Value-billing analysis - Hours not the reason why.

Sometimes a good idea is best buried. Ask the bright young consultant who arrives in the office for his first day at work. Eager to make his mark, he immediately spies a number of internal time efficiencies that can be made – the benefits of which could be passed on to the clients. He brings these to the attention of a senior partner. The callow youth is taken to one side and told, “If you come out with too many of these good ideas pal, we go out of business. Why the hell would we want to save time?” The young consultant returns to his desk, works at half-speed and is slapped on the back when his timesheet clocks up double time.

This scenario has all the hallmarks of an episode of On the Buses, and yet consultants continue to guard the timesheet as though it was the most effective means of revenue generation.

Lip service has been paid to the merits of value-billing. All consultants “perceive” the benefits, all consultants “think” that such an arrangement will become inevitable – but few are willing to take the first step. Consultants are not the only ones to blame. Lawyers and accountants play by the same rules.

The Managing Partners Forum recently played host to attorney Ron J Baker, founder of the VeraSage Institute and chief evangelist for the value-billing cause. Baker’s speech, entitled “Trashing the Timesheet – how to shift to value pricing from hourly billing” drew big names. Chief executives and financial directors from top legal, accountancy and advertising firms were in abundance. Management consultants were conspicuously absent.

Baker aimed to put the “billable hour” on trial. His speech was scheduled to last around four hours. That’s not a misprint. Even with a coffee break, four hours is an indulgence rarely allowed to anybody but Eastern European film-makers. At the outset, Baker assured his audience that he was not looking for them to think like him – but think with him. The billable hour is, perhaps, not the most compellingly theatrical of subjects, but Baker was a gripping guide to the topic and held his audience throughout.

The argument for value-based billing is simple. Customers do not select a consultant on price. Yet, too often, consultants define themselves by the cost of their billable hour. Research shows that customers are very specific about why they work with their chosen consultants; “they reduce my anxiety”, “they help me to create new opportunities”, “they utilise the most effective technology”, and “I trust them”. Baker points out that “pricing isn’t an issue here. When clients are dissatisfied with their consultants it’s because they have failed to fulfil service criteria – pricing isn’t even on the radar screen”.

Baker mapped out the route by which most consultancy billing works. A product is defined. The cost of that product is deduced. A price is put on the product. A value proposition is wrapped around the product and then pitched to the customer. Value-based billing turns this model on its head. The client comes first. Their needs are explored. A value proposition is then pitched to the customer based on their needs. A price is agreed for the service – in its entirety. The price covers the cost of producing the product or service. The value of the transaction is established from the outset. The price is almost an afterthought.

A year or two ago, consultants could pretty much charge as they pleased. They could present a “menu” of prices and services to a client and let them pick and choose their three courses. Times have changed. Consultants have, to an extent, buried their heads on this issue. The legal, accountancy and advertising professions are having to adapt to an evolving market, consultancy is going to have to follow suit.

Servicing “need” is the greatest challenge for consultants in a contracting market. While consultants are happy to expound the virtues of “value” to their customers, they have been a little slow to swallow their own medicine. The attitude of “this is what we do, this is how much it costs” cannot conceivably see a consultant through tough times. Most consultants would agree that tough times are here and yet the timesheet is still a firm fixture in most agreements.

Baker has always been seen as a fervent, but essentially lonely voice. His book sells respectably, but he is no household name. However, perhaps his time has come. The lecture room at Simmons and Simmons was packed – and a wealth of top executives sat and gave Baker four hours of their time. The collective billable hours in that one room do not bear thinking about. This was a speech that was being taken very seriously.

Value-based pricing has been a slow burner in this business – but it’s clear that a fuse can only be so long – at some point there’s going to be the most almighty noise. A noise that consultants are going to find it difficult to ignore.

VALUE-BASED PRICING NEW MODELS

– ComputerWorld’s definition of value-based pricing: “Value-based pricing is a method of pricing products in which companies first try to determine how much the products are worth to their customers. The goal is to avoid setting prices that are either too high for customers or lower than they would be willing to pay if they knew what kind of benefits they could get by using a product. Data mining software can play an important role by helping users segment their customers and define the value they receive.”

– Ariba and other e-commerce companies are looking for new ways to justify their existence to Old Economy industries. Ariba has announced two major changes to its operating model: the so-called verticalisation of its business and the change to a value-based fee structure that sets fees according to how much money their applications can save a company.

Oracle has changed its procurement fee structure, basing fees on the number of lines in a requisition and charging a few dollars per line. This model is cheaper than the model that Ariba is proposing, said Jeff Caldwell, vice president for Internet procurement and exchange development at Oracle.

– AMS research confirms that over half the mobile providers it surveyed still charge by duration for mCommerce services. With the advent of next-generation services, providers will need new value-based pricing paradigms geared to the level of service that the customer wants. So far only a fifth of the providers surveyed have experimented with value-based pricing models.