August 17, 2022

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Moving from hours to value

Professional services consultant Loren Fogelman of Business Success Solution dives into how accountants can find and communicate value without being dragged down by the anchor of the billable hour.

Transcription:

Dan Hood: (00:03)

Welcome to On the Air with Accounting Today, I’m editor-in-chief Dan Hood. You know, the billable hour is a tried and true staple of the accounting profession. It’s as much a symbol of the field as say the green eyeshade or the adding machine, but both of those are considered pretty antiquated these days, and more and more people are coming to feel the same way about the billable hour. Here to talk about that and what might replace it and what firms might be looking to do better than that is Loren Fogelman. She’s the founder and CEO of Business Success Solution and a sports psychologist turned business coach who works with accountants, tax pros and business professionals to increase revenues and lighten their workload. Loren, thanks for joining us.

Loren Fogelman: (00:35)

Absolutely. Dan, I can’t wait to dig into this conversation today.

Dan Hood: (00:38)

Yeah, it’s a big one for a lot of accounting firms, wondering whether they should or shouldn’t — can we give up the billable hour? It’s it’s a big topic. So as I said, you know, it’s, this is a staple of profession. Firms have been billing by the hour, since the very start of the modern accounting profession. Why do you think they need to change now? Why do you think they look to need to look to something different?

Loren Fogelman: (00:59)

Well, actually I believe that it’s of everybody’s best interest their clients, as well as their best interest to move away from the billable hour because the billable hour creates a tug of war between you and your clients, where your clients want you to do the work as fast as possible to pay as little as possible. You on the other side are not incentivized to have increased efficiencies, maybe even an add in technologies or improve your workflow because the faster you get, the less money you’re gonna earn as a result of that charging by your time means that you’re also overlooking the fact that you have years of expertise, your particular way of doing things. And you’re not compensated that you actually get punished as you add in technology and also gain insights as to how to do something more effectively. So once again, I believe that the billable hour is an easy way to be able to figure out how to charge someone, but it is not the most effective way because it creates a tug war between you and your client, as well as minimizing your expertise that you bring to the table.

Dan Hood: (02:10)

Gotcha. It’s like the it’s that the famous story, the guy who goes into a factory with a broken machine, he goes in hits, you know, it’s broken, he hits it in one place, sends in a bill for $10,000. He says, yeah, you were there for five minutes. He says, yeah, but I took me, you know, 25 years to learn exactly where to hit it with the hammer. And you can’t bill for that. As you say, if you’re billing by the hour, you can’t, uh, bill for all that expertise and all that, uh, that smart. But, but you bring up a good point. Raise the billable hour is an easy way to measure value. It’s an easy way for firms to measure, uh, well, not just value, but also effort and, and input on, on both sides. So how, uh, if you’re not measuring it by the hour, how do you measure value? How do you, how do you go to clients and say, this is, uh, this is what I’m worth.

Loren Fogelman: (02:47)

Well, I think that it’s realizing that different clients value different things. It’s similar to driving on the freeway and not everybody has the same exact car make and model. As you do. Some people will have very basic economy, cars, other people, most people actually have midsize cars and some people have luxury cars. And that that’s true for your clients. Also, some of your clients just need the very essentials to be able to have their accounting and tax needs taken care of the majority of clients will fit into this mid-range and then you’re gonna have some premium clients who want you to be able to do additional work for them. They wanna be able to have more meetings with you. They respect and value you as a resource in order to be able to help them increase their revenues, as well as their profit margin and avoid costly mistakes as they’re building their businesses.

Loren Fogelman: (03:42)

And that is something for you to think about also is you wanna, by getting away from the billable hour, what you wanna do is start to understand value from your client’s perspective and step into their shoes, as opposed to yours, because what you value is time. And course because you put a lot of time, money and effort into gaining the skill sets that you have, but that’s not what your clients are hiring you for. Your clients are hiring you for the ability to either fix a problem or to be able to help them achieve a result that they can’t achieve on their own. I will let you know that 70 price, 75% of your clients want you to fix a problem. The other 25% are aspirational and are moving towards some type of achievement that they need you as a resource for.

Dan Hood: (04:29)

Gotcha. Well, let me ask you this, cuz I, this is an interesting, uh, there’s there’s ways in which the billable hour discussion suddenly becomes, um, a discussion much more about sort of the structure of your entire client service offering model. In the sense of right now, I think for a lot of firms to say, well, we do work and we bill it by the hour and that’s kind of it, we’re not thinking in terms of that 25% type clients and 75% type of clients. Like we do work for a client. We charge for that for the time it took to do that, uh, that work. But if you’re dividing your clients or thinking of your clients differently, uh, whether it’s, as you say, the sort of the, the, the third that don’t need a lot of work, the third that are sort of middle, and then the, the luxury clients who really want you to be by their side all the time. Or if you’re thinking about that, like I said, that 25% who are really forward looking, looking to build something, looking to grow really need your expertise versus the 75% who we can maybe describe as just wanting compliance services, tax, bookkeeping, that kind of thing. Does this, the change to more of a away from a billable hour, does it require a, a shift in mindset around, um, your client service offerings?

Loren Fogelman: (05:28)

It, it definitely does part of what I have seen. Cause I look at many, many websites of accounting professionals is when I go to their websites and I go to the services page, I see this long laundry list of everything that they do and all the different industries that they serve. There’s a lot on there. They’re trying to cram in as much as possible to capture everyone. I will say, this is where the Pareto principle comes in play where really 80% of where your revenues will come is probably from only 20% of what you’re doing. Uh, the other part is just not fluff or else your clients don’t even understand what it means. If you’re putting that you do AP AR HR on your website, they might need those services, but not really understand what those are because they’re industry terms. And it’s not really spelled out for someone to be able to comprehend that, oh my gosh, this is exactly what I’ve been looking for.

Loren Fogelman: (06:25)

Right? So what you wanna do, as far as that mindset shift that you were mentioning, Dan is really follow what I call the, raise your rates formula. And I’m gonna just break it down really quickly into five steps here. Even if you just follow the essence of it, you will start to make that change. Right? The very first thing is recognizing that, uh, who your high value client is because in the beginning you’re accepting a wide range of client, someone alow value. Uh, there are high value and even your highest paying client can be a low value client. Let let’s just go there. so you wanna be able to understand what are the qualities and characteristics of your high value clients. And then the second step is how to be able to communicate your value, because you know that what you do is important.

Loren Fogelman: (07:14)

You’ve seen the difference that it makes for your clients, but you might not have the words or understand what value actually means. Because as I was mentioning before, what you value is different than what they value, therefore, how to be able to communicate that value makes a difference, and you can do it without bragging or having to pitch someone. Or I just wanna say that, uh, step number three is packaging your services. And, and this is really the essence that starting to move away from the billable hour or even a fixed fee is offering packages. As we mentioned on the highway, there’s gonna be those economy cars, the mid-size cars, and then the premium costs. And you can have three package offerings also, which is the, I call them silver, gold and diamond. Uh, and just to give you an idea when you’re starting do this, what you wanna do as far as a metric is they’re not thirds.

Loren Fogelman: (08:07)

We have one third in each package. It’s more that 20% of your clients will be in the silver package. And just what the basics, 70% of your clients will be in that mid-size package. And then 10% will be in your premium package. So that is what the metrics order look like when you start to package your services. And this starts to move you way from an alley rate or fixed fees. And that brings up it into step number four, which is value pricing your services. Because now what you’re doing is essentially you’re pricing the client, not pricing your work or your time any longer by doing this, you can earn two to three times more without working any additional hours. And then the last one is consultation mastery. If you don’t like the sales part, having to be able to pitch someone, you don’t like objections and push back about your fees or wanna ever negotiate your rates again, then you wanna have what I call a value conversation, where you’re asking great questions and you really having that connection, understanding what’s important to them instead of ever having to pitch your services. In fact, when you ask the right questions, they will naturally ask at the end of the conversation, how does this work? So I’m just gonna real quickly recap those five steps of the raise, your rates formula, Dan, it is high value client communicate your value package, you services, value, price, your services, and then consultation mastery.

Dan Hood: (09:37)

Gotcha. So it is interesting. I I’m think about every firm has, right. Those sort of tranches of, of clients, um, that bottom there’s the bottom group that really you would, would go away. But as you say, you took ’em on cuz you needed any client who could fog a mirror or sign a check. Um, uh, I guess the question is, you know, if as you reach along these points, does it make sense at some point to want to drop those lower clients? This is a, a, a whole other podcast we could probably talk about in great detail, but, uh, is there room to say, maybe we have, you know, would it, is there a reason to say all of our billing should be value based and none of it should be hourly? Or should we say, listen, these lower tier clients that we don’t care about, we really don’t wanna offer them high value services cuz they’re not high value clients. Does it make sense to just leave them on a billable hour basis, not go cuz it does require education on the client’s part as well. Uh, does it make sense leave them or is there a value in having everything you do be shifted off the billable hour, um, uh, platform.

Loren Fogelman: (10:32)

There’s two questions that you ask that I wanna answer is one, does it make sense to keep some people on a billable hour and other’s value pricing? And the other one is whether you order fire those headache clients or not the answer to the first one, about some people on an alley and then some people on value pricing means that you now have two different business models within your own firm, which is not very efficient or effective. I know that charging someone after the fact arrears actually lowers your value because your highest value is before you do the work mm-hmm as opposed to after you do the work. And Dan, I have seen so many accounting professionals, whether they’re bookkeepers S or CPAs, that don’t invoice on a regular basis because it takes time away from their busy work to create the invoice, get it out, ask for payment. And then they’re having to negotiate fees or maybe write off fees for work they’ve already done. So by doing this and following the RA rates formula, they, we actually correct that way. They’re getting paid before they do the work. That way they’re no longer chasing money and it improves their AR. The other part with the low value clients is I work with every single one of my clients to fire those headache clients.

Dan Hood: (11:51)

Loren Fogelman: (11:52)

Because accounting professionals are customer service professionals. They are very much about wanting to serve the individual. And as a result of that, they have a very high tolerance level. They tolerate a lot regarding people, places and things. And sometimes they have clients that they wish would go away that don’t respect them, maybe treat them well, but treat their staff like an employee. And that’s not a great client. So what we look at is eventually recalibrating who they work with. So they have more dream clients and we’re actually shedding the clients at our headache to work with.

Dan Hood: (12:30)

Gotcha. Which has gotta make everybody well, everybody, except those bad clients is gonna be happy with that. Um, no,

Loren Fogelman: (12:35)

Sometimes those bad clients are happy to go also, cuz if you raising your rates to new fees, they don’t wanna pay that much. Most of them are very price sensitive. So they’ll find somebody else they’re more loyal to a low rate than they are to your firm.

Dan Hood: (12:47)

exactly who needs that. All right. I wanna talk a little bit more, I wanna dive into some of the internal aspects of a move away from a billable hour and what it might mean for how firms function, but we have to step away for a, for a quick break. All right. And we’re back with Lauren. Fogelman talking about, uh, moving away from the billable hour, moving towards more of a value, uh, a value pricing and a value based, uh, firm structure. And we’ve talked a lot about, uh, how it might work with clients and, and, and how they perceive value. Can we talk a little bit, you know, internally there are some issues with firms have brought up the issue that how will I know how much, uh, how much effort a service will take. If I don’t have my billable hours, that’s how I measure, you know, how much time will this engagement involve for whatever it is, whatever it may be. Uh, how do, how do firms, uh, measure their efforts measure? Because at some point internally, they need to know, you know, how many staffers will I need for this? How many hours will it take to do this auditor to do this, uh, to close the books on a, on a regular basis. And if they’re not tracking the billable hours, how do they, how do they adjust for that?

Loren Fogelman: (13:45)

Well, I think one thing I wanna put out there is that as you are raising the value of a client, you might not need as many clients in order to hit your revenue goals. And that is something to think about also is that by raising the, uh, value of a client, you might be able to actually work less hours and regain so many personal time that you originally sacrificed in order to serve your clients. Right? So that’s one thing to take into consideration. A lot of my clients, what they do is they continue to have their employees track time, but they stop tracking their own time. Um, and they do that for internal measures to make sure as they’re moving in this direction, that they are being profitable. But after all, if you’re doing value pricing correctly, every single client ought to be very profitable.

Loren Fogelman: (14:36)

And that you no longer need to worry as much about time because you focus more on doing quality work and you know that the value is already there and you’re being well paid for the work that you’re doing. But the other thing that happens, which I think is even more important than simply tracking your staff’s time is looking at the fact that when we’re moving this direction, we are looking at what’s on your plate as the firm owner and deciding what have you been holding onto that might be delegated to somebody else in order to free up your time. And that way you can focus on higher level work, you can focus on business development, or you might be able to just start taking Fridays off. And that would be fine because you deserve that as a firm owner. I want you to have a firm that increases the quality of your life instead of takes from it. And therefore, by really looking at what’s on your plate, you’ve been holding onto and getting that onto somebody else’s plate and training your client, your employees up is really the best move that you could possibly be, be making.

Dan Hood: (15:42)

I agree, but I think it’s interesting cause I think there’s, there’s some big mindset shifts, not just around the billable hour, but around what , what, how accountants add value. I think for a lot of firm owners, they will say, well, if I’m not working 80 hours a week, am I even working at all? Right? I mean, they sort of, that’s a badge of honor for many of them and a model that many, uh, them have internalized from previous generations that constant lots and lots and lots and lots of work and lots and lots of billable hours is how I, how they see their own personal value almost, or not only their personal value, but their personal value to the firm is that I’m just cranking out the billable hours. So there’s a lot, it seems like there’s a lot of mindset shifts. Mm-hmm , that’s not the only one, I’m sure there’s others, but uh, how do, how do you get firms to make those mindset shifts? Uh, because it really is ingrained in the profession for, for generations that too many hours is, is just enough.

Loren Fogelman: (16:28)

Uh, okay. What I would say is yes, and that’s because right from the beginning in school, we’ve been trained to be a factory worker instead of a factory owner. And part of what you, we need to look at is that what we have been taught is doing, um, a dollar earned, you know, for, uh, an a do an hour view work, whatever it is, right. That what we need to do is shift that mindset. And really from your client’s perspective, your highest value is what, you know, not what you do. They don’t really care what sort, where you’re doing, what your internal workflow and processes are or what tasks you’re doing for them. They care with the fact that you are helping them either solve a problem or be able to achieve a result. That is what they are paying you for. They don’t wanna rent your time.

Loren Fogelman: (17:20)

And actually, if you look at Amazon prime and FedEx speed has value to people, yeah. They have proven that people will pay for things to be delivered overnight and not having to meet their minimum for free delivery. People wanted to immediately and FedEx, if you need to get a contract to the next, uh, city over by the next day, you will pay four times more for it to be overnighted and guaranteed as opposed to going ground service or going with the postal service. So there is actually a lot of value in speed, but basically what you need to realize is that your clients are considering whether you have the expertise you will deliver in the timeframe that you promise to deliver. And they also care about the client relationship that they are not just a transaction and money in your bank account, but that there’s really a relationship and that you are looking out for their highest interest. The other thing that happens with this shift is so many accounting firms are now adding in advisory services. However, if you are so busy working in your business, that means that you don’t have time for these higher level services, which is the advisory services. And that’s why we need to shift some things off your plate so that you can open up that time for the things that actually your clients value most, which is having access to your brain and your insights,

Dan Hood: (18:50)

Right. And the bill about sort of discourages that, right. Cause they’re afraid. Well, I wanna call up and ask a question, but I’m afraid they’ll bill me for that five minutes. You know, where I get mm-hmm advice on, should I make this acquisition or should I do this, that

Loren Fogelman: (19:01)

That’s part of that tug of war I was talking about in the beginning. Mm-hmm

Dan Hood: (19:04)

uh, just maybe just, uh, uh, as a sort of a last point, we talked about some of the structural changes that firms need to make, uh, to, to manage this shift internally, right? Because we talked about there’s some mindset shifts, but there’re also just structural reporting kind of things that need to, to change. What are some of those that firms should pay attention to?

Loren Fogelman: (19:21)

What, what I would like to say is people have been hearing about value pricing and they might find it attractive, but not know how to move in that direction. And the first steps towards value pricing is similar to learning how to ride a two wheel bicycle. But in the beginning you have training wheels, uh, because you’re a little bit shaky. You haven’t quite figured out that balance and you don’t have the confidence yet. And I wanna give you some beginner steps, like the training wheels on how to start moving away from fixed or an alley rate over to value pricing. It’s what I call good, better, best pricing. And the formula is that in the beginning, you’re gonna have new clients coming to you. What I want you to do is calculate what that fixed fee would be, uh, typically looking at how many hours you think it will take by your hour rate and come up with that original fixed fee.

Loren Fogelman: (20:14)

And we are gonna move that now to your new good rate. What you’ll do is take that fixed fee, multiply it by 1.5. And that is your new good rate. I want you to be enrolling three people at a new good rate, and that lets you know, that clients aren’t quite as price sensitive as you thought they were after you have three people enrolled at that new good rate, we’re going up to tier two. We’re gonna now do your better rate. Once again, people will come to you calculate that initial fixed fee that you originally would’ve offered. And now we’re gonna multiply it by two X enroll, three people at your new better rate. And that’s showing you that you’re now working with a better quality client who respects you no longer treats you like an employee. You’re actually earning double for no additional hours spent working. And you’re getting some insights as to how to have more of that value conversation that I mentioned earlier after you enroll three people into your new better rate, we’re gonna go to tier three, which is your best rate. Now I will let you know that moving to your best rate takes courage, not confidence

Dan Hood: (21:23)

Loren Fogelman: (21:23)

But once again, you’re gonna go through the same process of coming up with that original flat fee price. We’re gonna now multiply it by three X and you’ll be enrolling people at your new better rate. As a result of this, you’re working with higher quality clients. We just tripled your rates in a very organic and step by step process. And because that you’re able to actually focus more on the quality of the work that you’re doing for them, the client relationship, you retain better clients. And it also increases your profit margin without necessarily having to affect your costs. So if you wanna be able to follow what I just said, I do have a re pre resource I’d like to share Dan. Sure. And that [email protected] forward slash package. Once again, it’s at business success solution.com forward slash package, and it’ll help move you towards value priced by following the good, better, best pricing model.

Dan Hood: (22:22)

There you go. Excellent. And I like when you said good, better, best when introduced that, I assumed it would be good, better, best, you know, for the clients like silver gold, but I love that it’s good, better, best for the accountant, right? It’s you’re getting paid more at your best rate. It’s not their best rate. It’s your best rate. That’s great. Uh, Lauren Vogel and this has been great. And, and uh, uh, like you said, this is an issue’s going on for some years, but uh, uh, great, fresh take on it. I appreciate you joining us.

Loren Fogelman: (22:44)

Thank you so much, Dan.

Dan Hood: (22:46)

And thank you all for listening. This episode of on the air was produced by Accounting Today with audio production by Kellie Malone. Rate and review us on your favorite podcast platform and see the rest of our content on AccountingToday.com. Thanks again to our guest and thank you for listening.

https://www.accountingtoday.com/podcast/moving-from-hours-to-value