Thursday, June 25, 2009

Strategic Pricing: A Study in Contrasts

While GM bankruptcy advisors are drawing ire for "staggering" fees, advice on value pricing is available in the current Journal of Accountancy.

Two GM consultants (Evercore Partners and AlixPartners) are being singled out by the bankruptcy trustee for overlapping and "excessive" fees reportedly totalling $130 million for one year, according to a story this week in the New York Times DealBook titled Trustee Objects to Fees for G.M. Advisers.

Of course, high fees are lightning rods for controversy, particularly in the turbo-charged GM bankruptcy. What is particularly striking is the lack of perceived value contained in the billing statements. Some of the hourly fees are apparently unspecified, but nonetheless add up to a potential $16 million per month for one consultant. Millions of dollars are also requested in "success fees." (How will the GM bankruptcy be considered a success, one wonders?)

Contrast this situation with an article by Ronald J. Baker in the current Journal of Accountancy titled Pricing on Purpose: How to Implement Value Pricing in Your Firm. The author opens by saying "a business is defined by the value it creates for its customers." He goes on to say that pricing by the hour is the wrong way to measure value.

Value is defined in part by what the client is willing to pay. A crucial value pricing consideration is the cost to the client of the problem that needs to be fixed. For example, if I have a $100K problem I might think that a $25K solution is a great value even if it translates into a high hourly rate. The author outlines 8 steps for pricing on purpose.

It's worth your while to read the value pricing article. Attorneys and other consultants can take a lesson from the accounting profession in learning how to more effectively communicate the value and delivery of professional services. If alternative billing is to win out over the billable hour model, this is a good place to start.