A Conversation with... Ron Baker
Ron Baker, the driving force behind the accounting profession’s migration to value pricing, in which rates are based on the value that clients perceive they receive, has raised the level of his argument for this dramatic shift in how accountants think.
Baker became an accounting profession celebrity of sorts and a coveted public speaker in 1998 with the publication of his first book, “The Professional's Guide To Value Pricing,” which postulates that accountants and other business services professionals create value for their clients and that is what they should price for, as opposed to pricing for their time and cost of materials.
His other writing on the topic since then includes “The Firm of the Future,” which he co-authored with Paul Dunn, creator of the Results Accountants Systems, practice management service. Baker has also written a variety of concise booklets on pricing theory published by the Association of Chartered Certified Accountants (www.accaglobal.com).
Baker says his life mission since shortly after he became a CPA in 1984, has been to “bury the billable hour.” He has been sharpening the edge of the verbal shovel that he hopes will dig the grave.
“Accountants price by the hour because they are risk adverse and the hourly rate shifts the risk to the clients, so they in turn will force the CPA to write down the billable hour. That’s not good pricing or smart business,” Baker says during a telephone interview at his home in Petaluma, California, where he oversees Verasage Institute, verasage.com, a think tank for professional service businesses, which he helped to create in 2001. “Firms that do this have a window of opportunity to charge a premium price.”
Value pricing’s goal is not to simply raise rates, but to find out what is valued, deliver it and then higher fees should follow, according to the picture that Baker paints. How to determine the specific elements of service that clients value and responding to them accordingly, will be among the new underlying themes in Baker’ ambitious schedule of accounting profession conference speaking engagements this summer, which include the American Institute of CPAs’ Practitioners Symposium in Las Vegas on June 11 and the New York State Society of CPAs’ Small Firm MAP conference on June 27.
His other engagements include a May 22-24 conference sponsored by Principa, an Australian based practice development services organization; six conferences for the California Society of CPAs; and “Boot Camp” training on Aug. 2-3 for technology vendor Sage Software, whose sales channel includes significant numbers of accountants who are resellers or are trained to consult on Sage products. Baker also handled some Sage boot camps in early May.
“Information technology services firms are much like CPAs on this issue, -- mired in the billable hour,” Baker says. He also directs his pricing training at law firms and advertising agencies, but accounting is clearly his passion.
Meanwhile, the accounting profession may be ready and primed for additional coursework. Value pricing, barely a thought for the profession before Baker began evangelizing eight years ago, is gaining a foothold.
Twenty-seven percent of small practice CPAs use value billing, versus 26 percent who market price based on what their competitors charge and 35 percent who cost price based on their costs for man-hours and materials, according to a recent survey by Bay Street Group, baystreetgroup.com, an accounting profession marketing and research organization. Most of the remaining respondents use value pricing in combination with market or cost based pricing.
The study also finds that value pricers are far more pleased with their billing strategies than either market or cost pricers.
Baker estimates that only 7-10 percent of accountants value price, adding that some of the Bay Street Group survey respondents may have identified themselves as value pricers when they do not follow all the key tenets of the practice which include agreeing with clients on an established price before the work begins. “A lot of people adjust their hourly rates, but that’s not what I’m talking about. They look at it the work in progress report, adjust it downward and think its value billing when it’s not,” Baker says. “Value pricing is always up front – it’s the value of a restaurant meal before you eat it.”
But, Baker says, “This (Bay Street Group study) gives a good vector that value pricing is in public discussion, that the train has left the station. Firms are doing this; they may be struggling in fully understanding it, but they know this is the future.”
Baker further notes that other practice management consultancies have been reporting that 20 to 30 percent of firms value bill in one form or another, and he says that his 7-10 percent estimate “is purely conjecture.” But it is educated conjecture, as Baker has been studying value pricing for decades, and he estimates he has reached more than 80,000 business services professionals in his public talks.
Baker, 43, began his career in 1984 with the former Peat Marwick Mitchell (now KPMG) in San Francisco and became disenchanted with billable hours almost immediately. While he became aware that accountants are high level knowledge workers and should be valued for their knowledge and how they put it to use for clients, Peat Marwick, like most other firms, measured value by the amount of hours worked.
"With knowledge workers, a measurement is not as important as a judgment," Baker now says. "How do you measure communication and listening skills?”
So he found some partners to open another firm in San Francisco where he first dabbled with the concept on pricing on what clients thought the work would be worth. “What I found was business clients saying, ‘This is great,’ because it was how they priced in their businesses,” he recalls.
He kept close notes on how his billing practice worked, combined it with exhaustive research that included macroeconomics and the pricing policies of major companies in other industries, to write “The Professional's Guide To Value Pricing”. Dunn liked the concept and quickly introduced it to firm members of the Results Accountants program, while nationally known accounting technology practice management consultant Gary Boomer began pushing Baker’s thinking to his clients and in his writing in accounting periodicals.
Baker has been a featured speaker and is usually the biggest crowd gatherer at dozens of accounting shows since then and has refined his message with each passing year. “I hate the term ‘guru,” he says, “I am an enthusiastic student of pricing theory, and I am constantly learning this and what about it resonates with people.”
He hopes to make this summer’s message resonate with a broad cross section of accountants by classifying the service ingredients that clients value as “Key Predictive Indicators,” a phrase he coined by modifying the popular term Key Performance Indicators, which companies use to determine their progress in meeting specific goals.
A Key Predictive Indicator (KPI) is a specific identifiable thing that clients value in the services they receive, which can be learned from surveys. It can include the obvious, such as rapid turnaround time on engagements, to the more subtle, such as clients’ individual preferences to be contacted by phone versus by e-mail; the amount of time in which they expect to get replies from their calls to an accountant’s office, and whether they prefer to talk only with a partner versus an associate. KPIs could also track marketing data to determine which clients respond well to things such as cross selling or how receptive they are to entirely new offerings from the firm.
The firm then builds a KPI matrix for clients which members refer to when deciding how to deal with individual clients. They also look for areas where they should devote additional resources or make other changes to increase the value to clients “You want to manage customer expectations so you can respond to them,” Baker says.
While Key Performance Indicators track historical or lagging data that can only be analyzed, Baker says his newly coined KPIs are “leading:” indicators that show what clients currently value. That, he says, enables firms to respond appropriately and increase the value the client perceives, which should lead to higher prices and profits.
“Key Predictive Indicators don’t show up on financial statements, they are what drive the financial statement,” he says. “Clients don’t measure us on the hours we work, they judge us, and we should be able to judge ourselves using the same factors,”
To be sure, KPIs are addressed in “Firm of the Future,” but Baker will go into more detail about them this summer and in his next book, “Measure What Matters to Customers", scheduled to be published in September.
In the larger view, Baker theorizes that when firms look at KPIs and other value pricing elements, they look at their effectiveness for clients. This is anathema to looking at billable hours and time sheets, which deal with efficiency.
"In professional services, what matters is effectiveness,” Baker says. "If you are in a hospital, do you want an efficient surgery or an effective one?”
“This is not simple,” Baker says. “It changes how firms communicate with clients, and it changes roles; it’s a hard cultural change that requires top down management, a significant theoretical shift that may not happen in our lifetimes.”
Written by John Covaleski, AccountingWEB Staff Writer.