The bastard brother of value pricing is the trend towards eliminating time tracking. When every other industry runs toward metrics, the CPA biz runs the other way. I’m not surprised. Nobody likes admin tasks, even when they provide information necessary to succeed. Telling children they don’t have to eat vegetables is popular with kids even if it isn’t true.
In November, I attended the CCH User Conference in Las Vegas. One of the break out sessions was a round table on value pricing. The moderator gave us a little information about his firm, $3.6 million in revenue with forty employees. He then told us that his firm had eliminated time tracking with great success.
He told us how he didn’t need classic metrics like billings per employee. He knew he needed to hire additional staff when he had an additional $180K in work to perform. That is the industry standard he explained.
Let’s look at the metric he disdained, billings per employee. Normally, I would delegate this to staff, since it involves higher math like division, but I see $90K in billings per employee for his firm. That would be $3.6 million / 40 employees. That’s not particularly close to $180K.
Now you might correctly note, my calculation doesn’t account for admin staff. Correct you are. I don’t know how many admin people he has, but it would take twenty to get to $180K in billings per professional staff. If he has 20 admin people, we are talking about another problem entirely.
If he has ten admin staff, the per staff billings are $120K. Since this is Sunday, I again did that math without assistance from our staff.
Now the problem is revealed. We have a guy, who doesn’t know his numbers. By the way our firm number is $170K. I have my numbers and not just in total. I have them person by person, year by year, position by position.
But now that we’ve given him his number on billings per professional staff, what can he do to improve? Here’s the really serious problem with tossing time tracking. He can’t tell where his problem lies. From the metric, we know billings per employee stinks, but we can’t tell which employees are the problem. He has no per employee billing records. He’s guessing at best.
A couple years ago, an article appeared in the Journal of Accountancy titled, “The Firm of the Future.” The article spotlighted a firm that had implemented value pricing and tossed out their time tracking. The article gave readers enough financial information to calculate billings per employee.
I wrote a letter to the editor commenting on the firm’s poor per employee billing metric. I opined, as I did above, that they didn’t even know where to start to diagnose the underlying problem.
My letter was about four paragraphs long. Both the author and the managing partner of telyhe spotlighted firm responded with ten paragraphs of denial. They told me my metrics didn’t apply since I came from a high faluttin’ DC CPA firm. Last time I checked division is divison.
A few months later, the news section of the Journal reported the acquisition of the spotlighted firm. I can only speculate why, but my guess is that they were struggling financially based on their per employee billing. The firm of the future was history in a few short months.
Above are two examples of firms lacking one very simple metric, billings per employee. There are many more metrics that matter like realization per employee and error rate per employee. Can you imagine advising your clients to give up profitability metrics? Take your own advice.
Thanks for reading!
Frank Stitely, CPA, CVA