Traditionally, CPA’s bill their services by the hour. The time it takes to complete a project is inherently tied to the project’s value. Billable hours and revenue are directly correlated. So, in order to increase your revenue, you need to increase the amount of billable hours.
The problem with this logic in a modern CPA practice is two-fold:
First of all, technology is significantly decreasing how long it takes to complete a project. This is without a doubt disrupting the traditional practice of billing by the hour. Just because technology has allowed you to reduce the time you spend on a tax return or financial statement, is the product/service any less valuable to your client? If the product is the same, why does it matter how long it took you to create it? There are tons of resources on the theory of value-based billing out there (Ron Baker is one of the best thought leaders in this area) and I encourage you to do some digging if you haven’t already.
The second problem, and the point of this post, is that by focusing on the number of billable hours, you are setting goals and expectations for your staff that aren’t in line with the goals of the firm: to increase profit.
Here’s an example to prove my point: you meet with a potential new client and bid on a reviewed financial statement. You tell the client that your firm has standard rates for staff, manager, and partner level work. You expect that the client’s financial statement will take approximately 25 hours to prepare, and the total cost will fall somewhere between $7,000 and $9,000.
You win the bid. Congratulations!
Behind the scenes you have been encouraging your staff to work more. Not work more efficiently, just work more. So with this in mind, Jane Smith puts in 80 hours last week! Bravo Jane.
Next, you get to the end of the month and do your billing. Holy crap there is $20,000 in the WIP for the reviewed financial statement you just bid on! There’s no way it should have taken Jane 70 hours to prepare the reviewed financial statement. Now you’ve got $13,000 worth of write-offs, because guess what…when you gave the client a range of $7,000 to $9,000 they heard $7,000. Try going back to them and say, “we ran into some hiccups, and therefore we need to charge you $20,000.” We all know how that goes, and if you don’t, I wouldn’t recommend it unless you are willing to lose the client on the spot.
So, how did this happen?
You encouraged Jane to work more. Maybe you had a minimum hour goal, or even paid out bonuses based on overtime hours. There was never a discussion between you and Jane regarding your quote or where you expected the profit margin to fall out. That was between you and the client. Sure you might have slapped a budget on the routing sheet (if you’re still using those) but as we all know, budgets are just another reason for staff to play the hours game, an entirely different topic we won’t get into here.
Back to my point.
If you determine that a basic S-corp return prepared by your office is worth $1,800 to your client, wouldn’t it be in your best interest to prepare the return as “cheaply as possible.” I’m not implying that you should cut corners or not spend adequate time reviewing the return for accuracy and planning opportunities. What I am saying is that if there is a way to make the process more efficient, and create the exact same product (the tax return) with less resources (aka your staff’s time) wouldn’t that have a positive impact on your profit margin, i.e. the big picture goal of the firm?
So in turn, shouldn’t the firm’s goal be to prepare as many 1120S’s as possible with the resources available? Instead of having billable hour quotas, or paying bonuses based on the amount of overtime hours worked, wouldn’t it make more sense to encourage and reward those who got more done in less time? To evaluate how many returns you had in the office and strategize WITH your staff on how you were going to get them complete and out the door? I realize that this is all good in theory, and would take a major shift in thinking for most firms, but it’s something I think we all need to really sit down and consider.
First, what is the goal and second, how can we create a collaborative environment where everyone is working towards the same goal?