Educator and thought leader Ron Baker wants CPA and accounting firms to view themselves in a new light and a big part of that will require the profession to jettison one of its favorite tools: the billable hour.
Frequently citing pioneering management thinker Peter Drucker, Baker told an audience of CPAs at the New England Practice Management Conference last week that they need to re-evaluate where their value and their profits come from.
“CPA firms aren’t professional services firms -- they’re professional knowledge firms,” said Baker, and that means that their value comes not from an hour’s worth of labor, but from the quality of the insights, advice and services they can deliver because of the knowledge that their staff bring to bear.
“Stop telling young CPAs that they sell time -- tell them they sell knowledge, instead,” Baker suggested.
That shift will mean a change in business model for many firms, though. “Business models are inextricable from pricing,” Baker explained. “Any new model will almost inevitably include changes to pricing.”
Requiem for a model
Whether it’s accounting and law, or architecture, engineering, and financial planning, “All professional services firms are moving away from the billable hour, though at different speeds,” Baker said.
“We’re still using measures Frederick Taylor invented in the 1880s. Haven’t things changed?” he asked, referring to an early proponent of “time and motion” studies in business and manufacturing. “But time is not a cost -- it’s a constraint. We’re all subject to the same constraint, and [using the billable hour as your main unit of value] limits your potential profitability right out of the gate.”
“We’re writing down and writing off more than we’re writing up,” he warned. “If we had a blank slate and starting the accounting profession all over again in 1896, how would you draw up the business model? Would it look the same?”
As an alternative, Baker explored the notion of rival assets versus non-rival assets. A rival asset is a good or service that diminishes when you share it a billable hour spent on one client, for instance, is an hour that a CPA can’t sell to another client or use themselves. A non-rival asset, on the other hand, can be shared among many people and improved upon by other users. Non-rival assets tend to be knowledge-based, he explained, like alphabets and number systems or the kinds of business processes, advice and innovations that accountants can develop and offer to clients, in place of hour-based compliance services.
“When a friend has a baby, do you want to hear about the labor pains, or do you want to see the baby?” Baker asked. “In accounting, not only do we focus on the labor pains, we measure them in six-minute contractions.”
In the end, CPA firms shouldn’t sell hours, but pursue a Druckerian “result” which Baker described as a larger goal for the organization. “Churches want to save souls, hospitals want cured patients, schools want educated students,” he said. “What’s the result’ of a CPA firm? A happy customer. Someone who comes back and maybe even purchases more. Someone who refers you.”
