The Essential Management Tool. Next, read The Case for Value-Pricing.
Value-Pricing or Hourly-Billing: Which works better and why?
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By Ed Mendlowitz
There is a strong growing movement to do away with timesheets in favor of value pricing. Needless to say, I have been following both methods – long before Ron Baker and his adherents formalized the no timesheet protocol. Because of my experience and along with discussions I have had and continue to have with hundreds of accountants a year I have heard many arguments on both sides of the issue. The ones in favor of no timesheets are more passionate but that doesn’t lessen the opinions of those that don’t agree with this. I will be referring to Ron Baker a lot so I want to mention one of his books that should be read by everyone interested in this debate: Implementing Value Pricing. Regardless of how you feel, it would be irresponsible for a firm leader to be unfamiliar with what he suggests.
I have opinions on both sides of these issues, and at various times express them depending on the circumstances. That prompted these two columns: "The Case for Timesheets" and "The Case for Value-Pricing."
Here I will present the case, the way I see it, for timesheets. In "The Case for Value-Pricing," I argue for discarding timesheets and using the value-pricing model, or some form of fixed prices, exclusively. I hope you enjoy them and this format. We welcome your comments.
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The Case for Timesheets
Timesheets are a staple of many service organizations, with accounting a strong user. Further, billing on the basis of time has become accepted by a large number, and, if I might suggest, a majority of clients. As such it is ingrained in our compensation system. Given that, it is always easier to maintain the status quo than changing it. It is also easier to go along than create a disruption. Time billing is accepted by clients and as such, there is little pressure to have it changed.
However, when I look closely, I see many so-called timesheet billers setting caps or ranges of the fee, which, in reality, is a form of fixed prices So I believe many don't fully understand what they are really doing or saying. Yet timesheets are the cornerstone of their billing system. Another comment is that many clients in many industries are negotiating fixed fees and will no longer accept time-based bills.
In the sense of using timesheets, I have found them invaluable as a cost system and tool to monitor performance and out-of-scope work done by partners and staff. I know that the time is not collected based on costs, but by applying a percentage factor to the rates, you can get pretty close to the cost. So, any arguments that it is not a cost system are, in my opinion, fallacious. I have been pretty successful using the time charges as a cost system, but more importantly, it creates a metric that can be used for comparison that can measure changes and growth. It is also a method for keeping track of staff and client service development and progress.
Some of the things I have used timesheets for besides keeping track of costs is scheduling, seeing which clients our staff worked on and the type of work they did, a measure of relative costs for an assignment. By segmenting types of clients, we're able to judge and isolate profitability and assess partner performance or effectiveness.
It seems I drifted somewhat from the billing aspects of timesheets, so let me go back to it. Many clients expect such terms and accept it… except when it is outside of expectations. I have used timesheet billing when I get involved in an unknown situation and do not understand the level of cooperation from the client, condition of the records, or when the work will be determined by factors somewhat beyond my control such as in when working in matters involving litigation, bankruptcy, sales or purchase of a business, unraveling a mess, tax examinations, first audits of a client that never had a financial statement or with clients I suspect will be mercurial in thoughts and actions.
When I started in practice, which was when I moonlighted, I primarily set fees in advance for a business client or suggested a fee for a tax return where it usually ended up that amount unless there were unforeseen circumstances, and then I either got what I asked for, or negotiated something extra, though not quite what I asked for.
As my practice grew with staff and larger clients, time-based billings became more of the norm. When I left my Manhattan practice to form Mendlowitz Weitsen with Peter Weitsen in 1988, we decided to convert all clients to fixed fees.
One of the reasons was that I hated the constant arguing with clients over monthly time bills.
Another reason was that we wanted predictable cash flow from the bills we sent out at the beginning of each month [this also gave us a quick bump up in cash flow since the bills mailed the first of the month were paid within a couple of weeks while time-based invoices were sent out after the first week of the month after the work was done].
And a third reason was that our use of computers was accelerating with high costs which would eventually reduce our time and our revenue. There seemed to be a contradiction here and the conventional wisdom at that time didn’t provide any clear arguments on how to do this. Ron Baker didn’t start his movement, yet and while I attended speeches by many of the well-known CPA firm consultants, timesheets wasn’t a major topic. Probably Dave Cottle was the first person Peter and I heard who talked about value pricing and that was a few years after we started our practice.
In 1994, we acquired a practice from a sole practitioner that billed his clients for every hour he spent. We met with each client and told them we would set the fee they paid the previous year as a fixed fee, and bill it monthly, and that we would convert their accounting to computers at our cost. And, while we would initially spend much more time, we expected to reduce our time, while creating faster and more usable financial statements and information for the client.
We finished the year with a 70% realization and then with modest increases always had close to 100% realization with the fixed fees. When we had special projects, tax audits, or there were unusual occurrences, we never had trouble getting paid, usually after we did the work [which is a no-no for the Ron Baker method followers. But what we did worked for us]. Note that realization is a measure determined from timesheets. The amount billed is divided by the time charges and that percentage is the realization.
What I have gotten away from is quoting pretty much routine work, which is at least 80% of the work that comes in, on a time basis, and the fixed fees work well. You need to understand that you will never get the fee exactly right, but in the long run, it will be just fine.
I think a basic assumption of Ron Baker is that all billing is done using timesheets, which they really aren’t. To give Ron credit, and a lot of credit, is that his arguments are not really about timesheets but about a different model of running a professional practice which I feel has significant merit and must be considered and thought about even by those totally mired in the timesheet model.
Our firm uses timesheets, but we use them more as a management tool than a billing mechanism. There are things I don’t like about them, but the benefits outweigh the negatives, so I am a diligent timesheet proponent and user.
Next, read The Great Debate: The Case for Value-Pricing