An Essay on Timesheets
Paul Kennedy, O’Byrne and Kennedy, Great Britain
I write as reformed sinner.
Once, not only did I believe that a firm could not be managed without timesheets but thought our profession privileged to have such important information!
I now write with all the vile and evangelical passion of a reformed sinner. My conversion probably went through various stages. Not unlike the development of mankind from Neanderthal to modern man.
The five stages of an accountant
- “We need timesheets to price and to monitor team performance otherwise we wouldn’t make any money”
- “Timesheets are not relevant to pricing but they are an essential tool to monitor job and client profitability and team performance”
- “Timesheets are not the only way of monitoring client, job and team performance, but are still relevant and they don’t do any harm”
- “Timesheets are not the only way of monitoring client, job and team performance, are not relevant, but they don’t do any harm”
- “Timesheets are dangerous and lead to massive sub-optimization but how do I run a business without them?”
I now run an accounting practice without timesheets and I am so glad I found a way to do it
Any reader who thinks that price is in any way related to cost needs to find a more basic article to read. This essay addresses readers who are at point 2 or beyond!
Our Focus Determines Our Destiny
If timesheet measurements were a small part of an overall Management Information System then their impact would not be so insidious. The fact is they are the main (only?) tool for managing accounting practices. The problem with this is that they focus our attention on the wrong things––and what we focus on is what we get.
Take the true story of the supermarket cashier. A customer at a supermarket asks the cashier if he could help him pack his shopping in his bags. The cashier just shook his head and kept on scanning the goods and passing them along the conveyor. Only after scanning the last item and ringing up the till did the cashier turn to help the customer, who by this time was swamped with shopping. The cashier apologized for not helping before and explained that the management measured his scanning speed against benchmarks! This story illustrates the dangers of measuring the wrong things. What the supermarket really wanted was happy customers who kept coming back. By measuring productivity they unwittingly cultivated a behavior that was inconsistent with this main aim. Timesheet metrics do the same thing in our profession.
Metrics must be aligned to our main aim. If accountants typically pursued a cost leadership strategy (Porter) or a operational excellence model (Treacy & Wiersema) than cost related, short term resource allocation KPIs like yield and productivity may be more important metrics in an overall MIS dashboard (although only partly as every organization exists to create value outside of itself to quote Drucker); but accountants are not these sort of businesses or shouldn’t be!
Accountants are in a mature, fragmented industry and a more likely appropriate strategy is a differentiation strategy through customer intimacy. Management and management metrics therefore need to focus on the customer view of the business.
Profits come from our ability to create value for our clients and from our ability to capture some of that value (and of course risk). We create value by delivering benefits that satisfy their needs. We capture that value by pricing those benefits over the resource costs of creating those benefits. Our long-term profitability will therefore depend on:
- Our ability to understand our target customers’ needs
- Our ability to target those customers most likely to value those things we can do well (customer segment selection and selection criteria within segment)
- Product/Service design and mix
- Our ability to develop our clients needs in their minds (selling)
- Our ability to generate and convert leads of the type we want
- Our ability to value price our services
- Our ability to select and manage appropriate intellectual capital (mainly people)
If timesheets were part of a range of feedback metrics covering all the points above, and the information was properly put in context of the main aim of the firm, then arguably the data could contribute to the overall view. However, in many accounting practices they are the dominant (sometimes only) feedback system and are not put into any proper context. As a result they lead to behaviors that contradict the firm’s main aim (not that many firms have a consensus as to what their main aim is!)
For the purposes of this document let’s assume the firm’s main aim is long term profitability and wish to pursue a customer intimacy strategy.
Ironically the first problem lies with our professions failure to understand all the dimensions of profitability. You cannot maximize profits without asking the question “Over what period of time?” If you wanted to maximize profits during the current hour you should probably not be reading this essay! The fact is long term profitability requires investment. Investment in fixed and current assets but also intangible assets including relationship capital, structural capital and human capital. These intellectual capital investments are particularly significant to the knowledge economy and to accounting firms.
Timesheet data gives us crude (some would say inaccurate!) data about productivity, yields and recovery rates. Problems are:
- They measure quantity of time spent not quality
- Assumes time spent is a cost not an investment
- Does not consider longer term profitability issues, lifetime value of a customer (see Frederick Reichheld’s The Loyalty Effect)
Not all hours are equal
Take the example of accountant a and b in the example attached. (Figure 1) Accountant a would have performed well by the traditional way of measuring performance. The average yield per hour was above target with a recovery rate in excess of 1 (1.05).
Accountant b by contrast wasn’t watching the timesheet reports. He was thinking about the client. He recognized client expectations could be greatly exceeded if he put some additional thought (and in this case some extra hours) into the job. As a result the job added value to the client in such a way that the client became a “raving fan”. The client’s trust was enhanced, his price sensitivity eased and he was more willing to spend more money with his accountant. Job 2 is meant to represent the long-term numbers for this client.
In this example accountant b put additional work into delighting the customer when he spotted the opportunity. The question is had he been looking at his timesheets would he have done so? Would he have done so had he had to explain the recovery rate to his boss?
Adding additional value doesn’t always mean doing more hours. Indeed the quality of the hours is what counts not the quantity. However client relationships do need investment especially in the early days of the relationship when trust is being established. Timesheets militate against such investments because time is seen as a cost not an investment. The long-term benefits of such investments are represented in job 2 ET seq. By focusing on client value and not on short-term profitability metrics, accountant b became more profitable in the longer term. Long-term profits will only come from focusing on client value.
In the example above the additional work is reflected in a higher rate of productivity. If productivity was already very high this could not have happened. This is why we should always leave room in first class (Baker).
Also, the example should not be confused with discounting, scope creep or being cheap. If you have selected the right sort of customer who recognizes that he or she is paying a price premium in the first instance then all the more reason to do whatever it takes to delight the customer and keep them for the long term. It amazes me that firms are prepared to budget for “lost time” to win new clients and then think the marketing and selling to that client finishes once the lead becomes a client.
Strategy/Positioning is Everything.
The key point is delighting the customer must be our aim. In the long term this is what will lead to our profitability. Timesheets do not measure relationship capital or consider any long-term issues. By focusing our attention on short-term profitability they force us to behave in a way that contradicts our long-term aim.
Figure 2 represents the variability of the value clients receive over time compared to the relatively invariable nature of a typical accounts prices. Area x represents the additional value the client received, some of which could have been captured through higher prices. Area y represents the work where the client did not perceive any value and resents paying (whether articulated or not).
A number of observations on this diagram.
Do clients tolerate y because of x? In other words, do clients console themselves that in the long-term they get value, if not from every job? Or does y make the client very cautious about using the accountant? Does it make him query the price (which in reality is value) of future work? Does y erode the trusted status of the accountant?
Also, we must not ignore the impact pricing has on the perception of value effectively taking the perceived value line higher.
Figure 3 assumes that the firm’s pricing policy is aligned to the client’s perception of value received. By pricing to value in this way the firm and the client can choose whether the work in area y is done or not. If the price at which the client would value it is too low for the accountant to want to do it other options can be explored. It may be doing it at a loss is better than doing it at a profit because of the impact on long-term relationship capital. By constantly ensuring the client receives value––by working at understanding their needs whatever the cost––the firm builds trust, which translates into premium pricing, value added work, and a bigger share of the client’ wallet.
Once again we cannot ignore the importance of good strategy. Good positioning, client selection and value added product design all make the difference. If a firm took the whatever the cost approach to a mixed bag of clients some of whom are never going to value what their accountant does, then they are going to have problems. The fact is that most accounting firms are over servicing some clients (those they should not have as clients) and under servicing others. The cost of under servicing our better clients is huge and the rewards of addressing this are similarly huge. By focusing our attention on short-term profitability, timesheets systemically prevent us from tapping this potential.
Mismanaging with Timesheets
Take a typical write off report. For example this report tells you that you have worked 10 hours at an average hourly rate of £100 and your work in progress is £1,000. Let’s say your fixed fee was £800. What does this mean? Does it mean that £200 was lost on this job? I’m not sure it does, but in any event how would you use this information to manage the business? The answer in most cases I believe is that the accountant would charge a higher price to this client next time. But price has nothing to do with cost! If the client would pay the higher price then shouldn’t the higher price have been charged in the first place? Even for firms who have made the intellectual leap of fixing prices in advance and believe they are not using timesheets to price still are! Only this time they are making pricing adjustments on future contracts based on historical timesheet records. Accountants even use it for client self-selection. “We will put our price up on this job so that we will make a profit (as defined by them) and if client won’t pay then they can go somewhere else”. In this way the client is given the choice, which is better than not giving him the choice by after-the-event-billing. Clients must always be given the choice but this form of marginal pricing is an abdication of our responsibility to choose our market in the first place.
And maybe the price wasn’t wrong. Maybe the problem was our cost. But timesheet data looks at the effect of cost, not the cause. To control cost at source you will need to consider:
Product/ service selection and scope
Target market selection and scope
Customer selection criteria
Internal process design
Recruitment and training
What if the write off report shows time costs at £800 and the fee at £1,000? How would this information be used? Is the inclination to pat ourselves on the back and say “well done”? But what if the fee could be £3,000 not £1,000, based on client perception of value? In short timesheet feedback tends to punish operatives who think about long-term relationships and reward those who are failing to capture real value. Truly we are the profession intent on not making job losses while not making (to much) job profit.
The argument given is often, “Yes but how do know whether you are making money on a job/client?” Timesheet data doesn’t tell you. The problem is that accountants think it does and this is why they are so dangerous. The truth is that the typical job cost report does not measure profit (see Not all hours are equal above) but focusing on this false information we take decisions that take us further away from our objectives of higher real profitability.
Yet firms spend huge amounts on maintaining this irrelevant and misleading information! Software, time taken to do time recording, write offs, report production, erroneous decision making! That said, the real costs are performance sub-optimization, degraded team morale and strategic focus.
An alternative Value-Based Management System
Instead of looking at cost and time data at the end of a job, consider the following checklist: (see Checklist for Examining Closed Files)
- Did we add value with this job?
- How could we have added more value?
- Could we have captured more value through higher price?
- If we were doing this type of job again how would we do it?
- What are the implications for product/service design?
- Should we communicate the lessons on this job to our colleagues and how?
- How could we have enhanced our client’s perception of value?
- What other needs does this client have and are we addressing them?
- Did this job enhance our relationship with this client?
- What impact has this job had on developing our client’s trust in us?
- How would you rate our client’s price sensitivity before and after this job?
These questions force prompt action. Actions that are consistent with long-term profitability.
How to Run a Practice Without Timesheets and Live Happily Ever After
The practicalities of ditching timesheets include:
•How do we measure income WIP or prepaid income for the purposes of our monthly and annual practice accounts?
•How do we know how well our team members are performing
•How do we plan and monitor jobs
We have designed our own systems for doing these things. Our system also gives us a forward view of value creation and pricing.
The benefits of the way we work include:
•We have become a value focused business
•We price based on client perceptions of value (we have no choice!)
•We fix all prices and arrange standing order payments for invoices
•We no longer have damaging and time consuming price disputes
•We have prepaid income in excess of our work in progress
•We have no credit control function
•We have no timesheet management processes including:
•Timesheet completion and input
•No write off processes
•No after date invoicing processes (we do all our invoices at the outset of the contract)
•We have no timesheet software (we have our own value and job tracking software)
•We have a happier team
•We have happier, less price resistant clients
Change
Having moved from a timesheet/cost culture to a value culture I now wonder what stopped us from taking this step before. The answer I now confess was fear. Winning the intellectual argument may do it for some. But change is usually about emotion. To paraphrase Anthony Robbins “You intellectually know that chocolate cake is not good if you are trying to loose weight, but you will only stop eating it when you mix it with tuna casserole in your gut”. Ron Baker has started a revolution. The value based accounting firm has been born. The market place has been destabilized, the dominant business model challenged. Be afraid.