Lore has it that a woman once approached Pablo Picasso at the height of his fame and asked if he would sketch her portrait. He dashed off a few strokes and handed her the drawing. She asked how much she owed him.
"$10,000," Picasso is said to have replied.
"But you did that in 30 seconds," the woman protested.
"No," Picasso said, "it has taken me 40 years to do that."
The anecdote
For all the talk about moving toward value-based pricing, many accounting firms remain tethered to a billing model based on rates and hours. This imposes on firms the messy task of dealing with “outrage constraint.” This is the fear that clients will be irate when they’re presented with a bill larger than what they were expecting.
Outrage constraint creates a perverse incentive for accounting firms to “work to the wallet,” potentially undervaluing their services for fear of alienating clients. No reputable firm wants clients to
While endemic throughout the accounting industry, outrage constraint is particularly troublesome for the tax services sector, where it can undermine those firms’ unique values. Consider this hypothetical situation: A large, multinational company is struggling to determine the state and local tax implications for an unusual item sold in high volume in a specific jurisdiction. Fortunately, this company’s accounting firm happens to employ a leading expert on the law in this complex jurisdiction. The expert immediately knows the answer and provides it with a quick phone call. That’s a five-minute solution to a multimillion-dollar problem, but in the rates-and-hours model, it might merit just 0.1 billing hours.
Remember Picasso? Did it take the hypothetical accounting firm five minutes to solve the tax problem, or was it the career’s worth of experience of the in-house expert, to say nothing of the smart manager who hired them?
Punishing paradox
The rates-and-hours model creates a paradox: The more expertise your firm brings to a given challenge, the faster you’ll be able to solve the problem, which means you’ll bill for fewer hours than a less-capable competitor. The model punishes expertise.
A move toward value-based billing can rationalize these incentives, while also avoiding the trap of outrage constraint. Agreeing on a set price for a service ahead of time eliminates the risk of sticker shock. For clients with recurring accounting needs, firms might consider a subscription model.
A value-based pricing model — particularly when structured as a monthly or yearly subscription — can take the mystery out of the billing process. In a subscription model, firms and clients agree on a sum for services, generally in one-year increments. Clients may pay upfront or monthly. The subscription model reduces the threat of outrage since clients enter the relationship with a reliable, predictable figure for what their services will cost, and don’t worry that they are being overbilled.
Endured for a reason
Of course, the rates-and-hours model has endured for a reason. It’s familiar, widely used, and will likely remain vital when a client needs one-off, bespoke service to handle a singular event, like a messy IRS tax audit.
It also aligns nicely with the accounting mindset. It is based on a reliable metric — hours worked — and firms can simply take what they’re paying their staff per hour and apply a markup.
But for firms that want to be the Picasso of numbers, it can be a bad fit. This gets at the core of an accountant’s professional identity — are they creative experts who deliver clients a unique value proposition emanating from a lifetime of experience, or are they providing commodity services for an hourly wage?
A hard rethink
In many cases, shifting billing models will require firms to rethink their value proposition, and how they articulate that to their clients. To get over that hump, it helps to envision the benefits. In a subscription model, for instance, a stable monthly expenditure will help with clients’ planning. It can also reduce friction in the relationship because the client won’t hesitate to call up the accountant that’s on retainer with a question that they might not have bothered to ask if they knew every interaction would run up the bill.
This can be a substantial pivot but consider the benefits. Clients will, in many cases, be comfortable paying known fees for their unique needs. And firms will no longer suffer from outrage constraints, allowing them to offer the most appropriate services based on what they know is best for their clients.
Some firms are further along on their transition to value-based pricing than others. Regardless of where they are on their billing journey, all should be considering the change. It’s the future of the industry, and it’s what ever-more sophisticated clients are coming to expect.
