Daniel Morris: Qualesit
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Evil Pricing System Discovered:

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Hour-by-Hour, Minute-by-Minute; You’re Screwed

No one appreciates a “Surprise” on his or her invoices from “any” Service Provider. Recently, on behalf of my customer I experienced the “Unabomber-Envelope” of invoices. 1

A little background, as my Customer’s Agent, I facilitated contracting a third-party business expert to design and help implement a business program. The third-party was referred by a trusted business resource and after being interviewed (live and digital), presented themselves as qualified, caring, and reasonably priced (albeit slightly more expensive than alternatives). My customer and I had received and approved a fixed-price cost proposal for annual services at which point the invoice was paid and services retained.

There were some initial hiccups as the service provider was slower to deliver some intermediary deliverables. What was intended as a 45-Day setup and implantation expanded to about 120-Days? Needless to say, my customer and I were not pleased, however, there were aspects that were outside the direct control of the service provider and the project moved forward.

Fast-Forward; 180 days and my customer continues to be less than thrilled with the service they’ve received from the contracted “Business Expert” and sought advice from me about their options. Ultimately, the time to make a decision about the transfer of the Project-Management duties arrives and I inform the “Business Expert” of their termination.

Justin Lynham  https://www.flickr.com/photos/sadmafioso/ Listen carefully...Of course there is major “Shock” as the original service provider (“Business Expert”) had believed that all was well with this business relationship. Of course the “relationship” has been tenuous from the beginning and I had, in fact, advised my referral source of this pending firestorm and had expressed to the “Business Expert” that the Customer was not happy… Deaf ears followed. 2

On the evening of informing the “Business Expert” that his services were being replaced, he shared that a tremendous amount of money for services rendered that were never invoiced and thus not paid would “still” be owed. I, of course, inquired how could this be since we had been quoted a fixed-price that to my understanding was for the first year-of-service.

Regardless of price, we have an obligation to deliver a “Quality Service” that is so valued by our customers that they are willing to pay us a profit

The service provider explained that they record their time (e.g. time and billing) and their “Excess-Project-Value” based upon time efforts, is recorded and collected into a customer “Suspense Account” where it is allowed to grow unrestrained. The pricing strategy he finally explains are the prices based upon market-based pricing which frequently is above the standard hourly based pricing matrix (he relies upon a long-term relationship where future work priced above an effective rate of “X” hours is used to reduce the cumulative over-budget time charges from previous work) Of course my Customer and I were never aware of this pricing methodology (hourly based billing without restraint) while my Customer and I understood we were proceeding via a project-based pricing proposal; we later discover it was never really project pricing. Needless to say, we’re very disappointed.

Now, anyone with any experience with invoicing time and billing systems understands that unbilled hours are captured by the system and at any moment the system should be able to provide a report of open time charges. When I pressed for this report documentation, I was told that he would have to program the “Report” since no one had ever asked for such a document (the insinuation was that this was the first time ever that a customer had terminated service with an “open” balance) before. I push further for an answer since I couldn’t envision the amount of hours associated with his “claimed balance”. In the end, I never received any details or report documentation and his final comment was he wasn’t interested in spending hours to develop a report unless the court required it; at which point he would comply.

My Goal is to Provide the Best Value for my Customers

I price my professional services using the subjective theory of Value. Sometimes I misjudge the commitment necessary to deliver the services contracted, but I don’t price by the hour; the efforts don’t matter other than opportunity costs and the understanding that some services are inherently more valuable than others. As a businessman, it is my responsibility to seek opportunities that improve my chances of better revenue rather than reduced revenue for my Firm Morris+D’Angleo and for those who retain my professional services. Regardless of price, we have an obligation to deliver a “Quality Service” that is so valued by our customers that they are willing to pay us a profit (thank you, Stanley Marcus for this concept) 3.

It is appalling that a business would present project-based pricing for their external deliverables while secretly recording time-based efforts and accumulating an unknown “theoretical” customer liability without informing the customer that this was happening. I would have never accepted or advised my customer to accept a pricing methodology of “Fixed-Price Unless Hours-Are-More” model. This shifts 100% of the risk to the customer — In an underhanded (dishonest) way.

In a traditional Time-Based model, the customer is aware and knows that efforts expanded equals higher invoices (costs). This could be why some people detest their lawyers. The business culture many Lawyers still follow allows for the attaching of minutes and hours to their billing systems and invoices. Customers are often surprised at the time charges and lawyers are defending for their efforts. This has never been a good situation (old and tired business model).

In a traditional Time-Based model, the customer is aware and knows that efforts expanded equals higher invoices (costs).

Surprise; Surprise…

dan-morris_squarespot_blog_truthI have never experienced a Business Service Provider commit to a fixed-price-agreement while accumulating a pool of over/under actual time-based charges only to share this information at their termination. This surprise-invoicing model is bad for customers and bad for any business.

I’m guessing the report details don’t exist or he would have quickly provided it. If the service provider in question has a proprietary system that doesn’t generate a report, this is a leading indicator of a poor quality system since these types of reports have been available since… MSDOS (Microsoft DOS operating system)… I Don’t Get It!

Many Lessons to be Learned:

Hindsight is most often 20/20 and this experience is no different as I reflect upon them.

  • Accountability
  • Improved Customer-Side Payment
  • Invoicing Accountability
  • Pricing Disclosures with terms to avoid hidden charges
  • Improved Due Diligence on new service providers
  • Finally and unfortunately, diminished belief in the professionalism by many of our colleagues

Ultimately there will be a conclusion to this over time; currently, it’s unfortunate that we continue to proceed in a difficult, confrontational way when a simple, open and transparent and easy way is right in front of us.

Time to live, learn and move on…

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  1. Photos: Furrowed, Tom Waterhouse and Feature Image: Mask, Mike T via Flicr.com

  2. Photo: Listen carefully, Justin Lynham via Flickr.com

  3. Harold Stanley Marcus, was an early president (1950–1972) and later chairman of the board (1972–1976) of the luxury retailer Neiman Marcus in Dallas, Texas via Wikapedia

  4. Photo: Cupcake Tray, Thomas Hawk via Flickr.com, Instagram: @ThomasHawk

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Dan Morris is a founder of VeraSage Institute, a think tank dedicated to promulgating and teaching Value Pricing, Customer Economics, and Human Capital Development to professionals and businesses around the world.

Dan presents frequently at national and regional conferences.

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