I received an email yesterday challenging me on why I am so adamant about ridding the Professional Knowledge Firm (PKF) of timesheets. At the request of the author, I am not disclosing his name, but I thought his questions were worthy of a response.
This is an excellent example of why the timesheet mentality is such a cancer in the PKF world. It does, indeed, keep professionals mired in the mentality they sell time. I don’t think Bill Gates thinks in terms of $300 per hour.
I have indented my responses to the original email below.
Reading your books and the site materials I share your confidence that value-based pricing is the right thing for service selling. I feel, though, that your obsession to wipe out timesheets is akin “delenda est Carthago” motto.
Maybe the evil is not in time-based pricing itself but in its mighty acceptance which obscures the principle of value-based pricing making it the ultimate end instead of a means.
Indeed, you’re fighting cost-based approach but what if one uses time as a driver of value? Airlines or tailors don’t charge for time they spent because it’s irrelevant. The scope is clear and predefined so the customer doesn’t care how much time it would take or what internal cost would accrue. In the scope-defined engagements it makes sense but I have two examples where I’m struggling to justify a Fixed Price Agreement (FPA).
I don’t understand how you can reconcile the subjective theory of value while asking “but what if one uses time as a driver of value?” That’s the whole point. Time is not value. You have simply asked if the labor theory of value isn’t true. It’s not true, it was refuted in 1871.
Time spent in Professional Knowledge Firms is just as irrelevant as with airlines and tailors. It’s not because they have a more defined scope. It’s because the labor theory of value is false across all human behavior.
I’m a “trusted adviser” and sell my brain-time to the customer via meeting or calls attendance. Say, I have a retainer to spend 1 day a week with him and we sign an FPA for the advisory service for $2400/week (read, 8 hours/day). Now the customer wants to change the scope to 2 days/week. What should I charge him? Something like $4800, right?
It’s logical, clear, and simple. If the customer gives me some unusual “homework” and occasionally I need to spend between half to 2 days additionally on her projects how should we agree on that? Regardless whether we shape it as a change order or a new FPA (taking into account the average extended time) the time will be the driver for the calculation. I’m not saying the customer buys my time—she buys my value—my advisory service, measured via the time we spent. I’m capable of charging $300/hour not because I’m a commodity but certainly because I’m differentiated and the customer recognizes it. We use a Timesheet here just as a measure of the scope and due to the lack of any project-finite scope. I see no other way to measure my services but to multiply the time I spend servicing her on the value the customer perceives to get from the service.
Again, you are not selling your “brain-time” since that is an input. What if you spend a long time thinking but creating no results for your customer? What you are selling is knowledge that creates wealth for your customer.
In your example of $2400 to $4800, you state the customer is not buying your time, but rather your value. But how? You priced this based on time, and that’s not value. What if you come up with a million dollar idea in an hour in that marginal second day? Under your method, it’s worth the same $300 per hour as an hour in the first day. This is suboptimal pricing that has no relationship to your value. The fact that it’s “logical, clear, and simple” does not mean it comports to reality—the subjective theory of value.
You’re still locked into the $300 hourly rate mentality, which demonstrates you are still selling time. This is the exact problem with the timesheet. It’s keeping you mired in the mentality that you sell time.
You ask how you should price another half or 2 additional days, and I would say up-front, before you do the work. Value is subjective, and contextual. It all depends on what you are doing.
You then say that the timesheet is used “just as a measure of the scope and due to the lack of any project-finite scope.” This is why you are still selling time, and not Value Pricing. Timesheets are backward looking, whereas project management, which always defines a scope no matter how limited it may be, projects forward.
You say you see no other way to measure your services, but there are, indeed, other ways to value your services when there is no project-finite scope. We’ve discussed this at length elsewhere. You are letting a problem kill an opportunity to add value to your customers. As a result, you are sub-optimally pricing yourself by the hour. Some would argue—I being chief among them—that this is the result of your timesheet.
Another example is about a typical project in high-tech consulting, solution integration. Timesheets makes life easier when we do have a project scope but the customer has to develop (supply, prepare, deliver) additional tasks my execution is dependent on which. If the dependency is very tight then often times I won’t be able to progress without customer’s delivery. Another pitfall is just so many unexpected things that may happen (which, honestly, may happen with FPA too). So the whole project becomes a huge change order. In that case timesheet becomes a good protection for me since the customer knows that his inefficiency really costs him and I’m not its hostage. So should I drop such customers or just use timesheet as a shield against his inefficiency?
No, you should quote a price for a defined scope up-front, with a covenant that the customer is responsible for providing certain tasks by a deadline. If they fail to deliver, you have a Change Order. Keeping your customer worried about the time you spend is exactly the wrong thing to have them focus on. It’s not a shield to protect you, it’s a shotgun pointed at their head.
You then say that so many unexpected things can happen that the whole project becomes a huge change order. That’s usually the result of very poor planning and project management. It may also indicate incompetence. Face it, if things are that out of control, why are you doing the project in the first place?
But even allowing for your logic, so what? My insurance company provides me earthquake insurance, yet they don’t know every contingency, nor do they even know what their costs are going to be. They still give me a fixed price because I, like all customers, demand it. No one would buy insurance being priced on a time & materials basis.
Your timesheet is preventing you from being a better project manager.
The last reason for timesheet is it’s much more accepted (I guess you heard this one many times) in the industry, customers know how to measure and value my service, and I’m protected against inefficiency or unexpected things. On the other hand, when the scope is concrete and I can trust the customer I’m all for using FPAs (and surely the time then is not the primary driver but the value the customer gets is).
Again, so what? Everyone used to think the world was flat, that didn’t make it right. Customers accept the hourly rate, but they don’t like it. Who wants uncertainty in the price of what they buy? You are way too focused on the internal machinations of your business. This is hindering you from focusing on external value.
Actually I’m negotiating now an offer to join a practice and I was re-reading your books thinking, maybe, to influence my new partners to switch to FPAs. The above is a result of “critical thinking” where playing a devil advocate I wanted to reveal FPA weaknesses and exceptions.
We love critical thinking. We love the fact that you are wrestling with this issue. We love it when people ask “when won’t this theory work?,” since that is how you falsify a theory and come up with better ones.
Critical thinking also means looking at empirical evidence, and the fact is we have over 600 firms that have trashed timesheets. They have solved every one of the problems you point out. You have added nothing new here. That’s not to belittle you, that’s just to say we’ve overcome these hurdles. Read our Trailblazers section for examples of IT firms that have made the transition. Also, read this post that provides additional resources broken down by category of things you have to do to implement Value Pricing and trash timesheets.
I think that the advantage of FPAs is in the value-based approach but must I dig up timesheet completely to sell value? I think I can sell value and still use timesheet for certain cases.
Yes, I believe you must ditch timesheet in order to become better at pricing. Your email is even an illustration of why this is so.
I used to not believe this. I used to say, “Keep your timesheet, but use them as they were originally intended, as a cost accounting tool only, but price on value.” I no longer say this, because empirical evidence has changed my mind.
The best pricers across all PKF sectors—from accounting and law, to advertising and IT firms—all have one thing in common. None of them maintains timesheet.
I used to believe this is because they became so good at pricing, timesheets became superfluous. But I now believe that they became good at pricing precisely because they got rid of the timesheet, which forced them out of the “we sell hours” mentality and made them obsessed with value.
We are very reluctant at VeraSage to state a causal relationship. Too many confuse causation with correlation, as if to say wet streets cause rain.
But here is where I will state a causal relationship emphatically: If you want to become a better pricer, you have to trash timesheets. You have to do other things as well (project management, KPIs, AARs, leadership, etc.), but there’s no doubt in my mind, if you are serious about creating and capturing value, the timesheet must be buried.
To borrow a phrase: Ceterum censeo Carthaginem esse delendam.