In February, US practice development guru Ron Baker urged participants at a Mercia Group conference to 'Burn your timesheets'. AccountingWEB members were quick to reply, prompting the following response from Baker himself.
Dear AccountingWEB.co.uk readers,
I was humbled to see that more than 2,400 of you read the article 'Burn your timesheets', with 12 comments posted in response. I didn't realize it was generating such a debate, and I feel I need to respond to both friends and sceptics regarding this important issue.
While I cannot adequately explain the philosophy of trashing timesheets in this short venue ' and why I think this is necessary for firms of the future ' I would like to reply to all those who took the time to comment.
The problem with timesheets is they measure the wrong things. Just because you can measure something doesn't mean you should. There is no such thing as a free statistic. I would rather have imprecise measurements of the right thing than precise measurements of the wrong thing. No customer buys time, and hence firms that keep timesheets have the mentality that that is what they sell.
The argument that timesheets are used for cost accounting is specious; they are used for pricing, and that link must be broken. No other company in the intellectual capital world ' from Microsoft to Oracle ' thinks it sells hours, and hence doesn't keep timesheets. If timesheets are such an effective cost accounting tool, why are we one of the few professions in the world that use them? The short answer is: Because they are so closely linked to our pricing.
Also, timesheets are a lagging indicator ' at best ' and don't measure the effectiveness of the firm in dealing with customers. I am proposing to replace timesheets with leading Key Performance Indicators (KPIs) that measure success the same way the customer measures success.
Let me be clear: I am not saying measurements are not important; I am saying measure the right things. There is an enormous difference between effectiveness and efficiency, the former being more important, in my opinion, than the latter. I'm sure the buggy whip manufacturers were models of efficiency. So what? What if you are efficient at doing the wrong things?
Let me briefly respond to each posting.
Richard Murphy commented: "Value pricing is good news, liberating, and a key component in modern practice management. But so too is good cost control. You need to know whether the "value" you sold was generated at a cost less than the sale price to determine whether you want to repeat the exercise. Which means timesheets have a critical role in the world of fixed value added pricing - because they provide the feed back loop to check that you got your judgement right."
Ron Baker: Richard, Most firms know their costs, which are fixed, and this is not what timesheets are being used for. They are being used to price, and once you break that link, you can scrap timesheets if you replace them with more meaningful measurements. Loss making is very rare in a professional firm. And, since there is a built-in profit in the hourly rate, that is not cost accounting. It is profit forecasting, and there's a big difference. In the real world, costs don't determine price; price determines what costs can be profitably invested in to generate an adequate return on investment.
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Nigel Harris said: "I know if I've made a profit when I compare my fee income and my expenditure, I don't need a time printout to tell me this... the WIP printout it to imply that my staff are more profitable running up non-chargeable time, because that doesn't get reflected in an under-recovery on a bill!!"
RB: Excellent points, but I do advocate getting rid of timesheets as a way to convert to Value Pricing ' and Fixed Price Agreements, Change Orders and up-front pricing ' quicker and more effectively.
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Daniel Clark: "I would contend that the article is talking about one part of the process - what value you bill. The other part of the process is understanding internally if 'what value you bill' is profitable or not and how productive your staff are." He then recommended "a good time-recording system".
RB: You are advocating measuring lagging indicators, and put productivity ahead of effectiveness. Productivity enhancements are not the answer to the profession's profitability problems. Capacity utilization rates have been between 60-75% since the dawn of time, whether a quill pen or a laptop is used. Focusing on pricing will lead to much greater profitability gains, and effectiveness measures ' utilizing leading KPIs ' will adequately determine team member performance. You are offering a buggy whip in an automotive world.
Adrian Pearson: "I am not convinced that timesheets are even a useful cost-control tool, as some of the other posts suggest. Your salary and overhead costs are fixed in the short to medium term. Allocating them to jobs based on hours spent is of no relevance."
RB: Bravo, and excellent points.
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Mark Lee commented that when he has lectured on the topic, few participants showed any enthusiasm for up-front pricing. However, tax practitioners who submitted their fixed-fee bills along with ready-to-sign tax returns enjoyed a noticeable boost to their cashflows.
RB: Every other business has to price up-front, even insurance companies that have no idea what their costs are before they set a premium for, say, disaster insurance. Just because most of the profession doesn't price up-front doesn't mean they aren't paying an enormous reverse risk premium for the privilege of dumping the risk of the transaction onto the customer. What do you buy as a consumer that you don't know the price before you buy? Would you buy any item under those conditions? If so, are you very comfortable when you do so? Would you fly an airline that priced at $4 per minute? The profession ignores these very basic laws of consumer psychology, price psychology, leverage, etc., at its peril.
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Jeremy Benjamin: "Like most of what gurus say, this is old stuff rehashed. He is just saying charge what the market will stand, not what it cost you plus a little extra."
RB: The point is not obvious, and what you say is not what I'm saying. I'm saying you price commensurate with value, not just what the market will bear (what's a market anyway? Only people buy things). Nor do I ignore competition. You must find ways to differentiate your firm from the competition if you want to charge premium prices. If everyone in the profession thinks they sell hours, how can I differentiate my firm from the firm down the street?
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Drew Edgar: "The sentiments are laudable. However, if there is ever a dispute and the matter goes to Court or arbitration they immediately look for time sheets and charging rates."
RB: Yes, you are correct, courts will look at timesheets. But they are starting to realize that if you have a Fixed Price Agreement, signed by the client before the work begins, that by definition is a fair price, and in the states' courts ' I can't speak for UK courts ' that will be accepted.
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Afzal Dossani: "I agree with Baker. Customers should be aware of how much each service will cost... However, to keep the customer job costing information, for statistical purposes and if necessary to justify renegotiation, we should maintain timesheets."
RB: I agree with most of what you say, except for renegotiations of price. These should be handled with Change Orders, which are negotiated up-front, before you do the work. Your arguments for timesheets are much weaker, and especially when you say to 'justify renegotiations.' I repeat: timesheets are used for pricing, not cost accounting, and this link must be broken. I know of no better way than to scrap them so firms no longer think about time when it comes to pricing. Furthermore, leading KPIs replace lagging timesheets as a measure of team member effectiveness.
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Jay Tanna: "I have always believed in Fixed Price Pricing. If you can't quote the price of a particular job then you are not fit to be in practice!"
RB: Bravo! You are right. If you can't quote a price up-front, maybe it's because you have no idea what you are doing and shouldn't be doing it in the first place.
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Malcolm Palmer: "I totally agree with value pricing but this doesn't mean we can get rid of the timesheet... If you cost every job out you learn from the successes and from the failures. To coin a phrase from Results Accountants who promote Ron Baker widely, "What you can measure, you can manage".
RB: Don't confuse timesheets with cost accounting, they are used for pricing. What you can measure you can manage may be true, to a point. But so what? That is a tautology, it doesn't tell us what we should measure. Why not replace timesheets with leading KPIs that measure the right things from the customer's definition of success, not ours? Ultimately, all profits come from customers, not cost accounting.
What do you replace timesheets with?
Daniel Clark commented from Softworld Accounting & Finance that most accountants still accepted the need for time sheets and they found the utilization statistics useful. I think the reasons those comments came across is because I did not spend any time explaining what timesheets would be replaced with. That will be taken up at the next conference this autumn.
I understand there are still sceptics, and I hope they will attend the Mercia conference this autumn where we will deal with these issues'and the objections'in great depth. If at the end of that day I cannot convince you to get rid of timesheets, then perhaps nothing will.
At least we are finally debating this important topic, and many firms are beginning to realize that:
1) customers don't like pricing by the hour;
2) maintaining timesheets glues in place that we sell nothing but time;
3) timesheets effect team member morale negatively, and basically send the message that the leadership of the firm doesn't trust its knowledge workers;
4) timesheets are a relic of a bygone era, utilized by factories for efficiency purposes, yet we live in an intellectual capital world that employs knowledge workers.
I hope to see you all this fall.
Ron Baker, Founder