Big Hat, No Cattle: The Hourly Rate Delusion

This blogpost originally appeared on Practice Paradox's blog.

There’s a saying in Texas, “Big hat, no cattle.” Someone who talks a good game, but who has no substance behind their claims. Like the rancher who wears a 10-gallon hat and looks the part, but does not actually have any cattle.

I’ve seen this a lot in business over the years. The worst offenders are flaky business coaches who say their average hourly rate is $500 or even $1,000 or more, but in reality they’re not selling many of their hours.

Or they’re claiming that a one-hour consultation with them is $1,000 but they fail to take into account the 2-hour sales process with the prospective client, and the one hour spent after the consultation, doing documentation, emails, invoicing and so on.

So their $1,000 “hourly rate” is, in reality, $250.

They like the ego-stroking effect of stating their seemingly high hourly rate to others, but they’re deluded.

So are many accountants.

In the 2016 edition of The Good, the Bad & the Ugly of the Australian Accounting Profession by Business Fitness, and in particular in their related publication, Rates & Pricing – 2017 Outlook, the firms surveyed reported that their Director Charge Rates ranged from $150 to $520 an hour, with a median of $300, an average (mean) of $313 and an upper quartile of $375 an hour.

14% of firms surveyed stated they don’t use charge rates and instead value bill what they think a job is worth.

But these we-do-not-use-charge-rates firms still do have an hourly rate, don’t they? It’s not an hourly charge rate used for pricing, but it is an hourly yield.

And if you don’t know your hourly yield in your business—regardless of whether you own an accounting practice, a financial planning firm, a fish and chips shop, cleaning business or a coffee cart—you’re ignorant of whether your business is the best use of your time.

And your time is your life.

Which would you prefer:

• Firm A: You work 30 hours a week and the business returns you Net Profit per Equity Partner (Before Partner Salaries) of $330,000 per annum, or
• Firm B: You work 60 hours a week and the business returns you Net Profit per Equity Partner (Before Partner Salaries) of $450,000 per annum?

Depending on your stage of life and your values, your answer will vary.

Based on a 45-week working year, Firm A yields you $245 per hour worked whereas Firm B—where you’re putting in big hours and are likely to be a stranger to your family—yields you $167 per hour worked.

But what if Firm B states that their Director Charge Rate is $500 an hour?

Clearly, that ‘rack rate’ does not matter. A stated hourly rate like this is just a big swingin’ dick. Apologies for the coarse language there. Let’s continue our less offensive Texan analogy instead: this hourly rate is just ‘a big hat’.

Your actual hourly yield for the hours you put into your business, is ‘how many head of cattle’ you really have.

But what if you don’t track how you invest your time? What if you have ceremoniously “thrown out your timesheets” and don’t actually know how many hours you have worked in your business in the past year?

Put simply, you’re flying blind.

Sure, you could estimate how many hours you’re working based on average start and finish times, but in my experience advising businesses, there is a big difference between ‘gut feel’ estimated numbers and the actual numbers when properly measured and tracked.

In my last post, The Timesheet Paradox for Accountants, I explained that:

1. I agree that typical timesheets linked to time and billing practice management software should be thrown out—these are tedious, painful to complete and their use sends the wrong message to your team. They indicate that, as a business, you ‘sell time’ which you most certainly do not.
2. I believe that every business should use a DIFFERENT type of time tracking tool that has a completely DIFFERENT purpose. It should have nothing to do with work-in-progress (WIP) or billing.

Which tool do I recommend? Toggl.

Now before you go Googling that app, let me state that even though Toggl can be used for the old-school purpose of tracking time for billing purposes, that is NOT what we use it for at PARADOX. We don’t recommend you use it for that either.

In a nutshell, we use Toggl to track our time use in our business because:

• We want to know where we’re investing our time across:Functional areas of the business such as Operations, Marketing, Financial Control, Admin, Sales and Management
• Clients (or ‘Members’ as we call ours)
• Projects (e.g. our Blog Article Service or Social Media Updates service)
• Types of activities such as delivering services, communicating with members, internal team communication, training and learning time, social media time, creating content, building systems, dealing with technology-related issues and so on.
• We want to know how much time we’re each working so we can know:Are we at a sustainable capacity or risking burning out some people?
• Do we need to hire more and expand our capacity?
• Do we need to achieve greater efficiencies and more automation?
• We want to know:Which services are our most profitable?
• Are we servicing our members profitably and sustainably?
• Are any members being over-serviced to the point of being unprofitable for us?

At the end of any day, week, month or year we can answer the question, “Where did we invest our time?” That allows us to assess, “Is that the most strategic and leveraged use of our time?”

Our Toggl reports give us data to help us better manage our business. And it’s not a chore to track our time. Toggl makes it easy and even fun to do. Really? Yep.

You can use Toggl in your web browser or through desktop and mobile apps.

Personally, I use it in the browser and the Mac desktop app simultaneously because I like how the app detects “idle time” and then asks you if you want to record that time or discard it. That’s useful because sometimes you do—like when a call comes in and you stopped what you were previously doing but you didn’t use your computer during the call, so the app infers you may have been idle. Other times you want it to stop or discard a recording if you take a quick break.

One advantage of using a modern time tracking app such as Toggl rather than old-school time and billing software is that it becomes easier to track time that is not linked to a particular project, engagement or client. This is time that old-school accountants call “non-productive time” but which is often THE most productive time for a business owner—you’re working ON the business improving your strategy, marketing, systems, processes or HR.

This is yet another reason not to use WIP-based timesheets: Often the things you are working on are not linked to a specific client or job. But they should be tracked for analysis as to whether you can eliminate, automate or delegate more in certain areas of your business.

With WIP-based timesheet software, “non-productive” time often gets attributed to larger clients where it can be absorbed without raising eyebrows—which apart from being inaccurate from a data perspective is just plain unethical—or bogus jobs and “internal clients” need to be created in the system so that this time can be logged against them.

That’s clunky.

It might sound odd to describe a time-tracking app as a pleasure to use, but that’s what Toggl is. Over the years we have used Time Doctor and also the Timer function within our task and project management system, Wrike, but Toggl has better features and more functionality than other apps we’ve used in this category.

A disadvantage of using a time-tracking app that is built into your project and task management app—for example Wrike, Podio, Basecamp, Trello, Asana or Teamwork-is that not everything you invest your time in during the day is an actual project or engagement.

Oh, and by the way, if you’re thinking that automated time-tracking apps such as Time Rescue and Chrometa are a good solution for examining your time usage, we’ve not found this to be the case. These apps assume that certain apps and websites are either a productive or non-productive use of time. That’s inaccurate. 15 minutes in Facebook might have been you taking a break and checking your personal Facebook (non-productive from a business perspective), or it might have been you posting an update to your Facebook Page or Group (productive time). These automated apps don’t make this distinction without retrospective manual editing of the entries, which negates the advantages of automation.

Another great feature of Toggl is that you can create reports of your time usage for today, yesterday, this week, this month, year to date and so on, and you can get permalinks (URLs that don’t change over time) and have these automatically emailed to yourself, your team, your partners, your spouse! You can also have them automatically posted to your internal team collaboration app such as Slack or HipChat.

This level of transparency creates accountability and encourages focus.

Oh, and that reminds me of yet another super-useful benefit of tracking your time: FOCUS.

In this day and age of multi-tabbed web browsing, open plan offices, multiple notifications from email, SMS, messaging apps, social media… it is easy to get distracted and fragmented in your focus across the day.

But your moment-to-moment focus is one of your greatest resources.

We find that by tracking your time and specifying which task and member/client or project you’re currently working on creates a gamification effect where you have a target time in mind for the current focus. When a distraction comes into play it’s easier to stay on purpose and park the distraction to be attended to later.

Is the point of this article, “You should use Toggl”?

No. Toggl is just a tool that happens to be our preferred one for this purpose. Use whichever tool works for you and fits into your business’ app ecosystem.

The point here is simply this:

• You need to know your hourly yield:Across the business
• Per client
• Per project
• You need to know how your hourly yield compares with your target yield and also with your other opportunities for investing your time.
• The only way you can accurately know this is to effectively track your time usage for later analysis.
• If you have interpreted the “throw out your timesheets” advice to mean, “stop tracking your time”—rather than, “stop selling time”—you need to:recalibrate your thinking,
• throw out your kaftan, and
• tell your value pricing zealot friends that you won’t be around to link arms and sing kumbaya with them anymore.

You’ve chosen to re-enter effective commercial reality.

P.S. Toggl tells me I invested 1 hour and 23 minutes writing this article. That’s within my target. Time tracking helps focus.