Value Based V Timesheets – Billing in Accounting Firms
I thought the Value Based No Timesheet Accounting Firm was a mythical creature. The 'Yeti'... I had never spotted one in real life. I had heard from business coaches and consultants that it’s “the future of billing”… I ran into the occasional firm that previously tried and turned back to timesheets several months in… saying "I had no idea what was happening in my firm"....
In my travels, I have now found this mythical creature. In plain sight. Multiple sightings. I have been able to get to know them and wanted to share my findings.
Definitions in this comparison
Timesheet Billing – May or may not be involved in fixed price billing. May or may not be charging upfront, in arrears or monthly arrangements. What defines this definition is that they use timesheets, and that time correlates to value.
Value Based Billing – Is involved in fixed price billing. It is scoped/quoted upfront. It may or may not be charged upfront, in arrears or monthly arrangements. What defines this definition is that they do not use timesheets and pricing is based on value. They will still create jobs and tasks. They will still invoice against the jobs and tasks.
What is value?
According to the ChangeGPS team on their Value Price Plan (VPP) Masterclass, it is;
1. Increased Profits
2. Less Tax
3. Increased Wealth
4. Saving Time
5. Peace of Mind
When I traditionally look at value-based billing, I immediately think of Business Brokering and Real Estate. The more you sell the property or business for, the higher the % commission. Creating more value means more revenue. Not directly connected to time, given the variables at play. Reputation, smarter marketing, wiser negotiations with the buyer, etc.
Can the same be applied for an accounting firm?
Let us get granular on this subject to chase down the answer to this question. Too often it is high level nonsense and examples fit for purpose. Like tax savings based on restructuring, taking a % of the tax savings is value based. However, it is not the foundation of Public Practice serving the small to medium enterprise (SME). The foundation is financials, tax, lodgements. So, let us use a foundation example. Lodgement of a quarterly BAS. The theory goes that the fee is based on value. $300 for a BAS lodgement. But how did this amount come to be on the table? Market rates? The market rates of a service are surely still aligned to time-based billing. I’ve been told that the accountant still comes up with this figure based on how long it will take them. Which immediately triggers the fact that this is not value based billing.
If we broaden our discussion to a fixed price agreement with a range of different service offerings to the client. I do see firms break down their fees between Value and WIP. As an example, $60k fixed price agreement paid monthly across the financial year with $20k of that agreement value and $40k WIP. The fee earning staff are held accountable to the WIP proportion. It goes against their recoverability metric and they are not given a free ride on the value write up. From the client’s perspective, they have peace of mind to know that the partner will answer the phone at 6.00pm on Friday night. The comfort that the accounting firm is aware of what needs to be done. What new legislations and government new subsidies are available. I would pay for that value. Knowing my accountant is on my team. Yes, they are charging me on a WIP basis for my needed lodgements, but I also pay for the value proportion. The expert in my corner, who understands my business and is available.
Reporting with Value Based Billing
Extending this out further, and into the reporting space. If we do not have timesheets, the foundation of productivity and recoverability is out the door. So how do you dictate success? How is an individual accountant given KPIs to succeed and drive performance?
The answer to that is revenue. When you invoice the client, a staff member is allocated a proportion of that job’s fee. So, what does that immediately spell out? This is a speed game for accountants. Fast. Fast. Fast. If you finish quickly, you bill more. The client gets the work faster.
Consequently, feedback from fee earning accountants, is that they prefer no timesheets. They are less stressed. Team orientated accounting firm. I question this. Why are they less stressed? Because they feel they are not accountable anymore? They can take the foot off the pedal.
When I go into accounting firms, they will almost certainly be timesheet-based accounting firms. They have a strong concentration on productivity, but what is generally the case, is also a failure on recoverability. 50-60% rates on average. Why? Because the staff are not being held accountable to this recoverability KPI.
Conclusion
I personally see value-based billing across accounting firms as fundamentally flawed. Drilling into the detail of the quotes/upfront fees, is generally a dollar figure based on time, or if created based on market rates, the market rates come from time-based value.
I think there is an element of marketing by the firm with this value-based billing concept. In essence they are a fixed price billing firm, no timesheets are irrelevant, and are just potentially creating a lack of accountability on the staff.
Clearly though that is my line in the sand view. Based on the firms I speak with, I think they are predominantly playing the position with reference to marketing, happier staff, and client acceptance.
There is enormous potential to have a hybrid WIP and Value billing system. It makes sense to me to have an element of both. It fit’s nicely inside a fixed price agreement where you can explain the annual fee. The WIP portion for financials, tax return lodgements, etc as well as the value proportion. At Etani, we have built in some steps to deal with both options. If you wanted to discuss this further with me, you can book in time with us here.
If you would like to learn more about reporting with Xero Practice Manager, check out this page