Nearly every professional firm offers some fixed fees. They may not always like doing it but they do it because:
- their competitors are offering it, and/or
- the market expects it.
Indeed, in an increasing number of areas, fixed fees have become the norm rather than the alternative. Even though the motivations for firms offering such fixed fees are questionable, it is on the whole good news for clients who at least get certainty and predictability of their costs.
So, over the last few years many professional firms have well and truly moved on from “Do I continue to only time base bill?” to two much more salient questions:
- What range of billing and pricing options do we offer? and
- Do we still keep recording time?
We still find that there is confusion in the professional services market as to what constitutes a fixed fee, a menu price and a value-based price. We believe this infographic by our friends and colleagues Jay Shepherd and Michelle Golden River nicely explains some of those differences:
Many firms unfortunately continue to confuse fixed fees with value-based fees.
At Innovim Group, we make no apologies for believing that a better pricing approach is to adopt value-based pricing principles - what we call at the Innovim Group, “Aligned Pricing”.
In short, that means we first need to clearly understand that the value of whatever we provide is determined solely by our client's perception of value - not ours. At best we can only influence our client's perception of value.
We need to have a conversation with our clients around what they value, agree on both the scope of the work and the price for the work before the work is undertaken - not after. It is about focussing on outcomes and results - not activities and time spent. Even if you agree on a fixed fee, if that fee is solely calculated by projected time to be spent as per the above infographic, it is not a value-based fee-it is merely time billing in drag.
The mention of fixed fees often elicits a sense of doom in professionals because they equate the pricing approach with "discounting" their fees and losing money. One of the reasons is that those firms still calculate everything premised on time under the mistaken belief that, for professional firms, time is money. It logically follows from such a mindset that, if our time is reduced or fixed, so is our ability to make more money.
If firms are going to continue to calculate any fixed fees based on time, of course, they are never going to get it "right" - actual time is never ever going to equate exactly to anticipated time. This is why firms practising under the time-based billing model have so many problems providing accurate or even realistic estimates of their proposed fees to their clients (clients of firms continually tell us that a final bill they get from their external provider almost always exceeds the initial estimate or quote). And so, they attach many disclaimers to their estimates and even their fixed fees.
Another reason why many firms still recoil from fixed fees is that when they fix a fee, they still continue to produce their work in exactly the same way as if their client was still paying them an open-ended time-based fee. The smarter firms have focussed on re-engineering the way they produce their work - or in economic parlance, reduce their own costs to serve - and at the same time, they have put more skills and emphasis into proper project management. Project management is about focussing on what you want to happen in the future whereas timesheets merely reflect on something (and one thing only - time) that happened in the past. The only "time" good project managers focus on is elapsed time or turnaround time as that is the only time your clients should really ever care about.
At Innovim we always encourage firms to look at a range of pricing model options but only if those models are not using time to calculate their value to their clients. Not all fixed fees are value-based and not all value-based fees are fixed fees. Value-based fees don't have to be a fixed fee from whoa to go, they can and do encompass a huge variety of fee arrangements which might include models such as:
- retainers and subscription fees;
- staged pricing;
- success/bonus fees, contingency fees (just not in all of Australia, at least at the moment, in litigation);
- holdbacks, etc.
What aligned pricing does not include is any price that cannot be agreed in advance, such as:
- blended rates;
- capped rates;
- volume discounts and the like.
Rates are not prices.
You might ask “Why shouldn't my firm, in addition to offering non-time-based fees also offer time-based fees?” After all aren't you limiting your potential client base, revenue and profitability-especially if a client insists on paying you by the hour - by limiting your pricing offerings?
Our short answer is “No”. The overwhelming majority of your clients will understand the benefits to them of agreeing prices upfront - price certainty and predictability, no bill shocks, for starters. After all, that is probably how the vast majority of your clients price their offerings- and it is how you buy most things.
You will, of course, encounter the odd client who won't like your price but when are you better off knowing that - before or after you do the work? You might also experience the client who won’t accept your fixed fee if you continue to relate that fee to time and have so many disclaimers attached it is not really a fixed fee at all.
The other major problem in firms offering both time and non-time-based fees is that, by definition, if you still have time-based fees you have to record your time and record it accurately (even though it is impossible to accurately record time). Invariably, what that has meant to many firms practising this way is that, even with the best will in the world, when they attempt to offer non-time-based fees, they usually struggle as they still default to time as their principal costing and billing tool.
When you stop relying on timesheets as your firm’s indicator of cost and as a prime internal measurement and reward tool, you better and more quickly understand that value is created outside your firm.
As those firms who now use value-based fees and their clients will attest, once both parties become more accustomed to discussing and understanding value from the client’s perspective and work together to become more competent and confident in pricing, the benefits to both the professional firm and its clients far outweigh any effort and courage required to make any change. You will make pricing mistakes – as firms do now with time-billing it’s just we can now learn from those pricing mistakes.
"With timesheets you think what's billable: without timesheets you think what's valuable"
For most firms though, this requires a mindset and business model change-not simply a pricing or billing model change. Therein lies the main obstacle but as those that have transformed their practices will attest, it is an obstacle well worth conquering.