After practicing for over 30 years I can unequivocally say we’ve never had a ‘perfect client’. One who always applied the accounting principles correctly, on time and provided the requisite support. Without exception. (The other assurance partner claims he had one, once, but he drinks heavily.) The only perfect client is the one you are doing a proposal for. He’ll promise to do everything perfectly.

In the proposal process, the Company’s obligation is to get the ‘highest level of service for the lowest possible price’. So of course they are motivated to commit to a course they are entirely incapable of keeping and the assurance team has to endure the shortcomings.  In a time sheet environment this may get passed on to the client, but not likely. And of course if it does the client squeaks that it is not consistent with the original proposal, and you have what my friend and mentor Ron Baker euphemistically refers to as ‘bill and duck’ (and hope they pay). For pricing firms, as we are, it results in scope creep.

My point is that ultimately no client is perfect. Propose based on what they commit to but invoice them for what they actually do or don’t do. Don’t whine because they aren’t perfect. Just implement a system that accommodates that imperfection without penalizing your Firm or creating animosity with your client(s). You might want to try Client Service Agreements. (Oh, and to all you seniors – ‘imperfection’ is why you get paid the big bucks! If all our clients were perfect we wouldn’t need your gray matter. We’d just use checklists. )

In most firms, the engagement letter – conceived / drafted / revised / and re-revised by attorneys attempting to protect us from ourselves – has become the primary, and frequently only, verbal communication with our significant clients prior to performing the engagement. Yet it does nothing to inform the client of their obligations other than to pay, or what our responsibilities or requirements are. It is a legal letter. Not designed to communicate, but rather to provide a defensible legal position.

As a Firm practicing ‘pricing’ – advising the client of the cost in advance of providing the service – we automatically assume the pricing risk of ineffective engagement performance. Of course we can only influence the risk for matters over which we have control, so what happens when the client doesn’t perform as agreed? The scope of the engagement is extended. We refer to this as ‘scope creep’. Without an agreement defining the engagement it is highly likely the service provider, if a pricing firm, will unfairly suffer the financial responsibility.

Poor communication can be even more detrimental to a firm who ‘bills’ – adds up the hours charged and then multiplies the total by some arbitrary rate at the end of the month – and drops an unexpected invoice on the unwary client. (Michelle Golden a national marketing and practice management consultant to service firms referred to this process when speaking with me recently, as ‘bill and duck’.) The frequent result can include non-payment or loss of the client, but at a minimum a deteriorated relationship.  

Does the engagement letter cover either of these possibilities and define the engagement? Contractually, maybe. Operationally, absolutely not.

During my career I’ve noted that when contractual agreements lead to dispute, it is primarily because they were not drafted jointly, but rather unilaterally. One of the fundamental tenets of effective leadership is convincing all parties necessary to a transaction or course of action to take ownership of the process. Undeniably you are more likely to take ownership of decisions you have participated in making than those that have been forced on you. It is no different with written agreements. Unilateral decisions are simpler to make, more convenient and easier to implement, but less likely to be embraced. In other words, they are sometimes more efficient, but typically much less effective.

Engagement letters are unilateral. They are without input from arguably the most important party to the contract. The client. We essentially are telling the client to take it or leave it rather than striving for concurrence. In our Firm, while we obtain engagement letters for every engagement, we’ve also implemented the use of Client Service Agreements.  Ron Baker refers to them as Fixed Price Agreements in his book the Firm of the Future.

We’re primarily an audit firm, and most clients have a very rudimentary understanding of the audit process. The CSA gives us the opportunity to explain the engagement process. Simultaneously, it provides the client with an opportunity to educate our audit team so that we don’t inadvertently or unnecessarily interfere with their work flow. The CSA is not a unilateral agreement. We develop it jointly with the client.

Typically our CSAs cover our approach and what we need the client to do for us to be successful; what the client needs from us to make the engagement tolerable and successful from their perspective; scope of services; timing; responsibilities of all parties; the additional financial cost and potential for missed deadlines if the client doesn’t meet their responsibilities; detailed schedule of payment for services; and our service guarantee. Little of this, if you think about it, is covered in a typical engagement letter but all of which is critical to a successful engagement. Finally, in addition to our service guarantee we include a termination clause allowing either party to void the CSA if they become dissatisfied.

For us, the improved communication embodied by our CSAs has led to significantly improved engagement performance with happier clients. We have completely eliminated invoicing disputes and increased our accounts receivable turnover which has resulted in improved cash flow and profitability.

]]> http://www.markbaileyco.com/blog/practicemgmt/client-service-agreements-low-cost-big-returns/feed/ 4 http://www.markbaileyco.com/blog/practicemgmt/are-you-effective-or-just-efficient/ http://www.markbaileyco.com/blog/practicemgmt/are-you-effective-or-just-efficient/#comments Sun, 19 Oct 2008 23:52:38 +0000 Mark Bailey http://www.markbaileyco.com/blog/?p=55 In the years since I began practicing, our profession has changed radically.  I do not want to sound like my parents and grandparents who lamented the passing of the nickel candy bar, 1 cent stamps, and walking to and from school ( up hill, both ways in the snow of Southern California), but are we progressing or regressing in terms of advancing the profession of public accounting and making it an attractive career?  What are the underlying currents that influence or even drive change?

Certainly there are many factors that influence the strategic direction CPA Firm leaders will choose.  Legal considerations, staffing concerns, regulation, marketing opportunities, lifestyle options, technological ‘advancement’, financial motivation,  and competition just to name a few.  Some we can influence.  A few we can actually control.  Most we can only respond to.

So how have we responded?  In the only way we’ve been indoctrinated.  By trying to improve efficiency.   By demanding ‘more hours’ from our team members; by marginally increasing our hourly rates; by adding technology  and hopefully cutting overhead costs.  All things to make us more ‘efficient’ and thus improve our profitability.   Ultimately we can only attain a finite level of efficiency.

By focusing solely on efficiency we are commoditizing (my word) our services.  We’ve already done that with taxation services in large part.  The key to improving profitability in a mature firm is to focus on effectiveness, not becoming even more efficient.  Ron Baker in his book, The Firm of the Future has several excellent discussions on efficiency versus effectiveness.

To improve your profitability, I believe you have to differentiate your service so that you can charge more for it.  You have likely controlled your expenses as much as possible so to improve your ‘bottom line’ the logical alternative is to increase the ‘top line’ – Revenue.  Guess what!  You’re not going to do that with time sheets.  Not significantly anyway.  Time sheets, are by their nature, tools of efficiency.    You must become more effective, because you are likely already as efficient as you are going to become.

How well you manage an engagement; how effectively you’ve priced and bundled it – in advance; how effective your client relationships are.  These are a few of the areas that can help you differentiate.  We’ve all hit optimal ‘efficiency’.  It’s time to focus on ‘effectiveness’.

One definition of insanity is “Doing the same thing over and over, but expecting different results”.  I have no idea who first said that, but truer words were never written.  And that’s what we seem to be doing too regularly in the accepted approach to practice management in our profession.  So after 25 years we finally recognized the need (and tremendous opportunity) to be innovative.

The catalyst was a presentation by author Ron Baker, on pricing and the Firm of the Future sponsored by CPAmerica and cpaconect.  Ron is a a shameless advocate of trashing the time sheet especially as a tool for measuring the value of the services we provide.  Ultimately, though, for us the derivative (sorry auditors I know you hate that word) benefit was the realization that time sheets are an insidious tool of micromanagement.  And micromanagement creates serious negative repercussions with professional knowledge firms (PKF’s – a Baker term).  This realization, brought about by eliminating time sheets in our firm, led to many positive changes some of which follow:

- a results oriented work environment – team members are ‘invited’ to work on specific engagements and may decline without prejudice; team members have a responsibility to get the job done on schedule, but they decide when, where and how the work will be performed.

- elimination of annual performance evaluations - in favor of a mentoring program.  This improved communication technique provides timely feedback in a non-confrontational manner rather than waiting until the end of the year.

- a true flex time environment - pick your level of commitment and be responsible for your own work/life balance.

- true team work – as a result of eliminating the dysfunctional staff competitive environments found in most firms.

- elimination of turnover – we’re nearly perfect in eliminating voluntary turnover in an industry plagued by the loss of the best and brightest talent.

There is much more.  The obvious result is a healthier professional environment, which has led to better client relationships a happier team and virtually no turnover.  Some of the ‘new’ things we’ve instituted to support this are:

- universal involvement at all levels in the committees that set the direction for the firm, whether it be audit, tax, consulting, pricing, marketing, admin, or social.

- a new pricing model supported by strong proposals, detailed client service agreements, a staffing and scheduling committee, after action reports, budgeting and profit analysis by engagement.

- a mentoring program.

Designing and replacing the system that was time sheet driven  to provide the management tools necessary to have an effective service firm in our current business environment has not been easy, and it’s an ongoing process.  There is much more to say than room on a blog to say it, but the bottom line is ‘we’re not crazy’!  And we have the results to prove it.

Written by Lewis Carroll, his poem “Jabberwocky’ in “Through the Looking Glass and What Alice Found There” is considered the most famous nonsensical poem in the English language.  It was certainly one of my favorites during my alcoholiclly impaired college years in the 1960′s.  It re-occurred to me today as I read a post by Ric Payne on the Principa blog titled Time Based Billing is Unethical – What Rubbish. 

I wouldn’t recommend reading the entire post.  Payne talks in circles.  He at once advocates advising clients of the proposed fee in advance (which I agree with) but supports using timesheets as a necessary tool in doing so.  He has thoroughly confused the importance of knowing what your resource cost is with the value of the project.   He naively seems to believe that the majority of clients who receive invoices based on time sheets know in advance how much those bills will be and they are “happy with a bill based on hours” because they were some how able to divine how much it would be prior to receiving it.  That is counter intuitive.  He rants on and on trying to justify time sheets, but at the same time advocating ‘pricing’ in advance as a superior alternative.  It all seems to make sense, until you realize the methodolgy he is proposing can’t get you to the results he seeks.   That’s my point.  Don’t take everything you read at face value – especially if it comes from a consultant – think about whether or not it makes sense.  Question authority.

Most consultants I’ve met are regurgitating the same tired old garbage they were taught in college 40 years ago.  They wouldn’t recognize a new idea if it bit them.  The practice management methodology they espouse is antiquated and without innovation.  You can’t get better doing the same old thing.  Yes it’s safer, but remember the reward for risk is profit.  People like Ric Payne know there is opportunity for improvement, but they will consistently try to justify old methodology because it is safe, they are cowards and they don’t know any other way.

Like Jabberwocky it sounds good and seems to make sense.  It just doesn’t work.  Oh, and if anyone wants to debate the specific issues of his post I’m happy to do so.  Just comment.

“Our work is guaranteed to the satisfaction of the customer.  If you are not completely satisfied with the services performed by Mark Bailey and Company, Ltd., we will, at the option of the Company, refund the price or accept a portion of said price that reflects the Company’s level of satisfaction.”

Initially this sentence caused serious concern among my associates, and I’ve have heard numerous ‘warnings’ from peers.  But what is it that we have to be afraid of?  It’s our work, and certainly if we don’t have enough confidence to back it up we shouldn’t be a service provider.  Should we be concerned about the unscrupulous client who arbitrarily decides not to pay, and uses our guarantee as an excuse?  We’ve never run into that problem, and don’t expect to.  We ‘price’ our services in advance so that our client agrees up front and is not ‘surprised’ by a bill they didn’t expect.  Realistically you are already giving this guarantee, whether you realize it or not, because it’s usually not worth a lawsuit.

If a client claims to be dissatisfied with your service and refuses to pay your invoice are you really going to pursue it in court?  Hopefully not.  Most lawsuits against accountants are filed as counter claims to collection attempts.  The legal costs, including the wasted efforts, frustration and stress on your part generally just aren’t worth it.  Negotiate a settlement that makes everyone unhappy, and  move on.  (And then fire them.)  Certainly if your service was sub-standard you would already have agreed to negotiate a write-down.

The confidence our clients gain from receiving our ‘guaranty’ extends not only to the price, but also to the quality of work we are doing for them.   Offering performance guarantees has set us apart, and  has been nothing but positive for us.

In a post last Fall, Rob Lewis of the British blog Accounting Web joined the debate. The comments have raged for some months – sometimes acrimonious – but ultimately leading to a healthy debate of the merits. Great comments from a bunch of ‘prisoners’. They are to be commended and it’s worth a look.

So how much does a system based on time sheets and the billable hour cost?

-Did the amount of time you spent at an arbitrarily guesstimated rate reflect the value of the service (even after you wrote it up) that would have been agreed upon with the client at the beginning of the engagement? We both know the answer. That’s a cost.

-Trying to collect a surprise invoice the client NOW doesn’t agree to or see the value in? That’s a cost.

-The ‘time’ spent in calling on accounts receivable? That’s a cost.

-The delay between when you sent the surprise invoice and when they paid it? That’s a cost.

-The impact on the relationship a surprise invoice has with your clients. (You’d hate it if you were on the other end). That’s a significant cost.

-The amount of ‘time’ it takes for you and your staff to record your time if you record time. That’s a cost.

-Communicating to your staff by micromanaging their time, that you don’t trust them to make conscientious effort or fulfill the contract they have with you to be professionally responsible in taking care of your clients. You tell me.

-In a comment to my first post on Why I Hate Timesheets, Shane pointed out the negative impact of using time sheets as a micromanagement tool for productivity and competency. I’ve had multiple discussions in employment interviews with professionals (at all levels) looking to leave their ‘jobs’ with national accounting firms. It’s a common theme. What is the cost of turnover? It also reflects a ‘cost’ of supporting a management system that relies on time sheets.

There is a place for tracking time. No doubt there is some value, but we don’t think the way we’ve been doing it as a profession, or more importantly what we’ve been using that information for is appropriate. Most importantly the cost far outweighs the benefit derived. We’ve outlined some of the costs, and can name many more. Can you give us some ‘benefits’?

We define ‘billing’ as determining the amount to be charged based on hours worked as summarized in time sheets after the service is provided, while ‘pricing’ is determined and agreed upon prior to the service being provided. In our profession, billing is typically predicated on the amount of time committed to the project which obviously bears no relationship to the value of the service. Further, billing is in my opinion, generally unethical. (While that is another discussion, I’m happy to have it at any time with anyone.) Pricing (determining value) does present some difficult administrative problems for accountants. In his post How Should Professionals Scope Complex Jobs Ron Baker offers some suggestions from a joint presentation with Chris Marston, to help service professionals more effectively propose on multi-dimensional engagements. We have very successfully used this approach in many proposals and learned some additional lessons in the process.

When we make a presentation (which we always do in person with the decision maker) the inclination is to provide a comprehensive proposal for all of the services we have identified that the client might need because we believe in giving ‘over the top service’. Most firms who ‘bill’ however do not include peripheral services because of course they can’t estimate their invoice until after they’ve provided the service and know how many hours they have accumulated. The difficulty has been that no matter how hard we pound the table and point out that our proposal is more comprehensive, the decision maker(s) are frequently focused on the total dollar amount only. Consequently in comparing our proposal to others, they are comparing Apples to Oranges.

There are a variety of reasons this happens, but typically it’s because the buyers are an audit committee who don’t see the value only the cost, while the beneficiary of the service – the cfo’s / accounting departments / ceo’s – see the value. What has worked well in overcoming this is to propose on ‘phase 1’ only (say the annual audit), and then once the confidence has built, the ability is apparent, and the service level is established and they are impressed with it, we can submit a change order for the additional services.

As an example last year we were engaged by a mining company to edit their 10K. We proposed at $10,000 for the editing alone, which was about what any other firm would have charged, and what it was worth to the client. We knew they had accounting issues, a registration statement to file which would foment SEC comment letters, a tax return and a potential divestiture. Had we proposed on all of that at once we would have had zero chance to be retained because they were looking for something much less. Not to mention we couldn’t have guessed at the ‘value’ to them. That client has paid us much more in the past year for a variety of additional services. The lesson learned. It’s important to propose on what is being asked for even if you identify many other needs. You can fill those later.

Ignoring the first two issues, Gary nails the significance of pricing in the service professions when he clearly states, “The hours x dollars (or cost-plus ) formula does not work in today’s results-based economy.” In my opinion this is true in establishing firm policies for both client satisfaction and even more importantly in associate / staff satisfaction and retention.

Further in the article he refers to author Ron Baker, one of my mentors and unquestionably the leading voice in burying the billable hour. He goes on to outline what he considers important considerations in partner compensation. Notably all are characterized by effectiveness, not efficiency. Damn! You mean the things easiest to measure are not the most important?!

I’ll bet you can name ten!