To what extent have you, your colleagues and your firm been looking at the efficiency, effectiveness and productiveness of your accounts and tax teams whilst in the working-from-home, locked down world we’ve been living in in recent times?
Certainly I've been experiencing a number of conversations with a number of firms around timesheets, and as a result I was stimulated by one of those firms to consider having a podcast discussion with several firms on the merits, or otherwise, of using timesheets.
One of the firms suggested - 'wouldn't it be great if you got the world's expert, Ron Baker involved as well!'
And I thought - 'that's a great idea. Let's ask him!', and I did, and I'm pleased, proud and privileged to say that on this podcast, you'll hear from Ron Baker!
You'll also hear from three very strong managing partners of accounting firms across the UK, one in the North, two in the South.
You’ll hear each of them sharing their experiences of not working with timesheets and working with time sheets.
And so we've created this podcast called the timesheet tussle, which I hope contributes to your thinking around the merits or otherwise of using timesheets and maybe other ways of driving the effectiveness, efficiency, productivity, and therefore, of course, the profitability of your firms.
So please join me, Nigel, Luke, John (the three managing partners) and Ron Baker at humanisethenumbers.online.
I hope you enjoy this very thought provoking podcast discussion.
"In the 30, some odd years, I've been doing this...
I'm happy to report, we've won this war, McKinsey & Co, Bain & Co and Accenture no longer do time sheets!"
Resources and Links
Soul of Enterprise Podcast https://www.thesoulofenterprise.com/
Episodes signposted by Ron:
Click the book cover images to learn more...
Changes in culture and recruitment
Making an impact
Team/family and their sense of achievement
Changes made based on team feedback
How will technological changes affect the accountant?
Click the play button below and use the slider on the audio below to get quickly to the chapters in the podcast.
Paul Shrimpling: Welcome to the Humanise The Numbers podcast series. Leaders, managers, and owners of ambitious accounting firms sharing insights, successes and issues that will challenge you and connect you and your firm to the ways and means of transforming your firm’s results.
Ron Baker: In the 30-some odd years I've been doing this, I'm happy to report we've won this war. McKinsey and Bain & Co and Accenture no longer do time sheets.
Paul Shrimpling: We've called this edition of the podcast series, the time sheet tussle. And if we're going to talk time sheets, it pays, it makes sense, don’t you think, to get the world's expert on trashing the time sheet involved.
And so I'm proud and privileged to say we have got Ronald J. Baker joining us today on this podcast. Now Ron started his CPA career in 1984 with KPMG's private business advisory services in San Francisco. Today, he is the founder of VeraSage Institute, the leading think tank dedicated to educating professionals internationally.
He's also a radio talk show host on www.voiceamerica.com with his show, The Soul of Enterprise (business in the knowledge economy). Stay with us to the end of the podcast and you'll hear Ron signpost a handful of specific shows that are relevant to the discussion we're about to have on this podcast. Ron has also authored seven best-selling books, including The Firm of The Future, Pricing on Purpose, Measure What Matters to Customers (my personal favourite) and Implementing Value Pricing. He's also toured the world spreading his value pricing message to over 250,000 professionals. He's been named on Accounting Today's top 100 most influential people in the profession, 2001, 2007 and 2011 to 2020, and inducted into the CPA Practice Advisor Hall of Fame in 2018.
He's a faculty member of the Professional Pricing Society, and he presently lives in Petaluma, California, but he's with us today on the Humanise The Numbers podcast.
Joining Ron and myself are three director-owners of three different firms, Luke, John and Nigel. And we're going to get them to introduce themselves. Let's start with Luke.
Luke Smith: My name's Luke Smith. I have a firm of 12 people in Jersey in the Channel Islands called Purpose. There are two directors in that firm. There's 38 monthly FPAs, fixed price agreements, and turnover, a little over a million pounds a year. In terms of my journey with time sheets – so back in 2007, I left industry having trained with KPMG, ex-audit, and bought into a local practice. Used to do time sheets to the penny. Got very excited about it every month with 12 to 15 staff members going through that process. Met Steve […] and Paul Dunn in 2011 and then went on a journey of discovery. Read Firm of the Future, Implementing Value Pricing, Pricing on Purpose, Measure What Matters, The Goal, Absolutely Certainty, E-Myth, Strategy and The Fat Smoker, the whole, the whole everything by […], you know, the whole lot and stopped doing time sheets straight after that. Moved everybody onto fixed priced, went very well for a very long time with that.
And we just implemented a new job management system, which has the ability to track time, but not put chargeout rates in – you can't put any financial information into it. And so that's where we are with that.
Paul Shrimpling: Thanks, Luke. John, how about you?
John Hillier: My name is John Hillier. I'm director and owner with another four equity owners of a firm called Condy Mathias based down in Devon in the West Country. We've got a team of 30 people working for us across two offices. Business clients – I did a quick look-see on our database earlier, which has 600 instances, although I freely admit it does need a bit of housekeeping. That’s another thing on the list of things to do. Total fees – if we hit target by the end of March, it'll be 1.7 million, which will be an increase, we hope, of six, six and a half percent over last year. In terms of the time sheets journey, I think I'm probably a bit earlier in the journey than Luke is, although I am an avid devotee of value pricing. I've been using value pricing extremely successfully with one-off project work and new clients. And I’ve had some tremendous success with that. So I've been practicing that for maybe four or five years, and I realized now that time sheets or the trashing of time sheets might be another logical step on that journey. The whole issue of time sheets in the firm came indirectly from a conversation I had with one of my business partners a few weeks ago wherein I was suggesting that we ought to be billing all our clients in advance, getting them set up on direct debits, just to improve the cashflow of the firm. And one of my business partners pushed back and said that'll just “expletive up” our internal accounting and cause us lots of more work, which I just see as a system issue. You know, we could solve that by working out what to do about it.
And if we did that, the conversation then went on to, well, why do we need time sheets? If we agree “in advance”, billing in advance, there's no need to bother with time sheets anymore. And we wouldn't end up with WIP in our accounts, which is, you know, based on these arbitrary charge at rates that we use. So that's really where I've got to on the issue.
Paul Shrimpling: Brilliant. Thanks, John. Thank you very much. Nigel, do you want to give us your backstory?
Nigel Bennett: I’m Nigel Bennett, I’m the chairman of Hallidays Group Limited. I was the managing director for about 15 years. I stepped down from the role as managing director to become chairman, to become the COO of Xeinadin Group Limited, which is a group of about a hundred accountancy firms that turns over about a hundred million. And I'm busy trying to extricate myself from that role, which hopefully will happen in two weeks, as I'm actually working beyond my retirement date and for various reasons. My time sheet journey probably started initially with looking at the clients that Hallidays worked for who were essentially compliance clients. We were providing a compliance service. And we were focusing internally on ourselves, and I think that's something that time sheets makes you do. And I wanted to find a way of driving the business towards delivering things that matter to clients and not what mattered to accountants.
So I looked around for a piece of software in the external market to replace time sheets and there wasn't anything. So we wrote something that measured the speed of the people to do jobs and measured tasks that we think were more relevant and mattered more to clients. That's actual process of giving the time sheets was part of it. I wasn't really thinking about giving time sheets up, but the actual catalyst for giving time sheet up was a presentation given by a certain Ron Baker that I think was at East Midlands airport. I think you'd flown over from America. I think it's about 20 years ago. I couldn't tell you exactly when. You look exactly the same age, Ron, by the way.
Ron Baker: Right after 2001, 9/11. Was that it?
Nigel Bennett: Around then, yes, it was.
Ron Baker: Wow. Okay.
Nigel Bennett: And that's when I thought, you know, we don't really need time sheets. We surveyed the team and with one or two exceptions out of about 40 people, there was wild enthusiasm at the team level for getting rid of time sheets and less so at the senior team level. And we've been on that journey since. We've never thought of going back. And my only thing to say is if you are going to get rid of time sheets, you need to make sure there's something else there to replace them before you just stick them in the bin.
Paul Shrimpling: That's interesting, Nigel. We're going to bring Ron in in a second. So Luke, you're looking at re-instigating time sheets. If you would just share, what it is that's prompting that, and then we'll bring Ron into chew that one over and hopefully spit it out again.
Luke Smith: So there’s sort of two big things in that, I don't know if they're specific to our organization, but the first one is deadlines, stress and pressure.
So we've got about 10 people. We've got about 40 clients, like I said. On average, those 40 clients have three or four organizations, entities, businesses that they're running, and we're doing consolidations, etc. Every month we’re churning out those 140 sets of accounts and 30 board meetings. And what we're doing there, as whilst we're applying what I would call knowledge work to the board meetings and assisting the clients, we are a factory for management accounting, and we've got a lot going on in terms of pretty strong processes through Xero and Xero Workpapers. And what we're finding is that our estimates of how long we think people should take to do things are not matching reality because we're missing deadlines on a fairly regular basis.
The junior team members were saying, well, this is how long it takes. And we're saying, well, we don't understand why that's the case. And they don't know what they're taking longer on or not. So that's one part of it.
And then the extra part of it is most of the clients we work with…some of them are daily and the rest of them are weekly. So we're heavily involved in their business. We're an outsourced finance function. And that means you get loads of requests all the time for things that are not “in the box” in terms of what a fixed price agreement would say. Quite a lot of those things are one hour, two hours here or there. Going through a change order process would take longer than actually doing the thing.
Or if it wouldn’t, you didn't know at the start before you tried to help the client out to do that thing. That it's actually going to take half a day and then you start missing deadlines and then everything sort of falls over.
We also don't have a group of people who are comfortable talking about price with anybody. So none of the accountants want to. They know these people very well, they work with them every day and they don't feel comfortable talking about money. And they don't really have an incentive to do that and they wouldn't want to do that. So those are, because of the way we’re set up, you know, £25-30,000 average fee across a small number of very close clients, we think that we just need to have more visibility of what the team is doing. Having a project and bringing in a project manager or an ops manager to just watch them doesn't…none of them wanted that. So they've actually welcomed back putting their time sheets in and reviewing them. I mean the junior staff are doing it, the managers aren’t – you might say, well, there's less value there because we don't know the overall time on the job, but ultimately, the more junior members of staff are actually quite comfortable saying how long things are taking them.
Paul Shrimpling: Okay. So, Ron, how do you want to respond to Luke? Do you have questions you want to clairfy things on or do you want to dive in?
Ron Baker: Well, all of these things that we've talked about, that I've heard all of you say, all the defenses of time sheets revolve around four issues, period.
In my whole 30 years of trying to destroy this thing and give it the death penalty, I've heard four defenses of timesheets. One, we need them for pricing. I think it's safe to say all of you on this call do not believe that. Is that fair? Okay. As Socrates said, he who says A must say B.
The second reason is we need them to track the efficiency of our team members. How would I know whether or not team member A spent longer than team member B on a certain job? How would I know if they were a good accountant? You know, the whole what you can measure you can manage.
Third is we need them for cost accounting. Otherwise, how in the world do you figure out customer profit? How in the world would you figure out job profit or hourly profit?
And the fourth defense is we need them for project management. If I don't know how long it takes, you know, we have budgets of projected time into the future, which VeraSage is okay with. We're not saying eliminate time. We're saying view it as is what it really is. Time is a constraint. It's not a cost. It has nothing to do with value. It's just a constraint. We can project time into the future. What I'm against is the fetishization of taking that projected time and comparing it to actual, after the fact. What's the point? The damage has been done.
We're all sitting here crying over spilled milk. So I think we have nuked these four issues. They're blown out of the sky. The time sheet came into the profession in the United States of America first, from what I can tell, in 1919 in a law firm in Boston, Massachusetts, heavily inspired by this guy named Frederick Winslow Taylor, who was an absolute fraud in his whole scientific management thing.
And my question is, has the world changed in 102 years? And not even that, forget the technology, forget the software that we have at our fingertips now, the apps, the whole ecosystem, forget all that. What about our thinking? Has our thinking evolved in 102 years? Might we have better processes than looking at something that's after the fact? Of course we do.
We've just been ignoring it. I have the magic solution for what replaces the time sheet. It's not magic, though. And it's not easy. I'm not saying any of this is simple, but I have never advocated ‘just get rid of the time sheet.’ We've always tried to replace it with superior systems or processes, whatever you want to call it, that we're more attuned to focusing on results rather than inputs.
I don't care about inputs. It's like the old Soviet Union. Give them a quota, tell them to build a hundred pounds of nails and they build one giant one, right? I mean, they hit the quota, but it's not valuable to anyone. So I'll just, I'll start there. And then I'll also give everybody encouragement and say in the 30-some odd years I've been doing this, I'm happy to report we've won this war. McKinsey and Bain & Co and Accenture no longer do time sheets. Now, they do a lot of knowledge work that's highly what we call… we make a distinction between magic and logic work. You know, the routine. I think you were talking about it, Paul, the routine, or Luke, the routine work, the predictable work – that’s the logic work.
The magic work is the creativity, the ideation, the innovation, the R&D. These guys do both. A lot of advertising agencies like Ogilvy and Mather do both. A lot of those folks have also gotten rid of time sheets. And they did this hand-in-hand with value pricing, because I posit to you that the only reason we're so attached to the time sheet is because it was part of our business model for so long. We sell time. Well, we're no longer selling time under a value pricing model, which is a change in a business model.
And when you change a business model, two things happen, at least two things happen. One, you always change the pricing strategies. So Airbnb does not use the same pricing strategy as Hilton or Marriott. And the second thing that changes is the metrics, the internal dashboards, the KPIs, if you will, what we look at. And I can assure you that Airbnb does not have the same dashboard as Hilton or Marriott. They look at different metrics and we need different metrics in a value pricing firm from an hourly firm. There's no place for a time sheet in a value pricing from. So, I'll stop there.
Paul Shrimpling: So, Luke, before we were talking about this difference between what Ron calls the logic work and the magic work. You were talking about the factory work versus the advisory work. Is there a specific question you've got for Ron that relates to your issue about getting back to time sheets?
Luke Smith: Yeah, well, I think in terms of optimal strategies, if you're a firm of 10 to 12 people, you have a different resource than Accenture and the others. And there is a lot of work to be done around value, chief value officers and pricing councils and all those things that you can afford to do if you're bigger you can take away and have more people do all the different roles and have different personality types and all that stuff. I think at a small level, when the vast majority of the industry continues to effectively churn statutory accounts and management accounts out, whilst the milk has been spilled, history does repeat itself on a regular basis. And I know that because it has again this morning with somebody upset.
So there is things to be learned from history and, yes, there are ways of managing those processes that are different. But I, having had eight or nine years without knowing at all what's going on in terms of having a way that people will happily just get habitualized, getting information into our system, it's been a lot easier and certainly for a lot of clients, you know, a lot of clients that we work, with when we have introduced a system into their business, they make more profit the next two or three months after, because they just don't have visibility, and it's an easier way of doing it, a cheaper, easier way of identifying lost revenue.
So I guess the question is, is there a bite point at which you're big enough to implement, wholesale, this change, and is there an argument at a lower level to understand, if you're not doing the magic, and I completely get that, is there a point there where it's still worth knowing, or not?
Paul Shrimpling: All right. I'm going to get Ron to answer that. And then I'm going to come to you, Nigel, to actually respond to that as well, if I can. Ron?
Ron Baker: Well, yeah, it's interesting. This whole revolution started in small firms – solos, two partner, three partner, four partner. I could never get the big firms to talk about it. And we've heard every excuse in the book why it can't be done and they're all contradictory.
Oh, well, that's easy for them. They're a small firm. They can do it. That's what the big four would tell me. You go to a small firm and they say, well, that's easy for the big guys because they have more resources. You know, that's easy for you. You're west of the Atlantic, I'm east of the Atlantic, that's easy for you. Your partners drive bigger cars than ours. You know, we've heard every excuse in the book for this. And the fact is, it's applicable to all size firms. I think the smaller you are, the easier it is to implement.
But let me just say, what replaces time sheets? Well, obviously value pricing. It sounds like you're all doing that. Fixed price agreements, whatever. Obviously, I'm a big advocate of a value council or a chief value officer. I don't think partners should price their own work. You know I think why authors and actors have agents is because those agents get them a better price.
We all suck at selling ourselves. We need to own up to that and realize it. And a lot of the problems, especially with these small change orders, one hour, two hour, half day here and there is we wimped out on the price to begin with, right? We always overestimate how quick we can get something done. And that's not a sign of bad project management, it’s a sign of bad pricing, if anything. It also could be sign of too many customers. The other thing is we need to do better at capacity and cashflow modelling, and we need proper project management.
And look, I do a radio show with Ed Kless from Sage, and this guy is a certified project manager, PMI Institute. He's got the certificates, it’s been his whole life. And he says, if you think that real project management is looking at time sheets and arrears, you're kidding yourself. Project managers have to worry about projecting capacity into the future, not looking backwards.
The other thing is key predictive indicators. I have a list of favorite KPIs, but here's the big one. And Luke, I think this would solve your problem, I really do. Well, let me say this. I think it would be a better system than going back to time sheets. I don't like the word solution because I don't think there are solutions. I think there's only trade-offs.
Implement after-action reviews – because after-action reviews actually give you context. There’s a reason every military unit around the globe uses this process and it's a series of four simple questions. The army has very strict guidelines. I've read what your army does, my army, the Canadian army, the Israeli army. They all call these things different things, but it's four questions.
What was supposed to happen on this engagement? What actually happened on this engagement? The ground troop is the… you know, like Mike Tyson said, everybody's got a plan until you're hit in the face. So there's always a difference between what you planned, what the objectives were and what actually happened out there on the ground – you met the enemy.
What did we learn from those deviations, from what was expected to happen? There were positive things out of that. There were probably negative things. And how could we do better next time? I've got a one page after-action review agenda that we kind of took the army’s formal agenda and tweaked it for a knowledge firm. And I'm happy to send this to you, Paul. And it's up on our show notes as well. We've got a whole show dedicated to what we call the best learning tool ever. You're only supposed to spend 50 minutes on this and I'm not saying do it on every single customer that you have, maybe do it on a group of customers or a group of projects, or after a particular busy season, certainly do it on the top 20% of your customers that generate 80% of your revenue, but do it because this thing is more contextual, then looking at a time sheet.
If I look at a time sheet and say, Luke, we projected you were supposed to spend 20 hours on that and you spent 40, that doesn't tell me anything. It doesn't give me any context. Why? Well, maybe the customer came in and you had to hold their hand or comfort them, or explain something really difficult.
I mean, there could be a million reasons why something goes over or under budget, and just looking at a time sheet doesn't give you any context. None. There's no knowledge gained from looking at the time sheet. There's tremendous knowledge capture from doing the after-action review, especially if you do it quickly after an engagement. You have to do these quick.
And it is a big cultural change. Paul Kennedy and his firm O’Byrne and Kennedy, over there, long-time VeraSage colleague, they got rid of time sheets in 2003. In fact, Nigel, it was after that same post-2001 event that we did that I think you were at, where they sat in the lobby of that hotel and figured out a plan to get rid of time sheets, which they ultimately did
Around the same time, they implemented after-action reviews and it propelled their firm tremendously because now they could really understand where the system breakdowns were, why things were taking longer than they thought, how could they do it faster?
Some things they eliminated because they figured out that they're not adding any value, they're just…we're only doing this for the department of paperwork in our firm. There's no value here for the customer. So I think the after-action review goes a long way and I'm stunned how many professional firms don't use it.
Paul Shrimpling: Luke, you looked as though you were twitching a bit about whether time sheets were actually contextual.
Luke Smith: We're not going to spend 40 minutes on 40 engagements. That's just…, it would take a week to work it out. So how do you prioritise which ones? Cause I agree with you…
Ron Baker: Well, you could spend a lot of time doing time sheets and inputting them in and reviewing them.
Luke Smith: I mean, I know proportionately…how do we prioritize which ones we do? Cause it's a valid point. We don't do it enough and we…
Ron Baker: Top 20/80 rule.
Luke Smith: So how do I pick those? How do I pick the ones that go wrong, if I don't know which ones go wrong?
Ron Baker: Then do the ones that go wrong first.
Luke Smith: But I don’t know which ones they are because we haven't got visibility of that. So that's what I'm saying. How do you prioritize which ones you pick?
Nigel Bennett: Even if you don't have time sheets, Luke, your team know which ones have gone wrong.
Ron Baker: Your team knows, Luke. I mean, just like, I bet if I asked you who your star team members are and who are, I'm not going to say duds, but you know what I mean? Just a ranking. And the thing is, you have that, you know that just through judgment. It's not a measurement. Knowledge work isn't about measurement, it's about judgment. I can't measure another surgeon's ability. I have to judge it if I'm a surgeon and it's the same with knowledge workers. You know who the good ones are just, and they know who the bad customers are.
Luke Smith: We'll give that a go.
Paul Shrimpling: Well, if you say you've got 40 jobs and you just did one job a week with an after-action review, you know, by the time it gets to the end of the year, you're cycling round again.
Luke Smith: We should be doing more of it. I think the energy involved in the next thing and getting things done is, you know, everybody is under a lot of pressure on a regular basis. And in terms of sort of being cheap on the price, I mean, we’re asking people to pay six or seven times what they paid their previous accountant and it's not an easy sell.
So, you know, how do we… Paul, I talked to you before about how we're splitting the service up between the magic and the logic a bit more going forward, and that will help. But yeah, I'll ask them who they hate working for and why, and I guess that's the best way of prioritizing which jobs to do…
Ron Baker: Make it a Christmas bonus.
Paul Shrimpling: Now, Nigel, what are your further thoughts about Luke’s issue and challenge?
Nigel: I think there's probably two thing that I would say. I think one thing is a generality about the accountants and the type of people who end up running accountancy firms. And another one is about how we manage profitability in our firm, which might help.
So first of all, when things go wrong in accounting practices, professional services firms, the people at the top of the firms tend to want to manage in detail the issue, whether it's a person issue or whether it's a job issue. And the fact of the matter is that, although Luke has probably got issues with clients and issues with team members, probably 95% of the jobs and 95% of the team, 95% of the time, are absolutely doing fine.
And we have a tendency to introduce systems that apply to 100% of the clients and 100% of the team, instead of managing the 5% that aren't working. And that is never a good thing, in my opinion. You are actually saying to your team who are working effectively, I don't trust you.
That's what you're saying to them. And it’s an abdication of responsibility in my opinion, at a management level, to do that, because what you should be doing is managing the individual issues that are arising at a client. If it's the fault of the client, of scope creep, you need to talk to the clients, not introduce the system that applies to all clients. If you've got a problem with a team member, everybody knows who the problem team members are, by the way, and they know the stars. You certainly, you must know who they are, Luke. And if you don't know, go and ask your managers, they know, and if they don't know, go and ask the secretaries because they know as well.
So that's one thing that I think applies to massive swaths of the profession, and I think it's partly a problem with the type of people that track to the profession, the way that the profession is portrayed by the bodies, you know, the institutes and things like that – they're a bit stuffy. They attract people who, and I'm not suggesting we're all like this because we're on this call, obviously we're not, but the profession is full of these people who have a certain profile. And part of that profile is wanting to do things in a certain, highly systemized way and micromanage people through that process.
And I don't think that is a good way of running a modern firm. And it's certainly not a good way for the younger generation, the ones we manage. They do not expect to be managed in that way, and they want greater freedom. And I like the football analogy that you use, Paul, so you could probably drop that in later. It's a great analogy of how you should manage people.
Ron Baker: We're control freaks.
Nigel Bennett: Yeah, exactly. Re the second, I just thought I'd tell you how we manage profit in the firm. So we have different teams in the firm, so that a team might be somewhere between 800,000 and a million.
So maybe not too dissimilar from you, Luke, if you add a couple of them together. And as I said, you've got to put things in that that surround removing time sheets. It's not just, we'll get rid of time sheets. And Ron said that as well. So you have to introduce a culture into the team and honesty and transparency about what you're going on.
And part of that is monitoring the team based on profitability. So as long as I know broadly that the direct costs of… the turnover is on target and the direct costs are around about 30%, I know how that that team is doing. I don't really need to know anything else from a profitability perspective.
I don't care if one of the jobs is more profitable and one of them is less, one of the team members cocks up and one of them didn't. Actually, within the team they have monthly meetings and they go through that stuff in detail. And if there's a particular problem with a person, we go to the pre-review meetings and manage the individual person the problem’s with.
So I think that's…The other side to that is that if you work out what your sweet spot is for your direct costs, if you then see them creeping down to the 25% level, and I’m not doing them now cause I’m the chairman, then I would have the monthly meetings with the team leaders and if the direct cost is creeping down to 25%, I'll be talking to them about efficiencies. Are you having difficulty getting jobs out the door, or difficulty in hitting deadlines, is there stress in your team, is the team happiness going down? Which is kind of different metrics from what you might otherwise think you'd be measuring.
If the direct costs are going up and getting to 33, 34%, I'm having conversations about pricing and having conversations about efficiency, putting the wrong people on the jobs, and those sort of conversations.
One key element to that sort of profit equation is you have to link salaries to turnover budgets. So when we do the turnover budgets for the following year, at the same time we do the salary increases.
Because when we had them separate, we used to say, okay, now what kind of turnover increase can you get this year? Oh, I don't think we can get any turnover increase this year. It'll be about the same as last year, maybe a little bit less even. And what about your salaries? What salaries do you…? Oh, I think we need to put them up by 10%. We need to pay everybody a lot more money.
And obviously that makes no commercial sense whatsoever, but if you don't allow the team to make that link, then they don't really understand that. And one of the points that you said, Luke, was that you didn't think your team wanted to have the pricing and expectations meeting.
We pushed that down to quite a low level. And actually, if you have those sort of dialogues at quite a low level about people. So if they’ve been asked to do that additional piece of work, and they know that they've got to, if it's of any significance, they've got to basically say there's an additional fee. And they've got to come up with some sort of verbal agreement.
Because we've got good relationships with the client, we don't, sometimes we don't insist they agree a fee. We’ve just got to get that recognition out there that there's going to be an additional fee and the dialogue has to happen. But if they know their salary rises are linked to the turnover and their turnover is linked to the price increases and making sure that you bill for all the work that we're that's done, then when they do the price renewal conversations, they tend to be on the high side and you tend to pick up more of the of the extra work, because they know that, you know, when it comes to the salary conversations, cause you can do this, the turnover calculation quite arithmetically for an accountancy firm based on the previous firm, your churn rate, etc., etc. So, that's about all I've got to say.
Paul Shrimpling: So it strikes me that, you know, Ron's kicked it off, is there's a conflict conversation around the after-action review. That's one type of conflict conversation. Another is a conflict conversation around the timesheets and another is what Nigel's just brought up, a conflict conversation around salaries versus turnover.
And Nigel and I've chewed this over many a time over the years. It's about building commerciality knowledge insight into your teams, so that they're connecting the dots between their costs and the performance of their role in delivering for the client, which I think is Nigel's point.
So, John, I'm thinking you've got a conflict conversation with your fellow business owners who are resisting taking time sheets out. What question do you want to post to either Ron, Luke or Nigel that'll help you out, do you think, in that specific conflict conversation?
John Hillier: Well, I am very interested in just exploring in a bit more detail about the after-action reviews, Ron. A specific question – would those include looking at the financial performance of that job? So taking Nigel's point about the direct costs and some overhead, would it include a review it to see whether you would have actually made a profit or not on that job?
Ron Baker: No, because I don't think you can compute profit per job, profit per customer, it's undoable. And this is the cost accounting defence, and cost accounting is awful, one of the worst ideas that engineers foisted on mankind. Accountants didn't come up with it, by the way, engineers did. And I don't know why we're so attached to it, but we are.
The fact of the matter is customers and jobs don't have costs. Firms have costs, and trying to allocate your rent and paperclips to every single job is impossible. You're starting to make relationships that have no bearing. I mean, if you have an accountant that you're paying a salary to, and they spend two more hours on that job than you budgeted, tell me who you write the check to.
It's not a cash transaction, so it doesn't matter. What matters is pricing and capacity management, project management. And so I'm not worried about profit per job. Nigel made a reference to like, he looks at the portfolio. That's what I'm looking at. I'm looking at a group of customers across profit, across a portfolio.
Now, if we have good customer onboarding, we only work with customers who adore us and are willing to pay us, then worrying about profit per job per customer per hour just goes away. I know I'm going to be profitable if I price it right.
So no, the AAR is a very high level, 30,000 foot review of the engagement. You can talk about why did this particular aspect take longer? You know, the customer wasn't ready. The customer was supposed to give us this information and they didn't. And therefore we had to sit out there and do the reconciliations or whatever. You can do all that in an after-action review, but they are just kind of a high level way to capture knowledge and share that knowledge with the rest of the team.
Just one quick story. I sat in an ICU ward of a hospital that does an after-action review at the end of every single shift, every eight to 10 hour shift, the two head doctors, the RNs, the LPNs, all the other medical personnel that work in this ICU life and death situation. Sit down at the end of every shift, take the chairs, put them in the circle in the middle of the ward, all these sick people around. And they talk about the day's activities. What went right? What went wrong? What could we do better? And they do it every single day. And he let me sit in on one of them. And my jaw hit the floor because this guy came out of the military and that's why he implemented them.
And I said to him, what has happened to your lawsuits as a result of doing these? He said, they're way down, because we're constantly improving. And I sat there through this AAR and I noticed that LPNs and RNs, all these highly dedicated medical personnel, were admitting freely in front of their bosses, mistakes they had made, errors they had made.
The AAR is not a gotcha tool. It's not an annual performance review. It's a learning tool to help us improve going forward. And so it's kind of a safe space to admit errors. You know you're not going to be dinged on your promotion, on your annual performance review, if you admit a mistake. And then other people are going to be able to chime in and say, yeah, you know, when you have to give that patient an IV, you have to do this first and do that and then turn them over and then put the IV in them. And I, and I sat there and watched this dynamic play out. They only spent 30 minutes. But they do it at the end of every shift.
I posit to you that's the best 30 minutes you can spend in a knowledge firm. Time spent on reconnaissance, as the military says, is never wasted. And we don't spend enough time reflecting on the lessons that we learned from the activities that we perform. We just frenetically jump from one activity to the next and never step back and reflect.
That would never happen in the army. It would never happen among a group of, like what do you guys have the over there, the Red Arrows. They’re doing after-action reviews at the end of every air show they do, usually four to six hours. They go over every aspect and you say, well, our team can't afford this, or our firm can't afford. You can't afford not to do this, because it's true knowledge capture and it's true improvement of future performance. This improves future performance, time sheets do not. Period. Time sheets are not contextual enough to improve future performance.
John Hillier: You’ll know if something took longer than it should, and actually having the hours recorded is, as you say, irrelevant. It just took longer than it should have done.
So we've got to change what we do next time to either reduce those hours or, if we can't reduce those hours, we've got to increase the fee. Cause it's taking too long. So the actual measurement of those hours, I think you're saying, is just completely irrelevant.
Ron Baker: What you’re doing when you come into it…And look, I'm the chief value officer of the 22nd largest firm here in the United States. And I have insisted on doing after-action reviews, trying to get them inside the culture, which is really different in a 1400 person firm. But at least we're doing them on jobs that have gone south.
So I end up doing a lot of after-action reviews on jobs that we just butchered, and most of the errors that we make, we didn't spend enough time upfront diagnosing the problem. We just jumped right into the work, which is always a mistake, right. We spend no time on diagnosis.
It’s like if we went to a heart surgeon and said, doc, I think I need heart surgery. Oh, hop up on the table, Ron. No tests, no MRI, no CAT scan, no EKG, nothing. And then we get in there and the thing’s a mess, and we wonder why we spent so much time on it. And so it's really important to do the after-action reviews. I think, start on jobs that go south because you do know.
But the last thing I want to do to my team is come in with time sheet data, come in after the war and bayonet the wounded. Well, you spent three times more on this than we projected. So what? There could be a million reasons for that. I mean, one, you give me stuff that I'm not trained to do, so maybe I need more training, or you've piled my plate so high I didn't make the right trade-off. Some other partner came in with a rush job or whatever. This is why people lie on time sheets. They fudge on time sheets. They eat time. You know, we think the time sheets are accurate. They're not. How can you possibly account for every six minutes of your day? How can you possibly do that?
John Hillier: It's interesting because I said at the beginning, I have been having some great success with the value pricing on one-off projects. And when you get the prospect of a one-off project for a client, if you're value pricing it correctly, you will force yourself to think about what you've got to do for that client very carefully. And I found myself doing that so that I…well, A, you establish the value. You find out what's going to be of value to that client. And then B, you've automatically told yourself what you're going to need to do, not in terms of hours, but in terms of value. And then you come up with the value price projects, which, as I said, I've had some astonishing success with, so if you do it right, I suppose it's self fulfilling.
Ron Baker: Yes. Price is the number one driver of profit. Period. I mean, more than efficiency gains, more than rainmaking. And if you price things right, at a good price that's commensurate with value, then you can take the extra time with the customer that might need a little bit more hand holding or coaching or comforting through a tough time, whatever.
We're not selling time anymore. We're not focused on the time. This idea that if we do things quicker we'll be more profitable is a huge myth. Our costs for technology, for human capital, for the rent that we pay on our buildings, these costs exist from a cash basis I'm talking about irrespective, of how they're utilized.
So whether or not your accountants are spending five or 10 hours on a particular customer, your cash costs are no different. So when you model cash, you get rid of this fuzzy thinking of allocating costs. And so that's a really good point.
Paul Shrimpling: Nigel, what do you think John can or should do to engage with his fellow owners and the team in terms of actually dropping the time sheet process within the firm, having gone through that? I'll come to you again on that one as well, Luke, after Nigel's said his peace.
Nigel: I think surveying them was definitely a good thing to do to get the feedback, and then having a sort of dialogue in the […] meetings about what we're going to do and when we were going to do it. We did make some mistakes. One thing that I didn't realize was that there are a small number of people and I mean a small number of people, certainly less than 5%, in fact, we only have one in our firm, who actually see time sheets is them recording time as the justification of their job. That's how they justify their existence in a way, and taking the time sheets away from that lady actually caused her an enormous amount of stress and she actually left.
And we hadn’t recognized that at all. So you have to be a little bit careful about that. Also, one of my co-directors who was the highest biller, and he was wedded to time sheets and he used to see his clients after at the end of the year and give them all an extra bill based on time. And a couple of years later he lost his largest client that I'd saved for him once by doing exactly the same thing. It was a well in excess of £100k fee.
So I knocked time sheets off on such and such a day and the team’s really delighted. Three months later, I found out that, you know who it is, Paul, but I better not say his name, in case you put it in, three months later, I found out in the notes area of the software that he was using that he'd been recording time and carried on doing the same basis. I went absolutely ballistic with him and he stopped doing that except on his probate jobs, but I said that’s okay, that’s allowable.
And if had gone back to him about a year after that and said, you need to go back to re-recording time, he’d completely flipped and became the absolute advocate of the way that we were doing it. But that's another typical trait of typical accountants – they hate change. And then when they get to the new norm, then they hate changing from the new norm.
Paul Shrimpling: Yeah. But I do wonder though, Nigel, if it's a bit like, I remember my father giving up smoking and he stood up in front of us and got a roll of sellotape and smoked one puff off the first cigarette and then put the whole sellotape on it with all us sat around with him, and said, right, I'm never smoking ever again. And I've never seen anyone rant at people who smoked after he flipped. It's that, you know, almost that road to Damascus piece, maybe. Very good. So, Luke, what are your thoughts in terms of John's conflict conversation with the team, but I'm thinking more about the fellow directors.
Luke Smith: Well, we've had nine or 10 years of not having them andthe margins are fine on a pool basis, it's all good. It's been a great journey, I've got a lot of appreciation for all the literature and everything else.
I mean, Paul knows that I don't believe in democracy. So benevolent dictatorship is the way forward and I would just tell them it's happening. But in terms of practical solutions, you do get comfortable with not knowing what's going on. I think where we are is, we have been under a significant amount of pressure because growth is coming very fast and we're not coping well with that.
And so saying to people, and I will say to them, because it is a benevolent dictatorship, but we will go, right, what do we do and what are we doing wrong and blah, blah, blah. But actually it's a resource thing, we just haven't got enough people in the right places.
And I think with you guys, as long as you've got some internal non-client-facing people, cause we don't really have anybody that doesn't do client […] because we all enjoy what we do, and with most of my conversations, I'm on the board of lots of the businesses and it's all lots of fun.
Actually you need someone who knits it all together and monitors it and understands it. And that's the investment. And the point I was making earlier is, is the cost of that investment and the risk less or more than going back to the crutch. That's the two sides of that.
And it's certainly a quicker fix, but … well, I'll see what they say tomorrow at breakfast and we’ll see what happens.
John, there's no reason not to do it. And everybody that I know that has, has made more money as a result of doing it. It may just be that when you hit certain growth points, I don’t think growth is a straight line, growth is spiky, and it's identifying that and when you're going to hit that spike.
Paul Shrimpling: And actually manage that capacity piece, which you think is the point you're making, Luke. So I'm going to come back to Luke, John, and Nigel for their final comments. And what I want you to think about is what is it about this discussion today that stood out have been of most value? But before we get to that, Ron, is there any final thoughts or insights that you think are relevant to our conversation today?
Ron Baker: Yeah, just one. There’s value pricing 1.0 out there, which we've been talking about and teaching since the nineties. There's value pricing 2.0, and 2.0 blows up all of this, blows up the change request. It blows up the fixed price agreement, it blows up everything and that's the subscription business model.
And it also changes what we measure. The income statement, the gap income statement looks different, very different on a subscription business model. That's a firm with annual recurring revenue. And I do believe that that is the firm of the future. It's going to be subscription-based and that's going to mean for us probably fewer customers at a higher price, but basically you tell them, whatever you need, you're covered, whatever we can do under our roof, you're covered.
If we can't do it, we'll go quarterback with a firm or an expert who can do it. And we'll shepherd that relationship through to the end result. To me, it's a more sane way to run a professional firm. I mean, the subscription economy is literally a tsunami around the world.
Most unicorns are subscription-based, most growth during the pandemic has been subscription-based, businesses that have weathered the pandemic really well had been subscription-based, and we already have a model inside professional firms to do this. Now I know you guys don't have this in the UK, but they're concierge medical practices and direct primary care medical practices.
So general physicians over here no longer take insurance and they charge their customers anywhere from $100 a month to $5,000 a month, depending on who their segments are. Some go after just CEOs. And they basically say, for anything medically that you need, and a GP can usually handle somewhere between 60 and 80% of your medical needs, not everything, but for what you do need, you're covered. You break a leg, you need stitches, you're covered, and we can do the same thing.
And it's a much saner, much less friction, much less bureaucracy, much less paperwork. You don't have to go through these annual FPA discussions. You just focus on where the customer is now and where do they want to be in the future and how can we guide that transformation? And that's an ongoing, continuous process.
And that just doesn't happen once a year. I mean, people are videos, not pictures, right? We're constantly learning and changing and our client customers are changing. And so I'm really excited about the possibilities of VP 2.0. And that just makes everything we talked about today completely obsolete.
Paul Shrimpling: Very good. Thank you very much, Ron. So guys, of everything we've talked about today, what stood out to have been of most value to you and your firm? Nigel, can we start with you and then we'll do John and Luke.
Nigel Bennett: I'm not sure there is something that is new to me. The name of the document that Ron is using, and the four steps is something. Obviously we do reviews, but I've not had heard it called what Ron called it and we don't use these exact four steps, but I really like that and that process because it's just in a simple…
Paul Shrimpling: After-action review piece.
Nigel Bennett: Yeah, I like to have these debates. I think it is that it's interesting. I feel that perhaps Luke hasn't asked himself the right question.
Paul Shrimpling: What do you think that right question is then, Nigel?
Nigel Bennett: I think you should say, what is the issue that you're trying to address? Not, should I get rid of time sheets?
Paul Shrimpling: Okay. Thank you, Nigel. John, what's been of most value to you?
John Hillier: Definitely the phrase, don't focus on profit per job. That's been sort of one I've been wrestling with for a while and of course, yeah, the after-action reviews. Most certainly I think those are, those I can see are going to be very powerful tools.
Paul Shrimpling: And it's about how to implement and introduce that, isn’t it? In terms of, and again, a little bit like Luke's issue in terms of do you need to do all 40 every quarter or every month. Probably not. It's actually, which ones do we do first? Which ones we do most often is going to be the issue, I guess.
John Hillier: Yeah. Those are kind of the replacement for time sheets, so to speak. That’s been very valuable for me today.
Luke Smith: We need more resource. That could be the issue. I'm not 100% swayed and I think there are a lot of reasons not to do it, to not go back. Because it's been lovely over the last ten or 11 years to not know. I think we just did that next stage of development of the business and it's whether or not I've got the energy, bearing in mind everything else that I've got going on, and how do we put something in place that other people can run?
How do we find those good people to run it? The model is very good, otherwise I wouldn't have read all those books, but it's just another leap of faith on the money, isn't it? So, yeah, I think that's the next stage.
Ron Baker: And Luke, just let me say that the issue I think you're confronting is you need more capacity and, traditionally, professional firms across all professions have put revenue before capacity, and that can get dangerous when you're starting to grow, because we think, well, I'm not going to hire somebody until everybody's at full tilt here.
If we've got an extra 5% capacity, we're going to work everybody harder before we bring on a new person. And I actually think you should put capacity before revenue, because you'll be amazed when you have the capacity, opportunities will just spring up and not just from new customers, but from your existing customers.
Imagine if your dentist ran at full 100% capacity. You'd be quite upset if you had a toothache and you called him, he said, yeah, well, we can fit you in three weeks. We should always have spare capacity for those last-minute, high-value jobs. And we don't think about that enough. And that's what I mean by good project management, good capacity planning.
Paul Shrimpling: What a brilliant way to finish. Ron, I can't tell you how proud I am that you've said yes to this. It's been an education, as it always is. Luke, John, Nigel, you all know how much I hold you in high regard, so thank you to you too. Gentlemen, I think this has proved to be an extremely valuable conversation.
Thank you very, very much.
Ron Baker: Thank you, Paul. Thank you everyone.
Nigel Bennett: Cheers, Paul. Cheers, Ron. Nice to see you again.
John Hillier: We’ll see you in 20 years.
Paul Shrimpling: Yeah, but you’ll look more knackered than you do, Nigel, and Ron will still look the same.
Nigel Bennett: Exactly. Very annoying.
]Paul Shrimpling: Brilliant. I really appreciate the offer about you sharing that after-action review piece, Ron. We'll forward it onto the chaps and put it into our show notes with your permission.
Ron Baker: Guys, if you go out to thesoulofenterprise.com, which is my podcast, or radio show, actually, that I do with Ed Kless from Sage, we have an archive tab, and if you go to show number 15, we have over 300 shows, but you'll see them all on the archive page, go to show 15.
And that's the show, the best learning tool ever, which is the after-action review. Check out the show notes. And at the bottom, there's a link to the agenda. It's a Microsoft word document. So you can tweak it for your own firm, your own culture. But Ed worked on that and did a really nice job with it. And if you're interested in why cost accounting and customer profitability is the wrong thing, check out shows 66 and 112. And we interviewed Dr. Reginald Lee, who wrote the Book, Lies, Damn Lies and Cost Accounting, and has just destroyed cost accounting. And again, he's an engineer, not an accountant.
And then if you're interested in trashing the time sheet and all the things that go into it, show number 119.
We cover that in depth.
Paul Shrimpling: Ron, thank you very much. John, thank you. Nigel, thank you and Luke, thank you very much for being so open today.
Ron Baker: And Luke, I didn't expect to be able to persuade you in an hour or so.
Paul Shrimpling: Thank you, gentlemen. Enjoy your evenings. It's been really good.
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