Excuse the salacious title, it’s not what you think. This past week I received two more emails with questions about timesheets, so All About T[imesheets] & A[nswers] seemed like a catchy title we could remember and refer back to often.
We have a lot of excellent resources on this issue throughout this Web site, so I thought it might be helpful to summarize our best ones in a single post, as well as answering the two emails.
There’s no shortcut through this topic, which is precisely why most firms haven’t ditched their timesheets yet. It requires that you take the time to read, think, innovate, and creatively apply the replacements for timesheets.
There’s nothing easy about any of this folks. We are very up-front about the commitment and courage it takes to make this change. If it were easy, more firms would have done it by now. But can you name anything worthwhile that is easy?
Let’s start with the two emails I received, because the first one asks a question that we have not dealt with as of yet. It comes from Carol, a CFO in an advertising agency:
Hello Ron,
You and I have met a couple different times over the last few years at 4A’s seminars. I’ve always been intrigued and inspired by what you have to say and try to implement a value mindset in our estimating and billing practices.
The one area that has always been a hard pill to swallow has been the ‘no timesheet’ issue. Not only does this practice allow for us to gage how long it takes to get something done, it allows us to predict staffing needs, inefficiencies, and most important for the purpose of my reaching out to you now, it allows us to record a WIP accrual every month of time incurred, not yet billed = revenue earned. The majority of our projects are just that, projects, rather than monthly ‘retainers’ with a fixed fee.
This may be a very naïve question, but if you could shed some light on it, it may be a life-changing event at this agency. The question is: If we don’t have reports that tell us how many hours have been worked on any given job so we know what to accrue for, (because we’ve abandoned timesheet entry) how would we determine the revenue accrual each month? Any alternative we seem to come up with only creates much more work for the finance team and seems to produce very guesstimated numbers at best.
So there is my quandary. Or at least one of them, I should say. Is there any knowledge you could share with me that might point me in the right direction and further my cause down the road to total Value compensation?
I so look forward to hearing from you and thank you for your time.
All the best,
Carol
Most of these questions, especially regarding forecasting “staffing” needs and “inefficiencies” are answered in the resources below.
The question we haven’t dealt with is how to book revenue without timesheets. As you know, timesheets are used for WIP [Work In Progress] reports, which is how most firms accrue their revenue.
Of course, do we really think that just because a firm “spends time” working on a project that it has earned revenue? Is the timesheet really the best measure of that process?
A better method is the percentage of completion accounting method. If a project can be broken down into milestones, you can then estimate what percentage of the job is completed at the end of any one accounting period. Rather than being based on time, you are basing it on the actual work that needs to be performed.
I’d love to hear how some of our Trailblazers are handling this, especially firms like Mark Bailey’s that do audits that may overlap between two years.
In any event, we at VeraSage are far more concerned with establishing an external price—commensurate with value. How you account for that internally, I believe, can be established utilizing good accounting principles on a consistent basis.
The second email is from Toby, a CFO for an engineering firm:
Ron,
I have been reading your pamphlets and find them to provide an excellent solution for changing the way Professional Service firms operate.
I have some questions:
I am the CFO at an Engineering Service firm. In our case many of the “jobs” are unique to each client. Do you have any examples of how this type of firm can apply the value pricing concept? Would we still use Fixed Price Agreements?
Also, I noticed that a “calculated price” based on “billable” rate assumptions was used by several of the examples you cite. It seems there can still be a value in keeping a billable rate handy. Am I missing something? Would it be reasonable to use the “billable” rate per person in arriving at the FPA amount?
Finally, wouldn’t we still need to report time (at actual paid rates) in order to measure the profitability of each client? (We would not be using a billable rate.) This would allow us to have information for use in renewal of the FPA, or give information as we price FPAs for new clients.
Any guidance would be helpful.
Thanks in advance.
Toby
Here’s my reply, which has been expanded upon for purposes of this post:
Dear Toby,
Value Pricing is ideal for unique jobs, since value is subjective. A pricer’s dream is to charge a price commensurate with each customer’s perception and actual value received—like at an auction.
It’s known as first-degree price discrimination, which is very difficult for most businesses to implement, but Professional Knowledge Firms can get closer to it since they meet with customer individually, especially since so many projects are customized and unique for each customer.
Advertising agencies are very similar to engineering firms, since their jobs are also very unique to each customer, and we have had ad agencies that have adopted Value Pricing (VP) and ditched timesheets. Our recent Trailblazer ad agency Fletcher Martin is one example.
See our Trailblazers section of the Web site for case studies from firms across the Professional Knowledge Firm (PKF) sector who have made the transition.
We don’t advocate a “calculated price” based on a billable rate, since that is cost-plus pricing. Of course, many people will compare a value price to a “billable” rate, just to prove that VP is higher. Once you do this a few times, you realize time tracking is superfluous.
There is no value in keeping a billable rate handy, since it’s an arbitrary rate. This is not to say you don’t do cost accounting. But the important point is to do the cost accounting BEFORE you do the project, not during or after. Toyota does this quite successfully, it’s know price-led costing.
It’s also important to remember that a “billable rate” is not cost accounting, since it includes a profit margin. No cost accounting theory that I know of allocates desired profit, just costs. To be true cost accounting, you must remove the built-in profit from the hourly rate.
As to measuring profitability of each client, there are other ways to do this without timesheets. After Action Reviews, and project management (which you engineers are excellent at, far better than the average CPA or attorney), are two such methods.
What Replaces Timesheets?
Here is a list of what replaces timesheets, based upon the empirical evidence from firms that have made the transition:
Price-led costing
Project management
Key Predictive (not performance) Indicators
After Action Reviews
Before Action Reviews
Fixed Price Agreements, Change Orders
Chief Value Officer and/or a Pricing Cartel
The following is a partial list of resources dealing with each of the above.
Ed Kless’ Cosmo Quiz to determine if your firm is truly Value Pricing.
My book, Pricing on Purpose, also explores pricing cartels and the successful characteristics of a CVO.
If this is so rational, why haven’t more firms done it?
This is a great question, one which we at VeraSage have spent a lot of time trying to answer and understand. Here are some thoughts on why more firms haven’t trashed timesheets.
We believe if you understand “why” to do something, the “how” becomes much easier—merely the plumbing. Since there’s no way to implement a bad idea, the “why” is critical.
I know, this is overwhelming. But think of it this way: All you have to do is read it and implement it. We’ve done most of the hard thinking for you.
I will leave you with this analogy. Trashing the timesheet is a true revolution, perhaps not as dramatic as the signing of the Declaration of Independence, but a difficult objective to achieve across all PKF sectors nonetheless.
In his book, Peter Block describes the six questions that are always asked when people are confronted with significant change:
How do you do it?
How long will it take?
How much does it cost?
How do you get those [other] people to change? [we get this all the time: I’m all for this, but my partner(s) won’t go for it].
How do we measure it?
How have other people done it successfully?
How would Thomas Jefferson have answered these six questions?
I don’t know.
I don’t know.
Possibly your life.
I don’t know.
I don’t think you can measure Life, Liberty, and the Pursuit of Happiness.
No country has ever done it successfully the way we are proposing. Sign here.
Block suggests two better starting questions:
What [type of future] do we want to create together?
What is the price [we are] willing to pay to achieve it?
It is simply impossible to know how to do something until you attempt it. It is the leap, not the look, that generates the indispensable understanding and the necessary knowledge to generate wealth.
I hope you find this list useful, refer to it often, share it with others and most importantly, implement the ideas as hundreds of other firms are doing.
One of the great things about facilitating learning sessions is that often times the teacher gets to become the student.
Such was the case a month ago when while talking about After Action Reviews, I had the pleasure of having a former officer of the US Army school me and the rest of the class on the way it is done. He made a few important points:
There are two type of AARs, formal and informal. The latter are conducted on just about everything including the changing of the toilet paper in the latrine. The former are reserved for the conclusion of a longer engagement or training session.
At AARs all personnel remove their hats. This signifies that in the AAR there is no rank. Insubordination is not possible.
While there is no rank, junior ranks are encouraged to speak first. Often times they are the ones who see the problems and therefore possible solutions more clearly.
Two types of tasks can result from an AAR. The first type is an immediate fix to a current problem; the second is a possible fix to insure the problem does not reoccur.
Finally, as a treat to all you hard core VeraSagers out there, he provided me with TC25-20, the US Army’s field manual for conducting AARs.
Bill Sheridan, E Communications Manager/Editor at the Maryland Association of CPAs, interviewed me briefly during the Maryland Business and Accounting Expo back in June for a podcast about Value Pricing.
The podcast is 5 minutes in length and you can listen here.
Also, if you’re interested in subscribing to the Maryland Association’s podcasts, you can do so by searching for “CPA Spotlight” in iTunes, or by using its RSS feed.
One minor correction: at the end Bill mentions my most recent book as The Firm of the Future, but I’ve published three books since then, all of which can be found here, including the three free ACCA books towards the bottom of the page.
A participant at a recent session of mine turned me on to TED, a Web site about ideas. It is great stuff.
One of the presentations was on Photosynth, a Microsoft Labs program which creates hyperlinks between photos thereby creating a 3D image. This got me to thinking, what if we could do this with tacit knowledge.
Take a look the video below and pay careful attention to the last few minutes. Now imagine instead of photos the links were the tacit knowledge of the people in your firm!
Drew from Gardenville, Nevada, is a sole proprietor CPA who attended our Sole Proprietor Retreat a couple of years ago with Dan Morris and Daryl Golemb.
He’s been implementing Value Pricing and ditched timesheets ever since. He recently sent me this update on his progress to date. I especially enjoyed the story about the litigation and the peer reviewer:
Was in a deposition last Friday. The grilling attorney from the other side held out the four trust returns (all were prepared post Baker seminars/books) I had prepared—with the invoices on top. He asked me to justify the bills—I said I billed based on value and that I estimate most return fees prior to preparation.
He pressed me re the bill re our hourly rates. I said something re that not being relevant (I’ll have to read the deposition to see exactly what I said).
He dropped the line of questioning at that point.
At the end of the depo the attorney for my client asked me if I was available for more forensic and testimony work. I guess I did okay.
More…
A recent new client...a good ole local Nevadan...signed an FPA [Fixed Price Agreement]...$2,000 down...$1200 per month...he loves me.
Also…
I need to get back and review what I’m doing...I’m busier than hell...I know I could be more productive...BUT...I AM up 20% from $460k in 2006. 2007 was $550k plus...and 2008—I should hit $500k in a few weeks, and approach $700k by end of 2008.
Staff is starting to approach work in FPA mode which is nice.
I still need to lose a bunch of clients...and become Daryl [Golemb]. [Meaning Drew wants far fewer customers in the long run].
Oh...going through a peer review. The reviewer wanted time records. I told him my time was not totally documented, but other team members were. Mentioned value billing and you in my email to him. He responded, said his firm tried the Baker stuff and then something re old dogs, etc.
Hope you are doing great...sorry I missed you and Mr. Morris at Tahoe just recently, I’m a bit buried…
A recent story in CRN about non-compete agreements is a classic example of poor thinking. The story laments how both employer and employees feel used screwed by the other.
This is just another example of the continued collective denial of the knowledge worker economy. In the 1950s Peter Drucker coined the term knowledge worker. Later in his writing he opined, “In a knowledge society the most probable assumption for an organization to make is that they need the knowledge workers far more than the knowledge workers need them.”
We must all embrace this statement and begin to create organizations for which people want to work. You are not going to do that be creating rock solid non-competes. Stop thinking, “How do we get them to stay?” and start thinking, “What do we do to inspire them to want to stay?”
After using it for a few months and have after action reviews regarding it, Ron came up with a great idea — add the ability of the faciliator to evaluate the participants. So, that is what we have done. We have added a question at the end asking if the participant would want the facilitator to provide feedback.
If the class is small enough (I would think 20 or fewer) the facilitator would email a few sentences to those willing to receive feedback. The facilitator would take class participation and the intellectual capital growth displayed on the evaluation itself into account. If the class were large or of very brief duration (one hour or less) the facilitator would provide the entire class with an evaluation of the class as a whole.
Hat tip to Ed Kless for turning me on to Shelfari, a resource that allows readers to share, discuss, rate, tag, and organize books onto your own bookshelf.
It’s like standing in front of someone’s bookshelf in their office. If you are what you read, then your bookshelf can tell others a lot about you.
Since we are asked all the time what books we would recommend, Shelfari is a dynamic way you can keep up-to-date with what we are reading. If you find a book that looks interesting on someone’s shelf, it’s very easy to put it up on yours.
You will find an example of my shelf under our Resources, Recommended Reading section.
This displays what I’m currently reading, as well as my all-time best business books. If you scroll over the title, my review pops up, along with my 1-5 star rating.
If you want more information, visit my shelf here. Below the shelf you will find many tags, sorted by topic—history, business, politics, economics, ethics, price theory, etc.
If you click on the “bbb” tag, you will find my all-time top 100 business books, though there are more than 100.
You will also see the “top ten business books” tag, which contains Baker’s dozen—thirteen of my top business books of all time.
If you want to establish your own shelf, you will have to sign in with a password. If you do, then you can request to become friends of people who you share a common reading interest.
BEW was founded by Lee B. Salz to bring together a community of business experts comprised of best-selling authors, award-winning speakers, and business gurus, designed to share their secrets of success.
I was honored when Lee invited me to participate. The Webinars are designed for a generic business audience, not just professional firms; the type of program professionals could recommend their business customers attend.
I received the following email from James Franks, a criminal defense attorney, in response to my series of articles in The Complete Lawyer:
I just read your article regarding who is in charge of value in your firm. The article is brilliant. I know because I’ve been saying these things to my fellow attorneys for years. I am senior in a two person firm. We practice only in Criminal Defense and Involuntary Psychiatric and Drug & Alcohol Commitments, so it is easier for us to follow your advice because we tend to do much the same work on a relatively regular cycle and so can estimate the amount of time we will spend on a particular matter.
I set my fees by determining two things: 1) What is my work on a particular case going to be worth to a client (or client’s family)? 2) What is the work worth to me in terms of cost plus profit margin? I determine the first by putting myself in the client’s shoes, e.g. what would it be worth to me to possibly avoid spending the next five years in prison. This starts out a trial & error, but becomes second nature. I only determine the second to make sure I am not taking a case which will lose me money. I determine the second by gauging the amount of time I should spend on the matter, much as a mechanic used their time book to determine how long it should take to replace a bumper on a Toyota. Again, it starts out a trial & error, then becomes second nature. I then quote the client a flat fee which is the HIGHER of “worth to them”, and “worth to me”. I quote the “Worth to me” when it is higher because occasionally I might miscalculate what a matter is worth to the Client, i.e. they might pay more than I expect. The Client, as you said, does not care what the costs are to you, or, frankly, how many hours you are going to spend.
I require my fees be paid in full up front. Thus my client knows what their actual costs are, and I have no billing issues or collection issues. Most of the attorneys I know spend half of their time trying to COLLECT their fees.
Occasionally I underestimate the hours I will spend on a matter. I just adjust the next time a similar case comes to me. A very inexpensive lesson.
I’ve also printed out two other articles by you re: hourly billing. You’re ahead of the curve.
Hourly billing is a dinosaur. But lawyers who have been using it for years have difficulty burying it. Maybe an asteroid would help.
Notice how he does his cost-accounting up-front, before quoting a price to the customer. This is critical in Value Pricing, since price drives costs, not the other way around.
I also believe even if you’re not doing work that is routine on a regular cycle, there are still ways to scope and phase this work and provide a Value Price. Chris Marston, CEO from Exemplar Law Partners, has an excellent approach explained here.
Thanks James, I appreciate the feedback. An Asteroid indeed.
A couple of months ago, we explained how sellers almost always and everywhere change pricing strategies, not buyers.
Add this story from The Economist June 28, 2008 issue to the examples cited. Millions of East Asians, like Americans, are addicted to online, “massive mutiplayer” video games.
Unlike in America, however, the Asian business model—another term for pricing strategy—is not to sell shrink-wrapped video games in retail outlets. Instead, they give away the software for free, while earning revenue from micropayments—small payments made by the more devoted players to purchase extras for their in-game characters, from weapons to haircuts.
Electronic Arts is now copying this pricing strategy with its “Battlefield Heroes” online game, which it also hopes to earn revenue from in-game advertising and the sale of character upgrades. Micropayments are also a part of Second Life as well as other social networking sites.
One interesting benefit of this business model is it takes away the worry about software piracy. In fact, the more people who download the game and play, the better.
Just another example of sellers innovating new pricing strategies. Notice they didn’t ask their customers if they could switch to this model; they just did it and allowed people to vote with their pocketbooks.
I wish PKFs would apply the same innovation and experimentation in moving away from the billable hour.
Michael Stewart, a member of one of our Trailblazer firms, sent me this email last month:
Hi Ron,
You’ll find a more eloquent and concise way of putting this I’m sure.
If firms have returned to timesheet because of scope creep...if you apply the same rationale in reverse, then firms would have abolished timesheet years ago because of write offs due to scope creep.
Ed Kless did suggest another way of putting it:
Some firms return to timesheet because they claim to experience scope creep. However, this is irrational because if that were the case then the converse would be true—they would have had to abandon timesheet when they experienced scope creep when originally tracking time.
Great points, no matter how you say it. The three defenses of timesheet are:
We need them for pricing
We need them for cost accounting, to determine if customers are profitable
We need them for measuring the productivity of our team members
We’ve destroyed each of these arguments, especially #1 and #3.
Yet #2 persists. But how many firms have fired a client because they are unprofitable? Very few. That’s because even small customers are profitable, which is why even Top 100 firms are doing $500 tax returns.
If a customer is unprofitable, you’re a lousy pricer and a timesheet isn’t going to help.
If you don’t scope a job properly up-front, a timesheet is only going to inform you after the damage has been done—like timing your cookies with your smoke alarm.
The other defense is we need to have timesheets to learn how long jobs take for the future. But then when we preach Value Pricing, people say each and every job is unique and can’t estimated in advance. Which is it?
The defenses of timesheets are simply illogical given what they are actually used for, which is pricing. Price based on value, and timesheets are superfluous.
I’ve known Ric Payne now for over a decade, and I consider him one of the towering intellectuals in the accounting profession. I’ve seen his ideas transform the practices of thousands of firms around the world, not to mention improve the quality of life for the practitioners themselves.
What I’ve always admired about Ric is that his content is empirically based on firms getting results, not the usual management fad of the month one sees from many consultants to the profession. Even when Ric and I disagree—as with our infamous debate about the necessity of timesheets—I still end up learning an enormous amount from him.
I highly recommend Principa’s programs to any professional who wishes to thrive in the future while bettering the profession for posterity. Principa does this by helping firms move up the Value Curve by offering business advisory services to their customers, as well as providing the tools and resources to do this and much more.
Ric has a new course he is offering in six locations throughout California, Oregon, Washington and Vancouver, Canada: Build a Great Firm in Tough Times. Ric describes the course this way:
The essence of the program is that difficult economic times present a great opportunity for business advisers to help clients who have basically “good” businesses secure a sustainable competitive advantage by “fine tuning” their financial and people management processes, customer & vendor relationships, pricing and product selection strategies.
Ric has promised he won’t be preaching the value of timesheets, nor the ethics of hourly billing.
For more information, visit Principa’s Web site here.
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