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.