This week’s newsletter has been on my mind for months.
I have trashed timesheets before but today I want to get into the initial tool you can use to start making the transition today.
The transition is from timesheets and hourly billing to value-based and subscription pricing models. The tool that I created focuses on three key things:
- Clear revenue and costs of services
- Assigning the service components
- Monitoring and supporting the team
Clear Revenue and Cost Of Services
I am going to repeat myself here.
You need to clearly define the services that you will offer. Plain and simple.
Moving to a repeatable value-based model will be impossible if you can’t or won’t stick to a set of services. Without fixed services, each new engagement will be hard to scope quickly and accurately. Understanding the costs of those different engagements will be challenging, and training and empowering your staff will be difficult.
Once you’ve landed on what you do, you will need to determine how you will price the value of that service. Again, you are focusing on the value that the client will receive – it has little to do with your inputs (hours) or outputs (reports + dashboards) but with outcomes and transformations. The price will be different based on the size and trajectory of the client’s business. Let me explain.
Size: Does a client have the resources to buy?
A small business client with $200,000 in annual revenue may want your $30,000/yr service which includes segmented financials, projection scenarios and weekly cashflow tracking.
However, given the size of their business (a revenue-based assumption) the 10% revenue increase and 15 day decrease in the cash conversion cycle will not justify the investment.
Trajectory: Does the client want to invest in the service?
A business client with $2.5M in annual revenue can afford and would benefit from your $30,000/yr service. The resulting 10% increase in revenue and faster cash collection would be an excellent return on investment.
If the owner does not want to grow due to personal circumstances, even though the ROI is clear, the price will be too high. It doesn’t align with what the business owner wants.
In each scenario, the business’s size and trajectory will determine your service’s perceived value and price. Value is contextual so find and attract those that can afford and want your service to maximize value.
Assigning The Service Components
Let’s break down what tasks need to be completed and by whom. Only with standardized services will this be possible. Here is a tool that I created to help with this process:
The spreadsheet shows the clients, their projects, the economics of the entire project and the costs of the individual tasks.
Get granular with the services, so you can leverage non-traditional talent. Provide more details about how project tasks are completed to allow VAs or non-accounting team members to complete the work. This gives the core accounting team the chance to focus on the highest-value work.
The cost of each individual task will total the project’s cost of sales.
Now assign the personnel to the work. Each team member will be assigned to the same task on multiple clients, so they can build efficiencies and increase their autonomy over their work.
The costs associated with the individual tasks will provide the total cost for that tasks they performed in the year. The combined total of all the task costs should be equal to or greater than their salary. Simply put, the work they do should cover their salary.
This tool allows you to be transparent with how their salary is comprised. You don’t have to share the firm margins, but providing a breakdown of where their salary is generated helps them share the responsibility of how they get paid.
Monitoring And Supporting The Team
The above spreadsheet is a good way to see how the work and costs can be allocated among the team members. Note: No hours are assigned. Only work.
If your firm is sustainably growing, you should revisit this spreadsheet frequently.
The spreadsheet is not the daily team management tool but is used to see the high-level cost structure of your team. It shows how your team is covering its salaries and the firm is getting its needed margins. The spreadsheet also informs how you will leverage your practice management tool, now that timesheets are gone.
Your PM tool will ensure work is progressing and deadlines are met.
At the time I sold my firm, I was using Karbon. I was able to see all outstanding tasks as well as outstanding tasks by team member. Being able to see what project step or task your team member is at reduces the time required to ‘get up to speed’ with various projects.
I love Karbon as you can have an internal chat conversation on a task level, so you don’t waste time referencing a task or step – you can ask your question, add a link, or provide assistance exactly where it needs to be.
The more granular you get with the tasks, the more clarity you’ll have about where team members need more training.
Other great PM tools include Click up and Asana.
You may have to retrain how you manage your team and the cadence of team meetings and touch-ins. Discovering employees that are struggling with the workload cannot happen after major assignments. It has to be caught in real-time.
Dynamic Pay Structures
Once you have dropped timesheets and team members know what they are accountable for, tracking hours becomes irrelevant.
Yes, that’s right. If they work less than 40 hours a week, but the work is being done well, they get paid the same.
This idea was introduced to me when I left public accounting for a three year stint as a finance and operational controller. The business owner, who was my boss, did not care about my hours.
However, he was clear that my team of 17 people and on-time delivery were my top priorities.
The energy that would have gone into tabulating and policing hours went into mentoring and developing team members. It really made me step up how I managed. My work wasn’t dictated based on the clock on the wall.
This method might seem like it doesn’t allow for impromptu projects or unscheduled work. The truth is that it really doesn’t.
I hear many firm owners say that unexpected work is easy revenue and we can squeeze it in.
If you don’t remember anything else from this week’s newsletter, remember this:
Easy revenue is usually hard profit. Easy revenue has lower margins, ties up team members and increases your opportunity cost.
Hard revenue requires cultivating a niche and valuable client relationships which makes profit much easier and more consistent.
Something will inevitably come up even if you are focused on scheduled, high-profit work. Communicate with your team about the one-time project or temporary increase in workload. Explain how it will impact the team’s schedule and how it will impact their pay.
The idea that wage reviews/increases only happen once a year is archaic.
If a high performer takes on more work or goes above and beyond their scheduled work, pay them immediately for it.
Let them see the direct reward for putting up their hand. If team members see that they have meaningful control over their earnings, you may discover that you can do more with less.
That’s it for now.
Build The Firm You Want,
Mark