For more than 25 years, Ron Baker has pushed accounting firms to dump the billable hour and embrace value pricing for client services. He now believes the profession is at a tipping point.
“As the lead prosecutor in trying to give the billable hour the death penalty, I can happily report that its ultimate death may not be within reach, but it’s definitely within sight,” Baker said.
Baker is founder of the VeraSage Institute, a think tank dedicated to burying the billable hour and archaic timesheets. The group also advocates for pricing in advance arrangements and for treating tax and accounting professionals as knowledge workers instead of timekeepers. He has more that 230,000 LinkedIn followers, authored seven books — including Implementing Value Pricing: A Radical Business Model for Professional Firms — and hosts the internet radio talk show The Soul of Enterprise: Business in the Knowledge Economy.
The Thomson Reuters Institute (TRI) recently spoke with Baker about how accounting firms deliver and price their services. The interview is being published in three installments. This initial installment covers the profession’s long, slow shift to value pricing. And in subsequent installments, we will discuss with Baker how accounting firms can make the transition today, and what he believes is coming next for the profession.
TRI: How did this work begin for you?
Ron Baker: When I came out of a Big Eight accounting firm (KPMG) back in 1987 and started my own practice, I realized that hourly billing was a really lousy customer experience. They never knew what the price was going to be until they saw the bill. If they were upset, they had to complain. It was just bad for the relationship all the way around.
So, in 1989, our practice we started offering fixed pricing. Now, it wasn’t technically value pricing because we didn’t really know what we were doing, but we did know we needed to fix the price and give the customer certainty — just like a fixed-rate mortgage is more valuable than a variable rate mortgage because it provides certainty. As a customer, we’re willing to pay for that certainty and risk avoidance. So, we tapped into that, and the customers loved it.
TRI: When did you take this message beyond your firm?
Ron Baker: In 1994, I started teaching in California through the CalCPA Education Foundation and it evolved from that. I was the only one on the circuit really talking about this, and there were no books on it, which is why we made every mistake under the sun when we started implementing this in ’89. But we stuck with it because we knew it was the right thing to do.
TRI: What was the response from the profession in the early days?
Ron Baker: When I first started preaching this publicly in ’94 the resistance was overwhelming. If I got 10% of the crowd to show any interest… that was a huge win. Most people hear you and say, ‘Oh that’s the dumbest thing I’ve ever heard,’ because all our life we’ve been taught the billable hour, including me. There was enormous resistance.
TRI: Where are we today?
[In this response, Baker references the Diffusion of Innovation Theory, which says a new product or idea gains approval in five stages — first by innovators, then in succession by early adopters, early majority, late majority, and finally, laggards.]
Ron Baker: We’ve come a long way. If you look at the diffusion curve, we’ve got the innovators; we’ve got the early adopters; and in some sectors of the profession, we’re in the early majority. I think we’ve hit the tipping point within the last five years.
The AICPA [the American Institute of Certified Public Accountants] puts out a MAP survey and anywhere between 30% and 60% of accounting firms that respond are now saying they value price. That is way up from 15 years ago. And many more larger firms are going down this road — probably one-fourth of The Top 100 are making serious investments in their pricing competency.
I feel like I’ve climbed this big hill and now I’m on the downside. We’re not coasting yet, but you’d have to be living in a cave not to know the advantages of value pricing versus hourly billing these days. There’s just too much out there, and everybody’s talking about it. There are tons of blog posts, books, consultants, webinars, videos, you name it — there are tons of advocates for it.
So, overall, I’m heartened. The billable hour is on the defense.
TRI: What changed?
Ron Baker: What’s really accelerated has been technology that enables firms to do much more work in much less time. Then, if your business model is we sell time, you’ve got a big problem.
When software companies go out and sell, one of the benefits they always tout is, ‘You can do things much quicker.’ And the accounting firms look at them and say, ‘Why would I want to do that? I’ll lose billable hours.’ And those software companies encountered that resistance enough to bring in people like me to preach a different message to their accounting firm customers.
Then, as more and more firms started to do it, and more and more started speaking at conferences, as more and more books were written about it, specifically for the profession, and more and more consultants were spawned in the profession, now there are many people out there talking about it.
I think another driver is talent. The only place ‘time spent’ should matter is in prison. It’s not what you want to do to smart, intelligent, creative knowledge workers to bring out the best in them. Having them track every six minutes of their day? That model’s obsolete.
TRI: What obstacles remain?
Ron Baker: There’s a lot of inertia in the status quo, coupled with the un-learning required to change a business model. A business model is how your firm creates and captures value. To change it is really, really difficult because it touches everything. It’s not just the pricing — it’s the marketing; it’s the R&D; it’s the way you communicate; and it’s the relationships you have with your customers. All of that changes under this new value pricing model.