The Write-Offs Paradox: Accounting Firms Waste Time Managing The Imaginary
In the past decade or so the accounting profession has received its fair share of well-meaning but ultimately misguided advice.
And right up there is the bravado-laden mantra, “Ban Write-Offs”.
Sure it makes seminar presenters and coaches feel authoritative as they confidently sprout this dogmatic advice from the stage. But how wise is it?
When you think about it from a commercial perspective, this advice is totally illogical. And from a moral perspective it’s questionable at best.
4 Reasons why the ‘Ban Write-Offs Policy’ is B.S.
1. Logic and ethics
Imagine this: An accountant quotes a client $3,000 for an engagement. But through inefficiencies, inexperience or inattentiveness the job needs re-work and excessive review time, blowing the work-in-progress (WIP) out to $6,000. Now, what should the accountant charge the client: $3,000 or $6,000?
Let’s assume the blowout wasn’t caused by any actions (or inactions such as insufficient disclosure at the start of a job) on the client’s end. It was totally caused by the firm.
The logic of the ban write-offs policy would be, “The job owes you $6,000 in WIP, so that’s what you have to charge. There are no write-offs here.”
That’s mercenary. How can it possibly be the right thing to do?
Imagine a motor mechanic doing that to you. “Yeah, I know we quoted $500 this morning. But we had some new guys working on it and the job blew out, so we now have to charge you $1,000. And our policy is to ban write-offs.”
What would your reply be? Probably something like, “Well, you can take your ban write-offs policy and shove it where the…”
So why would you as an accountant or business advisor do that to your clients?
You wouldn’t. Not if you’re ethical. And fair. After all, why should your clients fund your inefficiencies and misjudgements?
From both a logical and ethical perspective, it’s clear that you should charge the client what the job is worth, not what it owes you. There’s a fair market value for engagement within a spectrum of pricing based on your firm’s location, client types and positioning in the market place.
And the same coaches and consultants who naïvely espouse the ‘Ban Write-Offs’ advice think Value Pricing means Price Gouging. They tell accountants to get as high a price as they can for each job, especially in the area of tax advice. (More about this in a future post, The Value Pricing Paradox.) They’re taking advantage of clients who probably have little idea what a fair market price would be.
As an ethical advisor, we suggest you steer clear of Price Gouging and use transparent pricing instead. Let each client know they’re paying the same as every other client.
They deserve it.
2. Team culture – Poisoning the water supply
The mercenary Ban Write-Offs attitude has two insidious side-effects:
- The firm’s team culture
- The firm’s process efficiency
And these side-effects become blind spots for the Principal or Partners. They walk the hallways unaware that their Ban Write-Offs edict is poisoning their firm instead of helping it.
I know, because I’ve seen it happen.
Let’s say a firm still believes it sells time rather than value, and has a hard and fast policy where, “Each accountant or advisor must bill six hours of time before they go home each day. No exceptions”.
Why is this policy silently poisoning the firm’s culture?
for a smart, efficient, modern business it’s entirely the wrong focus. The message it sends to the team is, “We sell time”.
What they should be targeting instead is Value Delivered—the dollar value of engagements completed or client retainers serviced to the required (scoped) level each month. How long it takes them to hit that target is irrelevant.
If an advisor hits their Value Delivery target by lunchtime, they should be able to go home. If they hit their Value Delivery target a week out from month end, they should get to take the week off. After all, they’ve achieved the business’ commercial goal, and the firm will achieve the desired multiple on its cost-of-seat.
Another option is to reward them for achieving beyond their Value Delivery target by letting them work for financial bonuses or non-financial perks.
the Ban Write-Offs policy is a form of staff exploitation.
Why do I say that? Look at this scenario.
It’s 3pm, and a team member has only achieved two hours of ‘billable time’. There’s only two hours left in the day, but they still need to bill another four hours before they can go home. Going home any earlier would be against the firm’s policy, and would certainly raise the ire of the Partner they report through to.
Of course they could be behind for reasons beyond their control, such as:
- Multiple staff meetings
- Social functions in the firm
- Team training sessions
- Meeting with suppliers (e.g. software vendors) to address issues
- Dealing with staff issues, or taking time to listen to the concerns of their colleagues.
So what are their options?
- Doctor their timesheets from the first half of the day, targeting their largest clients whose sizeable fees can absorb additional WIP without anyone noticing. (Sadly, this practice happens.)
- Work full tilt for another four hours to reach their target of 6 billable hours for the day. If they’re lucky they’ll be home by 8pm.
What just happened?
In the first scenario, it’s deception.
In the second scenario, it’s exploitation because the staff member has effectively worked unpaid overtime. They do it to keep their job, but they resent it. And this resentment silently poisons the culture because everyone thinks they work for a slave driver who cares mainly about money.
Sure, if they’ve been slacking off instead of focusing on their scheduled work for the day then some extra ‘catch-up time’ after hours would be warranted. But a lot of the time they have to contend with all manner of legitimate ‘non-productive’ (non-chargeable) matters, not to mention inefficiencies in the firm’s processes and workflows.
Doctor the time-sheets, or work unpaid overtime? The mercenary Principal or Partner doesn’t care as long as chargeable staff hit their numbers and bill clients the full WIP value without exception.
But there’s another scenario to consider.
Sometimes a team member focuses all their attention on their work, but goes about an engagement the wrong way. They spend far too much time doing the work compared to a more experienced/skilled accountant or advisor.
Which leads to the next damaging side-effect of the Ban Write-Offs culture…
3. Process inefficiencies – A business running blind
If an accountant or advisor took four hours to complete a task or engagement that should have been finished in two, you’d want to know about it, right? Of course you would. Not to assign blame, but to diagnose the cause.
Inefficiency is feedback that your processes aren’t working and/or your team isn’t sufficiently trained in your processes.
In this situation, a switched-on business operator would ask questions such as:
- Where did the process fall down?
- How can we improve the process at those points?
- Does the team member need more training?
- Does the firm need to improve the front-end processes of:
- defining engagement scope?
- educating the client on what’s required of them?
- collecting the information from the client?
- Can steps in the process be eliminated?
- Can steps in the process be automated using technology instead of labour?
- Can steps in the process be delegated to lower-cost team members?
If you’re after innovation and best practice, all WIP blowouts demand a post-mortem. It’s an opportunity for process improvement. You want to know about inefficiencies. As an entrepreneur you welcome such ‘intel’.
But what happens in a strict Ban Write-Offs and Thou-Shalt-Bill-Six-Hours-Each-Day culture?
The evidence is buried. Hidden out of view. Those extra hours are worked (as unpaid over-time) but never recorded on the timesheet. And management is kept in the dark about the true efficiency and performance of the business.
And why would a team member bother to record the extra hours? Put yourself in their shoes:
- They’ll be judged by management as an ineffective or inefficient team member
- They’ll have to charge the extra hours to the client anyway, thanks to ‘Ban Write-Offs’
- They’ll face an uncomfortable conversation with the client about the fee blowout.
So, the inefficiency goes unrecorded and swept under the carpet rather than identified, analysed and rectified. Their firm may as well be called Oblivious Partners or Heads In The Sand Incorporated.
And the most incongruous (and amusing) aspect of this misguided practice management philosophy is that the Principal or Partner in Oblivious Partners thinks their “courageous” Ban Write-Offs policy is actually improving the firm’s operations and efficiency. Their ‘intel’ and
their practice management system (I use that term loosely, and will talk about it more in The Practice Management Paradox) is telling them there aren’t any write-offs.
But there are write-offs. They’re just not being recorded.
The Ban Write-Offs Policy should really be called the Ban Recording of Write-Offs Policy. In Oblivious Partners firms, Write-Offs are unmentionables. It reminds me of the Fawlty Towers episode titled The Germans where Basil Fawlty tells his staff, “Listen, don’t mention the war. I mentioned it once, but I think I got away with it alright”.
This management practice is so far from best practice, it’s laughable.
At best it’s naïve.
And, in my opinion, dumb.
4. Wasted energy – Managing something that doesn’t actually exist?
Here’s the irony. Accountants in public practice spend lots of time measuring and monitoring things in their business that really don’t matter, but ignore important lead indicators that produce their business’ performance. (And I’ll talk about that in The Measurement Paradox.)
Here are 7 things accountants do daily and weekly that waste time, money and energy:
- Complete time sheets for billing purposes. (More about timesheets later.)
- Repeatedly remind team members to complete and submit their timesheets.
- Massage their own timesheets to show management what they want to see (e.g. no write-offs).
- Spend time deciding whether they should bill the full WIP amount or write some of it off.
- Stress over telling clients the fee will be much larger than originally indicated.
- Deal with clients’ reactions to such unpleasant fee surprises.
- Focus on WIP amount instead of the workflow velocity of each job, and the weekly job completions in terms of (dollar) Value Delivered.
And here’s the ultimate paradox of this entire discussion about “write-off policies”…
The Write-Offs Paradox:
Accountants spend time, money and energy managing write-offs,
yet write-offs don’t exist when you accept
you are selling value, not time.
That’s right: write-offs don’t exist. So how on earth can you ‘ban’ and manage them?
As pioneering value pricing proponents such as Ron Baker advise, an accounting or advisory firm should price services based on their value to the client, not on the time (and therefore cost) it takes to complete it. And both the firm and the client should agree on a price before the engagement starts.
Am I saying the time required doesn’t come into pricing services? No, not at all. It’s an integral part of designing your service delivery processes and systems. You have a target number of hours each person in the process should be striving to meet (if not beat), which gives you the target hourly yield for an engagement. And hourly yield—which you can easily calculate after a job is completed—is relevant because your delivery costs relate directly to how many hours your team members take to complete an engagement. Even if a team member is on salary, there’s still an implied social contract (along with their actual contract) as to how many hours a day/week it needs. Most firms aim for at least three times what they pay each team member per hour to allow for overheads and profit. Some firms aim for multiples of four or more.
But once you calculate the price of a service, that’s the price of the service. Spending more time on an engagement is the firm’s issue, not the client’s. WIP blowouts should never be passed on to the client.
This price-on-value-but-still-record-time approach (which we recommend) gives both management and team members a strong incentive to improve processes and efficiency. Everyone is happy to record their time because they know it’s being used only for feedback on process efficiency and team member skill development. They know how long an engagement will take before it begins, and by recording and categorising all of their time they can work out how the Actual Hourly Yield compared with the Target Hourly Yield. An Actual Hourly Yield below the target leads to the healthy conversations and problem solving that improve a firm’s service delivery processes and systems.
But you can’t fix something you don’t know about, which is why I disagree with Value Pricing proponents telling firms to “throw out your timesheets”. To me, that’s like saying, “throw out your management information systems”. As a business owner or manager, you want a gauge on the efficiency of your processes. And the time spent completing a process is one way to measure it.
However, we don’t recommend the usual ‘timesheet’ recording approach because it reinforces the “we sell time” mindset. Instead, we prefer of more automated and useful time recording and analysis tools such as Time Doctor.
Time Doctor gives each user a floating toolbar that makes it easy to record and categorise how they use their time during the day. It detects when you’ve left your computer, and when you return it asks if you having a break or working on a task/project. It can also take screenshots of the screen across each minute of the day to give you a visual time record that’s extremely useful for analysing time blowouts. Using a tool such as Time Doctor shows you exactly what your team members are working on, whether they’re across the room or across the globe.
But instead of using Time Doctor for “time and billing” purposes (and I hope you see that phrase as the misnomer it is), you should use it as an analysis tool. It can give you powerful insights into how you and your team invest their time, not just within a specific Project (engagement) but across a week, month or year. It’s a real eye-opener when you look at the time usage data and observe the trends. We’ve been using Time Doctor for two years here at PARADOX. It was actually recommended by Ysabel, one of our team members based in The Philippines. She loves Time Doctor. We all do.
As you grow and develop your business, knowing where time is being invested helps you make better decisions on hiring employees or contractors. You can see which areas you can delegate to free up the most capacity, and which areas you can automate with technology and process redesign to reduce the number of staff (and therefore cost).
Don’t run blind on the true efficiency of your business.
Don’t exploit your staff.
Don’t overcharge your clients because of your own inefficiencies.
Don’t sell time.
And stop wasting time and energy managing something that doesn’t exist.
When you embrace the price-on-value-but-still-record-time policy you’ll be a modern business operator who understands the focus needs to be on the efficient and effective delivery of value. Not billing time.
That concept is a complete write-off. Ban it, I say.