Rip up my timesheet? Are you nuts?
It’s a crazy, counterintuitive thought for most professionals out there. I know.
The other night at QuickBooks Connect I had the absolute pleasure of having dinner with a bunch of my colleagues plus none other than the value-pricing guru himself, Mr. Ron Baker. Not only was it an exceptionally interesting conversation but I was also able to reinforce a few thoughts that I had been on the fence about, namely, that timesheets have no use in business.
Throughout the past year, our firm has delved deeper and deeper into his value pricing model and we are completely sold on Ron’s philosophy. Value pricing and the elimination of timesheet in your business is a difficult premise to wrap your head around since as professionals we have been trained to do one thing very well: write down the time you spend on a client and then bill it out.
In a previous post, I wrote about why value pricing should be adopted instead of the billable hour. Ripping up your timesheet is the first step to properly employing value pricing and as Ron says, it takes a “real commitment." I can tell you firsthand that this is true and you can expect a lot of mistakes early in the going.
Our firm has ditched timesheets from the very start of the firm’s existence in mid 2013 because our focus is on value, not time, and as such, timesheets provide no useful metric to us.
Let’s look at a few arguments in favour of the ever so famous timesheet.
Argument: Timesheets help our business price our services. We wouldn’t be able to accurately price things without them.
Timesheets are in place to record the costs of your time. We then re-bill these “costs” to our customers by adding a specified profit margin. But, as Ron puts it, time is a constraint, not a cost. Every business on this planet must deal with this constraint, so why are professional service firms the only ones to bill it out?
There is absolutely no correlation between price and costs, so it is strange that we employ this pricing method to our services. The value of your services have absolutely nothing to do with its costs. The customer can care less if the cost of your service is $100 or $10,000—all they care about is the value they will get out of what you are providing and what the price of it will be. Your internal costs have no bearing on their decision.
Something that had been on my mind for some time now was just how accurately (or inaccurately) we have been pricing our services under value pricing. I asked Ron specifically about the fact that I felt like I was throwing a dart every time I tried to price things out. His response: “good.”
As he says best, pricing is an art, not a science and with experience, this skill improves. As an accountant, I (as well as most others) have been trained to scientifically calculate everything to the very last penny, and if we cannot calculate it, then we cannot guarantee its correctness. But some things, such as price, cannot be scientifically calculated, as value is completely subjective. Calculating our price based on hours is super simple, but figuring out the price of the value that you are creating for your customer is an exceptionally difficult thing to do.
As an example, let’s say a prospective client has a retail business with no inventory management system and as such no visibility into their inventory whatsoever. With the right system in place and with the proper reporting, they would be able to reduce their inventory costs by $200,000 per year. What do you think the value of this service would be worth to them? $10,000? $20,000? More? Less?
On the other hand, what if this system only took 10 hours to implement? Multiply that be an hourly rate of $250/hour and you would generate an invoice for $2,500.
The example above shows that it would be super simply to price something out based on our hours, but does that price capture the value of what we have created for this client? I would argue no and as such, we are leaving money on the table.
Figuring out the price of the value that you are creating is the hard part and this skill only improves with experience. Expect many mistakes at the beginning, but also expect to learn a lot about your business at the same time.
Argument: Timesheets are our project management tool. How else would we know if we spent more time on a project than we needed to?
Timesheets are backward-looking tools. We record our time and then at the end of the project we assess whether we spent too much time or too little time. At that point it’s too late. No other action can be taken to change the past.
Proper project management needs to be done looking forward, before the project even commences, by setting up milestones, targets and delivery dates.
If we scope the project carefully enough, as professionals, we should be able to reasonably estimate how long something will take us and this time can be budgeted in advance so that everything can be properly planned out. If a project takes you longer than expected, more times than most, it is because you haven’t scoped it properly or you haven’t done your homework with your client.
In fact, by eliminating timesheets, we are literally forced to get a much better understanding of the project that we need to undertake. If we are going to price something at the forefront, you better believe that you need to know exactly what you’re getting yourself into. On our end, we have stretched out our client onboarding process immensely in order to fully understand what is coming on board. From there, we can reasonably estimate how much time something will take.
Lastly, time is the wrong thing you want to measure to know if a project is successful or not. Traditionally, our measure of success for a project is if we were under budget on time spent. In reality, the only thing we should be measuring would be whether we have added to the success of our client’s business and whether we have ultimately added value. Recording your time spent is a useless metric in this sense. Use different KPI’s instead.
Argument: How else would we know whether we are making profit on a particular project?
We as professionals want to know that every single project that we bring on board has a specified profit margin. This I can comprehend. But cost accounting (ie. allocating the cost of your time) has no bearing in the calculation of profitability of individual projects because we have severed ties between time and price.
As these twocomponents are completely unrelated and because cost accounting is backwards looking, the only thing that really matters is whether we can attain the minimum price we would want on that particular engagement. Below that minimum price, we would refuse the engagement.
What is that minimum price? Again, this comes down to being an art, not a science. It is your price that will drive the costs in your business. Not the other way around.
Remember that we already know the costs of our business. Arbitrarily allocating these costs to individual projects does not provide our business with any useful insight. At the end of the day, what we must look at is whether our overall profitability is where we want it to be. If it isn’t, we are doing one of two things wrong: we either aren’t pricing high enough or we aren’t creating enough value to the customer.
Get comfortable with being uncomfortable
Ripping up your timesheet and employing value pricing is an extremely uncomfortable process. It has been a real journey on our end and we are discovering a ton about our business, but it is not without its difficulties.
If you do commit to ripping up your timesheet and focusing on value pricing then you will see that you will become obsessed with one thing and one thing only: creating the maximum amount of value possible for your customers. You will begin to see much deeper relationships forming with your customers. Your customers will start seeing that your entire firm’s existence revolves around creating success for their very business. Trust will grow, referrals will increase and you will enjoy stronger relationships with your clients.
Eliminating your timesheets is the first step to employing value pricing. It is uncomfortable. It is time for your practice to get comfortable with being uncomfortable. You won’t regret it.
About Xen Accounting
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