The letter is from Lawrence W. Schwartz, CPA, MBA, CVA, of Fairfax, Virginia. Here’s part of what he writes:
For several years our firm (preceding our combination with another firm) carefully set “fixed” prices based on several factors, among them client hand-holding expectations, transaction volume and complexity, and intellectual capital requirements. Clients continually expected more for less, making scope creep (despite “change orders”) a consistent obstacle to the development of client-firm value congruence. This led to the continuation of unprofitable, sometimes unnecessarily risky, client relationships, and often for the wrong reasons. We were, thankfully, profitable but not nearly at levels we could have achieved using more traditional (and, admittedly, more carefully tracked) value and productivity measurements.
Change is good, and looking at things differently is a useful exercise…Unfortunately, the article failed to make the case for profitability.
You can read my reply, but I feel I left off a very important point (isn’t that always the case; you come up with the perfect retort long after your initial response).
Schwartz seems to be arguing that the profitability of Value Pricing has not been proven, based on his firm’s poor track record in implementation (does anyone really, really, believe they were doing Change Orders for all scope creep?).
But his argument belies logic. Hourly billing automatically puts a ceiling on a firm’s profitability, period.
And most firms don’t even reach this artificial ceiling, hence the realization rates of between 65 and 95 percent, depending on the size of firm.
Value Pricing inverts this ceiling into a floor. If done right, it will certainly lead to more profitability.
To argue otherwise displays a misunderstanding of the economics of value and pricing, and of logic itself.