This is the second installment of a series of articles that looks at the decisions firms need to make when they implement the next generation of time and billing applications.  The first installment presented an overview of the new capabilities you should expect to see in the tools of the future.  This segment looks at the concept of workcodes which have been a key part of the legacy time and billing products and will continue to have the same functionality in the next generation of tools.

Work codes (or service codes) are used to determine the value and the cost of services, identify service “products”, define steps in the work process, are used in reporting, and in the preparation of invoices.  Let’s look at each of these and identify the strengths and weaknesses.

Value and Cost
All time and billing systems use workcodes to set a standard value for an hour spent.  The current systems all allow for multiple rates for each team member and the use of a particular workcode determine the rate that will be applied to the time recorded to reflect the “standard” value of the time. 

I feel that this concept of using a “standard rate” to determine the value of the service is flawed.  It perpetuates the concept of CPA’s selling by the hour and increases the probability that improved efficiencies will mask increased services to the client, resulting in lower fees for the firm.  However, everyone uses these standard rates, so the first decision you need to address when implementing a new time and billing system (or revamping your existing system) is whether to use the multiple rates feature. 

Using a “mark-up” rate for a team member will at least accomplish the psychological purpose of getting more dollars in front of the biller for high-value time such as consulting, tax planning, etc.   However, avoid the temptation of using a mark-down rate that is employed when a team member is spending time on tasks such as re-do work, work below their “firm rank” (partner doing a bank reconciliation), low-value services, and so one.  Mark-down rates artificially keep realization up and discounts down, but the hide the opportunity costs from spending time on these low level tasks. 

The best use of the information collected through the time keeping process is to determine the cost of providing the service and to also indicate any changes involved in providing recurring services.  One feature almost completely unutilized in time and billing systems is the use of a “cost rate” for each team member.  Most firms feel that setting standard rates as a multiple of the per-hour cost of paying the employee is a good costing tool.  A simpler, more accurate approach is to calculate the cost of the tem member.

The most basic components of the cost rates are the direct costs of the employee: salary, payroll taxes, and the firm’s portion of insurance, continuing education, and other expenses directly related to the firm member.  You can expand on this cost calculation and allocate overhead and other in-direct fringe benefits.  When you get the total cost, just divide it by the expected hours the firm member will work (all hours, not just chargeable).  Plug this cost into the employee’s time and billing record and then every time item created will have a cost component associated with it.  This will let you easily get info about the profit margin for the firm, the responsible partners, the client, the staff, etc.  Can you imagine a Fortune 500 company not knowing what its products are services cost?  Why should CPA firms not use this info, especially when it is so easily to get?

Billing
When a firm member creates a time item, it provides information about who, when, value, cost, ad what the time was spent on.  This information is then used in the billing process, so one of the decisions the firm has to make is what will be the focus of the workcodes in the billing process. 

One way to build your work code structure is by “product line” (1040 Prep, 120 Prep, Tax Planning, Litigation Support, Monthly Write-up, etc.).  Since most of us bill by the service, this provides info for grouping information by product to facilitate the billing process.  You can accomplish the same thing by using the “service management” features of the time and billing (to be discussed in more detail in a future article).

Reporting
Another important use of workcodes is to provide info for reporting.  The firm can look to workcodes to provide info about products, departments, team member performance, and many other areas.  You have to consider the end use and reporting content when you develop your firm’s workcode structure.  Otherwise, you will be creating substantial inefficiency as you have to develop other processes and systems to provide the info you need to manage your practice and provide services to your clients.

How to do it (and what to avoid)
So you see the dilemma: workcodes provide info for setting values, costs, billing, reporting, etc.  Additionally, different departments require different information that can vary based on the specific services provided.  Finally, the information you need today will evolve into something else as time goes on.  Workcodes are very “permanent” and not easily modified.  So you have to make some good up-front decisions.  Here are some suggestions

 ·        Determine the information that you will need for the firm’s income statement.  If departmental info is not important to you may be able to simplify your workcodes substantially. 

·        Use the systems service management features (projects).  One of the benefits is that you will not have to use workcodes to differentiate between “products” billing purposes. 

·        Avoid having the “most interesting 400 work codes” your team members can dream up.  Most of us use only a very small number of codes to capture our time.  A large number of codes do not promote extensive data.  Instead, a bunch of workcodes increases the miscoding of time and expense information. 

·        Avoid markdown billing rates.  These are crutches that firms do not need.  If you make the decision to provide low-value services or get in the situation of having to use high dollar staff to do basic tasks, you will have the write-downs to show you the opportunity costs of your choices.  Remember that most firms do not “value bill” extensively, so if you use full-bolt retail rates instead of markdown rates, ore dollars will get to WIP.  For most firms, this will translate to higher fees billed. 

Next installment: The Art of the Bill. 

Tom Davis CPA is owner of Tom C. Davis, CPA LLC and president of Knowledge Concepts, Inc., the developers of FirmWorks.  Contact him at tdavis@knowledge.org and at 229.247.9801. 

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