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Ron Baker: And there's no doubt. I mean, some 40% of firms are out there either fixed pricing or value pricing. But I would say that only maybe about 5%, maybe to 10% are doing it without timesheets. One of the things you hear—and we can talk about this—is, well, it's not scalable. You know, a small firm …

Blake Oliver: Right.

Ron Baker: … can get rid of timesheets, but a big firm can't. And I – I want to hit that really hard.

Blake Oliver: Mm-hmm.

[00:00:20] Welcome to Earmark

Blake Oliver: You're listening to "The Earmark Podcast." I'm Blake Oliver, CPA. In this episode, I talk with Ron Baker about his favorite subject: timesheets. This is the second time we've talked about timesheets on Earmark. Last time was with Ed Mendlowitz. Back in episode three, Ed gave a rousing defense of the use of timesheets. I did my best. But to be honest, I was no match for Ed. He's a very persuasive man.

Fortunately, Ron Baker heard that interview, put on his cape, and offered to come on the show to offer an opposing view. Ron Baker started his CPA career in 1984 with KPMG. Today, he is the founder of VeraSage Institute and the host of the talk radio show, "The Soul of Enterprise: Business in the Knowledge Economy."

In this episode, Ron outlines the four most common defenses of timesheets, and he tears down those defenses. That's the main course. As an appetizer, the conversation starts off with a brief discussion of private equity, venture capital, and the changing business model of accounting firms.

If you're curious about that, listen to episode four of Earmark, featuring an interview with Charlie Weinstein of EisnerAmper, which recently took on private equity investment and split off the CPA audit firm. Now that that's out of the way, let's talk to Ron Baker.

Oh, and one more thing you can earn free, NASBA-approved continuing professional education credits for listening to this episode. After you listen, head over to earmarkcpe.com to sign up. Take a short quiz and get your free CPE. That's earmarkcpe.com.

Blake Oliver: Ron, great to talk to you.

Ron Baker: You, too, Blake.

Blake Oliver: Yeah. What have you been up to these days? What's new?

Ron Baker: Well, you know, we're pushing what I call value pricing 2.0, which is the subscription business model. And I just think that's the next frontier. We're – we're seeing an effervescence in the marketplace with this business model. And the – the market is screaming at companies, as you know with Pilot, that we want annual recurring revenue. And if you give us annual recurring revenue, we'll give you a higher business valuation. And we'd be silly not to listen to that market signal.

Blake Oliver: It was amazing speaking with Charlie Weinstein of EisnerAmper about their TowerBrook PE deal on a recent episode.

Ron Baker: Mm-hmm.

Blake Oliver: And he specifically mentioned Pilot as one of those reasons why they thought it was important to change the traditional CPA firm model. It was a kind of a shock to me to hear that coming from a top firm. Like, it's – it's actually hit the radar.

[00:02:57] Monetizing Intellectual Capital

Ron Baker: Yeah. From what I understand, digging into all the private equity moves that have happened, it's – it's really to kind of monetize the intellectual capital that's kind of latent in the firm and also attract talent and be able to reward talent …

Blake Oliver: Yeah.

Ron Baker: … even if they don't stick around for partner. 'Cause, like, you know …

Blake Oliver: Well, yeah.

Ron Baker: … the partnership model is broken. I mean, geez, if – if anything needs to change, it's that.

Blake Oliver: You know, before I got into tech, my last position was as a – as a – as manager in a CAS division at a large firm over at Armanino. Great firm. Really on the cutting edge with a lot of stuff compared to most CPA firms. But for me, as a manager, it was very hard to see a path to partner. I mean, I knew it was there. But what it actually was, was super ambiguous. And it was almost like you weren't even supposed to ask, I guess, until you'd been there for a while.

So, when I got the opportunity to go into tech and I could get stock options and I could see, you know, here's my shares, here's what I have to do over the next few years to earn those and stay here, and, you know, then there's an – there's an outcome, right? It's very tempting.

Ron Baker: Yeah. I mean, that's one of the reasons why this profession eats its young.

Blake Oliver: Well, you – you think that the deal was designed to help create liquidity, to create— So, you don't have to stick around until you're 65 to see the benefit …

Ron Baker: Right.

Blake Oliver: … of putting all this time with the firm, right? I think that's part of the – the idea. And also, you have all these partners who want to retire. How are they going to retire if the younger generation doesn't want to buy in to this "stick around until you're 65" thing, you know.

[00:04:36] A Downside to Private Equity?

Ron Baker: Exactly. I think that's part of it, too. And the other thing, I mean, let's gloss over the downside of this. I mean, private equities, they're, you know, they're flippers.

Blake Oliver: Mm-hmm.

Ron Baker: Their – their time horizon is three to five years. And I don't know if that coincides with the typical outlook of a partnership. So, that's why I don't think there's a great successful track record, you know. I don't know if they're going to be able to get in there and really change the business model to make their investment worthwhile within three or five years. But time will tell.

Blake Oliver: Well, you know, it's funny. I was on a webinar. I was listening to a webinar about this that, CPA Trendlines put on. And there were a couple of guys there, you know, talking about the deal. And then, a question came in. And the question was: "How do you think this is going to impact the firm's culture?" Because there's so much going on already. Like, how can they do this to the firm culture?

And I was thinking to myself, "Well, isn't that the point of this?" Right? Like, the – the point is to change the firm's culture, to thinking of actually more about the – the short-term growth and incentivizing people to do innovative and disruptive things …

Ron Baker: Right.

Blake Oliver: … rather than just 10% growth every year is what we aim for.

Ron Baker: Right. I – I listened to that podcast, as well, and I noticed that, you know, they also talked a little bit about pricing and the traditional metrics of the – of the firm being— We – we talked about realization and billing rates and all of that. Private equity guys don't look at that crap.

Blake Oliver: What do they look at?

Ron Baker: Well, they're looking at a portfolio approach. I mean, they're looking at the entire firm. The – the goal is to make money.

Blake Oliver: Mm-hmm.

Ron Baker: Not accounting profit, right? I mean …

Blake Oliver: Yeah. Yeah.

Ron Baker: … there's a – there's a big difference between those two things.

Blake Oliver: Cashflow, right? Yeah. That's – that's what they are obsessed about.

Ron Baker: Absolutely. They're modeling cashflow. And, you know, I wouldn't be surprised if they tried to push some areas of – of the firm into a subscription model and annual recurring revenue model. The problem I see there is I don't think you can have the subscription model under the same roof as a traditional CPA firm model. They're just two different business models.

[00:06:35] The Timesheet Disconnect

Blake Oliver: Well, and that's the perfect transition into what we are here to talk about today, which is timesheets. I struggled— And that's part of the traditional model. I think we should say it's like an ingrained part of the model, which is we track our time, we bill for time. It's something I struggled with. In my role, I was building a fixed fee subscription-based CAS practice (client accounting services) inside of a firm that used time-based billing.

The disconnect that I personally felt with timesheets was, when I was in practice, was I'm billing fixed fees, I'm trying to create positive outcomes for my clients, but I felt hampered by having to slot everything into this hourly model, where my staff were afraid to work more than X number of hours per month on a client where we'd get called out. And our realization metrics, like, they tied our – our hands.

And then, the thing that really, really, really frustrated me as a manager was I'm trying to put a new technology, which is going to reduce the amount of time we are spending on clients. And that's going to increase our profitability, 'cause we're doing fixed fees. The tech reduces the amount of work. We make a better margin. We can help more clients.

But the staff are billing hours, and they are incentivized with their bonuses based on hours. So – so, I actually found that they didn't want to do the tech. They didn't want to put in the technology because it would cut their hours.

And I actually had one very seasoned accountant who was not on the partner track, not on the manager track, just a – one of those, you know, career staff accountants, straight up telling me, like, "Blake, I'm not interested. I need to make my bonus." That was kind of a revelation for me, and I realized it wasn't going to work.

That was my experience with time-based incentives or – or— It wasn't billing, right? 'Cause we weren't billing the clients based on fixed fees. We weren't billing the claims based on hours. We were billing based on fixed fees. But the staff were tracking time and incentivized based on time. And that was difficult for me in my own experience.

[00:08:45] Two Things About Business Model Changes

Ron Baker: You collided with the thing that is different about moving from hourly billing to value pricing, is it's not just a pricing change. It's a business model change. Two things change, at least two things, when you have a business model change. One is your pricing strategy changes. So, we move from billing based on inputs to outputs. You know, fixed price or value pricing, where you price the customer. Either one, that's a pricing change.

But the second thing that changes—and most consultants don't talk about this and don't even recognize it, but I can't find a single exception to it throughout commercial history. When you see a business model, the internal dashboard changes. I promise you with—

Blake Oliver: But it has – it hasn't with accounting firms.

Ron Baker: Right. I—

Blake Oliver: Yeah.

Ron Baker: And I promise you that Airbnb is not looking at the same dashboard as Hilton and Uber is not looking …

Blake Oliver: Yeah.

Ron Baker: … at the same dashboard as taxicab companies. Although we – we moved to fixed prices and, some even, value pricing, we haven't got rid of the old metrics. Eventually, that is going to collide. And that's why timesheets are so destructive.

Timesheets go back to 1919. I still can't believe, in the year of 2021, we're having this debate. But okay. We – we have to have this debate. We continue to have this debate. But the timesheet's a hundred and two years old. And my question is: "Has the world changed in a hundred and two years? Has the way we practice accounting changed since, you know, the 1950s and the 1960s?"

I mean, we have all this technology. Blake, I think this is why a lot of firms were slow to adopt the cloud and all these other apps and all this other tech, like bots and AI and machine learning. Why? Because when your business model is "I sell time," the last thing you want to do is reduce the amount of time.

[00:10:22] Timeline of the Timesheet

Blake Oliver: The timesheet was invented in 1919?

Ron Baker: Yeah. It was a product of the scientific management revolution, which was, you know, the whole Frederick Winslow Taylor scientific management. The guy that used to walk around with a stopwatch. And Midvale Steel company was a complete fraud. His – his work has been totally debunked by scholars if you read the scholarly work on him.

A law firm – a law firm managing partner by the name of Reginald Heber Smith was inspired by the scientific revolution, because of scientific management, because he was a Harvard – he was a Harvard Law-educated person. And that was the zeitgeist at the time. And he implemented both timesheet and the billable hour simultaneously into his firm in 1919 in Boston, Massachusetts. And that's the very first professional firm that introduced it.

Now, we lawyers didn't pick it up or we accountants didn't up until about 40 or 50 years later. And, in fact, the law profession didn't pick it up predominantly until the '50s or so. So, it took a while for the idea to diffuse. But he was the first guy to do it.

And I just look at this and go, "The world has changed. Business models change. We need to get over this metric." It's got no predictive value. It – it can't predict the success of a CPA. Somebody can look great on a timesheet, be a complete hack, have a totally bad customer service attitude, be terrible and rude and toxic employees or their colleagues.

It's just not predictive. It's – it's a data point that is absolutely superfluous. If you're not billing hours and if you're value pricing or fixed pricing or subscription pricing, it's a data point that's not needed.

[00:12:04] The Case for Abandoning Timesheets

Blake Oliver: So, the timesheet is over a hundred years old now. And I know that you have famously said that you don't expect it to go away in your lifetime. But I – I have hope, Ron. And here's why. Because a cpa.com survey done this year or, actually, released this year, done in 2020, found a big shift in how time is used in firms.

So, back in 2018, when they asked, "How are you billing for CAS?" (client accounting services), outsourced accounting, what I like to call actual accounting as opposed to tax and audit, the stuff that we – we really used to do more of as accountants and we probably get back to doing, when they did this survey back in 2018, they found that time and materials billing was used by 53% of firms …

Ron Baker: Mm-hmm.

Blake Oliver: … in CAS, still. When they did the survey again in 2020, it had gone down to 25%.

Ron Baker: Mm-hmm.

Blake Oliver: So, that goes to— It's a data point that supports this idea that the majority of firms, vast majority now, are not using time to bill clients. We are using either fixed fees, which is the majority, and some are even doing value. It's funny, actually. In the survey, they said value billing, which is the – the wrong term.

Ron Baker: Interesting. Right. No such thing. Just— No such— If you say that, I automatically know that you don't understand value pricing, because billing is done in arrears.

Blake Oliver: So – so, 60% are using fixed fees, 28% are using value billing or whatever they think that is, and 25% of using time and materials billing. So, there is hope, because it means we're not – we're not billing the clients anymore. We are still, however, mostly tracking time. Even my most cutting-edge colleagues in what we like to call the cloud accounting community are – are tracking time, many of them.

[00:13:52] The Argument for Tracking Time

Blake Oliver: And there are some arguments for continuing to track time even though it is not aligned anymore with how we bill clients or price necessarily. So, I'd like to go through those arguments with you and – and see if we can maybe change some people's minds about this and tilt things even further, right? Let's get us away from using these to actually manage our practices now. What do you think?

Ron Baker: Yeah, no. I think that sounds great. And just on that survey, I mean, I'm always – I always take these surveys with an enormous vat of salt, because they're non-random, they're, non-scientific. People are self-selected that take these surveys. So, they're not a representative sample of the CPA profession as a whole.

Blake Oliver: But—

Ron Baker: And the reason I know this is because I teach ethics. And when you teach ethics, you meet everybody, 'cause it's a requirement for everybody.

Blake Oliver: Mm-hmm.

Ron Baker: And when I engage with those ethics audiences— Oh, geez. You would be surprised. They – they might as well be practicing in 1919. Oh, I just want to make that caveat about those surveys.

Blake Oliver: And to be clear, this survey is only specifically about CAS practices, which tend to be the more innovative practices …

Ron Baker: Right.

Blake Oliver: … in accounting firms …

Ron Baker: Right.

Blake Oliver: … now, too, as well.

Ron Baker: That's true.

Blake Oliver: So, in – in addition to not being statistically necessarily significant, it's also a subset.

Ron Baker: Right.

Blake Oliver: So, I mean, this is the – the growth area in a lot of cases in many firms. So, it gives us hope.

Ron Baker: No. It does. And – and it gives us a vector of what's going on out there, and it corroborates everything I've seen from other surveys that are done by state societies, AICPA, and even the, you know, software vendors in the space. I mean, Sage and Intuit. They all survey their customers, and we get an idea of what's going on.

And there's no doubt. I mean, some 40% of firms are out there either fixed pricing or value pricing. But I would say that only maybe about 5%, maybe to 10% are doing it without timesheets. One of the things you hear—and we can talk about this—is, well, it's not scalable. You know, a small firm can get rid of timesheets …

Blake Oliver: Right.

Ron Baker: … but a big firm can't. And I – I want to hit that really hard.

Blake Oliver: Mm-hmm.

[00:15:50] The Lord Doesn't Want Me to Give Up Timesheets...

Ron Baker: But there's four defenses, Blake, of timesheets. And we can go through this one.

Blake Oliver: Yeah.

Ron Baker: Each— Each— There's four defenses that I've heard. I've never heard anything other than, you know, somebody told me, "Well, the Lord doesn't me to give them up." And I didn't know how to respond to that. But here are the four defenses. We need them to price. Well, obviously, we don't. I think we've already knocked out one out of the park,

Blake Oliver: Well – well, to be fair, like, some people still— I mean, you estimate how many hours the job is going to be every month or whatever, and then you multiply that by your desired rate, and that's your fixed price.

Ron Baker: Right.

Blake Oliver: It's the easy way to price.

Ron Baker: Right. And – and if they – if they spend more time in a given month or a given period, then their price is too low. And then, they try and raise the price. Well, then my solution is, well, then get better pricing. Because if you can't put a price above your costs, you need better pricers. This is just basic Econ 101-type stuff.

And, again, the problem I still have with that, that check, is it's still the labor theory of value. It still assumes that, well, just because we put the time in, that makes the product more valuable." That's insane.

[00:16:55] The Art of Pricing

Blake Oliver: Right. There's – there's a whole science— Well, not a science. There's an art behind pricing, and there's a whole methodology to the ways that companies come up with prices. I think you've used the example in webinars I've attended where Apple doesn't calculate how many hours it takes them to put an iPhone together to come up with the price of a thousand dollars for a phone, right?

Ron Baker: No. Drug companies don't do that when they price drugs. No company— You know, no sophisticated company …

Blake Oliver: Right.

Ron Baker: … is using cost plus pricing, which is what hourly billing is. I mean, hourly— I think one of the reasons we like it hourly billing requires a calculator. But value pricing requires courage.

Blake Oliver: It definitely gives us, well, the – the feeling of certainty. And I – I kind of experienced this a bit myself, 'cause I just went off to start my own business again, and I've been doing some consulting on the side. When I started doing this consulting—and I've got a handful clients—I wasn't formally doing it, but I started kind of just like, in the back of my mind, tracking my time. Like, it's that instinctual. It is that hard to get away from.

And I realized at a certain point that mentally, it mentally made me want to do things that weren't valuable to the client, because it was easy for me to do. So, I could spend my time doing stuff that's easy, and I'm putting it into my hours, and I'm feeling like, "Oh, I'm – I'm I doing what I said I would do, 'cause I'm spending X hours."

But what they really want is an outcome. I had to shift my mentality to saying, "I am – I am going to deliver X dollars of value to this client every month or every quarter." Like you said, it takes courage, right? Because I don't know exactly I'm going to do that. I have to figure it out. It's not a clear, easy thing. If I just track my time and I do some work, okay, yeah, it's easy I can do work all day long, right? Anyway.

Ron Baker: But at least you're focused on the right thing when you're focusing on the value. I mean, the problem with the billable hours is it's precise. That's why we like it. It's objective.

Blake Oliver: Yeah.

Ron Baker: I can carry it out to two decimal places. But it's precisely wrong. And when it comes to pricing and value, I'd rather be approximately right rather than precisely wrong.

Blake Oliver: Yeah. So – so, that— So, let's get back to the list. That was number one …

Ron Baker: That was number one.

Blake Oliver: Which is we need, hourly, to price.

Ron Baker: We need to price.

Blake Oliver: And also, I think people you say to validate their prices.

Ron Baker: Right. That— Then, you just need to learn more about pricing, because …

Blake Oliver:. Right.

Ron Baker: … you know, in the CPA world, you're put – if you can't put your price above your marginal costs, which is the only thing that matters by the way, then maybe you shouldn't the pricing in your firm. Let somebody else do the pricing, 'cause that's not the right question. The question isn't "Did we make a profit on this job?" The question is "How much money did we leave on the table?"

[00:19:38] Do Timesheets Measure Actual Performance?

Blake Oliver: So, number two.

Ron Baker: Is we need timesheets to track the efficiency of our team.

Blake Oliver: That's a big one. I think many people would agree with that, so.

Ron Baker: Yeah. How would we know? It's hard to manage people, right? How would we know what they're doing? What you can measure, you can manage. All of these, you know, bumper sticker, logical, illogical, formulations.

I'm not interested in the efficiency of my accountants. I'm interested in their effectiveness. Because we can be efficient at doing the wrong thing. And innovation and creativity is antithesis of efficiency, right?

Blake Oliver: Mm-hmm.

Ron Baker: When we're talking about knowledge workers in a relationship business as CPAs are, you have to be effective. You have to do the right thing. And that's effectiveness. Efficiency is just a stupid mindless ratio, right? It's just outputs divided by inputs. Efficiency is always a ratio. It's always a calculation, which means there's no judgment behind it. So, for instance, I can prove to you with statistical and mathematical accuracy, Blake, that, on average, everybody in the world has one testicle. Now, that's completely efficient. That's completely right mathematically.

Blake Oliver: Mm-hmm.

Ron Baker: But it – it's not— Anybody who believes that doesn't have a lick of common sense. So, in a knowledge environment, like CPA firms, judgment trumps efficiency. And if you want your people to be creative, if you want them to bring innovation to serving your customers, then you have to look at effectiveness, which is doing the right thing, which requires judgment, not just a mindless measurement.

You know, the – the classic example is, if Walt Disney cared about efficiency, your kid would be home right now watching Disney Plus, and he'd be watching "Snow White and the Three Dwarfs." Because it would have been a hell of a lot more efficient to make that movie with three dwarfs rather than seven.

Blake Oliver: So – so, this is very much tied into the traditional firm metrics, like realization, job profitability. All that stuff.

Ron Baker: Which are completely made up, by the way. Because realizations based on what? A fictitious hourly rate. Where did they get the hourly rate? You know how CPA firms come up with hourly rates? They look around at the market and say, "Who's the cheapest firm? Who's the most expensive firm? Okay. We'll pick somewhere in the middle." It's completely arbitrary. It has nothing to do— I've never seen a firm that actually computes their costs and adds a profit onto it. And even if they did, they would still be dependent heavily on volume …

Ron Baker: Yeah.

Blake Oliver: … whether they serve one customer or 10. Wouldn't that change the rent allocation? It's completely ridiculous. It's completely fictional. You're – you're adding apples and pickup trucks. I mean, it makes no sense whatsoever.

[00:22:27] Cost Accounting is B.S.

Blake Oliver: What about job profitability? Like—

Ron Baker: That makes no sense either for the same reason. Because cost accounting is bullshit. I mean, if – if you look at the work of Dr. Reginald Lee, he wrote "Lies, Damned Lies, and Cost Accounting," which is a fantastic book, and then, he wrote a book called "Strategic Cost transformation." And, full disclosure, he's a VeraSage colleague. I did write the foreword to "Strategic Cost Transformation." But the reason that I – I even found Dr. Lee was because I was debating with Gary Conklin, who's a ABC specialist, activity-based costing specialist.

Blake Oliver: Mm-hmm.

Ron Baker: And we're going back and forth. And I have so little regard for ABC and have so much contempt for them. I can't even tell you. I think ABC is just a new way to be wrong. But Dr. Lee came into this LinkedIn debate thread, and he – he said, "No. Ron's right about this."

And I – I'd never heard him – heard of him before. And so, I started reading this guy's work and said, "Oh, geez. He gets it. He wants us to model cashflow." What matters is cash and accounting doesn't always translate to cash.

Blake Oliver: Right. The – the way that, yeah, I try to think about this, that helps me think – understand it is, in most firms, like, most staff are full-time. We're paying them a salary. When we divide their time into hours and we allocate those hours to different clients, that's nothing that's happening in the real world, right?

Ron Baker: It's completely arbitrary. It's like taking your rent, dividing it by the number of offices you have. Or what if three of your offices are vacant? Now what do I do? You get into these games like that.

Blake Oliver: Right.

Ron Baker: And it just gets ridiculous because it has— "Look, I don't care how you divide up that rent. If you signed a 10-year lease, your butt's on the hook for 10 years of that rent." Your— Divide it up anyway you want. It's ri— It's like how many angels dance on the head of a pin? That's why I think it's really important for firms to have minimum prices. You shouldn't just take on any customer at any price. You should have a minimum price to even let them in the door.

[00:24:23] How to Stop Leaving Money on the Table

Blake Oliver: So, what do I do then? If I don't have job profitability, if I'm allocating hours to projects, if I'm not tracking realization, the question is: "How do I know if I priced correctly? How do I know if I am not just losing a ton of money on a job?"

Ron Baker: If you're a pricer, then that's one of the things that you're very concerned about, is "How much money did I leave on the table?" You start to study that, and you start to develop, you know, after-action reviews and other processes that help you determine. Did we use the right price? Could we have gotten a higher price? And what happens over time is you build up a pricing competency, and it no longer becomes a question of "Are we making money?" It's a question of "Gee, did we leave money on the table? Would the customer have paid more and been just as happy?"

And that's something that requires judgment. You know, there's no formula for it. But, certainly, hourly billing doesn't help you do any of that, because all we're doing is looking at the inputs of work. And hourly billing is completely silent with respect to customer value. If you look at customer value, you're going to have a much higher probability.

That's why I like what you said about, you know, "Yeah. Now, I have to, you know, create so much value for my customers every month." It's not about how much time I put in. You could have a phone call with them in 10 minutes and give them a million-dollar-idea.

Blake Oliver: Well, and that exactly happened where I'm helping a client implement some new software. And we were sitting on calls for hours, and they were going about it the wrong way. And I finally figured out what the problem was. And I just said one thing, I said, "Guys, instead of doing this and focusing on this, which is not essential, why don't we do this instead?" And that changed the trajectory of the whole project.

Ron Baker: Yeah.

Blake Oliver: It was one— It – it was, like, five minutes of my time. So, how do you—? You can't bill that based on time, right? Now, we have to look at it and say, "Okay. Well, you know, what was the cost of this project failing that maybe my price should be at least that?" or "What is the value of the success of the project?" Which is hard to, you know. But we can come up with estimates.

Ron Baker: It is hard. because look value is subjective, and people want – people try and want to get a formula for it. And that's why they love to check their price based on the number of hours that they spend. But that doesn't check the price.

Blake Oliver: Yeah.

Ron Baker: That doesn't tell you anything about customer's willingness to pay or customer value that you created. It doesn't do any of that. So, you're better off looking at different metrics or different things, different questions to ask after a job goes south. I mean, one of the things that I find absolutely amazing is knowledge firms, like accounting firms, don't spend enough time reflecting on what they've done, whether it's technical work like taxes or audits or CAS or whatever. You know, we should be doing after-action reviews.

Blake Oliver: Right.

Ron Baker: And we don't do them. Which is amazing, but that's a whole nother issue.

Blake Oliver: Well, and even when we collect the time, we often don't ever look at it, right?

Ron Baker: This is the other thing that cracks me up for the defenders of timesheets. It's like, "Listen, you've been tracking these things for at least 60 years. You should be able to tell me down to the rat's butt minute how long everything takes."

And then, when you tell them that and you say, "Well, look, you – you should know how long exactly that takes, because you have all this track record of time to cull through all this data." And they'll say, "Yeah. But each job is different." Well then, okay. Then, why are you tracking time? If each job is a new black hole, why track time all?

[00:27:51] A Potential Solution?

Blake Oliver: Right. Right. Yeah. Why – why even bother?

So, there's something I want to offer as, like, a potential solution. And maybe you can let me know your thoughts on this. So, here's why job profitability doesn't work in my opinion, at least in my experience, is that clients are different, and they have different needs, and you fix the price and then your profitability, when you try to measure it based on a job, it's going to go up and down and swing crazy amounts every month. Because one month, they need a lot, and you give them a lot and you go over. And then, another month they never call you. And now, you look amazingly profitable, right?

So, it's all— That's kind of meaningless data. But what really matters is you've got these people on salaries. What matters is you add up all your costs for this team, and then you look at how much revenue it generated. You know, that's what matters. Like, the whole of the practice.

Ron Baker: Yeah. It's—

Blake Oliver: Right?

Ron Baker: It's an interdependent system. And trying to bust out to audit, tax, CAS, all these different practice groups, and then run a, you know, separate P&L and divide the overhead appropriately based on square footage, or all these other ridiculous things. That's completely arbitrary. The point is to – to maximize the profitability of the portfolio overall.

Blake Oliver: The whole firm, right? And – and then, this is where even my attempt to sort of broaden it and make it a profitability by practice—just the CAS practice, for instance—is problematic.

And this is why I think bookkeeping has gotten no respect for so long. Because the market does not allow you to charge the same rates for bookkeeping as for tax advisory work or – or audit. Because those jobs, that work requires more experience and more skill. And thus, it is valued, I suppose. I don't know. Maybe that's not the right way to say it.

[00:29:33] The Hidden Value of Bookkeeping Services

Blake Oliver: But anyway, the market values advisory work, like tax planning, audit, more than bookkeeping, which makes sense. There's more people providing bookkeeping. Anyway, you can't set same firm-wide rate for bookkeeping and expect to sell. So, when you measure the – the – the bookkeeping team just by itself, it doesn't look that great compared to the rest of the firm. And so, the firm doesn't want to invest in it. But what they fail to see is that all that bookkeeping work is a lead generator for all of the other work the firm does. It brings in customers.

Ron Baker: It's a loss leader if you want to think of it like …

Blake Oliver: Yeah.

Ron Baker: …you know, a milk in the grocery store.

Blake Oliver: It's profitable. It's just not as profitable based on your traditional metrics. if you look how much work that my bookkeeping brought into my firm, I mean— But we didn't have a way to measure that …

Ron Baker: Right.

Blake Oliver: … 'cause we— It wasn't like we'd go there and take— Okay. Let's take some of these tax profits and allocate that to the bookkeeping department, because we brought in the clients. Like, there's just no way to do it.

Ron Baker: Right.

Blake Oliver: Yeah.

Ron Baker: And not only do – do I not think it – it should not be done even by department-level, revenue by department, it certainly shouldn't be done revenue by individual person. Because, in teams, how do I split up revenue? Now, some firms that have adopted value pricing have figured that out. They throw the team in the room, and they say, "Okay. Here's the fixed price. You guys are going to charge for this job. You divide up the revenue amongst yourselves." And then, they hold one another accountable. And if somebody doesn't pull their weight, you know, they're voted off the island. And— But that's ridiculous. We— It's like we're one big firm here. We should be able to collaborate.

[00:31:06] The Value of the Subscription Model

Ron Baker: And – and this is what I love about the subscription model. Because in the subscription model, there are no silos, because everything just is brought to bear on whatever it is the customer needs. And the whole firm responds and shapes around that customer need. There's no lane of tax audit. No. No. It's whatever you need.

It's like a concierge doctor. Whatever you need, you're covered. The way the – a subscription business income statement looks and all the metrics. There's no room in there for – for looking at time at all. No venture capitalist is analyzing a SAS business or any other subscription business and looking at timesheet data. It just boggles my mind.

And people say, "Well, it's not scalable. This is why the only small firms have gotten rid of timesheets." And can I just say to that? Hmmm, small firms getting rid of time— They're the only ones that have done that. Bain & Company. McKinsey & Company. Those aren't small firms, and they don't do timesheets.

Blake Oliver: So, do they just not—? They don't care about efficiency?

Ron Baker: No. It's not that they don't care. I think they've gotten so good at their pricing.

Blake Oliver: They don't have to worry about it.

Ron Baker: They don't worry about that. They about improving their pricing skills and their – and creating more value and innovating. I don't know if they would label it, that they don't care about efficiency, but I certainly would. I would say they – they're putting more emphasis on effectiveness. Think about Google. Google gives their people 20% time. Do whatever the hell they want. You know, work on a project they think is really cool or join team that's working on a project. Can you imagine a CPA firm that bills by the hour doing that, eight hours a week?

Blake Oliver: Well, and this is—

Ron Baker: Times 50 weeks?

Blake Oliver: And this is why also staff were not interested in taking educational courses, like getting training, because it came out of their hours, or they had to do it off the book …

Ron Baker: Yeah.

Blake Oliver: … after hours. And the firm had some sort of like tiny allowance it, but it was not nearly enough. Not when you're trying to innovate. Well, innovation is not efficient. That's another— That's another—

Ron Baker: Absolutely.

Blake Oliver: Right. [CROSSTALK].

Ron Baker: Neither are CPE.

Blake Oliver: Right. And CPE is not efficient.

[00:33:09] Ron's Take on Why Work Takes so Long

Ron Baker: In fact, learning a new skill. You're going to be inefficient for a while until your skills climb back up.

Blake Oliver: Yeah.

Ron Baker: Why does work take so long in a CPA firm? Well, you could say it's bad management. You could say it's poor training. Okay. Okay. That— Those are really good surface explanations. But why?

Blake Oliver: Well—

Ron Baker: Why, after 60 years of timesheet data, does work still takes so long? Well, I would say it's because we under invest in CPE and knowledge management and after-action reviews, precisely because those things are not billable.

Blake Oliver: They're not billable, and the benefits are intangible. They take a long time to accrue.

Ron Baker: They build your invisible balance sheet, though.

Blake Oliver: Yeah.

Ron Baker: And that's why subscription businesses are worth more. The other thing you asked about, what other things do private equity or subscription business capitalists look at, venture capitalists, it's all about lifetime value.

Blake Oliver: Mm-hmm.

Ron Baker: It's about keeping that client, growing that client. You know, [INAUDIBLE] keep, grow type of thing. But when you look at lifetime value—and this is kind of the same thing with cashflow—you have to model it and project it. It doesn't— You can't pull that off an income statement or a balance sheet. It has to be modeled.

Blake Oliver: Well—

Ron Baker: And we're not so good with modeling.

Blake Oliver: Well, yeah. And then, there's also the issue that traditional GAAP accounting doesn't know how to handle intangibles. So, that's a separate …

Ron Baker: Absolutely.

Blake Oliver: … separate …

Ron Baker: Absolutely. Yeah.

Blake Oliver: … separate issue, right?

Ron Baker: Yeah. [INAUDIBLE] has really, really done a great job on looking at that topic.

Blake Oliver: Yeah. That's the challenge, too. It's like, how can an accounting firm build the subscription business when GAAP accounting cannot handle subscription businesses properly?

Ron Baker: Well, and this is why we have a stock market. Because thank God, because the stock market values things that the GAAP financial statements can't, which is why Tesla's worth more than General Motors.

Blake Oliver: So, that was number two. That was—

Ron Baker: The efficiency of the team. I need them to track the efficiency of my team.

Blake Oliver: And the – the answer is we don't actually need to do that. We just need to get better at pricing.

Ron Baker: No. Because you're— One of the simple put-downs of this objection or this defense of timesheets is "Do you know who your stars are, and your duds are without looking at any data?"

Blake Oliver: And we do.

Ron Baker: And, of course, you do.

Blake Oliver: Yeah,

Ron Baker: You live with these people …

Blake Oliver: Yeah.

Ron Baker: For eight, 10 hours a day. Of course, you know who, you know, the – the professional, who's got professionalism and, you know, good, cheery attitude and all those things that we – that are predictive of the success of a CPA where timesheet just isn't.

[00:35:43] Profit Per Customer – The Third Defense of Timesheets

Blake Oliver: All right. Number three.

Ron Baker: It's cost accounting. We need to calculate profit per customer. And if I didn't have timesheets, how would I know the profit per job? Well, first off …

Blake Oliver: Right.

Ron Baker: … you – you got to have minimum prices. You shouldn't be taking on work below a certain threshold. And I think as, over time, as you get better and more confident in pricing, that price goes up every year for new customers that you bring on, When you offer options, you're, you know— You have three options that you provide to each customer. You'll notice that most of them pick in the middle. Some will pick the top option, 15% or so. Some will pick the bottom option. That also gives you more profitability per job by offering options.

And there's other things you can do, too, like offer a value guarantee and bundling unlimited access and fix the payment terms around their cashflow rather than your workflow. Things like that. All sorts of things you can do to enhance the value, so you can command a higher price. Again, I want to look at the profitability overall, because we're going to have some customers sitting in the back of the plane, we're going to have some customers sitting in business class, and we're going to have some customers sitting in first class. And that's okay.

Blake Oliver: I love that analogy, because most airlines, if they thought like accounting firms and they had an empty seat in coach, they wouldn't sell the ticket, because they would say, "Oh, we're losing money." Because the coach— The – the first class and business class subsidizes everybody in coach for the cost of that – that flight.

And this is the fallacy of – of trying to do cost-based accounting or ABC or whatever you call it, because, like— And this is the problem with bookkeeping, too, where, okay, it may be lower than our hourly rate for what we can charge for bookkeeping, but that doesn't mean that we're actually losing money. Cash is coming in the door, right? Our costs are fixed.

Ron Baker: Right.

Blake Oliver: So, incremental work just adds to the bottom line if we have capacity. Did – did I say it right? I— Well—

Ron Baker: Yeah. Sort of. I mean, I – I would say this, that CPA firms, what they will do that airlines never do, is they will add capacity for back of the plane customers. Now, an airline would never do that. They're not going to put a bigger plane on a route because they have more coach customers. They will put a bigger plane route if they have more business class or first-class customers. But they're not going put more capacity chasing, you know, priceline.com shoppers.

Blake Oliver: Right. Whereas a CPA firm will take everyone that comes [CROSSTALK].

Ron Baker: Will – will take everyone. They'll – they'll sell— They'll fill that plane. In fact, they'll stuff it, and they'll make some people stand up in the bathrooms to stop the plane and, you know, create a lousy customer experience. And – and what that does is you end up spending so much, a disproportionate amount of time, you know, dealing with a little old lady hitting the call button 40 times during the flight to get more peanuts …

Blake Oliver: Mm-hmm.

Ron Baker: … at the expense of pampering those people in the front of the plane.

Blake Oliver: Yeah. So, maybe a CPA firm is more like Frontier Airlines. I had to fly at one. Have you ever flown Frontier?

Ron Baker: Oh, yes. It's awful.

Blake Oliver: It's literally like a metal bench covered in leather. I mean, you – you cannot describe it.

Ron Baker: Yeah. Yeah. I – I hear you. It's a terrible airline.

Blake Oliver: So, everybody is, like, crammed into that, right? Like, that's a – that's a CPA firm. Because there – there is no way to distinguish between other than, like, informally or just ad hoc between, like, your best customers and your—

[00:39:02] Close Enough for Horseshoes...

Ron Baker: But here's the thing with that, Blake. And I want to get your opinion on this. See if it comports to your experience. We got a lot of pushback in the early years when we used to put up a schematic of an airplane and talk about the first class, business class. We even gave percentages where we thought your capacity should be allocated. Because you get to choose, right?

You're not like an airplane. You – you can move that bulkhead around and have more of your – your seats dedicated to first class or business class. Whatever. And people would say, "Oh, no. No. We can't do that. We have to treat our customers the same. Are you saying—?" And – and you hear this with three options, too. "Are you saying that if they pick the bottom option that their books might balance? It will be close enough for horseshoes and government work?"

No. No. No. We're not saying that you're competing quality. That airplane has to land safely for all the passengers. So, they can't skimp on safety and maintenance and all of that. But what they do differentiate on is service.

Blake Oliver: Yes.

Ron Baker: Right?

Blake Oliver: Yeah.

Ron Baker: The people in first-class are going to board sooner. They're going to get their champagne. They're going to get their bags up first. All the amenities that they have for being in the front of that plane. But, you know, the flight gets there at the same time.

Blake Oliver: Mm-hmm.

Ron Baker: It's just a different experience, and people are willing to pay for that.

Blake Oliver: And that's the number one thing I hear from criticisms. If you go on and look at people's reviews of accounting firms, if you ask them, "Why did you switch?", most of the time, it's because "my CPA doesn't answer the phone. They don't return my calls."

Ron Baker: It's lousy service.

Blake Oliver: And— Right. And why did they do that? It's because they're too busy.

Ron Baker: They're too busy.

Blake Oliver: And why are they too busy? It's because they took on too much work. Why did they take on too much work? Well, it's because they have to bill 3,000 hours or something like that.

[00:40:41] Every Dollar is a Good Dollar

Ron Baker: Every hour [CROSSTALK]. I never met a billable hour I didn't like. Every dollar is a good dollar. That's what I was taught. I was taught from, Pete Marwick, that "professional firms are top-line driven, Ron, because our costs are fixed. So, we need to get that top line above breakeven obviously. But then once it's above that, then the money just flows to the bottom line."

Blake Oliver: Mm-hmm.

Ron Baker: "The more bill you out and the more hours you bill." It's – it's kind of a crazy model.

Blake Oliver: Yeah.

Ron Baker: And you're starting to see it change in the – in, at least in the medical space where you're seeing some of these concierge doctors and DPC doctors move from a panel of patients to 3,400 down to a panel of patients of 600.

I always like to ask people this: "Why did you become a CPA? What – what even got you into this profession?" Nobody's ever told me to bill the most hours, to kill myself during tax season, to have thousands and thousands of clients.

No. We – we got into this profession because we wanted to help people and/or their businesses, right?

Blake Oliver: Mm-hmm.

Ron Baker: You can't do that if you have too many people.

Blake Oliver: Yeah. I think—

Ron Baker: Don't confuse being busy with being profitable.

Blake Oliver: I think that's the root of the dissatisfaction in – in accounting. I feel like it's— Everyone feels burned out, so busy, and they – they can't help. They'd have too much work to help people meaningfully. And so, it's all just a scramble to, like, meet deadlines. it's hard to feel like your job is meaningful, right?

[00:42:00] Eating Time

Ron Baker: I agree. You're constantly running on that treadmill. And the billable hour just— And the timesheet, which I think is the real cancer of the billable hours and outgrowth of the timesheet. But it takes your life, and it bifurcates it. It says you're either billable or you're non-billable.

Blake Oliver: Mm-hmm.

Ron Baker: And when you're non-billable, meaning you're at your kid's soccer game or something, we want you to feel really guilty that you're not being more billable. And this is why people eat time and borrow time and fudge on their timesheets. And people say, "Well, no. Well, people don't lie. I mean, CPAs are honest. They don't lie on their timesheet." Well, okay. But let me ask you this. It's a fireable offense in most firms, especially the top 100, especially the big four. It's a fireable offense to lie on your timesheet.

Blake Oliver: Yeah. And all our listeners know they – that it happens all the time and they have probably—

Ron Baker: Yeah. Show me one person …

Blake Oliver: Yeah.

Ron Baker: … who's been fired for lying on their timesheet or eating time.

Blake Oliver: So, anyway, we – we need to get to number four.

Ron Baker: Okay. And that's project management.

Blake Oliver: Project management.

Ron Baker: We – we need project manage— We need timesheets to— How would I know, you know, my capacity if I don't have time? How would I know when to hire somebody else when—?

Here's the thing. Project management capacity forward. It doesn't look back backwards. It's like timing your cookies with your smoke alarm. It doesn't look backwards. It projects capacity going forward.

Somebody, a customer, comes to a construction company and, says, "We want you to build a skyscraper, and we want it to be able to go live, you know, open up on such and such date." And then, they have to project that capacity. Why do we need to do that? And is it even possible, right?

You saw this with some of the reconstruction around the LA freeways after the earthquake. There was that one contractor that said, "Look, we'll do it in four months. You're going to pay us an enormous price if – if we get it done or whatever." But— And he did. He got it done. In fact, he beat the rapid deadline and got a huge price increase because of it.

But project management basically fills the timesheet out in advance and projects it forward. What project managers don't do that accountants have a fetish about is compare that projection of time forward with what actually occurred and …

Blake Oliver: Right.

Ron Baker: … and trying to compute a variance. I'll give you a really tangible example that Ed talks about, that I just love. I give you a job, Blake, and I give you, I don't know, a tax return. And I say, "Blake, I think this should take about a day." Now, you— I could put— I could go to your whatever workflow system you use, right. Jetpack. Whatever it is.

Blake Oliver: Mm-hmm.

Ron Baker: And I could say, "Okay. I estimate that Smith file, that Blake's got is going to take eight hours."

Blake Oliver: Well, I'm definitely going to eight hours. I— I—

Ron Baker: Yeah. Yes. You – you – you probably will. You— If – if I—

Blake Oliver: [CROSSTALK].

Ron Baker: If I did that, you probably would. But, you know …

Blake Oliver: Yeah.

Ron Baker: … here's the thing. If you did it in two hours, we'd want to know about it, because then you probably figured out a way to innovate or – or do something, automized or, you know, whatever, brings some tools to it.

Blake Oliver: Yeah.

Ron Baker: We'd want to be able to share that knowledge. This is why after-action reviews are so critical. But if it took you 20 hours or 16 hours, I'd probably also want to know that, too, and say, "Okay. Well, why?"

Blake Oliver: Yeah.

Ron Baker: "Is it because you didn't have the education?"

Blake Oliver: But you would—

Ron Baker: "Is it because you have too much other work that, you know" …

Blake Oliver: Yeah.

Ron Baker: … "when I give you something, you should give up something." [CROSSTALK].

Blake Oliver: So, you're ne- – you're never going to know that, because I'm going to do that one time and then I'm going to have to do this long conversation about why it took so long. And then, the next time, I'm just going to write eight hours when it took 10 or 16 …

Ron Baker: Right.

Blake Oliver: … because it's not worth the conversation.

Ron Baker: You know, there's no perfect solution here, right?

Blake Oliver: Yeah.

Ron Baker: I mean, even project management, it's got some fudge factor built into it. But the point even broader than that is the project manager is not going to get all excited about whether or not you come in at 10 hours or six hours or 16 hours. The project manager is more worried about duration. Why did that job that I gave to Blake, that we estimated approximately a day, why did it sit in the firm for four weeks? Because that shows you where the constraints are. That shows you where the bottlenecks are.

Blake Oliver: Yeah. Yeah.

Ron Baker: Usually, the partner. Usually, the review process. This profession is over-reviewed, especially if you did risk profiling. We – we will spend hours writing the— There was a guy— Did you ever see the guy who did the Dumbass Review Notes website?

Blake Oliver: No. But it sounds amazing.

[00:46:25] Dumb@$$ Review Notes...

Ron Baker: Oh. Oh, he was – he was incredible. He was in a big eight firm. I forget whichever. Big six, whatever, big four at the time. And he would get these review notes, and he would publish them on his blog. This was back in the blogging days.

Blake Oliver: Mm-hmm.

Ron Baker: And he would publish the review notes. He gave the answers that he wished he could have written to them. And it was hysterical. Maybe you can find it on Time Machine. It was – it was called Dumbass Review Notes. I mean, we met the guy in LA, 'cause we were so blown away. And he was – he was great. I doubt he's in accounting anymore. But he just had the wickedest sense of humor when it came to just— We write these dumb review notes, and a lot of times maybe the partner or manager who – who wrote them will just clear them themselves if, you know— Whatever—

Blake Oliver: But that's the big problem. 'Cause then they do the work that – and the staff don't learn.

Ron Baker: Exactly. And did we solve that problem after 75 years? No. But this is what after-action reviews do. They solve that problem. Because everybody would get together and talk about what they learned on the job. What were the objectives? What went right? What went wrong? How could we do it better next time? That is scalable.

I – I was just in an air show in Sacramento. The Thunderbirds are flying. But – but I've never seen the Canadian Snowbirds, their air team, which is pretty cool, 'cause it was like 10 of them. They landed. And the announcer came on and said, "Hold on, folks. The Snowbirds are going to do an after-action review." And they walked. They—

Blake Oliver: What? Wow.

Ron Baker: They got out of their cockpit. They huddled, and they spent about seven, minutes doing an after-action review, talking about, "Okay. What just happened? What went right? What went wrong?" And then, of course, they go in and they do a bigger one, a four-hour one, just like the Thunderbirds do.

These are cohesive teams which, by the way, have 50% turnover. Usually, every two years, they get, you know, new pilots in every two. And after four months of doing this and with full after-action reviews, they can work more cohesively than a lot of teams in CPA firms that have been together for decades.

Blake Oliver: Well, 'cause we don't do that. We don't do after-action reviews.

Ron Baker: I know.

Blake Oliver: Only—

Ron Baker: And it just blows my mind.

Blake Oliver: Yeah. Well, 'cause we don't have the time, and it's not billable, right?

Ron Baker: That's right.

Blake Oliver: That's—

Ron Baker: Same reason knowledge management failed and same reason we're slow to adopt technology.

Blake Oliver: Yes.

[00:48:37] Technology Eats Hours

Ron Baker: Technology eats hours.

Blake Oliver: I just had this experience where I – I switched editing software for my – for this podcast. And I – I found something better. But I knew it was going to take me time to learn the process. I'd gotten it down, to like, I don't know, four hours with the old software. It took me eight hours the first time I did it with this new thing, 'cause I had to learn it.

Ron Baker: Mm-hmm.

Blake Oliver: And now, it's down to two. But for a couple episodes, I was way, way over. And in an accounting firm, if you have a similar situation, right, who's going to get punished for that? You know, who's – who's going to say that's okay? 'Cause it can also take a lot longer. It could take months, right, if you're changing technology to become more efficient. That's the problem with tech and hours.

Ron Baker: Yeah. There's a very well-known thing called learning curves or experience curves. And Bain & Company and Boston Consulting Group documented this really well. But for every doubling of output, your costs are cut in half. The time it takes you and – and the cost you incur to do whatever it is.

This goes from chickens laying eggs to building airplanes and eyeglasses. Everything else. It's really well-documented across a wide array of industries. And there's no doubt that, yeah, my hundredth tax return, I'm going to be much more "efficient" than my first two. Same with a surgeon operating. But technology does throw a wrench in it for a while because you do have to learn these new things.

[00:50:01] After-Action Review

Blake Oliver: Yeah. So, Ron, we're – we're about out of time. I was wondering if we could do a mini after-action review right now to make sure we've covered everything we wanted to talk about. The topic os- – os- – ostensibly was timesheets, and I think we nailed that. We had a little bit at the beginning on private equity, but it all tied in. We had four items that we were talking about. Do you mind going through the list again? Let's review.

Ron Baker: Sure. The four defenses of timesheets.

Blake Oliver: Yes.

Ron Baker: I need them for pricing. I need them to track or measure the efficiency of my team. I need them for cost accounting, so I can figure out profit per job or profit per customer. And I need them for project management, so I can know what my capacity is.

Blake Oliver: And I think we have fairly well-dispelled those four objections. I mean, the main thing— I really think the main thing that people like them for is knowing what people are working on. But—

Ron Baker: Yeah. You know? But you should know that through good, proper project management.

Blake Oliver: Right.

Ron Baker: If – if every time I assign something to, you know, one of my team, colleagues, I should be able to pull it up on their master workflow sheet and see everything that's in their pipeline.

Blake Oliver: Yeah.

Ron Baker: And I think – I think we need to get better giving team autonomy in saying, you know, "When I come to you, Blake, and I give you that eight-hour tax return," you say, "Ron, which of other jobs would you like me to postpone, so I can get this done?"

Blake Oliver: Yeah.

Ron Baker: And no team member wants to do that.

Blake Oliver: And there are all sorts of solutions now as an alternative to traditional practice management software that will give you a beautiful Kanban board, which is like a digital sticky note board, that shows, you know, a column for each person and what they are working on, the projects that are on their plate. And I love looking at something like that, because I'm seeing what they're working on right now and what's coming up versus what they did last week, which is as current as timesheets will ever be generally, right?

Ron Baker: Yeah. And – and by the time I see it on a timesheet, it's no longer manageable. It's – it's too late.

Blake Oliver: Yeah.

Ron Baker: It's – it's crazy to me. It's timing your cookies with your smoke alarm. But those are the four big different— And I just want to say this, too. People say, "Well, geez."

Blake Oliver: Yeah.

Ron Baker: "If you get rid of timesheets, we're going to have utter chaos, and it's going to be, you know, chickens with their head cut off, running around the firm. We're not going to know anything."

[00:52:13] Value Pricing Trumps Timesheets

Ron Baker: Here's what replaces timesheets: value pricing. A business model change. So, a different dashboard, obviously. Appointing, hopefully, a value council, maybe even a chief value officer, so you – you build up some pricing competency. Capacity and cashflow manager. Proper project management, which we use the timesheet to do now, which is completely ridiculous. Key predictive indicators.

Blake Oliver: Mm-hmm.

Ron Baker: You know, things like net promoter score, innovation revenue, turnaround time, HSDs. There's a few others that you can use as leading indicators. Turnaround time being really important because that's what the customer cares, right? It's why FedEx measures it.

Blake Oliver: Yeah.

Ron Baker: I don't care how long my package sat on a truck or on an airplane. I care that it drops on my doorstep by 8:30. And that's what FedEx measures. And they do it relentlessly every single day. They have a whole dashboard of— They call it the FedEx service quality index, and there's, like, 12 indicators and they're all customer-centric.

Blake Oliver: Yeah.

Ron Baker: We should measure things the customer— We should define success and measure the same things that our customers define the success of – of our relationship. Turnaround time, keeping your promises, returning phone calls. All those things.

Blake Oliver: I would love to meet a firm that measured response time. How long does it take you on average to respond to email from a client, and how long does it take to return a phone call?

Ron Baker: Yeah.

Blake Oliver: That would do amazing improve the service levels at the firm.

Ron Baker: It might. I mean, I, you know, I would also like to see how many points of contact we have with a customer that are either – that – that are not driven by a customer versus …

Blake Oliver: Mm-hmm.

Ron Baker: … us – us reaching out. And – and you can't do that if you have thou— You know, it's the same thing with the doctors. There's so many parallels between doctors and CPAs. That's why I'm so interested in the direct primary care model because the parallels are uncanny. Doctors, these DPC docs were doing telemedicine and texting and email long before COVID. I mean, years before COVID. You can get a response in 15 minutes, maybe sooner.

Blake Oliver: Yeah.

Ron Baker: They'll come out to your house. How can they do that? They have four times less patients. That's built into their pricing. Back to the subscription model, which I think is really cool. If you wanted to set up, like, a DPC-type accounting, your price would probably be able to go up by a factor of three or four five, because you're not just selling services or scope of work. You're ensuring that the customer is going to be taken care of for anything they need …

Blake Oliver: Yeah.

Ron Baker: … that the firm is capable of doing. So, if they get audited, you're covered. If they need, you know, something really quick, like a financial report or something to get a bank loan, you'll do it. You know, you're just covered.

Blake Oliver: Yeah.

Ron Baker: And you'll always have the capacity to do it, because, just like an airline, you'll always have a couple first-class seats reserved for that last-minute business class flyer or first-class flyer.

[00:55:05] Niches Make for Easier Pricing

Blake Oliver: And I'm not sure if you mentioned it, but one thing I think is really important that I'm seeing small firms succeed with is specializing in certain industries, certain types of clients. Very niched. Because that just makes the pricing so much easier when – when – when you're dealing with the same type of customers.

Ron Baker: It is.

Blake Oliver: We're like veterinary offices where we – we take every species in the world. And – and aliens, too, right?

Ron Baker: Right. Right.

Blake Oliver: Like, as opposed to that, you know, doctor who specializes in humans.

Ron Baker: It's really funny. I know several vets who actually specialize. They would only do dogs …

Blake Oliver: Yeah.

Ron Baker: … or only do cats or even just surgeries, special types of surgeries, just like some human doctors do. But, yeah, no doubt that the most profitable firms in the world, bar none, at least not even close, are all niched. So, I have a good friend who does nothing but dentists, and that's all he does. So, not only does it make his customer selection and customer cost of acquisition cheaper and easier. He turns away everybody who's not a dentist. But he only works with those that he thinks are interesting, that have a cool practice, that are doing something cutting edge. He's all on subscription. And he's a sole proprietor. He's got 12 team members. And he's the most profitable practice I know.

[00:56:17] Ron's Philosophy in Writing

Blake Oliver: So, Ron, if people want to learn more about your philosophy, which of your, like, 20 books should they read? Because I have one on my desk right now. "Mind Over Matter: Why – Why Intellectual Capital is the Chief Source of Wealth."

Ron Baker: Yeah. That wouldn't be the one. That – that – that's actually— Ed thinks it's the best book I've written, but it was also the most difficult. It tries to deal with that issue of intellectual capital and why – and trying to explain why GAAP can't account for intellectual capital. And, by the way, I don't think GAAP could ever account for intellectual capital. But that aside, the book I would recommend to people is "Im- – Implementing Value Pricing."

Blake Oliver: That's my favorite. I mean, that's the one that changed how I think about it. So, yes. "Implementing Value Pricing." I'll put a link to that in the show notes. Do you like people to buy that on Amazon or?

Ron Baker: Yeah. Amazon. It's on Kindle, too. It's a little bit cheaper. It is a professional book. So, it's got a sticker shock price tag. But if you get it on Kindle, it's a – it's a bit cheaper

Blake Oliver: It's value priced, guys. It's value priced.

Ron Baker: It's value priced.

Blake Oliver: You're going to get – get a lot out of it.

[00:57:17] Other Ways to Find Ron

Ron Baker: And, of course, "The Soul of Enterprise," the show I do with Ed. We've done shows on project management. We've done shows on after-action reviews. We've had Dr. Reginald Lee on, talking about the perils of cost accounting. We've talked a lot, done a whole bunch of shows on subscription, talked to the leading authors in that space, and – and just a whole bunch of other shows on all these different topics and KPIs. All of that. And people can get it all at thesoulofenterprise.com.

Blake Oliver: Listen and subscribe to thesoulofenterprise.com. And, Ron, are you on social media?

Ron Baker: Yes. I'm on LinkedIn. I'm one of the LinkedIn influencer bloggers. So, people can follow me there. I have posts up there of other shows I've also been on such as this one. And I'm also on Facebook and Twitter, @ronaldbaker. I have a very common name. So, sometimes, I have to use my, you know—,

Blake Oliver: Yes. When – when Googling Ron Baker, you do find a football player. It comes up.

Ron Baker: A Chevy dealership somewhere, I think, in LA or San Diego or something. Yeah. Yeah, no. It's a very common name. It's—

Blake Oliver: I'm fortunate in this regard. There are not too many Blake Olivers in the world. Actually—

Ron Baker: Yeah. You know, there's only one Ed Kless in the world, literally.

Blake Oliver: Really?

Ron Baker: Yes.

Blake Oliver: That's …

Ron Baker: He's—

Blake Oliver: … unlikely.

Ron Baker: He's done extensive research on that. There's only one.

Blake Oliver: Wow. Well, it—

Ron Baker: He's got a very unique name.

Blake Oliver: My co-host of The Cloud Accounting Podcast, David Leary, has the related problem of Denis Leary coming up …

Ron Baker: Yes.

Blake Oliver: … whenever people search for him.

Ron Baker: [CROSSTALK].

Blake Oliver: So, you know, how he got around it is he created a page on his website that says, "I am David Leary, not Denis Leary." And now, that comes up when people search "David Leary."

Ron Baker: That's fantastic.

Blake Oliver: Yeah. So, just a recommendation for anyone out there. Ron, thanks so much for your time. Great having you on. I'm so excited that our listeners are going to get CPE for this on the Earmark app. And I hope to have you back again.

Ron Baker: Cool. Thanks, Blake.

Blake Oliver: Thanks for listening. I hope you enjoyed this episode and that you learned something new. And if you did, wouldn't it be nice to get some CPE credit for it? Well, I've got great news. My new app, Earmark CPE, offers free NASPA-approved CPE credits for listening to podcasts, including this one. Visit earmarkcpe.com to download the app. Take a short quiz and get your CPE certificate. That's earmarkcpe.com.