If not timesheets, then what? Introducing a Fixed Cost Model to your firm
Timesheets have had their day in the sun.
Many firms have moved away from billing their clients on an hourly basis, but are stuck trying to make a Fixed Revenue Model with a variable, timesheet-driven cost structure.
The argument is that hours are the only way to track team capacity, and so the workload is managed and distributed based on hours. But there are two significant issues with hours:
1. Inherent issues with tracking time
Timesheets are incorrect, given the inherent human element.
Every single hour we work looks different from every hour we’ve previously worked. During the four years I worked at a Big 4 firm, I clocked over 9,000 hours. I can honestly say that each hour looked different. I may have been at my computer for those hours, but my output or productivity was different for every single hour.
There are internal variables that impact output, like rest and personal issues outside of work.
There are external variables like time of day, distractions, politics in the office, and internet or network speed.
2. Systemic issues with tracking time
Many firms will feed the incorrect timesheet data, noted above, back into the capacity and team planning for the coming week, month or year. Bad data is helping firm leaders plan budgets and how to ‘best’ utilize their team.
My experience with time budgets is that team members rarely complete the work under budget. Parkinson’s Law is alive and well: work will fill the time allotted.
Does this take a negative view of team members? Maybe. But what is a team’s incentive for being faster than management’s expectations?
I know most firm leaders understand the limitations of timesheets, but without a different option, timesheets remain the go-to for team management and capacity planning.
Track value instead of time
Tracking time measures and reinforces a behavior: complete the assigned work in the allotted time.
Karbon is our rocket booster that’s allowing us to grow at 40% to 50% year‑over‑year.
measures work being completed while actively encouraging team members to get faster and innovate.
You assign tasks to team members with due dates, but no time budgets. The individual team members are responsible for completing the work regardless of time spent.
If a team member was assigned a task and was free to go home after it was completed, do you think they would find a way to do it faster? Absolutely.
Each employee becomes responsible for their own work as well as their own profit—profit being measured by their hourly wage divided by their time. As they decrease the time it takes to complete the work, their productivity and personal profitability increase.
This is what I refer to as a Fixed Cost Model.
Fixed Cost Model
The Fixed Cost Model essentially turns all employees into mini business owners. They are no longer tethered to a desk for a number of hours, but have a list of work to be completed.
This model requires a shift in how engagements are structured, managed and completed:
Engagement economics
The revenue and expenses for each engagement need to be determined before they are accepted and distributed to the team. Many engagements are scoped solely on the projected revenue leaving the cost structure up to chance.
Continuing to accept varied types of engagements, both in size and business type, will minimize how you can manage your engagement economics.
The Fixed Cost Model is optimized only when you focus on a core set of services that you can accurately price with predictable margins, and execute quickly and repeatedly.
If you try to use a Fixed Cost Model with a variety of services, your team will become frustrated, as each assigned task will be different and hard to innovate with.
Discreet engagement tasks
Each engagement needs to be broken down into distinct tasks. Those distinct tasks will be assigned to the right skill level. The more granular, the better.
The more detail you have about the various sub tasks within an engagement, the easier it will be to:
Assign the most appropriate employees
Build the correct workflows
The mismatch of task difficulty with employee skill level is the number one reason for employee dissatisfaction.
One employee should not be handling more than 50% of any engagement. This is harder to achieve with smaller firms, but it should be the goal for any team size and composition.
By assigning the same task to an employee for multiple engagements, the employee can achieve a higher level of autonomy and expertise in a shorter period of time. They will innovate more when there is an incentive to be more efficient.
Proactive team management and training
A Fixed Cost Model needs a focused management team that is proactive in maximizing the team instead of hours.
Team huddles should be less about ‘getting up to speed’ about projects (you’ll use your practice management tool for that), but rather about improving the team’s efficiency.
Post-engagement debriefs are good but sometimes don’t lead to improvements in efficiency and workflows.
But real time support during an engagement is a game changer. Suggesting a change in approach to a team member, and then supporting them through it has to be a goal for your firm’s leadership.
When employees have control of their personal profitability, they will be quicker to ask questions, digest training and be more efficient.
Dynamic pay structures
You’ll hit a point where each employee is completing work equal to their annual salary. A team that has committed to a Fixed Cost Model can be disrupted with unscheduled work. This doesn’t have to be the case though.
Salaries that change only once a year are demotivating for high performers, especially as they routinely complete unpredictable and complicated work.
When a new project—recurring or otherwise—shows up, explain to your team how their schedule will change and how it will impact their pay. The engagement economics should be communicated to the team, so their involvement and their benefits are clear. Regular pay incentives should be normalized to get the best from your team.
Getting traction and implementing the Fixed Cost Model
The thought of switching to a different team and capacity management tool can be overwhelming. Most practice management tools already have time-tracking tools built in, so what can be done to get traction in a different direction?
Download a copy of my Fixed Price Model template. This tool is an introduction to viewing all of your engagements on a matrix with your team. You will assign each component of the individual engagements to your team members. Each team member will have a total cost that they are responsible for, which can be compared to their annual salary.
On the Instructions tab of the spreadsheet, you will find a step-by-step guide to help you start using the tool.
As the accounting talent crunch intensifies, the way teams are comprised and compensated has to change. A Fixed Cost Model approach provides a better framework to allow non-traditional accounting talent to support your core accounting team in a predictable cost environment.
Your team will be more autonomous, innovative and engaged in their work. You will see that your employees can do more in less time.
We spoke with ChangeGPS Director Tim Munro to learn why he removed timesheets from his practice, and the benefits and pitfalls he has experienced since.
Mark is a Canadian CPA who started in public accounting in 2010. In 2017, Mark launched a virtual CPA firm, and after four years of growth, exited his firm. Now he helps other firms with their team, tech, and trajectory.
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