3 flaws with this business model.
by rob nixon
i would love to meet the person who invented time-based billing. i think this person is a complete business moron and i would have much pleasure in highlighting the unethical behavior that this method causes. this is probably the same person who invented write-offs as well. what a complete idiot.
the premise is that if you get the charge rate right and the time to do the job right, then the price is right. nothing could be further from the truth.
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time-based billing does not value the project. the only value of a project is what the market is prepared to pay for it. i am going to challenge your thinking of time-based billing and encourage you to adopt a new model of value pricing.
time is not money
someone coined the phrase “time is money.” what a load of bs. time is not money, money is money. a good use of time can turn opportunities into money – but time itself is not money.
accountants have turned this “time is money” mantra into a sophisticated art form.
an elaborate system has been created of recording time and then charging the time with a charge rate per hour rather than charging for the value of the work. seeing how smart accountants are i find that very strange. you might say that the time and rate model does create the true value of the work. i beg to differ.
you see, how do you know what your work is really worth? the true determiner of the value of your work is what your client is prepared to pay for it. if the client has a problem that you solve, and the impact of solving it is huge for the client, then they should pay based on the value of the outcome – not by the time taken.
think of this analogy: a washing machine repair person comes to fix your washing machine. she takes one look at the machine, pulls out her trusty mallet and hits it in precisely the right spot. the washing machine now works. she writes out an invoice for $200. you ask her to itemize the invoice. so she writes, “parts and materials $1, knowing where to hit it $199.”
you know where to hit it yet you charge by parts and materials!
using the above analogy, your parts and materials is the accountant’s time and disbursements. most accountants have allocated their time to be 6-minute “units” – so 10 units per hour with each unit having a set price. if the accountant’s charge rate is $250 per hour then each unit is theoretically “worth” $25.
as the accountant is doing the work for a client these units are ticking away in the background. so that means that when a new job is started (typically without the client knowing the final price until after the job is complete), or an existing job is worked on, an electronic clock is keeping score. theoretically, if the accountant has to do something else not related to the client (like go to the restroom or reply to an internal email) then the clock should be stopped and restarted. i know for a fact that this is not the case. often, the client’s clock remains active in a lot of cases when personal and company activities are going on.
let’s say you take a phone call from a client (and of course you have stopped the clock on another client) and it takes 15 minutes. your employer has instructed you to start the clock with every “matter” on every client. how much time do you put down? is it 2 ½ units? i highly doubt it. my guess is you round it up to 3 units. you just ripped the client off!
can your worth really be determined by a 6-minute unit? does the unit price really set the correct price? what a burden to segment your life into small compartmentalized amounts. no wonder accountants are looking for the quick fix on everything. you are so time-driven that you miss the big picture. this method of determining your worth must surely drive low self-esteem and it must drive you crazy at billing time – i know it promotes the wrong behavior.
the wrong behavior with this business model is threefold:
- not charging for everything that you do for a client
- being rewarded for taking more time and being inefficient
- not focusing on client needs because you are scared the bill will be too high
let’s look at each one.
not charging for everything that you do for a client
whenever i have a group of accountants in a seminar i ask important questions like, “put your hand on your heart and honestly tell me when you do the work for a client, how much time actually hits the clock?”
i have asked over 5,000 fee-earning accountants (employees) this question. the answer is always predictable. if there are 100 in the group there will be two or three who say 100 percent (they’re lying). there will be five or so who say 95 percent. there will be 10 or so who say 90 percent and the overwhelming response is around 85 percent (they tell the truth); many say 80 percent or less. the first time i asked this question, one of the partners of the firm i was working with (judy) pulled me aside at lunchtime and said, “they’re stealing from me.”
i don’t get this. your business model says charge by time, yet your employees are making judgment calls at the time of doing the work how much the work is worth. last time i looked it was not your employees’ business!
i was on the way to golf one day and i called susan, who was the client manager with my old accountant. my inquiry was in relation to a new car i was buying for my wife. susan asked me some questions, gave me the answer and then said, “and if you do it that way you’ll have a tax break between $5,000 and $20,000.” she then hung up the phone. it was an 8-minute car ride and the call took 7 minutes of it.
did she give me good customer service? you might say so, because she answered my question. i have to tell you i had no idea what she said – yet she gave me (potentially) $5,000 to $20,000 worth of value.
i inquired with peter (partner at the firm) how much i was charged for this call. you guessed it. zero. it didn’t even make the time-recording system.
to value her expertise and give me better service, here is how the call should have been handled:
rob: i am going to buy a new bmw for my wife – what is the best way to finance it?
susan: it sounds like you are driving so i was wondering if this is an urgent matter?
rob: no – not urgent. i am on the way to golf.
susan: ok then. the best way to handle this is i need to ask you a whole series of questions and then i will write you a detailed letter of advice that you can take to the finance person. the letter will spell out exactly the best way to finance the vehicle and exactly what you need to do. depending on your answers you will get anywhere between $5,000 to $20,000 tax break on the purchase. so that you can be completely focused i would like to set up a telephone meeting with you (for about 10 minutes) later today when you get back from golf. as i said, you will be able to get between a $5,000 and $20,000 tax benefit when you do it the way i tell you to do it. my fee for doing this will be $495 – is that ok with you?
rob: sounds great. i’ll speak with you at [time].
susan: i will send you a quick confirmation email now and i will call you at [time].
after the call susan can use a standard template (which was used before with another client) with an embedded spreadsheet, send me the letter and now i have something tangible to take to the finance manager at the dealership.
being rewarded for taking more time and being inefficient
you promote a productivity target to your accountants. the way you typically define productivity is “client-charged time as a percentage of available time.” most accountants work on a 37.5 hour week and 45 weeks for the year – so available time of 1,687 hours. normally this productivity figure is around 80 percent of the 1,687 hours – or 1,350 of client-charged hours per year per accountant.
this focus on productivity causes accountants to go slower, make mistakes, inflate the time taken on time sheets, work longer hours (so your team can get their targets), hoard work and not care too much about the client. you are actually rewarded for doing the wrong things.
the right thing to do is to get the job done quickly and accurately for the client. under this productivity-driving model, why would you do that? you’ll get less revenue.
with a focus on productivity (selling time) you have inadvertently set up a “labor for hire” business. the more labor you get the more revenue you will get. however, this does not drive profitability. what happens with the productivity-driving model is you end up with far too many people to do what work you have to do.
you are not in a labor for hire business – you are in the knowledge-selling business. you turn your intellectual capital (what you know) into intellectual property, which is tangible. your intellectual property comes in the form of letters, reports, spreadsheets, emails, diagrams, manuals and plans.
if you adopt a “pricing up front” model and a focus on driving time down then you will run out of standard work. this is a good thing. you can downsize your team, increase your client base and sell additional services to existing clients without adding to your cost structure.
when we work with our coaching club clients and have them adopt this model, 100 percent of them run out of work in the first year. typically what took the firm 12 months to do last year they do in 9-10 months the first year they adopt the new model. in year 2 they typically do the same work in 6-8 months.
not focusing on client needs because you are scared the bill will be too high
as a seminar attendee (client manager) said to me, “i want to get out and find out what clients need. i want to sell. i am unable to because the partners want me to have 80 percent productivity.”
i think that sums up the entire issue here. it’s a conflict.
if you are focused on charging the client for everything then you will miss out on really helping the client with what they need. this behavior does not encourage relationship building.
i think it is a self-esteem issue. you seem to be more comfortable just charging time for the reactive work, rather than really finding out what the client needs – and proactively helping them. i find that most accountants think that the price will be too high (self-esteem again) and the client will not pay the higher fee.
you have to get to the point where you do not have to charge for everything. your projects should have enough margins in them that you do not have to worry. you should not be charging for quick phone calls or emails. if the clients know that you charge for everything then they will only do the bare necessities with you. they will limit the number of calls they make and the meetings will be efficient but very little time will be allocated to relationship building. the client is constantly thinking, “i hope i am not getting charged for the time he is asking about my family and the dog – i wish he would just get on with it.” how can you build a relationship with a client when the client is thinking this?
all interactions with a client are opportunities to discover additional needs. many phone calls are intellectual property-selling opportunities in disguise. you need to train yourself and your team to look for them – and not charge for the time used in finding out what the client needs.
as the world-renowned author on professional services firms, david maister, once said, “what you do with your chargeable time will determine your income. what you do with your non-chargeable time will determine your future.”
with this focus on time, another wastage phenomenon occurs – write-offs!
what typically happens is the project is worked on by the accountant and when it comes time to draft the bill, the gutless partner writes down (discounting before billing) the value of the work. what a self-esteem destroyer. your accounting team does the best job they can and by way of your actions you tell them they are not worthy. the partners think the client will not pay the full price – how do you know that? sure, from time to time an accountant “stuffs up” or there was more work in the project than first thought. if there was more work in the project then you should have communicated this to the client during the work in progress and invoked a change order on the original engagement letter. oh, i forgot. you did not price the job up front. you’ll have to wear the write-off in that case.
write-offs are one of the easiest things to fix. it’s a decision. you decided to write off. you can decide to write on. here’s how you eliminate write-offs once and for all. this piece of advice is worth millions of dollars.
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- make a decision to stop writing off.
- price every job up front with client sign-off.
- drive time down and take the write-up.
it’s that simple. be warned, though. if your business model is charging in arrears and you “write up” a client’s work then you have been very unethical. i do not care if you were super-efficient, your business model said charge for the time that was taken. there have been many cases of accountants going to court for overbilling. take a look at the movie “the firm” starring tom cruise. in the last scene the law firm was brought unstuck for overbilling. these are write-ups using a time-based, price in arrears model.
i have said it before, and i’ll say it again. you are doing your clients a complete disservice by focusing on charging them for everything and not building relationships with them.
to sum it up. how can this time and rate model ever work when …
- the price per hour is based on an accountant’s salary level.
- the time to do the job is never properly recorded.
- the time taken varies from person to person.
- you are rewarded for taking longer and being inefficient.
if you are going to be completely ethical and true to your time based business model then you should be charging by the hundred-millionth of a second, not a 6-minute unit.