Thank you to Senior Fellow Paul Kennedy for alerting me to this article by Rob Lewis, AccountingWeb (UK) features writer.
It’s obvious Rob doesn’t understand the economics of what we are advocating when we speak of Value Pricing. I, of course, want all the VeraSage fellows to chime in on the discussion at AccountingWeb (you’ll have to register to post a comment), as well as on this post.
I was limited to 200 words in my response in the Comments section to his article, but thought I would post a longer reply here:
From the land of Monty Python I naturally assumed this was an attempt at brilliant satire, but then I realized Rob Lewis is quite serious.
Let me start by inviting you to Las Vegas, Rob. If you feel so strongly that this is an important issue, Accountingweb should send you.
All of my books, especially Professional’s Guide to Value Pricing, refute everyone of your defenses of the billable hour. Have you read any of my books?
Value Pricing, as we teach it, is not a “guesstimate” with an adjustment for risk. It’s based on external value as determined by the customer. Why is a global think tank needed to convey that point? Because a lot of people still cling to your mistaken definition of value pricing. In fact, your entire article is a testament to why VeraSage exists, and needs to exist.
You talk about unscrupulous suppliers charging all they can. This is specious, it’s also anti free market. We advocate a fixed price BEFORE starting any work. This puts the customer in control. As Don Fisher says in the comments section, the customer doesn’t have to accept the price you quote.
Isn’t this how you purchase everything else in your life? Do you ever buy things based on the billable hour? Do you like not being able to compare value to price before you buy? Do you think that the laws of economics are different for Apple, Microsoft, Ford and GM, and accounting firm customers?
We also advocate a 100% unconditional money back guarantee on all engagements. Not a common policy among unscrupulous suppliers. And very professional, don’t you think? If the customer is not happy for any reason, they don’t pay.
You claim the billable hour is a token of independence. This is not just nonsense, it’s nonsense on stilts. Why is the billable hour more independent than offering a fixed price up-front, with a service guarantee? Why are most ethical problems related to the billable hour, more so in the legal profession, but certainly in the accounting profession as well? Do you deny the billable hour misaligns the interests of the customer and the professional right from the start?
Would you fly an airline that charged you $4 minute? Would that be professional? United Airlines has my life in their hands, certainly a higher standard of care and professionalism than an accountant or attorney. But they offer me a fixed price, before I fly.
By the way, in the States, all of our car mechanics quote a fixed price BEFORE they do the work. And they use Change Orders, as we advocate when the scope of an engagement changes beyond the original definition. I wouldn’t patronize a mechanic, contractor, plumber or anyone else who attempted to charge me by the hour.
We are in a knowledge economy, and the billable hour is a theory that dates back to Karl Marx’s labor theory of value. There is no correlation between hours and value, and we are not advocating a pricing model based on a service or industrial era economy, but one based on intellectual capital.
Do you think actors should be paid based on billable hours? Athletes? Authors? Shouldn’t people be compensated based on the value they create, regardless of the time they spend? Is it unprofessional that Merv Griffin earned nearly $80 million in royalties for writing the theme song to the TV game show Jeopardy, which took him less than one minute to write?
Would it be unethical for an accountant to earn £10,000 for an engagement that would have been priced at £1,800 by the hour?
You say the US Supreme Court banned fee schedules in 1975, and that is true. But those are not the same as Value Pricing as we are advocating. Those schedules were actually suggested prices for various services put out by the American Bar Association, and various state courts, that had no relation whatsoever to value.
There’s much more I could contest in your article, but this is why I’ve written 5 books on Professional Knowledge Firms, to disabuse these specious assertions, and three books for the ACCA, available for free at:
I will end with this. Ever heard of a black swan? Most people thought all swans were white, and then in Australia we discovered some were black. We had no idea. We don’t know what we don’t know.
You have some black swans in your own country, there are many in New Zealand, Australia, Canada, and the United States. These swans are the firms that 100% Value Price and don’t have timesheets, and are quite ethical, offer excellent service to their customers, are profitable, and are incredibly professional. One of them is my ex-partner, Justin Barnett; others are fellows of VeraSage.
You can deny the black swans all you want. But if you were intellectually curious, you’d seek to learn how they do what they do (I suggest this as well to “Long-live-the-timesheet-Jon Griffey,” from the comments section. By the way John, Toyota does not have a standard cost accounting system. How do they do that? If you don’t know the answer, you should be very scared that your fervent beliefs are blocking your learning).
[For a list of Trailblazer firms that have not timesheets and Value Price visit: http://www.verasage.com/blog/trailblazers].
But I understand we are guided far more by our beliefs than our knowledge. There is nothing wrong with having the wrong beliefs about the way the world works. There is an enormous problem in letting those beliefs stay wrong, especially when confronted with contrary empirical evidence. It’s hard to deny reality.
I say that as a former CPA who believed exactly as you do, Rob and Jon. I was wrong, and my books document my journey from one of understanding costs to one of understanding value. There is an enormous difference.
As one your most famous economists, John Maynard Keynes, said: “When somebody persuades me that I am wrong, I change my mind. What do you do?”