Professional services firms that bill by the hour face some very unique challenges.
The accountants and bookkeepers responsible for creating invoices and sending them to clients have a uniquely challenging job inside a professional services firm. Each month they beat their heads against a wall to gather time incurred and bill clients.
Nobody likes the process. The lawyers don't. The accountants and legal administrators don't.
And clients don't like the process or the result!
So why has this same process gone on for years and years you ask?
The Two Big Problems
Two realities are working together to create the problem.
- Clients don't know what the service will cost at the time the work begins (unlike most things were you agree to the cost upfront)
- Professionals don't like to track their time (so they delay, procrastinate, provide vague descriptions of the work performed, etc.)
A Law Firm Example
Let's see what the two realities (issues) look like in a Law Firm.
Here is the highly summarized discussion between a prospective client and an attorney about doing some legal work.
Client: How much will it cost?
Atty: I'm not sure, it all depends
Atty: We bill based on time incurred
Client: Oh. Hmmmmmmm
Atty: Our rates vary between $145 and $345
Client: Well, I need to resolve my legal issues
Atty: Ok, let's get started
The interesting point here is that he work begins even though the client does not know what it is going to cost him/her to get the job done.
When the month is over accounting cajoles, threatens, begs and pleads to get the lawyers and paralegals to complete and turn in their time reports and descriptions of work performed.
That process is harder (and more frustrating to the admin staff) than it sounds!
After some time passes and enough begging takes place, accounting gets the information and prepares the invoices to send to the client.
(In another post, I'll comment on whether it is "actual" time that is being billed when professionals have to go back and do their time reports for the past week or month. It sounds more like an "estimate" to me. But that's a subject for another post.)
Now the Client has the Bill/Invoice
First the client has to figure of whether the invoice is accurate.
Here's what the client walks through in their mind as they review the legal invoice they just received.
- How much time did they spend?
- What did they do?
- Who all did the work?
- What was each person's hourly rate?
- Are the hourly rates accurate?
- What other "stuff" did they bill us for?
- Was the work they did really necessary?
Second, the client has to come to a conclusion in their mind about out whether the total dollar amount of the invoice is fair.
- What value did I receive?
- Does the amount seem fair?
- If not, which part is unfair or inaccurate?
- Who should I call to complain or try to get an adjustment made?
- What amount would be fair?
- Should I approve the invoice for payment?
- When should we pay it?
And the client goes through that process every month that they receive a legal invoice. Yikes!
I'm willing to bet that 80% to 90% of what the client thinks through with every legal invoice drives from the fact that they did not know the cost before the work began. Most of the "value proposition" back and forth discussions would have been fully discussed and considered before the work started.
When the "value" discussion comes after a monthly invoice, it slows down the payment process big time. It throws sand in the gears of collecting receivables.
Is the solution flat pricing, in advance? Maybe. That certainly creates its own challenges though.
I Have an Idea That Will Surprise You
Being an experienced CFO, and having the luxury of seeing this problem both inside and outside of professional services firms, has led me to an idea that might solve the problem.
And it has nothing to do with flat pricing, alternative billing methods, or value pricing.
The idea comes from the likes of Reliant Energy, Amazon, and Banks everywhere… even Dominos Pizza.
This could solve the problem for professionals, accountants within those firms, and the clients they serve. A true win-win-win.
I'll share that vision in my next post.
Stay tuned! You're either going to love it or hate it. J
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