Paid to NOT Finish

From the tax side, accountants almost never know how long a complex tax job will take, so a fixed fee doesn’t make a whole lot of sense, unless it is a straight forward deal. Most firms write off excessive costs when the preparer did not work efficiently. This is because there is a standard of reason in what costs should be. In the public accounting firm I worked for and learned to prepare taxes in, if you worked to slow your billing rate would decrease and you risked losing your position and losing a chance to move up. The faster, more efficiently you worked, the better it reflected on you. Preparing complex tax returns is not the same as building a spec home.

How long have you been doing it that way? I have not meant anyone locally that does this. I am interested to know how successful it has been for you. I would fear that like most tax jobs, the job will take longer then expected, be more complex than the interviews reveal, and so forth. This would result in much lower effective billing than what your work was worth. If you have been doing it that way for awhile, how has it been working for you? Seems like you need flexibility between the two options. That being said,it definitely seems like a set fee is best, if possible though, can’t disagree with that.

Thanks for reading and commenting our post Joe we always welcome new insights and perspectives to everything we say on our blog.

I, too, was trained in a traditional accounting firm (albeit being in audit and consulting instead of tax) where billable hour/rate was king. Fortunately for me, I’ve discovered that billable hour x billable rate is not the only way to price out a job. Especially a complex job. You see, us at DeepSky and many of our friends from around the world (google Verasage or search #geeksunite on twitter) believe that we are professional knowledge firms with knowledge workers who have much more to offer the business world than simply our time. We are compensated for our ability to provide effective (not simply efficient) solutions that can change the lives of our customers. Provide value. I know you get that because you talk about it on your website too! So, why should our work be tied to the time we spent at all? Who cares? There are plenty of “stuff” out there that takes a tremendous amount of time to do but provides little to no value – you might want to consider why you are doing it if that’s the case – often times, it should/can be replaced by someone with less knowledge or better yet, by technology. Now, if they are complex because it’s a puzzle that requires IP to solve – then it definitely shouldn’t bee tied to the amount of time spent. (thanks to my friend Dan who’ve been value pricing for years now with his tax practice for these insights.)

Finally, the traditional measurement of utilization rate vs realization rate doesn’t reward efficiency nor effectiveness. It rewards inefficiency and punishes efficiency until the budget is met, then it turns around and punishes everyone. (ie. if I am better than my counter part and only takes 5 hours to complete a job budgeted for 10 hrs – my utilization is 50% while the “less efficient” counter part is at 100%. Both of us will have 100% realization. If i worked 2 jobs during that time. My utilization is now 100% which equals to my counter parts. I was not rewarded at all for doing more with less.) So you have “knowledge workers” spending their time on tweaking their time sheets and “maximizing” their utilization vs realization rate. The time spent on that provides no value to either customers nor the firm. It’s a waste of time – it’s a broken model.

Thankfully, like I’ve mentioned. There’s an alternative. Our customers care about what they get out of our knowledge and service. They can and should careless about the time we spent on it. It’s a battle to change a habit nurtured by both side, but we’ll get there. Check out this post talking about our other friend Chris’s method on pricing out complex engagements: http://www.verasage.com/index.php/community/comments/how_should_professionals_scope_complex_jobs

Good information Jody. I understand exactly your point, it is taking my point and flipping it around in the reverse. That still doesn’t address the opposite situation, but maybe it all washes out in your experience? I realize clients would rather know the cost up-front. This is a good way to have a competitive advantage as well, I would think. What I find interesting is your comment about the partners writing time off and hurting moral. That is an awesome point that I have never heard anyone bring up. That is traditionally how billing has been done for years. Thanks for the info. I don’t know any CPAs or firms that bill on fixed rates in my area unless the returns are very simple. They all adjust their billing, not just down, but sometimes up too.

Thanks for the thorough response Michael, it is very good. I have discussed this with other partners in the past, but never really was convinced myself.One issue I always worried about that has not been mentioned; trying to do too much in less time to realize higher profits, which could lead to lower quality tax preparation. Beyond that you have convinced me to look at it from a different angle. It seems it would be wise to do more research into what you have suggested, maybe my colleagues and I are missing the boat on this one.. Especially since nobody in our area that I know of does this.

I love the value pricing concept, but have met with resistance, probably due to tradition, but fear of change and money spent on time tracking software also factor in I bet. I guess I need to re-train my brain too because I sometimes find it hard to move from the concept to apply it in practice. How about this scenario:

New client comes in and wants to know the price. I can do a pretty good job estimating what time is involved (old hourly model) and thus can quote a price based on hourly rates. In a value pricing world what should I be looking at?

I feel like what Michael describes below – the guy that can get it done in 5 hours instead of 10 – so guess who gets dumped with the clean up work when the other employees can’t hack it? I guess it’s good from a job security standpoint, but I want to be rewarded for efficiency.

Joe,

We’ve been “timeless” for over 5 years now and we do complex tax stuff all the time. I’ll tell you a little story to show how it can work:

Customer came in with a mess created by their previous accountant – tax mess, accoutning mess, about 12 different entities in a very complex and un-managed structure. We told him it would take about 3 years to sort out in a managed and controlled way that would not create any problems for him tax or compliance wise. He understood and gave us the go-ahead. We agreed the price with him up-front to undertake this work.

Second year in to the project we sat him down and told him about what we’d achieved and how far down the path we were to “cleaning things up”. It was a mess and we did (if I must say so myself) a bloody good job of cleaning things up! Anyway, during the meeting, we went out for a break and he said – “you’ve done a stellar job – you need to be paid a bonus – I know a lot of good thinking and work has gone in to this”. After a bit of back and forward, we agreed on his paying us a bonus of $20,000.

Using a timesheet to bill your customers will not allow this type of occurrence – they will see you as being paid for your time. Going without timesheets they pay you on results and when the results are beyond their expectations (as this one was), they’re more than happy to pay bonuses.

Make the change and get rid of timehseets – it’s challenging but worth it.

Hi Jody, I feel compelled to chime in here. You will find a perfect case in Ron’s book, Implementing Value Pricing, for burning your timesheets. But I’m guessing you haven’t got to that part yet. Here is some reading that will move you there more quickly. The VeraSage website is PACKED with scores (maybe even more than a hundred) of posts that address your concerns.

First, the terrific essay of Paul Kennedy on his firm’s move from timesheets to no timesheets:

http://www.verasage.com/index.php/Trailblazers/comments/a_firm_with_no_timesheet_obyrne_and_kennedy_llp

then, see these:
http://www.verasage.com/index.php/community/timesheets_are_training_wheels/
http://www.verasage.com/index.php/community/no_timesheets_vs_utopia/

and you’ll find reference to a few more great pieces here:
http://www.verasage.com/index.php/community/ask_verasage_how_do_you_measure_client_profitability_and_employee_productiv/

Jody, we are excited to help you continue to pursuit of your full-fledged firm of the future. I know it’s a busy time of year for you that makes it hard to step back and think about these things at the highest level without feeling rushed. I think it is that rushed thinking process (very guilty myself) that lets us shelve the hardest aspects of these changes, but the profoundness of what you’ll find here is well worth the thought investment, even during busy season! Let us know your questions after you read… we want to help…

Really not trying to be obnoxious here, but want to specifically discuss scope creep. Scope creep is best controlled this way:

1. Extremely well defined original scope in your Client Service Agreement or Fixed Price Agreement (whichever you use) – ideally states both what IS included and what is NOT included but which your experience indicates may commonly arise (lack of client preparedness, inaccurate past filings, etc) that may be discovered later. Tip: if you price with options, you can provide an option that just covers any or all of this and this will be a highly priced option because you absorb all the risk.

2. Team is extremely well-educated on each CSA/FPA scope. If you are finding a continuing problem with employees disregarding your scope and giving away free work, perhaps it is a TERMINABLE offense to perform work that is outside of the scope without advance approval by the customer in the form of a written Change Request with price stated. You and your team need to make *conscious* decisions about what “extra” work is done or not done, and to what degree. Essentially, you won’t show up at the auto repair place to find they’ve done major work for which they demand to be paid, “oh by the way, we replaced your windshield so it’s an extra $350″ but you might find “we noticed your wiper blades weren’t good so we changed them for you at no charge to you.” One creates mistrust and anxiety and one creates goodwill. Judgment reigns.

You have to trust your people to do what’s best, but you have to educate them first as to the scoped parameters of each assignment, every time. And also let them get a feel for what is appropriate and not appropriate to “throw in,” and for whom. (Every customer is not equal.)

This will control your profitability and keep scope creep under control. If you want to track something, track what you estimate to be the value of money left on the table for work done that you didn’t get pre-approved. Assign it to the person who should have identified it, and use that for learning (versus beating up). Hope this helps…

Jody, I can’t add much beyond what Michelle’s already said, except to say that scope creep needs to caught BEFORE you do any work, not after. Timesheets are lagging indicators, and only inform you of problems after the fact. That’s not good enough.

Also, no private business does timesheets. Not Apple, P&G, nor Zappos. These companies hold their people accountable for results, not efforts. Timesheets measure efforts.

As for the “what gets measured gets managed” this is complete nonsense. I wrote an entire book disproving this axiom. All measurements are judgments, and in a knowledge firm a judgment is always and everywhere more valuable than a measurement. Timesheets measure the wrong things. I rather have you be approximately right with a judgment than precisely wrong with a measurement.

My book goes into this in much greater detail, and I’d be happy to answer any questions you have after reading it.

Hmmmm, I don’t know where to begin. I will say I convinced the traditional old client (see earlier post) that the value I was offering her was better any billable hour, and I start the new project at 9am tomorrow. So many things come to mind when I read what has been said, and what has worked for me is the principals of Intellectual Capital. If your structural, human, and social capital are in order the method will flow. You will be prepared in a new client meeting to ask the right questions. You will know the strengths and weaknesses of your team. You will being to see which clients are right for your firm. Only having done this for a year, and knowing my limitations, I can tell by the end of the initial client meeting if a client is a good fit. I can tell because I have made some poor decisions in my days with out the timesheet. Poor decisions = learning experience, I always want to be learning.
To say something about scope creep, I struggle with this the most with my business clients. I take it on a case by case basis. If a “first class” client calls and needs me to research something out of our agreement, I may let it slide because they are a first class customer, they pay on time, deliver when they say they will, and are pleasant to be around. If a coach client calls, yes I still have many coach clients, and pushes the button I have no problem explaining there will be a fee for that request. They usually decline, as I think they will. This gives me more TIME to go seek out the first classers I am looking for. This idea is a “theory” that makes sense to me, there are no rules, only suggestions which I happen to listen to more often than not.

Hi Michelle,

I’m a little embarrassed for my firm to admit this, but we have no PM other than the partners knocking on our door now and then asking when something will be done. Or something showing up in my inbox and it needs to get done ASAP. I love the link above you posted about the firm that decides what to finish this month and subsequently what their income will be that month. This conversation actually has me excited about some improvement for the first time in awhile.

Michael, you already know that I love this post. The comments are great as well. Another problem with the billable hour is the lack of constraint. As accountants using the billable hour we can always go back to our client and bill for over-runs (clients don’t like this obviously). I think there is a far more damaging effect of the billable hour than an upset client. This lack of constraint makes us lazy and unwilling to innovate or systematize our process to do our work better. Virtually every accountant setting up his/her own firm will use the same billing structure, technology, and methodologies that they learned from their previous firm.

Michael, glad you liked it (and you are right, I knew you would.) You and I talked about this for so long already and I am absolutely excited that I now have an even better understanding to be able to completely implement it. The guys at VeraSage are great – true inspiration for me since maybe of them have successfully implemented what you and I talk about and are successful at it. Hopefully, starting with us, we will be able to change the industry together my friend.

ps. Thanks for the mention and referral on your site too. =D