The Write-Offs Paradox: Accounting Firms Waste Time Managing The Imaginary

By Posted in - Public Blog on September 3rd, 2014 11 Comments

The Write-Offs Paradox

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?

Firstly,
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.

Secondly,
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?

They could:

  • 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:

      1. Complete time sheets for billing purposes. (More about timesheets later.)
      2. Repeatedly remind team members to complete and submit their timesheets.
      3. Massage their own timesheets to show management what they want to see (e.g. no write-offs).
      4. Spend time deciding whether they should bill the full WIP amount or write some of it off.
      5. Stress over telling clients the fee will be much larger than originally indicated.
      6. Deal with clients’ reactions to such unpleasant fee surprises.
      7. 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.

(11) awesome folk have had something to say...

  • Ron Baker -

    September 20, 2014 at 1:28 am

    MC, You write: “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.”

    But time isn’t value, nor is it a cost. It’s a constraint–a constant one at that (all businesses are subject to it, even Apple and Google). Why don’t these companies do timesheets? Because they don’t think they sell time. Don’t you see that it’s the timesheet itself that is keeping the profession mired in the mentality that it sells time? It’s not the billable hour; it’s the timesheet that is the real cancer.

    You say you disagree with proponents who advocate dumping timesheets. Fine. You are entitled to your opinions. But not your empirical evidence. How do you explain thousands of firms around the world–across ALL professional sectors, from IT, law, accounting to ad agencies and actuary firms–that have eliminated timesheets and are led quite successfully (some being the most profitable in their sector)?

    Doesn’t this call into question your advice regarding Time Doctor or other timesheet-like products? The only place time spent should matter is in prison, not in a professional knowledge firm.

    If you say A, you must say B. If you are a proponent of value pricing, then you have to logically rid yourself of time measures.

    Cordially,
    Ron Baker, Founder
    VeraSage Institute

    • Michael Carter -

      September 22, 2014 at 2:56 pm

      Hi Ron. Thanks for your comment. Agreed that time isn’t value. And agreed that time is a constraint. Time (capacity/labour of team members) is a resource, and that resource costs money.

      Keep in mind that I’m not suggesting the use of traditional timesheets. Timesheets that feed into time and billing systems are a BIG no-no in my book.

      I think it’s a crucial distinction to make between *timesheets* (which inherently relate to work-in-progress and billing, which is a dumb and out-dated concept) and *time usage analysis* tools. They may seem similar on the surface, but the motivation for using them are totally different.

      As I reply to you here, I’m using Time Doctor and it’s tracking a Task called ‘Replying to blog comments’ in a Project (category) called ‘Marketing – Creating Collateral’. This allows us to see across a time period how much of the precious resource of available capacity (‘time’) has been invested in that task and that category of activity. This allows us to assess whether that amount of time is worthwhile in terms of the benefit to the business, and/or to see whether we need additional resources in that area. This is useful data for management because it answers the question, “Where are we investing our time?” and “Where do we need additional resources or efficiency/automation?” This is incredibly useful. At PARADOX we bring up these reports in management meetings when we are looking at where we need to add resources. The insights are valuable and very often counter-intuitive. The existence of thousands of firms who operate successfully and who have eliminated timesheets, as you point out, doesn’t mean that a firm cannot track time usage and also succeed.

      It’s not the “what” is being done that matters, it’s the “why” it’s being done that indicates the firm’s philosophy and their understanding of value.

      The management decision/philosophy to dump timesheets is one I have seen work (due to the cultural benefits of that reinforcing the “we don’t sell time, we sell value”) and equally it’s also one I have seen not work for other firms. I remember a presentation by a Melbourne firm entitled, “From timesheets, to no timesheets, and back again” where they found that the firm ultimately operated better when their team members were focused on how effectively and for what purposes they were using their time each day. They weren’t recording time for billing purposes, just for ‘focus tracking’ purposes.

      The logic of “If you are a proponent of value pricing, then you have to logically rid yourself of time measures” is a non sequitur for me. The logic of value pricing — i.e. “we sell value, not time” – is irrefutable. I cannot see how anyone who thinks it through can argue with that. But it’s valid to measure various inputs in a business even if those inputs are not directly related to how you price your offerings.

      Selling value (outcomes) and tracking time usage are not mutually exclusive in my experience. For example, in a startup software company where developers are having to spread their time between writing code and supporting customers on the help desk, it helps everyone involved to know how many developer hours are going into each activity. If the support time goes above a certain level, additional support team members are hired. No-one in the software company thinks for a moment they are selling time just because they are tracking how they are using their time.

      I certainly see the symbolic value of eliminating timesheets if it helps to effect cultural change in a firm. It’s a massive move. Like burning the boats. And I think many firms might need to do that to send the very clear message that the firm no longer sells time.

      But once the new paradigm becomes accepted as ‘normal’ and obvious, then I think many management teams and also operatives within firms would like to know categorisation on their time usage so they can see if there are process improvement opportunities, the need for automation or elimination of certain tasks, or where they need additional resources.

      There are a range of management and business philosophies that can be successful. I value different perspectives and welcome debate. I certainly appreciate you taking the time to comment here Ron.

      • Ron Baker -

        October 2, 2014 at 2:15 am

        Michael, I understand your response, trust me, I used to believe as you do.

        But empirical evidence changed my mind. If a firm develops a competency in pricing, timesheets and time tracking become meaningless. Firms that went back to timesheets, if you dig deep, sucked at pricing upfront, and managing change orders.

        Again, you won’t find a timesheet or time tracking in Apple, Google or nearly any other company. Doesn’t this beg the question, why not? They have the constraint of time, too.

        Two more points: you argue that time is a cost. Then why are you dividing a cost by a cost with hourly realization? That makes as much sense as retailers dividing sales by hours, rather than square footage (square footage they can control; time they cannot).

        Second, no time tracking will tell you how much money you left on the table. Hence the importance of pricing competence, not time tracking.

        • Michael Carter -

          October 2, 2014 at 8:50 am

          Hello again Ron. Pricing well and tracking time (activity type) utilisation are not mutually exclusive. I agree. Price appropriately up-front.

          For us and many businesses, time tracking (for efficiency/diagnostic purposes) is far from meaningless. The information is gold. It allows better management of growth and resource allocation.

          I don’t think the examples of Apple, Google etc. is a like-for-like comparison with the typical professional services firm. Software is a massively leveraged product. Service firms have different drivers, and how advisors invest their time (and how much time it takes to deliver engagements) is important to know.

          If I was managing a division of Apple or Google, I would still ask team members to use Time Doctor so we could see where we’re all spending our time/focus/activities. Even if it’s only done throughout the year at certain times as ‘spot checks’. The crucial thing is people understanding the WHY of this approach to time tracking. If they don’t get that, then don’t do it. If they understand it’s to the benefit of everyone to improve processes, appropriately assign engagements (i.e. not opverload people) then they’ll get the “what’s in it for me” for them (and for the firm and its clients).

          Personally, I don’t like the “how much money you left on the table” phrase as it smacks of price gouging (a.k.a. “charge as much as you possibly can”). I prefer sustainable pricing over premium pricing as it supports long-term client relationships.

          Re the ‘sales by hour’ metric for a retailer, personally I think that’s a valid metric (not to the exclusion of other metrics). Dr Keith Cleland would agree with me on this. His brilliant Target Average Rate Index (TARI) concept would support sales-per-hour as something a retailer would benefit from measuring and monitoring. Ask any retailer. Every hour they are open is a cost.

          Enjoying the debate!

  • Stuart Spalding -

    September 24, 2014 at 10:07 pm

    MC – a long standing debate in the Accounting profession. Personally believe that all businesses should track their input costs (costs of production or delivery) regardless of whether these are a consideration in the pricing model.
    We see many profitable firms adopting value pricing but continuing to track time to effectively calculate GP on each assignment/service line and to monitor resource utilisation/performance.
    On this basis, not sure I agree with the comment “The only place time spent should matter is in prison, not in a professional knowledge firm”.

    • Michael Carter -

      September 25, 2014 at 11:00 am

      Thanks for your pragmatic input Stuart. We’re on the same page re the simple wisdom of tracking input costs for all business, accountants and advisors included. When you say “We see many profitable firms”, I should mention for the benefit of others reading these comments, that this is based on surveys of thousands of accounting firms over more than a decade through ‘The Good, the Bad & the Ugly of the Accounting Profession’ annual benchmarking study by Business Fitness, so it’s on a solid empirical footing.

      Agreed that ‘time spent’ matters in places other than prison! ‘Time spent’ equates to cost, both in a financial sense (accountants’ hat) and in an opportunity cost sense (economists’ hat). Ask any employer or person processing payroll if time spent equates to cost.

  • Phil Richards -

    October 1, 2014 at 4:51 pm

    WOW, a powerful piece and totally agree.

    I’m not a fan of the value add – price gouging philosophy – at some point it’s about living with yourself and your own conscience.

    Write offs are reality – no one can price every job perfectly and deliver it for the expected cost everytime – especially on new clients and new projects!

    We’ve all done it, doctored our timesheets, massaged the results and robbed Peter to Pay Paul.
    The whole point of testing and measuring is that we need to know the facts!!!!!!!

    • Michael Carter -

      October 2, 2014 at 8:55 am

      Thanks Phil. Glad the piece resonated with you! Look forward to catching up as discussed.

  • John Stitt -

    November 17, 2014 at 5:44 pm

    I agree with value pricing to clients (no gouging, fair pricing), and with keeping timesheets for costing purposes. To be good at value pricing you have to complete a time budget of the inputs used to complete the project. If you & your team don’t track time then for management purposes you have no idea how the project is progressing. Most manufacturers and tradies cost time and material costs into the jobs. Time does matter. Ask a manufacturer how he feels when a machine is not operating due to repairs or maintenance. I’m not saying professional team members are machines, but all inputs have to be tracked for managment & profit improvement purposes. How can team members play the ‘beat the job budget’ game where there is no job budget. You have to price your fees on value, & keep timesheets to monitor your costs. Otherwise, your business may ‘run out of control’!

    • Michael Carter -

      November 20, 2014 at 11:53 am

      Agree 100% John. Thanks for your comment. I think the “throw out your time sheets” proponents who justify it with rationales that include “but staff hate time sheets” and “it helps differentiate our culture” are ignoring the pragmatic points you (and our post) make/s re tracking input costs. If a firm thinks its “we don’t do time sheets here” policy makes it appear progressive and contrarian, then that could just as easily be achieved via things like, “we don’t wear ties” or “no collars here, only t-shirts” or “no fixed working hours, work when it suits you” other symbolic means that “break the rules” of what firms do traditionally. And the argument that “keeping time sheets emphasises the notion that we sell time, not value” doesn’t hold water for me, because, as an example, everyone at PARADOX knows we sell outputs and outcomes, not time, yet we happily use Time Doctor (not traditional time sheet software) to just help us track where our time is being invested so that ultimately we can see what is working, what needs streamlining, etc. We all ‘get’ that time usage and value delivered are not linked. That’s obvious to anyone who thinks it through. The conceptual argument that time is a constraint not a cost comes from someone who hasn’t been on the ground in real SMEs/SMBs any time lately.

  • Gavin Bottrell -

    September 21, 2015 at 9:36 pm

    I agree with you, MC.

    By cutting out write-offs and invoicing clients for the full amount on WIP firms may potentially run at a loss (being not budgeting time and accounting for overhead costs etc).

    Timesheets are an important indicator not only of the time put into the job, but also on the capability of those in charge of the job – this isn’t a negative thing, as you said
    ‘Inefficiency is feedback that your processes aren’t working and/or your team isn’t sufficiently trained in your processes.’

    Its the nature of the industry for staff in training or new client jobs to have a write-off amount in the beginning. I can’t imagine too many clients sticking around after being slapped with 100% WIP time due to poor management.

    Regards,
    Gavin Bottrell

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