Saturday, June 6, 2009

5 Reasons Your Accountant Bills By The Hour..None Good For You

It is fair to say that over 97% of the accountants bill by the hour. Then it is reasonable to presume it works for them. Why?
  1. It's easy for them. An accountant who bills by the hour essentially treats all of his clients the same - he is going to bill you how long it took and multiply it by an hourly rate. This doesn't mean it's good for you. Do you care how long it takes? You want to know how much it is going to cost you.
  2. It's less risky...for the accountant. When you agree to pay the accountant by the hour, you take on all the risk. The accountant has to research an accounting or tax issue, so he bills you the hours. Next time the question comes up, he already knows the answer. And you've paid for it for the next client. By paying by the hour, the accountant has no incentive to be efficient.
  3. They don't know any better. Accounting firms (and law firms too) didn't always keep track of time. They priced each engagement individually. Someone then had the idea to track time to get an understanding of how long different engagements took to complete. Then one day, someone had the idea that the hours accumulated were the inventory - multiply by billing rates and price it that way. This doesn't provide any value to the customer - you. Accountants have been billing this way for so long they just don't know any better. I've heard countless accountants say this is the only they can justify their billings. They think they are selling time; you are buying a solution to a problem not their time.
  4. It is an easy way to raise fees over time, and their income. Everyone knows inflation is a fact of life. So far we've addressed the hours side of this equation. The other side is the billing rate, an artificially set number. How do many accountants a billing rate? One way is to compare what other accountants are billing at, which again means the accountant doesn't have to do any thinking. The other way is to think about how much money they want to make and divide that number by the number of hours they plan to bill. Again, this works to the benefit of the accountant. And not to you.
  5. They are scared of billing by a fixed fee. This one is a no brainer. Say you are looking to hire a new accounting firm. Ask them what it will cost. Odds are they will say something like "Well it depends on the hours we incur and the relative billing rates of our staff that we assign to the engagement." Notice how this puts the risk back on you - they won't tell you what it will cost because they are scared to commit to a number. Because pricing is hard. But this isn't your problem, except they just punted it back to you.

I don't bill by the hour because it does not create a win-win situation for both parties, and because it is wrong. Future posts will address the benefits of fixed fee billings for you.

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