One of the hard lessons I’ve learned over my career is that not all hours are created equal. Most of us have only a few hours available every day when we’re in the flow state and capable of doing top-quality work. At the firm-wide level, I argue that the best team members—the top 20%—account for 80% of a firm’s value. That’s the Pareto Principle (aka 80/20 Rule) in action.
Is it really fair to charge clients the same for an hour of your after-dinner catchup time as you charge for an hour of your weekday morning time when you’re fresh and alert? Likewise, is it fair to charge out the same time of all third-year associates when some are highly talented and others are playing catchup?
Ultimately, time is an input, not an output. If you're charging for the value you create, you shouldn't be charging clients based on how much time you spent doing the work. You should be charging based on the output of the work: the value you created for them and/or the problem you solved.
AI’s impact on firm business models
I suspect that AI will help us break this cycle because it will accentuate the difference between highly productive hours and low productivity hours. Open AI’s peer-reviewed study estimated that 50% of all accounting and auditing tasks could be automated by pairing AI with software. To clarify, the study didn’t say that 50% of tasks could be automated; it said that access to large language models (LLMs) and LLM-powered software could reduce the time to complete each core accounting and auditing task by at least 50%—while maintaining quality.
Note: the researchers didn't explain what happens to all the hours freed up by AI. If we're smart, we'll use that time for higher-value, more-productive activities that will contribute greater value to the firm's bottom line.
If you're stuck in the legacy hourly billing model like I used to be at a large firm, fewer hours mean less revenue. That's why the partners rebuffed my pleas to switch to fixed-fee billing. They didn’t want to jeopardize anyone’s compensation, including their own. Even worse, team members feared that if they got their assignments done too quickly, management would just dump more work on them to make up for the hours that had to be "replaced."
You can see why obsessing about billable hours can lead to burnout, depression, and physical ailments. In my experience, the human limit seems to be five or six hours a day of really productive time. Voucher Cloud’s research determined that the average office worker is only productive for 2 hours and 23 minutes each day.
My new book “Building a Sustainable Accounting Firm” explains why there are many better ways to charge clients for your time and effort.
From my earlier career as a classical musician, the very best cellists I knew practiced about six hours a day—and it certainly wasn't six hours straight. They practiced intensely for two hours in the morning, two hours in the afternoon, and two hours at night. That’s what competitive swimmers and runners call the “interval” approach: Short bursts of intense activity followed by carefully measured rest periods.
Jascha Heifetz, considered one of the greatest violinists of all time, rarely practiced more than four hours a day, but he was fanatical about being as efficient and as purposeful as possible during his practice sessions. I learned from music that one hour of practice can yield widely varying results. It depends on whether you're highly focused or just jamming through your tunes without having a goal in mind for that session.
Let go of hourly billing
How does music relate to billing? I came to a similar realization about the hours I spent practicing my cello at my own bookkeeping firm when I shifted from hourly billing to a fixed monthly fee. Thanks to advances in cloud technology, we could reduce the amount of time it took to reconcile a client's books every month by 80%—that’s EIGHT OH! My clients were thrilled, but I would have lost a fortune if I continued to bill hourly because there would be 80% fewer hours on the invoices and 80% less money coming in. But when you’re on a fixed fee, the time savings becomes profit, not loss of revenue. The same thing is going to happen to tax service as AI gains adoption.
Let's say a client asks you a complex tax question via email. In the past, you could charge them for the time it took to read their question thoroughly (15 minutes), do the research (30 minutes), and write them an email response or explanation (15 more minutes). That’s roughly one hour of billable time. But now in your email program, you can ask AI to analyze the client's question. AI finds the answer in a matter of seconds by scouring the tax code at lightning speed. All you have to do is review the summary that AI came up with, make sure it's correct, and send it back to the client. Are you really going to bill the client for 15 minutes? You can't.
Same goes for writing a tax memo. Doing advanced analysis might take dozens of hours for which you could bill thousands of dollars. But with AI, research time could be essentially eliminated. However, that doesn’t mean you shouldn’t charge the same for your expertise and advice. That's where fixed fees and subscription pricing come in.
Align your business model
You can't just suddenly change your revenue model from hourly to subscription without realigning how you compensate your staff. You must think in terms of growing profit, not just growing revenue. To do that, you may need to abandon traditional accounting theory. As I've always believed, "GAAP is crap." The value of a subscription-based firm is worth many times more than the value of a traditional firm.
Don’t believe me? My friend Brannon Poe, CPA, founder Poe Group Advisors, told me on my podcast that subscription-based accounting firms are selling 2x to 3x revenue, while traditional hourly-based firms are lucky to fetch 0.8x to 1x. Subscription firms are just more scalable, more efficient, and more profitable, according to Poe.
Listen to the music
While keeping time is something great musicians and great financial advisors have in common, no one ever asked Beethoven how long it took him to write Symphony No. 5; we only care about the final, brilliant outcome. Same goes for the great work you do for your clients. They’ll gladly pay you for the harmony and peace of mind you provide them in their lives. They don’t care how long it took you to master that skill. That’s why a subscription-based billing model is something you can scale.
