In Part 1, we looked at why many CPA and bookkeeping firms use an hourly rate to charge for their services. We also looked at some of the downsides for the customer or client when they pay for those services after the fact, based on an hourly rate.
The alternative approach is to provide the client with a flat price. In our example of a client wanting to outsource their finance department (from CFO services all the way to the day-to-day bookkeeping), the flat price would be a flat monthly cost to the client for providing the service.
The Pluses and Minuses
For the client, the pluses of the flat price approach include:
- The outsource provider becomes very familiar with your company and how it works… on the front end. In order for the provider to quote a flat price, they have to spend time with you before the work begins. They get a sense for your business model, your goals and frustrations, how things work inside your company, your existing use of technology, and a host of other insights so they know what they will be doing (and how you define success) for the service they will be providing.
- You get a flat monthly price so you know exactly what they will cost before you hire them.
- They provide you an overview of the objectives of their service and information on what they will be providing to you in order to achieve those goals. So you know in advance what they are committing to provide. That way you and the provider can review the relationship frequently to ensure they are living up to your expectations.
- The services they offer are tailored to the goals you are trying to achieve in your business so you can confidently decide if the outsource provider is a good fit for you and your company.
One possible negative is you may wonder from time to time whether the flat rate is too high. (You may also wonder if it is too low. The last thing you want to do when outsourcing your finance and bookkeeping function is to hire a firm that is likely to disappear because they are weak financially.)
But wondering if you are paying too much is an easy question to answer. You do it every day with almost every other investment or expense in your company.
You think about whether the provider is adding value in a way that you can see, touch and appreciate. And you look at what it would cost you to have the entire function done in house. That's not difficult to evaluate. The combination of those two considerations provides you a way to evaluate the value you receive vs. the flat price you are paying.
The Hourly Rate Lives On
Despite the many benefits for the customer, the hourly rate will likely be around for a long, long time. Primarily for two reasons:
- At the heart of why professional firms like the hourly rate approach is how it deals with risk and uncertainty. When you look back at the reasons CPAs and bookkeeping firms like the hourly rate approach, you can see that each reason is based on uncertainty. Going into the work, they don't know how long it will take or what the objectives will be. So they deal with that risk by putting it on you… the client. The hourly rate approach ensures you pay them… no matter how long it takes them to do the work.
- Another reason they like the hourly rate is that it has been around forever. It dates back to the origins of CPA firms. As a CPA, I can tell you that we are one of the slower professions to adapt to new and better ways to serve businesses.
I'm in the flat price camp.
But I also understand there are certain occasions where the hourly rate approach can be a good idea.
The key is to put the focus on value and achieving objectives. Then pick the approach that most aligns with what you are trying to accomplish in your company.
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