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The timesheet pricing model is outmoded, so why does it still endure? asks John Haylock.

Timesheets seem incredibly hard for the profession to let go of. Lately I’ve been wondering why. To me it seems that a fixed pricing model is much better as it aligns the best interests of both client and accounting practice. Clients get the certainty of pricing they want, while the accounting practice is encouraged to operate more efficiently to maximise its margin on each job.

Fixed pricing also encourages a culture that focuses on completing jobs to keep clients happy. In contrast, the timesheet model encourages people to keep on starting new jobs to keep busy – this blows out work-in-progress and slows down completion of jobs. More importantly, though the timesheet-focused model has a fundamental misalignment of interests. It is in the client’s interest for the job to take less time, while it is in the practice’s interest to take more time.

While business ethics dictate that accountants don’t take unnecessarily long to complete a job, there is a clear economic incentive that they should. While that incentive won’t always win out, the suspicion that sometimes it does will always hang over the relationship when accountants charge by the hour. The other problem with the timesheet model is that a large number of people working in accountancy firms (and I was one) thoroughly dislike timesheets and the way of working it encourages.

As a result staff get grumpy while there are many other people who could work in accountancy firms who won’t because of the timesheet-focused business model. I think this business model has been a major contributor to the overall shortage of staff that accountants in public practice have faced in recent years. To me the logic of changing to a fixed price business model is irrefutable and the numbers of accountants who are doing so is increasing, albeit slowly.

So why does the timesheet prove so durable? It works. Accountants in public practice have by and large been making a good living operating under this model. There has been no compelling economic incentive for accountants to change. Profit for most firms is acceptable even though work-in-progress and debtors in many firms are much too high.

The timesheet model is also relatively easy to operate – just get the time recorded (though that does have its challenges), then calculate the fee at the end of the job. It is easier to keep billing that way than to set up fixed prices across your client base for the first time. Once fixed prices are in place it is no harder to operate on an ongoing basis but there is the initial upfront commitment to overcome. Another possible reason for the durability of the timesheet model is reflected in a study by Stanford researchers Jeffrey Pfeffer and Thomas D Dee II who found that employees paid by the hour are happier than those paid a salary.

A report on their research in the Stanford University News says that “money makes people happy” and “the relationship between money and happiness is stronger for people paid by the hour because they are more often reminded of how much they earn”. Pfeffer and Dee noted that “hourly paid employees know the exact worth of each hour of work. They think about their income regularly and begin comparing the value of their time to the amount of their happiness.”

It’s not a big leap to extrapolate this research on relative happiness of employees paid by the hour to the owners of accountancy firms whose income is similarly dependent on selling hours of labour. It ties in with a comment that an accountant once made to me – he liked hourly billing because he could see the money coming in every hour. Please don’t take this to mean that staff like being charged out by the hour. It only relates to earning money by the hour. It also doesn’t mean this way of operating is right – all it does is give a reason why this business model is so enduring despite its obvious shortcomings. While business ethics dictate that accountants don’t take unnecessarily long to complete a job, there is a clear economic incentive that they should.

John Haylock is Practice Performance Manager at BankLink.