as it won't be profitable, or charge what the job is worth to the accountant.

Do accountants using 'Value pricing' ever do work at less than cost because the client perceives a low value, or do they make sure the low value work is always lumped in with some 'high value' work, and the clients have to take the lot, rather than just the 'low value' work?

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By justsotax
04th Mar 2014 09:31

when it comes to

payroll I suspect so....one of those 'loss leaders' in the accountancy world...

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By The Practitioner
04th Mar 2014 21:03

OGA - O dear!

I suppose I could claim that OGA was my willing accomplice, but he has simply lived up to his name and fallen into my trap.

I do however stand by my statement, and it is borne out by our client base. The actual time required to prepare a set of company accounts from a sound set of Sage (or whatever) data is similar, whatever the size of the company. If I look at the audit trails in our final accounts software, the number of post-TB adjustments is inversely proportionate to the size of the company. Our larger clients can afford to employ more competent in-house accountants, so we get better data. Added to that we have always sought to train and educate clients with the explicit objective of reducing our compliance fees - in the expectation that this would free up money to spend on one-off projects and advisory work, which it usually does.

What many firms fail to do - and it sounds like OGA is one of them - is to itemise their work so clients understand what they are paying for. If you have to charge a wide range of fees for basic company compliance, I would suggest you are probably doing one or more of:

1. Basic clerical work, collating and compiling paper records, checking for missing bank statements and invoices (i.e sorting out a carrier bag of stuff)

2. Checking and correcting bookkeeping work that the client's staff has done wrong

3. Finishing off bookkeeping work that the client's staff didn't/couldn't do (including reconciliations)

4. Providing additional tax planning and other one-off advice - but mixing up the cost with the annual compliance fee.

Much of 1-3 can only be done on an hourly rate as it's so open-ended, but then client staff are effectively paid for time worked so it's no different. The trick is to itemise and charge for these services separately. The client doesn't want to pay so much? Suggest he might like to put the invoices in a file, check that there are no missing bank statements and reconcile the bank account (or get a bookkeeper to do it at 1/2 - 1/4 your hourly rate). That will reduce your fee.

Once you get that lot out of the way all you have to do is run the numbers through the accounts production software. 

 

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By User deleted
05th Mar 2014 01:46

I am getting ...

... heartily sick of patronising people on here telling how I run my practice - don't - please - you do not know.

A £10 million company with operating and finance leases, may be several classes of shares, possibly a factoring agreement, directors pensions to disclose, WIP and deferred income calculations to be checked, etc. etc. will have far more work to prepare an FRS/CA2006 compliant set of financial statements from a SAGE TB, however clean it is, than an IT consultant working out of his spare room with a dozen nominal codes. 

Yes, both would take around 5 minutes to put into IRIS, but to ensure the required disclosures etc. are properly made, the iXBRL tagging properly done etc. will take varying degrees of time. However good and clean the books are without a degree of "audit" a qualified accountant would be derelict in his duty. 

That is what I mean, nothing about correcting book-keeping errors and cleaning data - which to be fair, you have now moved the goal pots by adding in a caveat that the data is clean and prepared.

Finally, I doubt many on here have larger clients with teams of in house accountants, the best we probably have are those with one overstretched slightly above average bookkeeper with not enough hours in the day.

My point being, if our clients don't value the figures enough to adequately resource bookkeeping, what hope them putting high value on our work. I would hazard the client base of most on here only really want compliance work.

 

 

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By Spundry
05th Mar 2014 06:09

I side with OGA on this one.

I don't see how you can justify charging a flat fee irrelevant of the size of company, just because they use Sage (or any other computer software). 

You are required to 'prepare accounts based on the records provided'. If the company is larger, the chances are there are more transactions that need checking. If you are charging a flat fee then chances are that less checking of the transactions (on a proportion basis) happens on the larger client. 

Then (as OGA says) there is the likelihood that the balance sheet is more complex and therefore requires more time to ensure full compliance. Is the upcoming change in UK GAAP likely to have a larger impact on a £100k t/o client or a £2m?

This seems crazy to me. Even if you are provided with a fully reconciled copy of Sage, if the submitted accounts are wrong it is your [***] on the line. And personally I find the clients of smaller jobs more forgiving.

 

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Nigel Harris
By Nigel Harris
05th Mar 2014 09:54

Audit is different

I think both Practitioner and Old Greying are busy moving goalposts. A "£10 million company" (I assume you mean turnover) needs a statutory audit - completely different engagement, and somewhat outside of the debate here. In my experience a £5m turnover company is likely to have the slightly overstretched, average bookkeeper. The £10m company is more likely to have a qualified accountant of some sort - equally over stretched.

At the end of the day aren't we talking about RISK here - protecting our own backs? The larger the company, the greater the likelihood of larger errors, so we need to take more time to check the accounts. More time = higher fee, that's the price the client pays for our report. It's nothing to do with trying to assess "value" in the client's eyes. We tell them what he fee is going to be (if they're lucky, otherwise we keep it as our little surprise at the endof he job)that's the value! Hasn't it always been that way?

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By User deleted
05th Mar 2014 13:01

Sorry Nigel ...

... a £10m company only needs a statutory audit if if fails one of the other two tests for a small company, gross assets and employees - and yes, I meant turnover. So from my view point the goal posts are stationary.

Regardless, the point stands, producing accounts is different from the audit, it may be you prepare the accounts and another firm audits them, the two are separate and distinct procedures and I don't think it is uncommon.

I have a £23million turnover company that is "small" and does not require a statutory audit, although it opts to choose one to placate the bank!

I used £10m for effect, I could have used £5m, the difference between that and a limited omb "sole trader" still stands.

A qualified accountant must not put his name to any accounts he believes mis-leading, and he can only know that by some measure of "audit" - albeit self imposed and not statutory. Whether or not you are bound by the riules of a professional body or the requirement of a statutory audit, any accountant who signs off accounts without a reasonable amount of checking to the underlying records is to my mind negligent.

 

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By Sandnickel
05th Mar 2014 15:25

Also agree with OGA

I can't understand why a set of accounts would be signed off without going through the underlying records even if you know the computerised records are likely to be spot on. Seems like a disaster waiting to happen!

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Nigel Harris
By Nigel Harris
12th Mar 2014 20:30

Let's stick to our time sheets then!

So in summary, I think most of us are agreed that larger and more complex jobs take longer and should cost more. Time-based billing is the ONLY method that truly reflects that, and is therefore the fairest billing method for both clients and accountants.

(I appreciate that everyone will now say they still disagree, just for the sake of it, but that seems to be the consensus here!)

So, sorry Mark L, looks like you're on your own here.

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