Structural Improvements

Why professional services fees are getting easier to understand — and cheaper.


Next time you're hiring a professional services provider, your key question might not be "How much are you going to charge?" but rather "How are you going to charge?"

Squeezed by a contracting economy, everyone from lawyers and accountants to ad agencies and recruiters is changing price structures to reduce upfront costs for buyers and improve visibility into bills. That can mean switching from per-hour pay to flat rates, or vice versa; in some cases, customers can choose. Christopher Mirabile, former CFO and general counsel of software maker Iona Technologies, says he has sensed "an enormous receptiveness on the part of law firms to look at pricing models" in the last 18 months. "We're seeing it in all professional sectors," says Ron Baker, founder of the VeraSage Institute, a think tank that studies pricing strategies at professional services firms. New pricing models are even taking hold at consulting firms (see "Cheaper Advice"). Among the areas offering new options on fees:

1. Recruiters. Executive headhunters typically get paid either on contingency after a search is complete or by retainer (dividing their 90-day fee into thirds, for example). But when Marc Roberts founded Search Support Group 15 years ago to provide research services to headhunters and in-house recruiters, he adopted an hourly pay model. Now the roughly $1 million business does complete executive searches using the same model, charging $125 an hour. That structure is helping the firm thrive in this environment, says Roberts, because "a lot of clients are turned off by the idea of paying huge sums up front." Even the big search firms "are showing some flexibility over their rates," says human resources consultant Patricia Hunt Sinacole, since "a lot of small and midsize companies can't lay out those huge retainers."

2. Lawyers. "In the legal profession, during every tough economic time, clients rise up and demand a fixed price," says Baker. Historically, small firms have heeded the complaints about the "billable hour," but only when their clients were slashing legal budgets. When former technology-firm CFO Christopher Marston founded Exemplar Law Partners in 2005, though, he decided the firm would "absolutely not bill by the hour," based on his experience as a consumer. Bartlit Beck, a top litigation boutique, is taking the same flat-fee approach. Attorney Jay Shepard, whose small firm abolished the billable hour in 2006, estimates that clients pay, on average, about 25% less than they would if he billed them by the hour — and his revenues have tripled since the change.

3. Accountants. While "CPAs like the billable hour because it can be measured," a growing number are switching to fixed-price services, says Baker, a KPMG veteran who ran his own accounting firm for 15 years and never used timesheets. In 2007, Kennedy & Coe, one of the country's 100 biggest accounting firms, switched to fixed-price agreements, and smaller firms, including Snyder & Co., are following suit. So far, Baker estimates, about 7% of the country's CPA firms have given up the hourly meter. "CPAs don't sell time," he argues. "They sell intellectual capital."


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