Pricing Professional Services: It’s Time To Rethink Existing Models

Posted by neil-davidson on April 17, 2019

pricing professional services

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The threats to professional services firms are real. New market entrants are blossoming and challenging the incumbent players. Innovative technologies are disrupting the market making it even harder to compete.

In this environment clients hold more sway than in the past and are demanding greater value and flexibility at lower prices. It has hit profit margins and providers must respond.

According to our survey, Insight to Action – The future of the professional services industry, 51 percent of decision makers at professional services firms consider price pressure a top business development issue over the next 12 months. Moreover, 54 percent of chief operating officers say providing more value for the same cost is becoming par for the course.


 

Protecting Profit Margins


Why getting ahead of industry changes is key


View Insights

 

Rethinking Pricing

In this environment, firms must reassess their offer to clients – and how they charge for it. Firstly, professional services firms need to demonstrate they are giving value for money and so accurate billing is crucial. Clients today are not only expecting to pay less for the same services, but also demanding that professional services companies keep track of every minute they pay for.

 

"In this environment, firms must reassess their offer to clients – and how they charge for it."

 

 

Given professional services firms sell human expertise – not more tangible, physical products – keeping on top of billing can be hard. And as firms often charge clients a multiple of their actual labour costs, getting it right is key. Our survey found 33 percent of chief executives and managing directors view better-defined pricing models as a top priority over the next five years.

Firms should deploy an Enterprise Resource Planning (ERP) system to keep track of the man hours expended and expenses incurred. Having foolproof timekeeping systems in place, that work in tandem with project and resource planning systems, ensures that all time is captured and billed quickly and accurately. Not only does this allow firms to bill transparently, it also lets them make real-time, fact-based decisions about their own resourcing needs.

We recently caught up with attendees at the Digital Leaders Forum to discuss the impact that digitalisation and emerging technologies will have on the business models of Professional Services Firms. Hear what they had to say below.



Value-Based Pricing

Another solution is to abandon per-hour billing altogether and move from an effort-based pricing model to a value-based one. This creates a fee, based on a product or service’s value, as perceived by the client, and requires a deep understanding of the client’s business needs.

In such a scenario, a professional services firm would offer a complete package of goods and services upfront, rather than a minute-by-minute breakdown afterwards.

The benefit is that firms can be more agile by tailoring a menu of unique services to each individual client, thereby limiting the extra work that is not accounted for or billed. It is also appears to be the industry’s direction of travel: as our survey shows, some 71 percent of operators globally say they do not get paid for all change requests.

By agreeing the price and terms of engagement before the work begins, clients will have a clearer idea of what they are paying for and what they can expect. While some providers may find this change daunting, in time they will come to appreciate the value added.

Agility Is Key

Cost control does not only happen at the front end, of course – professional services firms must work more efficiently behind the scenes too. In big, complex projects that require a large number of team members, it is important to have project management and resource management tools that keep the project on schedule and to budget.

This will help firms get paid on time for the work completed, reducing the pressure on company cashflow. Effective people management will also stop delays, translating into cash for work being collected as fast as possible.

 

"Cost control does not only happen at the front end, of course – professional services firms must work more efficiently behind the scenes too."

 

 

By ensuring they charge appropriately, budget sensibly, and work efficiently, professional services firms will give themselves the best chance of staying ahead in a more competitive market. Not only will they be able to respond more quickly to new opportunities and threats, they will also be freed to take risks that may end up generating new, profit-driving ideas.

To do this, however, requires cultural change. Professional services firms for instance should promote collaboration and show more tolerance of failure to spur innovation. They may also need to expand in some markets and scale back in others, specialising to gain an edge over their rivals. And of course, they must embrace digital transformation to ensure they are ready for the challenges ahead.

Clearly it is time to act: as our survey shows, 33% of COOs say defining competitive advantage is among their top-three priorities for the next five years. Those who make the leap and embrace change have much to gain. But those who are complacent could put future profit and revenue streams at risk.

 

Protecting Profit Margins

Why getting ahead of industry changes is key

View Insights