There is a trend in the CPA business called value billing. Value billing is where your exalted, extremely knowledgeable, and capable CPA bills you the maximum amount he / she thinks you will pay for a project instead of the normal hours worked times a fixed billing rate per hour. In other words, your CPA bills you what the market will bear. I have no problem with the concept of value billing by itself. However, proponents of value billing usually combine it with the idea of eliminating time tracking for CPA firm staff. What is wrong with that? Let’s examine the logic behind getting rid of time tracking.
The logic runs as follows. Good employees are hard to find. Employees don’t like time tracking. Therefore time tracking is bad. That is it. That is the entire logical underpinning of the concept. What is wrong with that logic? Proponents of value billing combined with the elimination of time tracking make the rookie accountant mistake of confusing price and cost. Price is what you charge your customers. Cost is what you pay to provide the service to the customer. To set your price, you have to know your cost. Cost in the CPA business is almost entirely staff labor. As a CPA, if you aren’t charging more for a tax return than you pay your staff to prepare the return, you are in a world of financial trouble. How do you know how much it costs to prepare a tax return? You track the time your staff spends on the return, multiply it by the rate you pay per hour, and you have the means to determine if you made or lost money on the tax return. If you lost money, you know you didn’t charge enough. You charge more the next time. The CPA business is pretty simple, isn’t it? Not for a lot of CPA’s.
In November 2008, the Journal of Accountancy, the official publication of the American Institute of CPA’s, published an article titled “The Firm of the Future.” The article featured an Ohio CPA firm that had implemented value billing and had eliminated time tracking for its employees. This firm employed 13.5 full time equivalent employees to produce $1.3 million in annual revenue. According to the article, the employees were happy, the firm’s clients were happy, and the firm’s owners were ecstatic. What could possibly be wrong?
I wrote a letter to the editors of the magazine that was published a few months later. I pointed out that, according to CPA industry metrics, a firm with that number of employees should be billing more like $2 million per year, not $1.3 million. I wrote that I could understand why the employees were happy, but I had no idea how the partners could be. As you can imagine after reading this far, I made a few more snarky comments as well.
Both the article’s author and one of the firm’s owners responded to my letter. Their responses were twice as long as my letter. The owner responded that they didn’t need time tracking since they trusted their fine employees. Then he did it. He made the rookie mistake. He wrote that “the time sheet is not a measure of productivity” since it only measures inputs. It doesn’t consider the value of the services provided. The mistake wasn’t mine. It was his. He considered billing the only part of the profit equation. Cost doesn’t matter to him. He also went on to write that my firm is too much of a big time DC CPA firm to be compared to his. I think I struck a nerve in that emperor has no clothes kind of way.
The sad part about the Ohio firm is that the owners have no way of knowing why their financial numbers don’t measure up to industry averages. Since they don’t compare what employees bill to what they cost, they have no way of evaluating who is performing well and who should be fired. How do they evaluate employees? Do they base evaluations on looks or cheerfulness? They have no objective standards since they have no objective information. The really sad part is that they believe they are doing their employees a favor. In fact, they are doing a great disservice and inhibiting staff development. In our firm, because of our time tracking system, we know when someone spends too much time on a project. We have the information to get to the cause of the problem and provide additional training to develop our staff’s skill sets. Measurement and feedback are the most basic of management tools.
The author and the firm owner got the last word in the Journal of Accountancy, but I get it here. My original letter was edited to remove my last and best comment. I wrote, “The CPA firm of the future is destined to be like Dip N Dots, the ice cream of the future for the last thirty years.” Do you still think CPA’s are great business people? Do you want that CPA firm owner giving you advice?
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