Still charging by the hour? Time-based billing vs. Value pricing for accountants

This article was originally posted on my website RezaHooda.com. You can read the original here.

Did you know that the concept of time-based billing dates back over 100 years? 

Yes, that's right. It was the brainchild of a lawyer called Reginald Heber Smith. And he created it to get rid of the ills in his law firm. Sadly, however, this out-dated practice from over 100 years ago is still in use today, by certainly lots of lawyers, any many accountants. 

The good news, however, is that a lot of accountants have actually moved over, away from time-based billing and onto value-based, fixed-fee pricing which is much better for the customer. 

In this blog, I'm gonna talk you through seven reasons why time-based billing is just a crazy way to price, is absolute madness and really bad for the prosperity of your accounting firm. 

So, seven steps coming right up... 

Step #1 - Clients hate it, and if you were in their shoes, so would you!

Think about it, you have no certainty whatsoever in how much you're gonna pay for the service that you're going to get. Think about when you sat in one of those old taxicabs, perhaps they're still around today, where you sit in the cab and the meter just keeps ticking and ticking and ticking as you sit in traffic. How stressful is that? 

Well, it's the same sort of thing, that we have no idea how long something's going to take. That's why the Uber model has done so well. You know exactly how much you're gonna pay, you know exactly what you're going to get. 

Step #2 - There's a conflict of interest

You see, there's a conflict of interest in what your client wants and what you want. Think about it. If you are being charged by the hour, then from the client's perspective, they want you to get it done as fast as possible. On the other hand, as far as you're concerned, there's no incentive to do it faster. You will spend however long it takes, that you feel is necessary, whether you're productive or not, on trying to get it done. So there's a conflict of interest there between what your client wants and what you want. That's why time-based billing is a bad idea. 

Step #3 - It focuses on costs not outcomes

Reason number three: it focuses solely on inputs, costs, and efforts, and does not in any way shape or form look at the outcomes that you're generating, the results that you're producing, and the solutions that you're finding for your client. 

Step #4 - It discourages innovation

Reason number four: it discourages innovation. What incentive is there for you and your team to look for ways of working smarter, of working more efficiently, of working effectively together with the client to help them out with their challenges when you're being paid by the hour? There just isn't any reason for you to innovate in those areas if you're being paid for every minute that you spend on working for a client. 

Step #5 - It rewards busyness instead of effectiveness

Reason number five: it rewards busyness and utilisation instead of effectiveness and accountability. What we should therefore focus on is the satisfaction of the client, providing a wow experience, the quality of the work, and therefore the effectiveness of you and your firm, in generating outcomes, results, and solutions for your clients. 

Step #6 - It places all the risk on the client

Reason number six: it places all the transaction risk on the client, which just seems plain unfair. There's no incentive, there's no sharing of the burden in terms of the business transaction between you and your client. The client is completely at risk in terms of not knowing how long something is going to take and what they're going to get at the end of it. So in that sense, it seems completely unfair as a way to price. 

Step #7 - It fosters a production mentality 

And lastly, reason number seven: it fosters a production mentality instead of entrepreneurial spirit. We resign ourselves to being looked at as units of time instead of problem solvers and value adders, to get clients where they want to be and help them to achieve their goals, their objectives, and their dreams. 

So there you have it, seven reasons why time-based billing is an absolutely crazy idea. So if you are still charging by the hour, I hope that's given you food for thought, and you move towards a better way of pricing. That way of pricing is called value pricing and I'll be talking about that in my next video.