Ronald Baker is known for his quest to “bury the billable hour and trash the timesheet”. He’s written six books and co-founded the VeraSage Institute, a think tank for professional knowledge firms that promotes better practice methods, including better pricing, and is dedicated to helping professional firms become “free and independent from the tyranny of time”.
In this interview with Andreas Noodt, a member of the IFAC SMP Committee and practitioner at German accounting and consulting firm FIDES, Baker explains his pricing approach.
Noodt: Ron, you’ve been pursuing your worldwide quest to bury the billable hour and timesheets for
the purpose of pricing for more than 17 years now. What changes have you seen in that time?
Baker: Overall, I’m encouraged by the progress we’ve been able to make. We are trying to diffuse a new theory into the accounting profession, which is measured in decades – sometimes centuries, as with germ theory in the medical profession – so I’m encouraged, while admitting we have a long way to go. At least the billable hour and timesheet are now on the defensive.
Noodt: [What is] your criticism of the traditional business model?
Baker: A business model is how your firm creates value for clients and how you capture a portion of that value, so it’s inextricably linked to your pricing strategies. Throughout my accounting career, I was taught the following business model, which I think of as serving ‘the firm of the past’:
Revenue = People Power x Efficiency x Hourly Rate
There are several problems with this theory. First, once firms pass break-even, it gives them a false sense that any revenue is good. Consequently, they accept low-value clients, taking up a firm’s precious capacity and preventing it from reserving capacity for its most valuable clients.
Second, the way most firms were built in the last century was by leveraging people hours – the pyramid structure. As technology arrived – especially when the computer hit the desktop – the pyramids began to flatten. Most firms, however, still put revenue before capacity, always playing catch-up to the workflow and client demand. This inhibits innovation, client service, investments in CPE etc.
Third, most firms focus on efficiency by measuring utilisation rates and billable hours. Yet, if you study statistics going back 70 years, you’d find utilisation rates and billable hours are within a very tight range. So, whether firms are using a quill pen or a laptop computer, they can charge only so many hours in a year. The theory also compels leaders to believe efficiency is the talisman of running a profitable firm. This is demonstrably false. I’m sure the buggy-whip manufacturers were a model of efficiency before they were replaced by the automobile. What if you are efficient at doing the wrong things?
Last, the hourly rate. The profession has taught approximately three generations of accountants that the only thing they sell is their time. This is nonsense, for a very fundamental reason – no client buys time. How can you sell something the client doesn’t buy?
Noodt: [How] is your new business model different? Why is it better?
Baker: The old model doesn’t explain why firms are successful, nor does it offer viable alternatives to leveraging the critical success factors in an intellectual capital economy – it is suboptimal. The new business model for ‘the firm of the future’ is more optimal:
Profitability = Intellectual Capital x Effectiveness x Value Price
This theory has many advantages over the old one. First, rather than focus on revenue, the firm is forced to think about the profitability of each client. Not all clients are created equal. Many firms could stand to lose up to 40 to 60 per cent of their clients and they’d be more profitable.
Second, ‘professional knowledge firms’ (PKFs) don’t sell hours. They create and sell – and their clients buy – intellectual capital. This is a far broader view than thinking about leveraging people and hours. Apple and Microsoft didn’t create the wealth they have by pricing by the hour, and I doubt Steve Jobs and Bill Gates kept a timesheet.
Third, ‘the firm of the future’ will focus on effectiveness, not efficiency. There’s not much the average firm can do to squeeze another 15 to 20 per cent efficiency from its human capital, which is based on fallible human beings after all, not machines.If you study surveys of how clients select – or fire – their accountants, efficiency and price are never mentioned. It is almost always because of outstanding service or lack of service. You can’t provide outstanding service if you are focused on nothing but billable hour quotas and tedious efficiency metrics.
Last, PKFs need to recognise they are businesses that have prices, not hourly rates. You’d never fly an airline that tried to charge you $4 per minute – and sent you the bill based on the flight time after the flight. PKFs need to start pricing upfront for everything they do, period. No more excuses. Fortunately, in thousands of PKFs around the world – in all sectors, from advertising agencies to law, accounting and IT firms – this is beginning to happen.
Noodt: Would you elaborate on the concept of intellectual capital and discuss it in the context of accounting practices?
Baker: Intellectual capital is what economists call a non-rival asset – meaning you can transfer knowledge and it doesn’t diminish. In fact, it grows in usefulness as more people possess it and add to it. In contrast, a rival asset can only be used for one function at a time – [for example] if I give you the tie off my shirt, now you have it and I don’t. A billable hour is a rival asset – we can only do one thing at a time. This is a very limiting source of leverage around which to build a business model.
At VeraSage, we believe our new business model is superior to, and will eventually supplant, the old model. Eliminating the billable hour and timesheets may not be within reach, but it is definitely within sight.
Copyright © June 2013 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC. Contact permissions@ifac.org for permission to reproduce, store or transmit this document.
