You May Be Value-Billing but Don’t Know It [VIDEO]
Here’s how to find out.
Don’t try to tell Terry Putney, CEO of Transition Advisors LLC, your firm isn’t ready for value billing. In this video clip, he answers: You’re already doing it; and you’re probably doing it wrong. We caught up with Putney at the CCH 2011 Users Conference.
See Ron Baker’s Comment below.
Putney
Putney has over 30 years experience in the CPA profession. For six years, he was Managing Director-Mergers and Acquisitions for RSM McGladrey, the fifth largest accounting firm nationally, and held several executive positions with its corporate parent. He structured and negotiated many transactions resulting in the acquisition of accounting and consulting firms ranging in size from sole proprietors to firms with hundreds of professionals and multi-state operations. Prior to joining McGladrey, he was the Managing Partner of Donnelly Meiners Jordan Kline, a 60 associate CPA firm in Kansas City.
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24 Responses to You May Be Value-Billing but Don’t Know It [VIDEO] (Subscribe)
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http://www.verasage.com
Firms may already be doing “value billing,” but since there is no right way to do the wrong thing, it doesn’t really matter.
Value billing is done in arrears, after the work has been performed. There is no correlation between time spent and the value created for the customer. Hence, no value billing method is really based on value; it’s based on labor costs, plus desired profit.
Value Pricing, on the other hand, is done BEFORE the work has been started, and is established commensurate with customer-perceived value.
There is an enormous difference between these methods, and the two should not be confused.
Firms need to stop value billing, and start Value Pricing.
http://www.thebusinessfox.com
Ron, absolutely right. Unfortunately, most accountants immediately undervalue because they fear clients resistance so they start out behind the 8-ball. Leaders need to teach the mindset of money before they value price. I can’t tell you how many CPA’s I talk to “write off” time or plan to ‘write off” time before they even start a project.
http://www.b1g1.com
Not surprisingly, Ron Baker has the distinction absolutely correct. And has he points out NO ‘value billing’ method is really based on value.
And you just have to love this comment from Ron: ‘… there is no right way to do the wrong thing’.
Value Pricing really starts by ditching the time sheets and having the guts to do it — to really let go at last of the most outdated, non-customer-focused and inappropriate method of doing anything of value yet devised.
In regards to Paul Dunns comment, “Value Pricing really starts by ditching the time sheets and having the guts to do it”. Our firm has switched to value pricing and it has worked wonders. We have not ditched the time sheets (as much as I hate them) so that we can continue to measure employee productivity and efficiency. How do you measure staffing requirements? If an employee works a few hours at night and some hours on weekends and they don’t toot their own horn, how would I ever know it is time to hire new staff. If we have extra staff but don’t see that two people are wasting half their day every day, I would never know we are overstaffed. We are using the time sheets to track efficiency and how our training programs are working. If we see we are taking less time to accomplish the same task, we assume our training programs are working and the employee is progressing in their efficiency and knowledge. Unfortunately, we are still using the time sheets for billing on an ever smaller group of clients who just don’t want to be a part of this new fangled billing thing. We also use time sheets for other parts of our compensation model. All in all, we are using the time sheets slightly for billing but primarily for other reasons. That is why we specifically decided not to eliminate the time sheets.
http://www.thecommoncents.com
This is something that I have been struggling with at my small firm but the distinction is a definite AHA moment – and “there’s no right way to do the wrong thing” definitely hits home.
Thanks everyone…
http://www.blumercpas.com
Unfortunately, Mr. Putney leaves out one key ingredient to “Value Billing” – the customer. He mentions that the firms either writes up or down according to THEIR perceived value of what they have offered.
Really, the only perception of value that matters is from the view point of the customer. So what if we write something up from our time sheets? The question is “did our customer perceive the value?” And whether we wrote something up or down or sideways, if the customer did not receive value, then we have not done our job.
Time sheets are killing our ability to start focusing on our customers.
http://www.facebook.com/darrensanford
I agree. In college, I did a research paper on the value of human capital. When I began work at my first public accounting firm and kept a timesheet, I was green and didn’t know that my timesheet was used to bill clients. After a few months and my first performance “review”, I become aware that this was how clients were billed and how I was evaluated. In my opinion, timesheets are a way of negatively evaluating staff and does not take into account the quality of their work. Absent “padding” time, the amount of time it took is what it is. If you’re going to bill based on time spent. Then there shouldn’t be write-ups or write-downs.
We have always valued billed (since 1946)we have never used time as a factor, other than required by courts or law firms to justify the bills, based on court ordered rates. We will quote any engagement, some require ranges.
Clients love knowing their bills before we start. bills do not fluctuate based on prepare experience.Same bill for same job. Whether it toke a partner 15 minutes or a young staff all day.
We also include basic phone calls in our quotes,so our clients are not afraid to call us before they do something stupid.
Client satisfaction, predicable cost that can be budgeted.
only problem, most billing systems are time and billing oriented.
http://www.verasage.com
Chris,
There are better ways to evaluate the success of your team than timesheets. Timesheets are measures of inputs, but you should be focused on outputs. Plus, they are lagging indicators–like timing your cookies with your smoke alarm. By the time something shows up on a timesheet, it’s too late.
There is a lot of information at http://www.verasage.com on what replaces timesheets. I’d be happy to point you to some resources, or you can check out my latest book, Implementing Value Pricing: A Radical Business Model for Professional Firms. Well over a thousand firms have ditched timesheets–it can be done.
http://www.smt-associates.com
Ron, I have been a believer in value billing for a long time, have read your first book, but I probably don’t practice it as much as I should; it’s a work in progress. But all along I have failed to understand the logic of not keeping a time sheet. I also don’t understand your logic that a time sheet is a lagging indicator. When we keep time sheets, I know instantly whether I under-priced a certain job or a client. If I rely on macro indicators, maybe billings per FTE(?), it could take months for a problem to show up. And when it does show a problem, how do I know where to look? With time sheets, I can pinpoint the clients I am having a problem with and usually know much sooner.
I will check out your resources for some enlightenment.
http://edkless.com
Hi all, for those of you interested Ron Baker and I are presenting four Firm of the Future Symposia this year for my employer Sage. These are open not only to Sage Accountants Network firms but anyone who is interested in this topic for more visit — http://edkless.com/2011/10/sage-firm-of-the-future-symposiumnew-dates-announced/
http://www.verasage.com
Steve, timesheets are a lagging indicator because, like financial statement, they only reveal the past. But more importantly, they are irrelevant for pricing, so you really don’t know if you under-priced a job. You only know that based on customer value, not hours spent. Your customers don’t care about your hours; they only care about value.
For more resources on this, see this link at VeraSage:
http://www.verasage.com/index.php/community/comments/ask_verassage_all_about_t_a/
Hope that helps.
http://www.smt-associates.com
But if I bill flat-fee work, and after the course of doing this for 12 months I have no profits in my firm, where do I turn to look for the problem? One of the things mentioned in your link is the After Action Review; seems to me you would be reviewing how much time was actually spent so you could make improvements? If I bill someone $200/month for accounting and it take my staff person 10 hours to do the work, then 1) what indicator do I look at to know this is a problem amongs hundreds of projects, and 2) how do I know it is not a staff problem, process problem, or billing problem?
http://www.ariestech.com
Steve, you would not review how much time was spent rather was the project completed on time (or more accurately, were each of the project issues completed on time?).
Tracking whether or not each project issue has been completed on time generates a predictive indicator of whether or not the overall project will be completed on time and indicates the true status of the progress of the project.
Tracking project issues gives you (and your customer, since these documents are shared with them)a live up to the minute picture of the project status. Something a time sheet could never do (and you probably don’t give your customers access to your time & billing software, so it doesn’t help them at all).
Does knowing the number of hours you spent on a project tell you the percent complete of the project? No way. Number of hours spent on a project is worthless…number of issues completed on time is priceless (so are number of issues not completed on time).
Also, the question is not did my team member take 10 hours to complete a task but was the task completed on time. Knowing whether or not the person is completing their tasks on time is what you really need to track.
An After Action Review is performed (as the title indicates) after the project is completed. It’s designed to be reflective in nature…what did we do right, what did we do wrong and how can we become better. The AAR is an extremely valuable project management tool but it is not meant to be used as a predictive tool…that job falls on the Issues List.
http://www.smt-associates.com
Whether a project is completed on time is nice, but I need to know what it costs me to complete that project. So what if my staff got the tax return done by Tuesday if it took her 3 times the time it should have taken. What I hear you and others saying is it doesn’t matter what your cost are to complete the project, and that knowing costs is irrelevant. That is simply remarkable. It’s almost like people are making up reasons not to track the costs of their firm or simply not up to the task of tracking their staff costs and enforcing budgets.
http://www.ariestech.com
I find it remarkable that a time sheet can somehow tell you the cost of a project.
Mr. Marx’s theories have all been thoroughly refuted.
http://www.smt-associates.com
John, if I know a project should take 8 hours, and a month later I find out it takes 15 hours, I need to know that data. How else would I know that? And if I pay someone $30/hour, it is fundamental math to multiply dollars times hours to get the cost.
http://www.verasage.com
Steve,
We are not saying ignore costs. We are saying that you need to know your costs BEFORE you do the work, not after.
Timesheets allocate historical costs, they are not needed to know your costs. I can allocate your costs, per customer, based on other methods. Timesheets are just one way to do this.
If your person takes 3 times more to complete a tax return than you thought, I have news for you: your costs don’t change one penny. You cost allocation might change, but that’s an arbitrary allocation to begin with, as are all cost accounting allocations.
This is why cruise ships, hotels, and airlines don’t use cost accounting. Toyota and other Japanese companies also don’t use cost accounting. They use Target Costing, which is something completely different that I can’t explain in this venue.
But this is beside the point anyway. You are too focused on internal costs (and cost allocation) and are ignoring external value. Your customers aren’t buying time, so the time it takes is not as important as turnaround time, as John said.
If you price based on value, cost accounting is not that important–it can be done upfront, and close enough for government work. A CPA firm’s costs are fixed, and allocating them to one customer, or one project, is a low-value activity compared to pricing based on value, which is the ultimate driver of profit, not cost allocation.
My book, Implementing Value Pricing, explains this all in incredible detail. I hope you take a look. It also details firms that don’t keep timesheets, and yet are extremely profitable. It can, and is, being done.
Regards,
Ron Baker
http://www.hjortnesscpa.com
It appears to me that Steve and Ron/John are talking about two entirely different things.
Ron/John is talking about pricing, customer satisfaction and all things on the right side of the income statement.
Steve is talking about evaluation analysis. Once a project is completed, it makes sense to evaluate the performance of the team.
Say I have 100 customers I do $20,000 worth of individual returns for. Analyzing “projects” is not relevant – knowing that John took 100 hours to do $10,000 worth of work, and Judy took 50 hours, IS relevant.
I then would like to know that while I did $20,000 worth of individual returns, I also did $20,000 worth of corporate, and $20,000 worth of accounting. Which one was profitable? Do my firm’s strengths lie in individual, corporate, or accounting? More importantly, I have a $3000 marketing budget – how much do I spend on individual, vs. corporate, vs. accounting?
Ron/John addresses project issues – not profitability analysis. Two different things.
http://www.verasage.com
Eric,
We do assess profitability, but it’s driven more by pricing than cost accounting. Cost accounting is arbitrary, pricing isn’t.
Let me cut to the bottom in this discussion, and I’d like for everyone to focus on this: There are firms out there that don’t keep timesheets, and they are some of the most profitable in their respective professional sector. Obviously you don’t need timesheets to be profitable.
Either folks are curious how this is done or they are not. I can’t change the latter, but for the former there exist many resources and case studies for them to examine.
I am a former cost accountant who has seen the light.
Regards,
Ron
http://www.hjortnesscpa.com
Ron:
I understand. I did attend one of your seminars, and I do “get” the value pricing. I have a lot of questions on it, but that is not what I am talking about here.
The question was, GIVEN whatever we price the client – how do you evaluate your staff and their work? Timesheets are a good indicator of productivity, level of progression, and they serve as an objective measure that the employee and employer agree on. There are a lot of benefits to objective systems, of course.
http://www.verasage.com
Eric,
But don’t you think firms that have ditched timesheets have figured out superior methods to evaluate their team, and profitability?
A lot of these firms are filled with CPAs, who grew up with timesheets, as we all did. If these new methods didn’t work, they’d go back to timesheets. They haven’t. Now either you think these CPAs are ignorant, or maybe they know something you don’t?
Again, I understand all the questions, but I want to point out: firms are operating without timesheets, so obviously they’ve figured out how to evaluate the team, what to measure, and profit.
Btw, timesheets are not good measures of productivity because they are not predictive of CPA success. The hours on a timesheet tell a manager nothing about the CPA’s competence, quality, customer service, getting along with others, etc. These are subjective judgments, which are far more important than objective measurements that don’t mean anything. I rather be approximately right rather than precisely wrong.
Timesheets are a lagging indicator, not leading. By the time a manager sees the timesheet, the damage has been done. Timesheets are one of the primary reasons leaderships is so scarce in professional firms.
http://www.hjortnesscpa.com
Ron -
I don’t question that others have figured it out.
My question was simply, how?
http://www.verasage.com
Eric,
I can’t answer that in this type of venue, but you will find a ton of answers at http://www.verasage.com, or in my latest book, Implementing Value Pricing.