“Rumors of my demise are greatly exaggerated.” While I’ve been absent from the ‘blogosphere’ for a week or so, there actually was a reason. I could think of no other way to sneak in the following post. By being ‘gone’ I’m hoping the blasphemy of suggesting that time sheets may in fact have some value will slide under the radar. Ok. Here goes. Time sheets have value - in a cost accounting context. There. I said it.
The traditionally accepted business model for medium and small accounting firms is predicated on a revenue model that is cost based. Value is driven by cost, and cost is calculated as hourly rates times hours worked. Hourly rates are established by comparison to other firms in the same market. And then of course you have to accept the premise that every firm has identical expertise and will require the same amount of ‘hours’ to complete the engagement.
So if you have an average hourly rate times an average number of hours you have the value of the service provided. Right? Wrong! You may have your ‘cost’, but you absolutely, unequivocally do not have your value. Cost accounting 101 – value is not a derivative of cost. What you can reasonably expect to realize (value) determines the amount of costs you are willing to incur to deliver that specific product, not vice-versa. So why are you predicating value as a function of cost, and you are by accumulating hourly rates and billing them to your clients as the value of your services?
Typically I’ve railed against using hours and rates because I believe they under estimate value. But be careful. That knife cuts both ways. In our current market, the use of hours and rates as a basis for a proposal can almost guarantee you won’t be successful. In 35 years of practice I’ve never seen a market as cut-throat. Frequently in our firm it has gotten down to one question. “How bad do we want it?” When considering any unique advantages we would normally expect to get an advantage from (industry expertise, idle capacity, contacts, etc.) we use them to get to our ‘walk away price’. (The amount we won’t go below, regardless). Certainly we consider ‘cost’ in proposing on an engagement, but we consider it in light of what we believe we can price the engagement at to determine our level of interest.
How do we determine ‘cost’? Not by a standard rate. There are other more relevant metrics. That’s another post. How do we determine ‘value’? It’s unique to each potential engagement and to your firm. Do you have a Pricing Committee? You should. Let’s talk about that next week.