Ask VerasSage: All About T & A

Excuse the salacious title, it's not what you think. This past week I received two more emails with questions about timesheets, so All About T[imesheets] & A[nswers] seemed like a catchy title we could remember and refer back to often.We have a lot of excellent resources on this issue throughout this Web site, so I thought it might be helpful to summarize our best ones in a single post, as well as answering the two emails.There's no shortcut through this topic, which is precisely why most firms haven't ditched their timesheets yet. It requires that you take the time to read, think, innovate, and creatively apply the replacements for timesheets.There's nothing easy about any of this folks. We are very up-front about the commitment and courage it takes to make this change. If it were easy, more firms would have done it by now. But can you name anything worthwhile that is easy?Let's start with the two emails I received, because the first one asks a question that we have not dealt with as of yet. It comes from Carol, a CFO in an advertising agency:

Hello Ron,You and I have met a couple different times over the last few years at 4A's seminars. I've always been intrigued and inspired by what you have to say and try to implement a value mindset in our estimating and billing practices.The one area that has always been a hard pill to swallow has been the 'no timesheet' issue. Not only does this practice allow for us to gage how long it takes to get something done, it allows us to predict staffing needs, inefficiencies, and most important for the purpose of my reaching out to you now, it allows us to record a WIP accrual every month of time incurred, not yet billed = revenue earned. The majority of our projects are just that, projects, rather than monthly 'retainers' with a fixed fee.This may be a very naïve question, but if you could shed some light on it, it may be a life-changing event at this agency. The question is: If we don't have reports that tell us how many hours have been worked on any given job so we know what to accrue for, (because we've abandoned timesheet entry) how would we determine the revenue accrual each month? Any alternative we seem to come up with only creates much more work for the finance team and seems to produce very guesstimated numbers at best.So there is my quandary. Or at least one of them, I should say. Is there any knowledge you could share with me that might point me in the right direction and further my cause down the road to total Value compensation?I so look forward to hearing from you and thank you for your time.All the best,Carol

Most of these questions, especially regarding forecasting "staffing" needs and "inefficiencies" are answered in the resources below.The question we haven't dealt with is how to book revenue without timesheets. As you know, timesheets are used for WIP [Work In Progress] reports, which is how most firms accrue their revenue.Of course, do we really think that just because a firm "spends time" working on a project that it has earned revenue? Is the timesheet really the best measure of that process?A better method is the percentage of completion accounting method. If a project can be broken down into milestones, you can then estimate what percentage of the job is completed at the end of any one accounting period. Rather than being based on time, you are basing it on the actual work that needs to be performed.I'd love to hear how some of our Trailblazers are handling this, especially firms like Mark Bailey's that do audits that may overlap between two years.In any event, we at VeraSage are far more concerned with establishing an external price—commensurate with value. How you account for that internally, I believe, can be established utilizing good accounting principles on a consistent basis.The second email is from Toby, a CFO for an engineering firm:

Ron,I have been reading your pamphlets and find them to provide an excellent solution for changing the way Professional Service firms operate.I have some questions:I am the CFO at an Engineering Service firm. In our case many of the "jobs" are unique to each client. Do you have any examples of how this type of firm can apply the value pricing concept? Would we still use Fixed Price Agreements?Also, I noticed that a "calculated price" based on "billable" rate assumptions was used by several of the examples you cite. It seems there can still be a value in keeping a billable rate handy. Am I missing something? Would it be reasonable to use the "billable" rate per person in arriving at the FPA amount?Finally, wouldn't we still need to report time (at actual paid rates) in order to measure the profitability of each client? (We would not be using a billable rate.) This would allow us to have information for use in renewal of the FPA, or give information as we price FPAs for new clients.Any guidance would be helpful.Thanks in advance.Toby

Here's my reply, which has been expanded upon for purposes of this post:

Dear Toby,Value Pricing is ideal for unique jobs, since value is subjective. A pricer's dream is to charge a price commensurate with each customer's perception and actual value received—like at an auction.It's known as first-degree price discrimination, which is very difficult for most businesses to implement, but Professional Knowledge Firms can get closer to it since they meet with customer individually, especially since so many projects are customized and unique for each customer.Advertising agencies are very similar to engineering firms, since their jobs are also very unique to each customer, and we have had ad agencies that have adopted Value Pricing (VP) and ditched timesheets. Our recent Trailblazer ad agency Fletcher Martin is one example.See our Trailblazers section of the Web site for case studies from firms across the Professional Knowledge Firm (PKF) sector who have made the transition.We don't advocate a "calculated price" based on a billable rate, since that is cost-plus pricing. Of course, many people will compare a value price to a "billable" rate, just to prove that VP is higher. Once you do this a few times, you realize time tracking is superfluous.There is no value in keeping a billable rate handy, since it's an arbitrary rate. This is not to say you don't do cost accounting. But the important point is to do the cost accounting BEFORE you do the project, not during or after. Toyota does this quite successfully, it's know price-led costing.It's also important to remember that a "billable rate" is not cost accounting, since it includes a profit margin. No cost accounting theory that I know of allocates desired profit, just costs. To be true cost accounting, you must remove the built-in profit from the hourly rate.As to measuring profitability of each client, there are other ways to do this without timesheets. After Action Reviews, and project management (which you engineers are excellent at, far better than the average CPA or attorney), are two such methods.

What Replaces Timesheets?Here is a list of what replaces timesheets, based upon the empirical evidence from firms that have made the transition:

• Price-led costing
• Project management
• Key Predictive (not performance) Indicators
• After Action Reviews
• Before Action Reviews
• Fixed Price Agreements, Change Orders
• Chief Value Officer and/or a Pricing Cartel

The following is a partial list of resources dealing with each of the above.Price-Led CostingCost-plus Pricing: The Democracy of the Dead.How Much Are You Leaving on the Table Because of Mediocre Pricing?Sellers Change Pricing Strategies, Not Buyers.Hourly Billing is the Opium of the Profession.My ACCA book, Burying the Billable Hour, in pdf.My The Firm of the Future and Pricing on Purpose books.Project ManagementOur resident expert on Project Management is Ed Kless, who has written, and inspired, many brilliant posts on this topic. My favorites are:The Triangle of Truth.Elements of a Scope Document.Elements of a Change Request.A Critique of Project Management: A Means to Efficiency.The difference between goals and objectives.Defining the Word "Project."Ask VeraSage: Timesheets and resource planning.How should professionals scope complex jobs, inspired by Ed and Chris Marston of Exemplar Law Partners.Key Predictive (not performance) IndicatorsNo Timesheets vs. Utopia.He Who Says "A" Must Say "B."No Timesheets? Is it Possible?Ask VeraSage: How do you measure client profitability and employee productivity?Ask VeraSage: Why get rid of timesheets?Why we don't need consultants.Timesheets are Training Wheels.A Firm with No Timesheet: O'Byrne and Kennedy LLP. A case study by VeraSage Senior Fellow Paul O'Byrne (one of the few things from him on this blog, be sure to read it!).An Essay on Timesheets, by Paul Kennedy. This is one of the best explorations of this topic ever written. A must read.The Yank Strikes Back.My ACCA book, Trashing the Timesheet, in pdf.My The Firm of the Future and Measure What Matters to Customers: Using Key Predictive Indicators, books.After Action Reviews and Before Action ReviewsAfter Action Review—The Army Way. This post includes an excerpt from a US Army manual on how they conduct AARs. Highly recommended.My books, The Firm of the Future; Pricing on Purpose; Measure What Matters to Customers; and Mind Over Matter all deal with After Action Reviews and Before Action Reviews are dealt with in Mind Over Matter.Fixed Price Agreements and Change OrdersWhy Your Firm Needs to Offer Fixed Prices.Sample FPA and Change Order documents and other resources here.Ask VeraSage: Fixed Price Agreements and Engagement Letters.A Blinding Flash of the Obvious, which contains an example of a price menu from an Australian Trailblazer accounting firm.If You Don't Discuss Value, Expect to Discuss Hours.Utilizing Change Orders in Your Firm.My books cited above, including Burying the Billable Hour contain sample Fixed Price Agreements and Change Orders.Also, my Professional's Guide to Value Pricing, Sixth Edition (out of print), can be partially accessed from Google Books.Chief Value Officer/Pricing CartelYour Firm Should Establish a Pricing Cartel.Who's in Charge of Value in Your Firm?Ask VeraSage: Creating a Pricing Cartel.Ask VeraSage: How does a firm implement Value Pricing?Ed Kless' Cosmo Quiz to determine if your firm is truly Value Pricing.My book, Pricing on Purpose, also explores pricing cartels and the successful characteristics of a CVO.If this is so rational, why haven't more firms done it?This is a great question, one which we at VeraSage have spent a lot of time trying to answer and understand. Here are some thoughts on why more firms haven't trashed timesheets.The Diffusion of a New Idea.Old Dogs Don't Create New Tricks.The Answer to How Is YesWe believe if you understand "why" to do something, the "how" becomes much easier—merely the plumbing. Since there's no way to implement a bad idea, the "why" is critical.Read Peter Block's The Answer to How Is Yes for why this is so.I know, this is overwhelming. But think of it this way: All you have to do is read it and implement it. We've done most of the hard thinking for you.I will leave you with this analogy. Trashing the timesheet is a true revolution, perhaps not as dramatic as the signing of the Declaration of Independence, but a difficult objective to achieve across all PKF sectors nonetheless.In his book, Peter Block describes the six questions that are always asked when people are confronted with significant change:

1. How do you do it?
2. How long will it take?
3. How much does it cost?
4. How do you get those [other] people to change? [we get this all the time: I'm all for this, but my partner(s) won't go for it].
5. How do we measure it?
6. How have other people done it successfully?

How would Thomas Jefferson have answered these six questions?

1. I don't know.
2. I don't know.
3. Possibly your life.
4. I don't know.
5. I don't think you can measure Life, Liberty, and the Pursuit of Happiness.
6. No country has ever done it successfully the way we are proposing. Sign here.

Block suggests two better starting questions:

1. What [type of future] do we want to create together?
2. What is the price [we are] willing to pay to achieve it?

It is simply impossible to know how to do something until you attempt it. It is the leap, not the look, that generates the indispensable understanding and the necessary knowledge to generate wealth.I hope you find this list useful, refer to it often, share it with others and most importantly, implement the ideas as hundreds of other firms are doing.Along the way, keep us posted on your progress.I hope to see you in our Trailblazer section.