How tax agents can kick the hourly billing habit

How tax agents can kick the hourly billing habit

How tax agents can kick the hourly billing habit 1200 630 Colin Kennedy
Image: Watch

It doesn’t matter how many times you hear this question; there aren’t many other questions quite as capable of putting an expert practitioner on the spot like a butterfly pinned to a display cabinet than the dreaded: ‘What’s it going to cost?’

For accountants, lawyers and others who sell their expertise, it sometimes seems the only measure of value is the clock, but time – unlike money – is finite and never an accurate estimate of an expert’s value.

Hourly billing is something most clients – and experts – can understand. It is tangible and easy to grasp and sell because it doesn’t put a price on anything (at least when you’re trying to win the client). 

However, hourly billing is also widely disliked by both parties. It is not an accurate valuation of worth for the expert, and for the client, the final price remains a dreaded unknown. After all, how long is a piece of string?

The problem for many people who value their time by the hour is fear. They fear they may lose the client to somebody else who sets a tangible hourly fee, and they fear clients will become suspicious, or that there will be scope creep which leaves them out of pocket at the end of the day.

Unfortunately, the hourly bill also sets the expert up to be negotiated down and for limits to be set on a project’s scope. It also opens them up to questions about how each unit of time was spent.

In essence, the biggest challenge to overcome with hourly billing is a change in mindset for both parties.

Base your value against objectives

Part of changing a client’s mindset about project-based fees is to set expectations upfront.

Bestselling author Alan Weiss points out that clients know what they want, but they do not know what they need. As the expert in the relationship, your value-add comes from determining what it is they need.

Once you know the client’s objective and – based on your knowledge of what they will need to get there – you are in a position to charge against a successful outcome across two or three scenarios. With most finance, tax and law-related issues, there will be varying levels of success. For example, a reduction in tax owed, or a write-off of tax owed or a repayment arrangement with the IRD.

The tax agent may spend the same amount of hours, give or take, in achieving one of those scenarios, but most people can agree that achieving a tax write-off for the client will be worth more to the client than a repayment arrangement with the IRD, and they’ll be willing to pay accordingly. 

Take an unrelated scenario, say in public relations. A multi-national operating in New Zealand may be under pressure from the media because they are accused of engaging in environmentally unfriendly practices. The local pressure is costing the company thousands, but globally the costs and damages are running into the billions.

The consultant, drawing on his or her expertise, may spend just two hours conceiving a strategy so successful, the multi-national rolls it out across the globe. Based on hourly rates, they would have earned a grand total of $600. Is that a true reflection of value?

Three things to consider

To shift your practice to a more value-added billing system, try these steps:

  • Establish the client’s objectives. They may want the problem to ‘just go away’. For example. letters of demand from the IRD. But what do they actually want? A repayment arrangement, a write-off of taxes, or a massive reduction in the debt?
  • Using your expertise, determine what they need. What are the possible outcomes, from the worst-case scenario to the best-case scenario?
  • Set your project-based fees against each scenario. For example, $900 for a repayment arrangement; $2000 for a partial debt write-off and a repayment plan or $4000 or a total write-off of the tax debt.

While every tax agent has an ethical duty to ensure the best possible outcome for clients, reality suggests that there will always be varying degrees of success. Charging against those ‘degrees’ of success may be a fairer outcome for all.

Finally, avoid seeing each client as a one-off problem to be resolved. Instead, view your first engagement as the start of a value-added relationship.

“As a professional engaged in providing service to your clients, the immediate urge may be to fix what ails the client. However, the long-term goals are best met by improving the client’s condition.” – Alan Weiss