A Value Pricing Innovation

Source: Inside Public Accounting

IPA interviewed Ron Baker, founder of Versage Institute, on “TIP” – To Insure Performance – provisions in engagement letters. TIP is a price for services based on success of the engagement. The clause can provide for a minimum payment plus what the client wants to pay based on results.

TIPs won’t work if the firm charges by the hour. The client will simply want to pay the hourly rate.

TIPs can be used in a variety of engagement types, such as acquisitions, tax planning, or financial statement engagements requiring unusually fast turnaround. They cannot be used, obviously, as contingent fee arrangements with audit clients.

Prerequisites to using TIPs or any value-billing scheme is to not use billable hours, and to stop valuing people based on hours they charge.

Here is a suggested TIP clause in an engagement letter (from The Firm of the Future, by Ron Baker and Paul Dunn): “In the event that we are able to satisfy your needs in a timely and professional manner, you have agreed to review the situation and decide whether, in the sole discretion of (client name), some additional payment to (firm name) is appropriate in view of your overall satisfaction with the services rendered by (firm name) and/or the financial results achieved by (client name) for this transaction.” Appropriate changes would be needed for audit clients.

TIPs must be presented to the client up front, not after the engagement has begun. Expect some clients to be uncomfortable with it, but if you are really providing extraordinary value, they may be accommodating.

TIPs work well in firms with value pricing traditions. A very small percentage of firms use value pricing.

From Inside Public Accounting, December 2006, p. 5. The Platt Consulting Group (www.plattgroupllc.com). Subscription $369 per year; back issues—nonsubscribers $40. 317-733-1920.