Value Pricing & Timesheets are they compatible?
In recent years, there has been a solid movement in the professions, accounting, legal and others, to move away from the classic time based billing of customers to a value pricing model.
This makes perfect sense, and the arguments for it, which is not the subject of this article, are many and varied and also compelling. There is however a movement among the proponents of value pricing that this method cannot work in an environment of time recording or timesheets.
The hypothesis is that value pricing and timesheets are mutually exclusive. The objective of this article is to test this, and to offer a way forward that uses the best of both.
Timesheets & Time Based Invoicing
This method of running a professional firm is still by far the most widely used. It continues in use by the major accounting firms, most law firms and many others.
A key issue with it, particularly in the accounting profession, is that the data being used is largely inaccurate. In simple off the cuff surveys among professional accounting groups, the level of accuracy of the time recorded is claimed between 50% and 90%, with a good average being 70%. That is the accuracy of what has been recorded compared to what actually has occurred.
The reasons are many and varied and the list below is not exhaustive.
Time not charged to avoid exceeding a budget
Time charge arbitrarily to an entity to meet chargeable percentage requirements
Time not charged because it seemed to trivial or ‘not worth it’
Time not charged because the action was forgotten – usually with late entry timesheets
The approach leads to completely inaccurate time being recorded, and as a result of the rate multiplier, erroneous charges being created. This is compounded by the fact that Charge rates too are fairly arbitrary. Charge rates can be calculated using a simple ‘times three of salary divided by the annual available hours’, to very complex calculations, that to be perfectly honest are no more accurate!
Just because a partner or team member has a charge rate, this mere fact does not necessarily make them worth than amount. It may be a target, or an expectation, but does not determine value.
The inaccuracy of the charge rate (and this is clearly measurable by the write-offs so prevalent in the accounting profession) combined with the inaccuracy of the time measured makes for an interesting use of this method. Basically, many firms are just wasting enormous amounts of valuable time when invoicing chasing rainbows. Essentially and often expensive team members poring over inaccurate data!
The real charge rate is the amount the customer will bear (the value), divided by the number of hours worked to achieve the result.
In some strange way, this is what accountants have been doing for years. The work is performed using the largely discredited hourly billing of the charged time. This is suitably adjusted, and usually down from the standard or scale to a price that the customer will bear – the value.
As much of the work in an accounting firm has historically been repetitive, usually year on year, the ‘value’ deemed is often last year’s fee plus an inflationary percentage. As this is all usually done historically, there is often little the practitioner can do to improve or change this.
What is required is for the firm to consider what the work being performed consists of, what does this add to the customers business (if anything), and using a degree of subjectivity offer a price for the performance of the engagement. The agreed price with the customer forms part of the engagement, and includes dates, invoice and payment plans, and lists of who will be doing what and when.
The actual physical work still needs to be performed. Value Pricing does not abrogate the firm from doing the work. The objective of the engagement is not now charging as many hours to it as the price can bear, it is about getting the work done according to and on the dates of the agreed plan.
This is a key and fundamental change.
It is a given that business will only make profits when the outputs exceed the inputs. Simply, if the inputs on a job are greater than the output, that job will run at a loss. No amount of recording or not recording the time will change the result.
An extreme example but nonetheless will illustrate the point. Assume your team member A is paid £2,000 per month. If they work on a job for the whole month that only brings in £1,800, you have run at a loss.
The question is – can Value pricing and the keeping of time records co-exist? The author believes not only can they co-exist, the benefits derived from keeping these records exceeds the effort to do so.
Even in firms or departments of firms that have “ditched timesheets” there is more than conjectural evidence that records of activity – let’s call them timesheets - are being kept.
At a recent meeting on this topic with the managing partner of a top 100 firm, it was indicated that a certain new department had dispensed with keeping timesheets. The author postulated that even in this scenario, team members will keep details (timesheets) of what they are doing. Two weeks after the meeting the group was found to be doing just that – keeping time details.
What is not happening in these firms and department is they are not using these time records for invoicing or billing purposes. This is a win.
Best of Both Worlds
The best way forward is surely an inspired compromise. Firms will be well placed to move towards Value Pricing whilst keeping appropriate records of activity. It is far more important to know what has or has not been done on any project than to know the minutiae of recorded time. The value of time bears no relation to the completeness or not of the assignment, and merely supplies what has been charged. This needs to change.
Value Pricing works best on discreet and finite work, as encapsulated in a Job, Matter, Assignment or Project – the title is irrelevant. What is important is that the scope of what is to be done can be defined with a high degree of accuracy.
The customer is presented with a Value Priced fixed or agreed quote for a specific set of work to be performed and most importantly for a result to be delivered.
The completion of the steps in the process are recorded and possibly timed. The effort is toward the completion of the project and not the accumulation of ‘billable hours’. All of the hours will be billable, their rate will be determined by the fixed price.
The ‘old way’ has not worked – it has existed. Changing to a new paradigm whilst keeping a revision from the past in activity recording rather than time keeping, will free a firm from the shackles of the billable hour, yet retain a degree of control and oversight on the profitable completion of the relevant Jobs.