Rob Lewis Returns in AccountingWebUK

Back in September 2007, Rob Lewis of AccountingWeb in the UK wrote a provocative piece entitled “In defence of the billable hour!”

He stirred the hornets nest with that post; as a matter of fact, it’s still drawing comments as late as today, has been read 3,883 times and attracted 67 comments as I write this. In fact, now the comments have equated Value Pricing with religion. Though some of these comments are witty as hell, especially the one by Allan Mackie, I must say that Value Pricing is based on sound economic theory.

The technical name is price discrimination for those who want to research it further. This is a theory that goes back to the 1880s, but was really developed well by the 1920s. It has nothing to do with religion. Nor does trashing timesheets. This is based on empirical evidence, from firms that have done it. Not quite a religion.

In any event, Rob is back today with another post “Value pricing: a debate without end.” This one is less provocative and much more reasoned. It appears based, at least partly, on an interview I had with Rob after his last piece. I found Rob to be very intelligent, someone who asked penetrating, tough questions. It’s obvious to me that he is wrestling with this issue. Good. He should, as should all of us—I still struggle with it!

I actually liked this article by Rob. It’s already attracted four comments, the first being from VeraSage Senior Fellow Paul O’Byrne [I know, amazing, but that’s another story. I’ve posted a longer version of Paul’s comment in the comments section to this post]. Rob’s piece is balanced, well reasoned, logical and he does quote me accurately, which I’m grateful for.

I would like to clarify just a few points from his column. I will let others go further with this discussion, such as Eric Fetterolf—one of our Trailblazers—who has already commented. I’m sure there will be many others. This is certainly not the last word on this topic.

I like Rob’s opening question in the first paragraph: “Will value pricing remain on the sidelines, or is it about to enter the ascendancy?” It’s an excellent question, one we at VeraSage have pondered long and hard. Rob reported my view on how this is a new theory, and germ theory took the medical profession centuries to become widely accepted. There are many more examples. I wrote an article about it: The Diffusion of a New Idea.

A little further down Rob writes that I believe the accountancy profession should be “defined above all else by what it can charge for.” Well, that’s not quite right. We do say a business is defined by that for which it charges. But what it really means is the accounting profession should be judged based on its ability to create value, not just capture it with better pricing. Any organization, from a government hospital to a non-profit, is judged, ultimately, by the results it creates outside of its four walls, something Peter Drucker called the marketing concept.

Then Rob explains how the billable hour became common between the 1940s and 1960s, proving a new theory can diffuse relatively rapidly. True enough. There was enormous pressures and technological factors that led to the rapid diffusion of the billable hour. There was also no VeraSage Institutes questioning the economic theory behind such a change. A herd can move damn fast once it gets going.

But I would remind everyone that scientific truth isn’t determined by majority vote, or consensus. Science, like business, progresses based on dissent. The logic and economic theory behind the billable hour was always weak, and that doesn’t change just because a majority of a population does it. In fact, if you want to get technical, most of the business world does not price by the hour, so the minority is really the PKF sector that clings to the billable hour.

Rob then writes, “Pricing itself is a tricky and intricate activity,” noting the existence of professional pricers. Yes it is. So what? Does that mean firms shouldn’t do it? Or shouldn’t develop a core competency in doing it? Nearly all of the Fortune 1000 have pricing professionals, demonstrating the benefits outweigh the costs of investing more creativity and intellectual capital into this function. All we are saying is firms should do the same. Is it any different than benchmarking best—or perhaps, next—practices?

But here is where Rob loses me. Let me quote him:

It’s also an aspect of value pricing where the theory contradicts itself somewhat.

Value-pricing is supposed to create a market-led, client-focused competitive marketplace. It’s also supposed to boost your profits. And that is a big paradox.

‘Of course we’re professionals, but we’re also business people,” Baker argues, ‘and I don’t see anything unseemly about charging a price centered around the value you create. Sometimes that could very well mean a lower price.’

Really? Rather than invoicing your billable hours and charging, say, £1500 (which you believe they will happily pay), you value price, decide what your work is really worth to the client, and charge £1200. For most people, that would be a decision that flies in the face of normal economic behaviour. And the problem theoretically, of course, is that the market isn’t really making that decision: you are.

There’s no contradiction here with Value Pricing. Again, it’s classic price discrimination, and overwhelming empirical evidence proves it does add to profits. What price discrimination says is quite simple: With a downward sloping demand curve—which economists call having market power—if a business can then segment those customers who are willing and able to pay above the so-called equilibrium price, then the marginal revenue will add to profits [click on the supply and demand graph at the end of this post. What any business is looking for are customers in the shaded area, those willing and able to pay more than the equilibrium price. This is how price discrimination works in theory. There’s more to it than this, there are different degrees of price discrimination, but this is the essence of it. For those wanting a deeper explanation, see my Pricing on Purpose book].

In the real world, there are myriad examples of this being done: from airlines, hotels, rental car companies and cosmetics, to hardcover vs. paperback books, liquor, wine, beer Coke, etc. I document dozens of examples of this in my books. There are literally thousands.

There’s no contradiction in that theory with the real world. Something simple as your local Starbucks menu is an example of price discrimination in practice.

Rob then poses an example of £1200 vs. £1500 price and says the market isn’t making the decision, you are. But you’re not making the decision, the customer is, since they are given a price before you do the work. I would also add, markets don’t buy things, people do, and value is subjective. Accounting firms can meet with each and every one of their customers at a very low marginal cost, so it behooves them to determine the value of what they are doing for each customer.

If the airlines had the ability to interview you before your flight to determine if it was travel for business or leisure, they’d be able to customize a price based on the value of your trip. The problem is, the costs of doing that exceed the benefits, so they develop clever rules to segment customers—Saturday layovers, how close to departure are you purchasing your ticket, etc. But that’s not true in an accounting firm; they meet with each customer anyway, so the marginal costs of determining value are negligible.

Rob them writes that only firms that offer exceptional service and highly specialized knowledge are able to value price. He even writes: “But for the average firm, value pricing may not be the way to go. One issue could be that you end up charging clients wildly different sums for the same work.”

But why is value pricing not right for the average firm if the economics make sense? I guess I have more faith in the average firm than does Rob, because I see firms of all sizes and shapes that have adopted value pricing successfully.

Now the charging different prices for the same work is truly a straw man argument. Mark Lee has an excellent comment (#4) on the post that talks about the more common scenario. But let’s deal with this straw man head on.

If a firm does a large volume of tax work, say hundreds or thousands of returns, then many firms offer a menu price service: A sort of American Express Green, Gold, Platinum card offering. If all the customer needs is the minimum bundle, then prices will be the same across customers that select that bundle.

It’s when you get into the customers that require more than minimal compliance services where you customize a Fixed Price Agreement, and this is where no two customers are exactly the same. As I say, there are strategies that can deal with the charging different customers different prices issue, if you are willing to research them. For an example of a menu strategy from an Australian firm, see here.

Then Rob claims the billable hour prevents this problem. But does it? Two partners can charge radically different prices for the exact same work, depending on their level of self-esteem and who works on the jobs. People can lie on their timesheets. People can eat time. You can’t tell me the billable hour produces the exact same price for similar customers. Fixed prices are far more likely to do so.

Rob ends on a discussion of trashing timesheets, and says it’s a leap of faith. Really? There are 500+ firms that have done it, across all PKF sectors, from advertising agencies to IT firms. How can that be a leap of faith? They are not a good management tool, we have provided many replacements that actually enhance the value of a firm’s intellectual capital far more than timesheets.

All that said, I love Rob’s last sentence:

But surely the simplest way for most accountants to make sense out of value pricing is to forget about the pricing bit, and just concentrate on becoming more valuable?

Amen. A firm must first create more value if it wants to capture more value. This takes hard work. It takes creativity, innovation, and deep thinking. It’s why most firms have not made the shift to Value Pricing.

Rob, you answered your own question. If you’d like, we can arrange for you to interview any of our Fellows and talk with them in-depth about how they Value Price and operate firms without timesheets. I’d start with O’Byrne & Kennedy since they are in your backyard. I’d be more than happy to introduce you to others, or you can contact them yourself, under People on our Web site.

Thanks for furthering the discussion, Rob.



  1. I wanted to share the longer version of the comment posted by Paul O’Byrne on AccountingWeb, due to word limits on the AccountingWeb Web site.

    [It might be his first blog post!!!]

    Here’s Paul comment:

    Oh there’s more on

    Frustratingly small reply limits on – don’t know how Ron copes! Here’s the fuller reply I prepared before having to pare it down. (Why wasn’t I told the deal up front? What a paradigm!)

    It’s great to see the debate, and I am happy to join in more. In our Hertfordshire firm we have been value pricing since we saw Ron Baker in 2000 and read his Value Pricing book, and even though he is American, and talks and writes provocatively, he actually make a lot of good points, which he is carefully backs up.

    May I contribute first by pointing out some of the addressing some assertions made by Rob Lewis that I consider to be plain wrong.

    For the past 6 years I have been one of those speakers on Value Pricing in Australia, Canada, New Zealand and the USA, to lawyers and accountants, and have found that it is not unique to Brits, nor accountants, to be shy about discussing money.

    We DO discuss money when first meeting in a client, we have to and we do, but in a round about, avoid the issue, obfuscate-like-hell kind of way. “Well, it depends…”

    What do we buy without knowing the price up front? Yet professionals have got away with ducking the issue for decades. If we don’t bring it up the client / prospect will, and that’s not a good dynamic for the start of your professional relationship.

    Yes, pricing is tricky, but it’s a fundamental part of running a business. If accountants can’t do it, what right do they have advising clients? Market researchers inevitably aggregate and average. We deal with individual clients creating value for them uniquely to their – and our – circumstances. You think a market researcher or a benchmark study can tell you what a price SHOULD be? This must be easier for a small practice – they really know their clients and can price everything individually without worrying about firm-wide policies.

    There’s no contradiction or paradox if you truly look at the value you create and using price to capture a fair share of that. The point here is that we need to look at the whole client relationship not any individual assignment. If the client is happy to pay ?1500 what process are we to go through to “value price” it at ?1200. A fundamental concept of Value Pricing (as is said, pricing is done up front, not billing, in arrears) is that the client is the ultimate arbiter of value, it’s what the client is happy to pay, not some arbitrary figure thrown out by some made-up hourly rate multiplied by some (made-up?) hours. If they say for that work we are happy to pay ?1500 and you would have been happy with ?1200, I suggest you go with ?1500.

    If the client says about the same piece of work, “I think it’s worth ?600”, wouldn’t you rather know that before you do the work? That’s when you need to ask, for this client at this time: “they think it’s worth ?600. Can I do it for that? How? where do their expectations come from? Have I explained what’s involved (but not in hours). Who has got the sense of value wrong here? Do I want to do this for that price? Should I be outsourcing or just declining that piece of work? Is this an example of clients turning against the swings and roundabouts approach (They know they overpay us for some work, but get bargains at other times)?”

    All good questions for a professional – meriting that epithet – to ask.

    Markets don’t make decisions. It’s just individual customers and suppliers.

    Thanks you for suggesting we are market leaders or one of an elite few. We think of ourselves as value-obsessed. But I deny the implication that each and every accounting firm cannot do this. We have unique relationships with our clients, they value us more than they say; that’s fine it’s not their job to talk up our prices. Why don’t they chop and change accountants each year? Each assignment? Switching costs, you say? Well yes, but don’t say it cynically; they value the depth of the relationship, the history and all that’s unsaid because of longevity, they may like our people, our offices, our responsiveness. They MAY like our prices because they feel they’re getting a bargain. We KNOW our clients like our prices, because they agree the quantum and payment terms ahead of us doing the work. We’re happy too, but always wonder if we are leaving too much value on the table. You never know, it’s more an art than a science – maybe why accountants avoid it?

    The above answers somewhat the issue of charging clients different amounts for the same work. The same work? It never is! You say that the “same work” comes out on the time sheets the same? Differing standards of records, completeness, timescales, different people doing it at different charge rates and effectiveness, other costs to serve. It’s never the same. But mostly the client’s perception is never the same. Not even the same client at different times. Value is in the eye of the beholder.

    I won’t even start on time sheets, save to say that we got rid of them in 2002 and have never looked back. We’ve got real, real-time management information now.

    Accountants don’t think value, no wonder we don’t get Value Pricing.

    Oh, and Adam Smith was a Scot.

    Paul O’Byrne

    Partner, O’Byrne and Kennedy LLP, Chartered Accountants
    Senior Fellow, VeraSage Institute

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