One of the problems with the billable hour is it provides zero knowledge in terms of how to improve pricing.
How do we know? Because we hear stories like the following I received earlier this week from a CPA colleague. I've sanitized the names to protect the guilty.
Here's why there's no education in the second kick of the mule:
Been meaning to write to tell you a story.
I recently got a new SEC audit client. The predecessor auditors were a large regional CPA Firm.
The engagement letter for the 2008 year end wasn't signed until about March 10. The client and auditors met in mid February to iron out the fee. By the time the letter was signed, at least 90% of the audit was done. The client fired them for various reasons, and hired us about a month after the 2008 audit was completed.
Client receives a letter and an invoice about a month later from the predecessor CPA Firm for overages on the audit--67% higher than the so called fixed fee in the engagement letter. The explanation is they had all of this excess time and so on and so forth. CPA Firm provides hour and rate detail and reduces their standard rates by 20%.
Needless to say my new client is rather upset. Me being your disciple says to the CEO "It isn't your responsibility that they can't manage things on their end" and "You sell your product for a set price and it is up to you to make money at it. They have to make money at what price they sell you the audit."
I point out how the engagement letter says that if they get into trouble on hours that they will contact client and discuss and agree on a resolution before they go further. Too bad for the CPA Firm that they didn't do that.
Audit Committee Chair sends a polite letter saying we don't accept invoice and gives a couple of reasons, including what the engagement letter says. CPA Partner writes an email back asking for a telephone conference to resolve. My client was already steamed, but that was the straw that broke the camel's back. Long email back that discussed a bunch of things, and questions how could things have gotten so bad hours wise when they were almost done when they set the fee.
Of course, I'm thinking of your writings as all of this is going on.
There were several reasons I got this job. For one, I have a different professional approach (predecessor was very adversarial). They like me. But most importantly, I gave them a firm fixed price--lower than the new quote from the old CPA Firm but one I can be very profitable at.
Amazes me how a large firm like that one could get that big with this kind of behavior.
Firms make this mistake all the time, never learning a single thing from losing the customer.
The billable hour and timesheets let the firm off from doing the following: proper project management; communicating with the customer scope creep changes; pricing up-front, which all customers expect for everything they buy; the opportunity to win back an unhappy customer.
It's one thing to lose a customer over bad service, or a mistake. It's quite another to lose them over something like this. There's little chance of regaining the trust lost due to this type of stupid pricing.
And here's the sad thing: The larger firm will blame losing the customer because of a lower price competitor. This is the ultimate excuse, enabling the firm to never have to look in the mirror to see what they did wrong.
Long before there is a problem with price, there's a problem with service and value, as this story illustrates.
When will firms learn it's the billable hour that is killing their value proposition?