Sunday, July 01, 2007

Intelligent Questions Deserve Intelligent Answers

Finally, a professional who commented on my last post asked some intelligent questions worthy of attention and discussion. For the purposes of this post, I will include his questions and comments in quotes and then answer them. Although there are far too many good questions here to answer them all in detail, I will choose a couple and we can move onto the rest in a future post. The professional asked:

"Do you use timesheets internally?I am having trouble letting go of timesheets for internal firm management and am not sure if I should even be trying to. Externally we fixed-price our services, but if I really think about it we arrive at our pricing by asking ourselves 1) what is a client willing to pay and 2)will it be profitable enough for it to make sense for us to service it. It is that second part that requires the measurement of time. Although the time we spend on a project does not dictate the value we create, it does dictate how profitable the firm can be."

Great question! The answer is NO WAY! Time sheets are like toilet paper in a normal business. Forget about professional service firms for a moment and think about the companies that are far more profitable and own billions of dollars in assets. Ask yourself this: Does their profitability depend on the COST of making and delivering their product? Hell yes it does!! News flash: Not a single one of those companies use timesheets and they make so much money it is silly. They all know who their top performers are, their best project managers, and their worse ones. What do you really think you are counting in 6-minute increments? It is like you are counting my pores to prove I have skin!

Here is what I am getting at: Your 2 step process is correct, so I want to give you credit for that, but the conclusions you are drawing from part 2 that are way off and counter to how the real world operates. Question 1 is properly 1) How much is this worth (and how can we design the services to be worth the most) to the client, and 2) What is the RESERVE price. You are correct that in a fixed-price world profits depend on lowest cost delivery. Where you made an error was taking the leap from understanding costing impacts profits to "we have to measure time in advance in order to understand how profitable we can be." Time is only one small part of costing and as our services begin to involve far more than just time, such as service costs, etc, to please the client, or a car service to pick up clients who do not want to drive into the city, you can see that the fascination with counting time is misleading at best.

First, pricing based on value requires that #2 have no impact on price. What you are trying to get at with understanding costing (NOT JUST TIME) to get to an ACCEPT/REJECT Price. This means you will go back to you intellectual "engineers" and see how efficiently they can use firm resources to accomplished the outcome outlined in the SCOPE section of your fixed-price agreement. Only good project managers will know how to do this well. The point is not to maximize profit with this exercise or even to estimate how long you "think" it will take, the point is to identify the lowest-cost-delivery" that would result in an acceptable profit. By doing this, you will know the lowest price that you will accept to do the work. If the value is 3x that price, you have a winner, if it is below the reserve price, you should REJECT the client.

On a side note, here is another problem with time: Most professionals don't understand their business well enough to use time estimates to understand cost. They are used to multiplying by Billable rates, not actual cost per day for the use of a resource. They also do not understand project management enough to realize how to use low-cost resources (NOTE: this is different from low-billable resources) to accomplish an end. Costing as an exercise should be fully-loaded and include more than time in order to be accurate.

"There is a reason that the Big 4 (very scalable, profitable and successful businesses) still use timesheets even when using value pricing. "
First, lawyers who say this do so to rationalize continuing a billing practice that started as an accident and everyone hates. The Big 4 is not value pricing for one, and yes there is a reason (which is neither good nor compelling as a reason for you): That is the way they have always done it!!
As the firm grows my personal involvement and knowledge of project profitability becomes further removed. Without timesheets how do you determine:1) Which jobs are least profitable and need to be re-priced or eliminated?2) Which resources are the most efficient and therefore should received bigger raises?3) How many engagements (and therefore how much revenue) an efficiently functioning delivery team can service at full capacity?"

GREAT QUESTIONS!!!! I could write a book about these! I will try not to, but here you go:

Let me first begin by challenging you here. You preface questions 1-3 with the statement "without timesheets how do you". My problem with that is this: You are assuming there is a relationship between timesheets and the answers to your questions. Prove it, you ask? Again, look at every single profitable company in this economy. . . they have fixed price products and services, no timesheets, and yet they know their price points, costs, which resources are most efficient, who performs best and they understand capacity limitations, etc. I really should write a separate blog about each of these topics, but put simply, the entire world economy works like this and proves that it works. Now, let's explore this in a professional services firm context: However, I will not, in answering your question, acknowledge that there is a relationship between ditching the timesheet as you know it and the questions you ask.

1) Part 1: Profitable JOBS is not you goal as a business. Profitable Clients is your goal: Distinguish between profitable jobs and profitable client. Timesheets distort reality and make for bad decisions. So what if a job is not profitable? What if you have a very profitable client and you decide to do it as a loss-leader? A look at the data might tell you that you need to raise your price, but simple business logic tells you that you did the right thing to "throw em a bone". So, don't lost the forest in the trees: Most lawyers are so afraid to be less profitable in 6-minute increments that they win the battle and lose the war: Higher profitability on a project, but less on average per client

Part 2: There is no such thing as re-pricing a job. It is either within the SCOPE or outside the SCOPE and requires a change order!
Here is the symptom that prompts the question and my diagnosis:
SYMPTOM-- Job 1 is taking too much time and we are losing money on this one
Problem 1
DIAGNOSIS 1
a) Poorly Defined Scope -- Whose fault is this? YOURS! If you Scoped the job properly, you would not have this problem. You should certainly not blame the client and raise the price. You should not fire them either. Remember, you are VALUE pricing. Just because you added $50k in value for $20k in price, remember that they still feel the value you add. WOW them at a loss and capture that value on the next job. Use it as an opportunity to show them what you can do.

b) Clear Scope, work is creeping outside of scope (Scope Creep)
Sometimes the people delivering the service are so far removed from the partners who sold the work and scoped it out that companies experience Scope Creep. Good communication and teamwork goes a long way here. Make sure the team understands boundaries and communicates to the relationship partner that they need to have another conversation with the client about a Change Order.

c) Clear Scope, Project Manager sucks
Again, some project managers will just suck. It is not the client's fault, right? It may cause you to think you underpriced a job but remember: If you actually price on value you simply CANNOT underprice a job. . . you may have taken in when you should not have, but sometimes people will project manage the job so terribly that you lose your shirt. Make sure you get them off the deal. . . . fast! Do not increase the price to the client, LOWER THEIR SALARY INSTEAD!!! Value price your people. You will get to pay your best more in the end!

d) Clear Scope, Error in Accept/Reject Process
Sometimes you scope the job right and every once in awhile realize that you should have rejected the client. If you want to make a lot of money you cannot be afraid to eat one every once in awhile! There is such a thing as a Risk/Reward Relationship in business!!!

e) Client is high maintenance and consuming more resources than expected:
2 choices. . . . 1) What would Donald Trump say ("yer fired!") OR 2) double the price
on the next job. Those clients know they are a pain in the butt and will pay for
someone to put up with them.

Your second Question:
2) Which resources are the most efficient and therefore should received bigger raises?
This has nothing to do with timesheets at all. I know who our most efficient workers and least efficient workers are. Most managers know this without any time accounting at all. How: You give them a bunch of work and see how much they put out and at what rate and quality. I never needed a timesheets Here is what we do: We bonus our project managers for managing profitably. It is their job to delegate internally to get the job done at lowest-cost delivery. Watch this: If someone is not pulling their weight what do you think will happen? Our project managers will not use them for a project because it will impact their bonus. OK . . . so how do you know your weakest players are who are not productive? They are the ones sitting around because none of our project managers want to give them work? What about our best ones? They are busy as hell and in high demand. NO TIMESHEETS REQUIRED! It is a beautiful thing! The best and worse ones self-identify through this system.

TIP: Identify a healthy profit and split the difference that your project managers can achieve above that amount. (remember: do this at a client level, not per-job. There are very compelling business motivations for doing a job or two at a loss. Walgreens happily sells potato chips and batteries at a loss knowing that you will come in and spend $10 more on other things.

Your last question I will leave to a future blog so I don't end up writing a book here.
The point here is this: Timesheets are toilet paper to a normal business. Time-accounting is NOT costing. It is a component of cost, and is becoming less and less as technology, benefits, and other value-added services enter the equation. Accounting for one's time to understand cost, at best, need not be done by minute or hour but instead at a very high level. You might ask your people what percentage of their time went to each of the top 5 accounts they worked on this month and you would get the information you need in order to add time in the rest of your costing calculation.

3 comments:

Ron Baker said...

Chris,

Two great posts! I just wanted to add one more point to the discussion.

What good does it to know your costs if the client doesn't see the value contained in your price?

This is how Toyota can operate not only without timesheets, but without a standard cost accounting system! They know the cost BEFORE they build the car (they call it target costing, we call it price-led costing).

The point is firms have to compute (estimate, actually--close enough) the cost of the project or client BEFORE they do the work, not after.

It's also important to note that timesheets allocate average costs, whereas for pricing, marginal costs are what counts. Moreover, timesheets that include a built-in profit level are not cost accounting, they are profit forecasting!

99% of the objections of no timesheets can be overcome with excellent project management, a good scope document, and using change orders.

This is the number one question we get at VeraSage, and I have recently posted an answer, with a list of further reading at:

http://www.verasage.com/index.php/community/comments/ask_verasage_how_do_you_measure_client_profitability_and_employee_productiv/

I hope this further helps your reader. Keep up the great work!
Ron Baker, Founder
VeraSage Institute

Christopher Marston said...

Thanks Ron!

Very good points. I think you said it clearer than I did. The way timesheets are used with "rates" (with the built-in margins)is not costing for sure. That is what I mean by the fact that timesheets do not tell you the cost. firms need to really understand the cost of all resources, including time, to do costing (or RESERVE PRICING) in advance. The true challenge is getting the law firm administration to provide this information to the committee of attorneys doing the costing in advance so that they can really begin to understanding costing. Thanks for your comments and readers really should read your post as well!

Anonymous said...

You mentioned that "we bonus our project managers for managing profitability". What measurement metrics do you use to do that? I had kicked around the idea of bonuses based on revenue per manager or % of deliverables completed on time... which would incentivize them to increase productivity but not necessarily profitability (they might use a quicker more senior resource to get the job done). How do you get to client profitability to incentivize lowest cost delivery?