A Firm with No Timesheet: O’Byrne and Kennedy LLP
by Paul O’Byrne
We were frightened of trashing our timesheets. As a general practice working for owner-managed businesses, everyone in our practice of ten professionals had grown up with them; it was what people in practice did. Over the years we had developed very good patter explaining how time-cost billing worked, why it was best and—we were very good at this—why fixed prices were bad.
I had often told other accountants the single best investment we had made was our time and fees software. We even persuaded certain clients that they needed to record time, otherwise how could they know what the profitable jobs were, and who was and wasn’t pulling their weight?
So when first introduced to Ron Baker in March 2000, initially by reading his book Professional’s Guide to Value Pricing, and shortly afterwards hearing him speak at an event, I was deeply unsettled. He was very persuasive and made sense as he talked and described a world of fixed prices, guarantees and–horror of horrors—no timesheets. I read his book again and had the opportunity to discuss (argue, really) many of the points with him over the next couple of years (he is indubitably the world’s best replier to e-mails).
We didn’t see why we had to adopt everything he advocated. He seemed to be right about fixing prices in advance. We had long noticed clients’ resentment to the blank cheque approach of professional pricing, and started to introduce fixed prices and adapted his example Fixed Price Agreement (FPA). However, we still had timesheets and so could track the success of this experiment.
It took us time to even try FPAs, initially just using them on new clients or on one-off assignments. But once we committed to having them firm-wide, we had all but a handful of clients on them within a year. Some clients were somewhat suspicious of FPAs, partly as a result of our training them as to the benefits of time-cost billing. The overwhelming majority welcomed fixed prices for agreed assignments—and turnaround times. “About time, too” was the single most common reaction when we told them we were going to fix all these things in advance.
We had been using FPAs for around 18 months before we decided to discard timesheets. We had some successes but several failures—or losses—on jobs with FPAs. Being accountants and never wanting to take a loss on anything, we, of course, scrutinized the losses. We found three causes:
1. Outrageous optimism/myopia on our part.
2. Not holding clients to what they said they would do.
3. Scope creep, being of two types:
a) Misunderstanding the client expectations of what we were to do and then being made to do it; and
b) Blithely doing more than we contracted to perform.
Of course, the way we recognized our losses (especially the blithe ones) was by looking at our time records and wondering how on earth so much cost was on a job. The big revelation (“epiphany” in Baker-speak) was our abject disappointment that one particular “good job,” a £25,000 management advisory, training and accounts job, made a £2,000 loss.
Our post-mortem analysis here showed that willful scope creep (“this is such a profitable job, I’ll just do this one more thing”) poured time onto the job needlessly. This extra work did add value to the client, but we did not capture any of the value created by utilizing “Extra Work Orders,” our name for Baker’s Change Orders.
But even that did not cause the loss; it just stopped us making a profit. The root problem was that a qualified manager did work that a junior could and should have done. (This may never happen in your firm, but sometimes we mis-schedule, have insufficient resources of the right type, etc.) Thirty or forty hours were recorded on this job at £96 (don’t ask me why £96!) per hour that should have been less. Fact is, we do not actually pay our managers £96 per hour. The whole “loss” was spurious, just as Baker argues, because it included a “Desired Net Income” factor.
We made money on the job—of course we did—but the timesheets led us to believe otherwise.
Holding onto timesheets after introducing FPAs had led us to recognize scope creep—albeit after the fact—and to be attentive to clients’ expectations and their obligations to provide us with information. But it finally dawned on us that all of those things should be dealt with before the work was done. Timesheets were a crutch, but one that was holding us back.
We understood we should price independently of timesheets. What surprised us was that the timesheets did not help us with our profit forecasting or profit recognition. Maybe we were too analytical about this, but once FPAs were in place firm-wide we realized just how inadequate a measure of value timesheets were.
They were also inadequate measures of cost. Accountancy firms have fixed costs. Our task is to consider how to allocate the resources bought by those fixed costs. The introduction of FPAs taught us how to discuss value with clients for a given outcome.
We recognized that it was our task to design the cost structure to meet the price—the opposite of the “blank cheque” approach of hitherto.
The last possible reason for holding onto timesheets (odd that we so desperately wanted to hold onto them: nature abhors a vacuum?) was for work-in-progress valuations. Timesheets and time recording had given us something to fix on as the amount of value created in a given period, be it a day or a year. They gave a way of assessing work-in-progress at the month end, which we then adjusted for known write-downs (never write-ups, of course; timesheets don’t’ help capture the extra value you create).
We realized that we had to talk with our team about what work was going to be done, by whom, and when we could expect to complete it. Otherwise how could we be sure when to recognize profit? We went so far as to suggest that if we wanted to make life easy for ourselves, wouldn’t it be best if we could start and finish any given assignment within a calendar month, thus assisting profit recognition”? This, serendipitously, gives clients exactly what they want: predictable and (compared with the past) quicker turnaround times. So our firm decided to track the following KPIs:
Value expected to be created in the month;
Total contracts WIP at start and end of month;
Average turnaround time of jobs.
We were severely tempted to do more, but resisted. Now we do the timesheets in advance: “XYZ company audit to be finished this month? OK, let’s put the resources on it so by month end it is 100% complete.” Of course the more we do this, the more we recognize our work for clients as being the fulfillment of contracts, for which we require certain resources at certain times.
We learned form experience and mistakes somewhat slowly, but we are now so confident that we can plan our work and capacity sufficiently in advance, that we could abandon timesheets. In effect, we complete the timesheet before we do the work, and then use the turnaround time KPI to track—on a real-time and leading basis—our firm’s velocity. Thus from 1 July 2002 we became a firm of accountants not using timesheets for pricing, nor for project or team evaluation (not that we ever did, but we always thought we could).
We are now in a position where “no timesheets” attracts clients and prospective recruits (think about it!), and the partners, team members and bank manager love it. Our clients welcomed fixed prices so much that we arranged the payment terms so that we are paid almost entirely in advance. We now have negative lock up (20% - 73 days – of our annual income is prepaid) and at the start of the month the team agrees which jobs will be completed in the month and thus what income earned.
I know what you’ve read in this booklet sounds unsettling, even scary. I’ve been there, gone through it, and have now emerged on the other side. I had the benefit of Ron Baker constantly berating me for holding onto the antiquated timesheet, and we had some major arguments over this issue. Once he developed the KPIs presented in this booklet, we decided to take the leap of faith and abandon timesheets.
You now have the same opportunity. I have yet to meet an accountant who likes completing their timesheet. And since no customer buys time, and does not measure the success of their accountant based on time, why do we all continue to hold onto a practice that is not relevant to our success—and injurious to our relationships with our customers? I commend Ron Baker and his ideas to you. He has helped our firm with his insights, logic and passion. We could not be sure, in advance, that we were right to abandon timesheets, so to some extent we took a leap of faith. Not a very big leap, because we could always bring them back, but it was uncomfortable abandoning something everyone else was doing. Now we scoff at timesheet-padding scandals, we tell clients and referral sources that we don’t do timesheets, and we certainly tell recruitment agents and potential recruits.
We love not having timesheets and will never look back!